Capital Southwest
Annual Report 2016

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FORM 10-K(Mark One) ☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2016OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 814-00061CAPITAL SOUTHWEST CORPORATION(Exact name of registrant as specified in its charter)Texas 75-1072796(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)5400 Lyndon B Johnson Freeway, Suite 1300, Dallas, Texas 75240(Address of principal executive offices) (Zip Code)Registrant's telephone number, including area code: (972) 233-8242 Securities registered pursuant to Section 12(g) of the Act: Title of Each ClassName of Each Exchange on Which RegisteredCommon Stock, $0.25 par value per shareThe Nasdaq Global Select Market Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES ☒ NO ☐.Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). YES ☒ NO ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K. ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filerand large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):Large accelerated filer ☐Accelerated filer ☒ Non-accelerated filer ☐Smaller reporting company ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).YES ☐ NO ☒.The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2015 was $645,722,948 based on the last sale priceof such stock as quoted by The Nasdaq Global Select Market on such date.The number of shares of common stock, $0.25 par value per share, outstanding as of June 10, 2016 was 15,726,006.Documents Incorporated by ReferencePortions of the Proxy Statement for Annual Meeting of Shareholders to be held July 20, 2016 are incorporated by reference in this Annual Report on Form10-K in response to Part III. TABLE OF CONTENTS PART I PageItem 1.Business2Item 1A.Risk Factors22Item 1B.Unresolved Staff Comments34Item 2.Properties34Item 3.Legal Proceedings34Item 4.Mine Safety Disclosures34 PART II Item 5.Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities35Item 6.Selected Financial Data38Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations40Item 7A.Quantitative and Qualitative Disclosures About Market Risk49Item 8.Financial Statements and Supplementary Data50Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure98Item 9A.Controls and Procedures98Item 9B.Other Information98 PART III Item 10.Directors, Executive Officers and Corporate Governance99Item 11.Executive Compensation99Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters99Item 13.Certain Relationships and Related Transactions, and Director Independence100Item 14.Principal Accountant Fees and Services100 PART IV Item 15.Exhibits and Financial Statement Schedules101 Signatures 102 Table of ContentsCAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements regarding the plans and objectives of management for future operations. Any such forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results,performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-lookingstatements. Forward-looking statements which involve assumptions and describe our future plans, strategies and expectations are generally identifiable byuse of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or othervariations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and we cannotassure you that the projections included in these forward-looking statements will come to pass. Our actual results could differ materially from thoseexpressed or implied by the forward-looking statements. The forward-looking statements contained in this Annual Report include statements as to:·our future operating results;·the valuation of our investments in portfolio companies, particularly those having no liquid trading market;·the dependence of our future success on the general economy and its impact on the industries in which we invest;·our transition to a debt focused investment strategy;·our expected financings and investments;·the adequacy of our cash resources and working capital;·the timing of cash flows, if any, from the operations of our portfolio companies;·our business prospects and the prospects of our existing and prospective portfolio companies;·our contractual arrangements and other relationships with third parties;·our ability to recover unrealized losses;·our regulatory structure and tax treatment;·our ability to operate as a business development company and a regulated investment company, including the impact of changes in laws orregulations governing our operations or the operations of our portfolio companies;·the financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;·the return or impact of current and future investments;·the impact of a protracted decline in the liquidity of credit markets on our business;·the impact of fluctuations in interest rates on our business;·market conditions and our ability to access additional capital; and·the timing, form and amount of any dividend distributions;For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this Annual Report, please seethe discussion under “Risk Factors” in Item 1A. We have based the forward-looking statements included in this Annual Report on Form 10-K oninformation available to us on the date of this Annual Report on Form 10-K, and we assume no obligation to update any such forward-looking statements,unless we are required to do so by applicable law. 1Table of ContentsPART I Item 1.BusinessORGANIZATIONCapital Southwest Corporation (“CSWC”) is an investment company that specializes in providing customized financing to middle marketcompanies in a broad range of industry segments located primarily in the United States. Our common stock currently trades on The Nasdaq Global SelectMarket under the ticker symbol “CSWC.”CSWC was organized as a Texas corporation on April 19, 1961. Until September 1969, we operated as a small business investment company(“SBIC”) licensed under the Small Business Investment Act of 1958. At that time, CSWC transferred to our wholly-owned subsidiary, Capital SouthwestVenture Corporation (“CSVC”), certain assets including our license as a "SBIC”. CSVC is a closed-end, non-diversified investment company registeredunder the Investment Company Act of 1940, as amended (the “1940 Act”). Prior to March 30, 1988, CSWC was registered as a closed-end, non-diversifiedinvestment company under the 1940 Act. On that date, we elected to be treated as a business development company (“BDC”) subject to the provisions of the1940 Act, as amended by the Small Business Incentive Act of 1980. In order to remain a BDC, we must meet certain specified requirements under the 1940Act, including investing at least 70% of our assets in eligible portfolio companies and limiting the amount of leverage we incur.We are also a regulated investment company (“RIC”) under Subchapter M of the U.S. Internal Revenue Code of 1986 (the “Code”). As such, we arenot required to pay corporate-level income tax on our investment income. We intend to maintain our RIC status, which requires that we qualify annually as aRIC by meeting certain specified requirements. Because CSWC wholly owns CSVC, the portfolios of CSWC and CSVC are referred to collectively as "our,""we" and "us."On September 30, 2015, we completed the spin-off of CSW Industrials, Inc. (“CSWI”). CSWI is now an independent publicly traded company.CSWI’s common stock trades on The Nasdaq Global Select Market under the symbol “CSWI.” CSWI’s assets and businesses consist of the Company’s formerindustrial products, coatings, sealants & adhesives and specialty chemicals businesses and also include all the equity interest of The RectorSeal Corporation,The Whitmore Manufacturing Company, Balco, Inc., and CapStar Holdings Corporation.Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, is the management company for CSWC and CSVC. CSMC generally incurs all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment andother administrative costs required for day-to-day operations.CSWC also has a direct wholly owned subsidiary that has been elected to be a taxable entity (the “Taxable Subsidiary”). The primary purpose of theTaxable Subsidiary is to permit CSWC to hold equity investments in portfolio companies which are “pass-through” entities for tax purposes. The TaxableSubsidiary is taxed at normal corporate tax rates based on its taxable income.The following diagram depicts CSWC’s organizational structure: 2Table of ContentsEmployeesAs of March 31, 2016, we had fifteen employees, each of whom was employed by our management company, CSMC. These employees include ourcorporate officers, investment and portfolio management professionals and administrative staff. All of our employees are located in our principal executiveoffices in Dallas, Texas.Corporate InformationOur principal executive offices are located at 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas 75240. We maintain a website atwww.capitalsouthwest.com. You can review the filings we have made with the Securities Exchange Commission, the SEC, free of charge on EDGAR, theElectronic Data Gathering, Analysis, and Retrieval System of the SEC, accessible at sec.gov. We also make available free of charge on our website ourAnnual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to those reports and any other reports filed orfurnished pursuant to Section 13(a), 15(d) or 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after filingthese reports with the SEC. Information on our website is not incorporated by reference into this Annual Report on Form 10-K and you should not considerthat information to be part of this Annual Report on Form 10-K.The public may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330. The SEC also maintains a website thatcontains the reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.The charters adopted by the committees of our Board of Directors are also available on our website. Information contained on our website is notincorporated by reference into this Annual Report on Form 10-K, and you should not consider that information to be part of this Annual Report on Form 10-K.OVERVIEW OF OUR BUSINESSWe are a specialty lending company that provides customized financing to middle market companies located primarily in the United States. Ourprincipal investment objective is to produce attractive risk-adjusted returns by generating current income from our debt investments and capital appreciationfrom our equity and equity related investments. Our investment strategy is to partner with business owners, management teams and financial sponsors toprovide flexible financing solutions to fund growth, changes of control, or other corporate events. In allocating future investments, we plan to continueinvesting primarily in senior and subordinated debt securities secured by security interests in portfolio company assets, coupled with equity interests.We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and provenmanagement teams with strong operating discipline. We target senior and subordinated investments in the lower middle market and private loan transactions(club deals), as well as first and second lien syndicated loans in larger middle market companies. Our target lower middle market companies typically haveannual earnings before interest, taxes, depreciation and amortization (“EBITDA”) between $3.0 million and $15.0 million. Our target club deal companiestypically have annual EBITDA between $15.0 million and $50.0 million. We believe that these middle market companies have less access to capital and thatthe market for such capital is underserved relative to larger companies. Companies of this size are generally privately held and are less well known totraditional capital sources such as commercial and investment banks. Our target companies for syndicated first and second lien loan investments are in largemiddle market companies that typically have annual EBITDA that is greater than $50 million. We make available significant managerial assistance to thecompanies in which we invest when we believe that providing managerial assistance to an investee company is critical to its business development activities.Because we are internally managed, we do not pay external investment advisory fees, but instead directly incur the operating costs associated withemploying investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operatingexpense structure when compared to other publicly traded and privately held investment firms which are externally managed, and our internally managedstructure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. 3Table of ContentsRecent DevelopmentsIn April 2016, we exited our investment in Freedom Truck Finance and received principal and accrued interest payments totaling $6.0 million. OnJune 7, 2016, we announced our Board of Directors had declared a $0.06 dividend per share for the quarter ended June 30, 2016. The record date for thedividend is June 20, 2016. The payment date for the dividend is July 1, 2016.Our Business StrategyOur principal investment objective is to produce attractive risk-adjusted returns by generating current income from our debt investments andrealizing capital appreciation from our equity and equity-related investments. We have adopted the following business strategies to achieve our investmentobjective:·Leveraging the Experience of Our Management Team. Our senior management team has extensive experience advising, investing in and lendingto middle market companies across changing market cycles. The members of our management team have diverse investment backgrounds, with priorexperience at investment banks, commercial banks, and business development companies in the capacity of senior officers. We believe this diverseexperience provides us with an in-depth understanding of the strategic, financial and operational challenges and opportunities of the middle marketcompanies in which we invest. We believe this understanding allows us to select and structure better investments and to efficiently monitor andprovide managerial assistance to our portfolio companies.·Applying Rigorous Underwriting Policies and Active Portfolio Management. Our senior management team has implemented rigorousunderwriting policies that are followed in each transaction. These policies include a thorough analysis of each potential portfolio company’scompetitive position, financial performance, management team operating discipline, growth potential and industry attractiveness, which we believeallows us to better assess the company’s prospects. After investing in a company, we monitor the investment closely, typically receiving monthly,quarterly and annual financial statements. As a team, we analyze and discuss in detail the company’s financial performance and industry trendsmonthly. We believe that our initial and ongoing portfolio review process allows us to monitor effectively the performance and prospects of ourportfolio companies.·Invest Across Multiple Companies, Industries, Regions and End Markets. We seek to maintain a portfolio of investments that is appropriatelydiverse among various companies, industries, geographic regions and end markets. This portfolio balance is intended to mitigate the potentialeffects of negative economic events for particular companies, regions, industries and end markets. However, we may from time to time hold securitiesof a single portfolio company that comprise more than 5% of our total assets and/or more than 10% of the outstanding voting securities of theportfolio company. For that reason, we are classified as a non-diversified management investment company under the 1940 Act.·Utilizing Long-Standing Relationships to Source Deals. Our senior management team and investment professionals maintain extensiverelationships with entrepreneurs, financial sponsors, attorneys, accountants, investment bankers, commercial bankers and other non-bank providersof capital who refer prospective portfolio companies to us. These relationships historically have generated significant investment opportunities. Webelieve that our network of relationships will continue to produce attractive investment opportunities.·Focusing on Underserved Markets. The middle market has traditionally been underserved. We believe that operating margin and growth pressures,as well as regulatory concerns, have caused many financial institutions to de-emphasize services to middle market companies in favor of largercorporate clients and more liquid capital market transactions. We also invest in securities that would be rated below investment grade if they wererated. We believe these dynamics have resulted in the financing market for middle market companies being underserved, providing us with greaterinvestment opportunities. 4Table of Contents·Focus on Established Companies. We generally invest in companies with established market positions, experienced management teams andrecurring cash flow streams. We believe that those companies generally possess better risk adjusted return profiles than earlier stage companies thatare building their management teams and establishing their revenue base. We also believe that established companies in our target size rangegenerally provide opportunities for capital appreciation.·Providing Customized Financing Solutions. We offer a variety of financing structures and have the flexibility to structure our investments to meetthe needs of our portfolio companies. Often we invest in senior and subordinated debt securities, coupled with equity interests. We believe ourability to customize financing structures makes us an attractive partner to middle market companies.INVESTMENT CRITERIA AND OBJECTIVESOur investment team has identified the following investment criteria that we believe are important in evaluating prospective investmentopportunities. However, not all of these criteria have been or will be met in connection with each of our investments:·Companies with Positive and Sustainable Cash Flow: We generally seek to invest in established companies with sound historical financialperformance.·Excellent Management: Management teams with a proven record of achievement, exceptional ability, unyielding determination andunquestionable integrity. We believe management teams with these attributes are more likely to manage the companies in a manner that protectsand enhances value.·Industry: We primarily focus on companies having competitive advantages in their respective markets and/or operating in industries with barriers toentry, which may help protect their market position.·Strong Private Equity Sponsors: We focus on developing relationships with leading private equity firms in order to partner with these firms andprovide them capital to support the acquisition and growth of their portfolio companies.·Appropriate Risk-Adjusted Returns: We focus on and price opportunities to generate returns that are attractive on a risk-adjusted basis, taking intoconsideration factors, in addition to the ones depicted above, including credit structure, leverage levels and the general volatility of cash flows.·Location: We primarily focus on companies located in the United States. Each new investment is evaluated for its appropriateness within ourexisting portfolio. Acquisition candidates for our existing portfolio companies may be located worldwide. Investment ProcessWe have an investment committee that is responsible for all aspects of our investment process relating to investments made by CSWC. The membersof the investment committee are Bowen Diehl, Michael Sarner, Douglas Kelley and Joseph Armes.Our investment strategy involves a team approach, whereby our investment team screens potential transactions before they are presented to theinvestment committee for approval. Transactions that are either over a certain hold size or outside our general investment policy will also be reviewed andapproved by the board of directors of CSWC (the “Board of Directors”). Our investment team generally categorizes the investment process into sixdistinctive stages: 5Table of Contents·Deal Generation/Origination: Deal generation and origination is maximized through long-standing and extensive relationships with privateequity firms, leveraged loan syndication desks, brokers, commercial and investment bankers, entrepreneurs, service providers such as lawyers andaccountants, and current and former portfolio companies and investors. ·Screening: Once it is determined that a potential investment has met our investment criteria, we will screen the investment by performingpreliminary due diligence, which could include discussions with the private equity firm, management team, loan syndication desk, etc. Uponsuccessful screening of the proposed investment, the investment team makes a recommendation to move forward and prepares an initial screeningmemo for the CSWC investment committee. We then issue either a non-binding term sheet (in the case of a directly originated transaction), orsubmit an order to the loan syndication desk (in the case of a large-market syndicated loan transaction). ·Term Sheet: In a directly originated transaction, the non-binding term sheet will typically include the key economic terms of our investmentproposal, along with exclusivity, confidentiality, and expense reimbursement provisions, among other terms relevant to the particular investment.Upon acceptance of the term sheet, we will begin our formal due diligence process. In a syndicated loan transaction, rather than a formal term sheet,we will submit an order for an allocation to the syndicated loan desk. ·Due Diligence: Due diligence is performed under the direction of our senior investment professionals, involving the entire investment team as wellas certain external resources, who together perform due diligence to understand the relationships among the prospective portfolio company’sbusiness plan, operations, financial performance, and legal risks. On our directly originated transactions, our due diligence will often include (1)conducting site visits with management and key personnel; (2) performing a detailed review of historical and projected financial statements, oftenwith a third-party accounting firm, to evaluate the target company’s normalized cash flow; (3) interviewing key customers and suppliers; (4)evaluating company management, including a formal background check; (5) reviewing material contracts; (6) conducting an industry, market andstrategy analysis; and (7) obtaining a review by legal, environmental or other consultants. In instances where a financial sponsor is investing in theequity in a transaction, we will leverage work done by the financial sponsor for purposes of our due diligence. In syndicated loan transactions, ourdue diligence may exclude direct customer and supplier interviews, and be limited to review of reports from the financial sponsor or syndicationagent for industry and market analysis, and legal and environmental diligence. ·Document and Close: Upon completion of a satisfactory due diligence review, our investment team presents its written findings to the investmentcommittee. For transactions that are either over a certain hold size, or outside our general investment policy, the investment team will present thetransaction to our Board of Directors for approval. Upon approval for the investment, we re-confirm our regulatory company compliance, processand finalize all required legal documents and fund the investment. ·Post-Investment: We continuously monitor the status and progress of our portfolio companies, as well as our investment thesis developed at thetime of investment. We offer managerial assistance to our portfolio companies and provide them access to our investment experience, directindustry expertise and contacts. The same investment team leader that was involved in the investment process will continue to be involved in theportfolio company post-investment. This approach provides continuity of knowledge and allows the investment team to maintain a strong businessrelationship with the financial sponsor and key management of our portfolio companies. As part of the monitoring process, members of ourinvestment team will analyze monthly, quarterly and annual financial statements against previous periods, review financial projections, meet withthe financial sponsor and management (when necessary), attend board meetings (where appropriate) and review all compliance certificates andcovenants. During the quarter ended December 31, 2015, we established an internally developed investment rating system to rate the performance and monitorthe expected level of returns for each debt investment in our portfolio. The investment rating system takes into account both quantitative and qualitativefactors of the portfolio company and the investments held therein, including each investment’s expected level of returns and the collectability of our debtinvestments, comparisons to competitors and other industry participants and the portfolio company's future outlook. The ratings are not intended to reflectthe performance or expected level of returns of our equity investments. 6Table of Contents·Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing above underwriting expectations and thetrends and risk factors are favorable. ·Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the risk factors are neutral to favorable. ·Investment Rating 3 involves an investment performing below underwriting expectations and indicates that the investment requires closermonitoring. The portfolio company or investment may be out of compliance with financial covenants and interest payments may be impaired,however principal payments are generally not past due. ·Investment Rating 4 indicates that the investment is performing materially below underwriting expectations and the risk of the investment hasincreased substantially. Interest and principal payments on our investment are likely to be impaired. Determination of Net Asset Value and Portfolio Valuation ProcessWe determine our net asset value (“NAV”) per share on a quarterly basis. The NAV per share is equal to our total assets minus liabilities divided bythe total number of shares of common stock outstanding.We determine in good faith the fair value of our portfolio investments pursuant to a valuation policy in accordance with Accounting StandardsCodification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) and a valuation process approved by our Board of Directors and inaccordance with the 1940 Act. Our valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio.We undertake a multi-step valuation process each quarter in connection with determining the fair value of our investments. Our Board of Directorsis ultimately responsible for overseeing, reviewing and approving, in good faith, our determination of the fair value of each investment in our portfolio. Thevaluation process is led by the finance department in conjunction with the investment teams. Valuations of each portfolio security are prepared quarterly bythe finance department using updated portfolio company financial and operational information. Each investment valuation is also subject to review by theexecutive officers and investment teams.In conjunction with the internal valuation process, we have engaged an independent consulting firm that specializes in financial due diligence,valuation, asset-backed lending services, and business advisory services, to provide a third-party valuation review of certain of our investments. Our Boardof Directors is ultimately responsible for determining the fair value of our investments in good faith.COMPETITIONWe compete for attractive investment opportunities with other financial institutions, including business development companies, junior capitallenders, and banks. We believe we are able to be competitive with these entities primarily on the basis of the experience and contacts of our managementteam and our responsive and efficient investment analysis and decision-making processes. However, many of our competitors are substantially larger andhave considerably greater financial, technical and marketing resources than we do. Furthermore, our competitors may have a lower cost of funds and manyhave access to funding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances or different riskassessments, which could allow them to consider a wider variety of investments, establish more relationships and build their market shares. In addition, manyof our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. See “Risk Factors—Risks Related to Our Businessand Structure—We Operate in a Highly Competitive Market for Investment Opportunities.”We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and resultsof operations. In addition, because of this competition, we may be unable to take advantage of attractive investment opportunities and may be unable toidentify and make investments that satisfy our investment objectives or meet our investment goals. 7Table of ContentsDIVIDEND REINVESTMENT PLAN We have adopted a dividend reinvestment plan ("DRIP") that provides for the reinvestment of dividends on behalf of our shareholders. Under theDRIP, if we declare a dividend, registered shareholders who have opted into the DRIP as of the dividend record date will have their dividend automaticallyreinvested into additional shares of our common stock. The share requirements of the DRIP may be satisfied through the issuance of new shares of commonstock or through open market purchases of common stock by the DRIP plan administrator. Newly-issued shares will be valued based upon the final closingprice of CSWC’s common stock on a valuation date determined for each dividend by our Board of Directors. Shares purchased in the open market to satisfythe DRIP requirements will be valued based upon the average price of the applicable shares purchased by the DRIP plan administrator, before any associatedbrokerage or other costs. ELECTION TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY AND REGULATED INVESTMENT COMPANYBoth CSWC and CSVC individually are closed-end, non-diversified management investment companies. CSWC has elected to be treated as a BDCunder the 1940 Act. In addition, we have elected for both CSWC and CSVC to be treated as RICs under Subchapter M of the Code. Our election to beregulated as a BDC and our election to be treated as a RIC for federal income tax purposes have a significant impact on our operations. Some of the mostimportant effects on our operations of our election to be regulated as a BDC and our election to be treated as a RIC are outlined below.·We report our investments at market value or fair value with changes in value reported through our consolidated statements of operations.In accordance with the requirements of Article 6 of Regulation S-X, we report all of our investments, including debt investments, at market value or,for investments that do not have a readily available market value, at their “fair value” as determined in good faith by our Board of Directors.Changes in these values are reported through our statements of operations under the caption of “net unrealized appreciation (depreciation) ofinvestments.” See “Determination of Net Asset Value and Portfolio Valuation Process” above.·We intend to distribute substantially all of our income to our shareholders. We generally will be required to pay income taxes only on theportion of our taxable income we do not distribute to shareholders (actually or constructively).As a RIC, so long as we meet certain minimum distribution, source of income and asset diversification requirements, we generally are required to payU.S. federal income taxes only on the portion of our taxable income and gains we do not distribute (actually or constructively) and certain built-ingains. We intend to distribute to our shareholders substantially all of our income. We may, however, make deemed distributions to our shareholdersof any retained net long-term capital gains. If this happens, our shareholders will be treated as if they received an actual distribution of the netcapital gains and reinvested the net after-tax proceeds in us. Our shareholders also may be eligible to claim a tax credit (or, in certain circumstances,a tax refund) equal to their allocable share of the corporate-level U.S. federal income tax we pay on the deemed distribution. See “Material U.S.Federal Income Tax Considerations.” We met the minimum distribution requirements for tax years 2013, 2014 and 2015 and continually monitorour distribution requirements with the goal of ensuring compliance with the Code. 8Table of ContentsIn addition, we have a wholly-owned taxable subsidiary, or the Taxable Subsidiary, which holds a portion of one or more of our portfolioinvestments that are listed on the Consolidated Schedule of Investments. The Taxable Subsidiary is consolidated for financial reporting purposes inaccordance with U.S. Generally Accepted Accounting Principles (“GAAP”), so that our consolidated financial statements reflect our investments inthe portfolio companies owned by the Taxable Subsidiary. The purpose of the Taxable Subsidiary is to permit us to hold certain interests in portfoliocompanies that are organized as limited liability companies, or LLCs (or other forms of pass-through entities) and still satisfy the RIC taxrequirement that at least 90.0% of our gross income for federal income tax purposes must consist of qualifying investment income. Absent theTaxable Subsidiary, a proportionate amount of any gross income of a partnership or LLC (or other pass-through entity) portfolio investment wouldflow through directly to us. To the extent that such income did not consist of investment income, it could jeopardize our ability to qualify as a RICand therefore cause us to incur significant amounts of corporate-level U.S. federal income taxes. Where interests in LLCs (or other pass-throughentities) are owned by the Taxable Subsidiary, however, the income from those interests is taxed to the Taxable Subsidiary and does not flowthrough to us, thereby helping us preserve our RIC status and resultant tax advantages. The Taxable Subsidiary is not consolidated for U.S. federalincome tax purposes and may generate income tax expense as a result of their ownership of the portfolio companies. This income tax expense, if any,is reflected in our Statement of Operations.·Our ability to use leverage as a means of financing our portfolio of investments is limited.As a BDC, we are required to meet a coverage ratio of total assets to total senior securities of at least 200.0%. For this purpose, senior securitiesinclude all borrowings and any preferred stock we may issue in the future. Additionally, our ability to utilize leverage as a means of financing ourportfolio of investments may be limited by this asset coverage test. While the use of leverage may enhance returns if we meet our investmentobjective, our returns may be reduced or eliminated if our returns on investments are less than the costs of borrowing.·We are required to comply with the provisions of the 1940 Act applicable to business development companies.As a BDC, we are required to have a majority of directors who are not “interested” persons under the 1940 Act. In addition, we are required tocomply with other applicable provisions of the 1940 Act, including those requiring the adoption of a code of ethics, fidelity bonding andinvestment custody arrangements. See “Regulation as a Business Development Company” below.Regulation as a Business Development CompanyWe have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions betweenBDCs and their affiliates and principal underwriters as well as their respective affiliates. The 1940 Act requires that a majority of the members of the board ofdirectors of a BDC be persons other than “interested persons,” as defined in the 1940 Act. In addition, the 1940 Act provides that we may not change thenature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by holders of a majority of our outstanding votingsecurities.The 1940 Act defines “a majority of the outstanding voting securities” as the lesser of (1) 67% or more of the voting securities of holders present orrepresented by proxy at a meeting if the holders of more than 50% of our outstanding voting securities are present or represented by proxy or (2) more than50% of our voting securities.The following is a brief description of the 1940 Act provisions applicable to BDCs, which is qualified in its entirety by reference to the full text ofthe 1940 Act and rules issued thereunder by the Securities and Exchange Commission (the “SEC”).·Generally, to be eligible to elect BDC status, a company must primarily engage in the business of furnishing capital and making significantmanagerial assistance available to companies that do not have ready access to conventional financial channels. Companies that satisfy certainadditional criteria are defined as "eligible portfolio companies." In general, in order to qualify as a BDC, a company must: (1) be a domesticcompany; (2) have registered a class of its securities pursuant to Section 12 of the Exchange Act; (3) operate for the purpose of investing in thesecurities of certain types of eligible portfolio companies, including early stage or emerging companies and businesses suffering or just recoveringfrom financial distress (see following paragraph); (4) make available significant managerial assistance to such portfolio companies; and (5) file aproper notice of election with the SEC. 9Table of Contents·An eligible portfolio company generally is a domestic company that is not an investment company or is excluded from investment company statuspursuant to exclusions for certain types of financial companies (such as brokerage firms, banks, insurance companies and investment banking firms)and that: (1) does not have a class of securities listed on a national securities exchange; (2) has a class of equity securities listed on a nationalsecurities exchange with a market capitalization of less than $250 million; or (3) is controlled by the BDC itself or together with others and has arepresentative on the board of directors of the company controlled by the BDC. The 1940 Act presumes that a person has “control” of a portfoliocompany if that person owns at least 25% of its outstanding voting securities. ·As a BDC, we are required to provide and maintain a bond issued by a reputable fidelity insurance company. Furthermore, as a BDC, we areprohibited from protecting any director or officer against any liability to us or our shareholders arising from willful malfeasance, bad faith, grossnegligence or reckless disregard of the duties involved in the conduct of that person’s office. ·We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws,review these policies and procedures annually for their adequacy and the effectiveness of their implementation and designate a chief complianceofficer to be responsible for administering these policies and procedures.Qualifying AssetsThe 1940 Act provides that we may not make an investment in non-qualifying assets unless at the time of the investment at least 70% of the value ofour total assets (measured as of the date of our most recently filed financial statements) consists of qualifying assets (the “70% test”). Qualifying assetsinclude: (1) securities of eligible portfolio companies; (2) securities of certain companies that were eligible portfolio companies at the time we initiallyacquired their securities and in which we retain a substantial interest; (3) securities of certain controlled companies; (4) securities of certain bankrupt,insolvent or distressed companies; (5) securities received in exchange for or distributed in or with respect to any of the foregoing; and (6) cash items, U.S.government securities and high-quality short-term debt. The SEC has adopted a rule permitting a BDC to invest its funds in certain money market funds. The 1940 Act also places certain restrictions on the nature of the transactions in which, and the persons from whom, securities can be purchased and beconsidered qualifying assets.Managerial Assistance to Portfolio CompaniesIn order to count portfolio securities as qualifying assets for the purpose of the 70% test, we must either control the issuer of the securities or mustoffer to make available to the issuer of the securities significant managerial assistance. However, where we purchase securities in conjunction with one ormore other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerialassistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted,provides, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.Idle Fund InvestmentsWe hold funds that may soon be invested in “qualifying assets.” We may hold these funds in cash, cash equivalents, U.S. government securities,short-term investments in secured debt investments, independently rated debt investments and diversified bond funds. We refer to these investments as idlefund investments.Senior SecuritiesWe are permitted by the 1940 Act, under specific conditions, to issue multiple classes of debt and a single class of preferred stock if our assetcoverage, as defined by the 1940 Act, is at least 200% after such issuance of debt or preferred stock (i.e. senior securities may not be in excess of our netassets). Under specific conditions, we are also permitted by the 1940 Act to issue warrants. 10Table of ContentsCommon Stock As a BDC, the 1940 Act generally limits our ability to issue and sell our common stock at a price below our NAV per share, exclusive of anydistributing commission or discount, without shareholder approval. Shares of our common stock have traded below our NAV per share. While our commonstock continues to trade at a price below our NAV per share, there are no assurances that we can issue or sell shares of our common stock if needed to fund ourbusiness. In addition, even in certain instances where we could issue or sell shares of our common stock at a price below our NAV per share, such issuancecould result in dilution in our NAV per share, which could result in a decline of our stock price.Code of EthicsWe adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certainpersonal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts including securities that may bepurchased or held by us, so long as those investments are made in accordance with the code’s requirements. Certain transactions involving certain personsclosely related to us, including our directors, officers and employees, may require approval of the SEC. However, the 1940 Act ordinarily does not restricttransactions between us and our portfolio companies.Compliance Policies and ProceduresWe have adopted and implemented written policies and procedures reasonably designed to prevent violation of the U.S. federal securities laws, andare required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation, and to designate aChief Compliance Officer to be responsible for administering these policies and procedures. Michael S. Sarner serves as our Chief Compliance Officer.Proxy Voting Policies and ProceduresWe vote proxies relating to our portfolio securities in a manner which we believe will be in the best interest of our shareholders. We review on acase-by-case basis each proposal submitted to a shareholder vote to determine its impact on the portfolio securities held by us. Although we generally voteagainst proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons todo so.Our proxy voting decisions are made by the investment professionals who are responsible for monitoring each of our investments. To ensure that ourvote is not the product of a conflict of interest, we require that: (1) anyone involved in the decision making process disclose to our Chief Compliance Officerany potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (2) employeesinvolved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce anyattempted influence from interested parties.Shareholders may, without charge, obtain information regarding how we voted proxies with respect to our portfolio securities by making a writtenrequest for proxy voting information to: Chief Compliance Officer, 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas 75240.Regulation as a Regulated Investment CompanyElection to be Taxed as a RICWe have qualified and elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally are not subject to corporate-level U.S.federal income taxes on any income that we distribute to our shareholders from our tax earnings and profits. To qualify as a RIC, we must, among otherthings, meet certain source-of-income and asset diversification requirements (as described below). In addition, in order to obtain RIC tax treatment, we mustdistribute to our shareholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our net ordinary incomeplus the excess, if any, of realized net short-term capital gain over realized net long-term capital loss, or the Annual Distribution Requirement. Even if wequalify as a RIC, we generally will be subject to corporate-level U.S. federal income tax on our undistributed taxable income and could be subject to U.S.federal excise, state, local and foreign taxes. 11Table of ContentsTaxation as a RICProvided that we qualify as a RIC, we will not be subject to U.S. federal income tax on the portion of our investment company taxable income andnet capital gain (which we define as net long-term capital gain in excess of net short-term capital loss) that we timely distribute to shareholders. We will besubject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed distributed) to our shareholders.We will be subject to a 4.0% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner anamount at least equal to the sum of (1) 98.0% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one year periodended October 31 and (3) any income recognized, but not distributed, in preceding years and on which we paid no U.S. federal income tax. In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:·Meet the Annual Distribution Requirement;·Qualify to be treated as a BDC or be registered as a management investment company under the 1940 Act at all times during each taxable year;·Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gainsfrom the sale or other disposition of stock or other securities or foreign currencies or other income derived with respect to our business ofinvesting in such stock, securities or currencies and net income derived from an interest in a “qualified publicly traded partnership” (as definedin the Code), or the 90% Income Test; and·Diversify our holdings so that at the end of each quarter of the taxable year:oat least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, andother securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% ofthe outstanding voting securities of the issuer (which for these purposes includes the equity securities of a “qualified publicly tradedpartnership”); andono more than 25% of the value of our assets is invested in the securities, other than U.S. Government securities or securities of otherRICs, (1) of one issuer (2) of two or more issuers that are controlled, as determined under applicable tax rules, by us and that areengaged in the same or similar or related trades or businesses or (3) of one or more “qualified publicly traded partnerships,” or theDiversification Tests.To the extent that we invest in entities treated as partnerships for U.S. federal income tax purposes (other than a “qualified publicly tradedpartnership”), we generally must include the items of gross income derived by the partnerships for purposes of the 90% Income Test, and the income that isderived from a partnership (other than a “qualified publicly traded partnership”) will be treated as qualifying income for purposes of the 90% Income Testonly to the extent that such income is attributable to items of income of the partnership which would be qualifying income if realized by us directly. Inaddition, we generally must take into account our proportionate share of the assets held by partnerships (other than a “qualified publicly traded partnership”)in which we are a partner for purposes of the Diversification Tests. 12Table of ContentsIn order to meet the 90% Income Test, we have established a special purpose entity, and in the future may establish additional such entities, to holdassets from which we do not anticipate earning dividend, interest or other income under the 90% Income Test (the “Taxable Subsidiary”). Any investmentsheld through a Taxable Subsidiary generally are subject to U.S. federal income and other taxes, and therefore we can expect to achieve a reduced after-taxyield on such investments.We may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if wehold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind interest or,in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accruesover the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We anticipate that a portion ofour income may constitute original issue discount or other income required to be included in taxable income prior to receipt of cash.Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of theaccrual, we may be required to make a distribution to our shareholders in order to satisfy the Annual Distribution Requirement, even though we will not havereceived any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to obtain and maintainRIC tax treatment under the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raiseadditional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail toqualify for RIC tax treatment and thus become subject to corporate-level income tax.Furthermore, a portfolio company in which we invest may face financial difficulty that requires us to work-out, modify or otherwise restructure ourinvestment in the portfolio company. Any such restructuring may result in unusable capital losses and future non-cash income. Any restructuring may alsoresult in our recognition of a substantial amount of non-qualifying income for purposes of the 90% Income Test, such as cancellation of indebtedness incomein connection with the work-out of a leveraged investment (which, while not free from doubt, may be treated as non-qualifying income) or the receipt of othernon-qualifying income.Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated ascapital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant.Investments by us in non-U.S. securities may be subject to non-U.S. income, withholding and other taxes, and therefore, our yield on any suchsecurities may be reduced by such non-U.S. taxes. Shareholders will generally not be entitled to claim a credit or deduction with respect to non-U.S. taxespaid by us.We are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. Under the 1940 Act, we are not permitted to makedistributions to our shareholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See“Regulation as a Business Development Company” above. Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by(1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assetsin order to meet the Annual Distribution Requirement or to avoid the excise tax, we may make such dispositions at times that, from an investment standpoint,are not advantageous.If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, we will be subject to tax in thatyear on all of our taxable income, regardless of whether we make any distributions to our shareholders. In that case, all of such income will be subject tocorporate-level U.S. federal income tax, reducing the amount available to be distributed to our shareholders. See “Failure To Obtain RIC Tax Treatment”below.As a RIC, we are not allowed to carry forward or carry back a net operating loss for purposes of computing our investment company taxable incomein other taxable years. U.S. federal income tax law generally permits a RIC to carry forward (1) the excess of its net short-term capital loss over its net long-term capital gain for a given year as a short-term capital loss arising on the first day of the following year and (2) the excess of its net long-term capital lossover its net short-term capital gain for a given year as a long-term capital loss arising on the first day of the following year. Future transactions we engage inmay cause our ability to use any capital loss carryforwards, and unrealized losses once realized, to be limited under Section 382 of the Code. Certain of ourinvestment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (1) disallow, suspend orotherwise limit the allowance of certain losses or deductions, (2) convert lower taxed long-term capital gain and qualified dividend income into higher taxedshort-term capital gain or ordinary income, (3) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (4)cause us to recognize income or gain without a corresponding receipt of cash, (5) adversely affect the time as to when a purchase or sale of stock or securitiesis deemed to occur, (6) adversely alter the characterization of certain complex financial transactions and (7) produce income that will not be qualifyingincome for purposes of the 90% Income Test. We will monitor our transactions and may make certain tax elections in order to mitigate the effect of theseprovisions. 13Table of ContentsAs described above, to the extent that we invest in equity securities of entities that are treated as partnerships for U.S. federal income tax purposes,the effect of such investments for purposes of the 90% Income Test and the Diversification Tests will depend on whether or not the partnership is a “qualifiedpublicly traded partnership” (as defined in the Code). If the entity is a “qualified publicly traded partnership,” the net income derived from such investmentswill be qualifying income for purposes of the 90% Income Test and will be “securities” for purposes of the Diversification Tests. If the entity is not treated asa “qualified publicly traded partnership,” however, the consequences of an investment in the partnership will depend upon the amount and type of incomeand assets of the partnership allocable to us. The income derived from such investments may not be qualifying income for purposes of the 90% Income Testand, therefore, could adversely affect our qualification as a RIC. We intend to monitor our investments in equity securities of entities that are treated aspartnerships for U.S. federal income tax purposes to prevent our disqualification as a RIC.We may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be clear or may be subject torecharacterization by the IRS. To the extent the tax treatment of such securities or the income from such securities differs from the expected tax treatment, itcould affect the timing or character of income recognized, requiring us to purchase or sell securities, or otherwise change our portfolio, in order to complywith the tax rules applicable to RICs under the Code.We may distribute taxable dividends that are payable in cash or shares of our common stock at the election of each shareholder. Under certainapplicable provisions of the Code and the Treasury regulations, distributions payable in cash or in shares of stock at the election of shareholders are treated astaxable dividends. The Internal Revenue Service has issued private rulings indicating that this rule will apply even where the total amount of cash that maybe distributed is limited to no more than 20% of the total distribution. Under these rulings, if too many shareholders elect to receive their distributions incash, each such shareholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of their distribution in shares ofstock. If we decide to make any distributions consistent with these rulings that are payable in part in our stock, taxable shareholders receiving such dividendswill be required to include the full amount of the dividend (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-termcapital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profitsfor United States federal income tax purposes. As a result, a U.S. shareholder may be required to pay tax with respect to such dividends in excess of any cashreceived. If a U.S. shareholder sells the stock it receives in order to pay this tax, the sales proceeds may be less than the amount included in income withrespect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. shareholders, we may berequired to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if asignificant number of our shareholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on thetrading price of our stock.Failure to Obtain RIC Tax TreatmentIf we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to qualify as a RIC for thatyear if certain relief provisions are applicable (which may, among other things, require us to pay certain corporate-level federal taxes or to dispose of certainassets). 14Table of ContentsIf we were unable to obtain tax treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would notbe able to deduct distributions to shareholders, nor would they be required to be made. Distributions would generally be taxable to our shareholders asdividend income to the extent of our current and accumulated earnings and profits (in the case of non-corporate U.S. shareholders, generally at a maximumfederal income tax rate applicable to qualified dividend income of 20.0%). Subject to certain limitations under the Code, corporate distributees would beeligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return ofcapital to the extent of the shareholder’s tax basis, and any remaining distributions would be treated as a capital gain.If we fail to meet the RIC requirements for more than two consecutive years and then, seek to re-qualify as a RIC, we would be subject to corporate-level taxation on any built-in gain recognized during the succeeding 5-year period unless we made a special election to recognize all that built-in gain uponour re-qualification as a RIC and to pay the corporate-level tax on that built-in gain.SMALL BUSINESS INVESTMENT COMPANY REGULATIONSCSVC is licensed by the Small Business Administration (“SBA”) to operate as an SBIC under Section 301(c) of the Small Business Investment Act of1958.SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under SBIC regulations, an SBIC may make loans toeligible small businesses, invest in equity securities of those businesses and provide them with consulting and advisory services.Under current SBIC regulations, eligible small businesses generally include businesses that (together with their affiliates) have a tangible net worthnot exceeding $19.5 million and have average annual net income after federal income taxes not exceeding $6.5 million (average net income to be computedwithout benefit of any carryover loss) for the two most recent fiscal years. In addition, an SBIC must devote at least 25% of its investment activity to“smaller” enterprises as defined by the SBA. A smaller enterprise generally includes businesses that have a tangible net worth not exceeding $6 million andhave average annual net income after federal income taxes not exceeding $2 million (average net income to be computed without benefit of any netcarryover loss) for the two most recent fiscal years. SBIC regulations also provide alternative size standard criteria to determine eligibility for designation asan eligible small business or smaller concern, which criteria depend on the primary industry in which the business is engaged and are based on factors such asthe number of employees and gross revenue. However, once an SBIC has invested in a company, it may continue to make follow-on investments in thecompany, regardless of the size of the portfolio company at the time of the follow-on investment, up to the time of the portfolio company’s initial publicoffering.The SBA prohibits an SBIC from providing funds (1) to small businesses for certain purposes, such as relending and investment outside the UnitedStates, (2) to businesses engaged in certain prohibited industries, and (3) to certain “passive” (non-operating) companies. In addition, without prior SBAapproval, an SBIC may not invest an amount equal to more than approximately 30% of the SBIC’s regulatory capital in any one portfolio company and itsaffiliates.The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies (such as limiting the permissible interestrate on debt securities held by an SBIC in a portfolio company). Although prior regulations prohibited an SBIC from controlling a small business concernexcept in limited circumstances, regulations adopted by the SBA in 2002 now allow an SBIC to exercise control over a small business for a period of sevenyears from the date on which the SBIC initially acquires its control position. This control period may be extended for an additional period of time with theSBA’s prior written approval.The SBA restricts the ability of an SBIC to lend money to any of its officers, directors and employees or to invest in affiliates thereof. The SBA alsoprohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert)owning 10% or more of any class of capital stock of a licensed SBIC. A “change of control” is any event which would result in the transfer of the power,direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise.An SBIC (or group of SBICs under common control) may generally have outstanding debentures guaranteed by the SBA in amounts up to twice theamount of the privately-raised funds of the SBIC(s). Debentures guaranteed by the SBA have a maturity of 10 years, require semi-annual payments of interest,and do not require any principal payments prior to maturity. As of March 31, 2016 and 2015, we had no SBA-guaranteed debentures. 15Table of ContentsSBICs must invest idle funds that are not being used to make loans in investments permitted under SBIC regulations in the following limited typesof securities: (1) direct obligations of, or obligations guaranteed as to principal and interest by, the United States government, which mature within 15months from the date of the investment; (2) repurchase agreements with federally insured institutions with a maturity of seven days or less (and the securitiesunderlying the repurchase obligations must be direct obligations of or guaranteed by the federal government); (3) certificates of deposit with a maturity ofone year or less, issued by a federally insured institution; (4) deposit accounts in a federally insured institution that is subject to a withdrawal restriction ofone year or less; (5) checking accounts in a federally insured institution; or (6) a reasonable petty cash fund.SBICs are periodically examined and audited by the SBA’s staff to determine their compliance with SBIC regulations and are periodically requiredto file forms with the SBA.MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONSThe following discussion is a general summary of the material U.S. federal income tax considerations applicable to us and to an investment in ourshares. This summary does not purport to be a complete description of the income tax considerations applicable to us or to investors in such an investment.For example, we have not described tax consequences that we assume to be generally known by investors or certain considerations that may be relevant tocertain types of holders subject to special treatment under U.S. federal income tax laws, including shareholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, financial institutions, U.S. shareholders (as defined below) whosefunctional currency is not the U.S. dollar, persons who mark-to-market our shares and persons who hold our shares as part of a “straddle,” “hedge” or“conversion” transaction. This summary assumes that investors hold shares of our common stock as capital assets (within the meaning of the Code). Thediscussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this Annual Report on Form10-K and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. This summary does notdiscuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws thatcould result if we invested in tax-exempt securities or certain other investment assets.For purposes of our discussion, a “U.S. shareholder” means a beneficial owner of shares of our common stock that is for U.S. federal income taxpurposes:·A citizen or individual resident of the United States;·A corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the UnitedStates or any state thereof of the District of Columbia;·An estate, the income of which is subject to U.S. federal income taxation regardless of its source; or·A trust if (1) a U.S. court is able to exercise primary supervision over the administration of the trust and one of more U.S. persons have the authorityto control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.For purposes of our discussion, a “Non-U.S. shareholder” means a beneficial owner of shares of our common stock that is neither a U.S. shareholdernor a partnership (including an entity treated as a partnership for U.S. federal income tax purposes).If an entity treated as a partnership for U.S. federal income tax purposes (a “partnership”) holds shares of our common stock, the tax treatment of apartner or member of the partnership will generally depend upon the status of the partner or member and the activities of the partnership. A prospectiveshareholder that is a partner or member in a partnership holding shares of our common stock should consult his, her or its tax advisors with respect to thepurchase, ownership and disposition of shares of our common stock.Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or itsparticular situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including taxreporting requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effectof any possible changes in the tax laws. 16Table of ContentsTaxation of U.S. ShareholdersWhether an investment in shares of our common stock is appropriate for a U.S. shareholder will depend upon that person’s particular circumstances.An investment in shares of our common stock by a U.S. shareholder may have adverse tax consequences. The following summary generally describes certainU.S. federal income tax consequences of an investment in shares of our common stock by taxable U.S. shareholders and not by U.S. shareholders that aregenerally exempt from U.S. federal income taxation. U.S. shareholders should consult their own tax advisors before making an investment in our commonstock.Distributions by us generally are taxable to U.S. shareholders as ordinary income or capital gain. Distributions of our “investment company taxableincome” (which generally is our ordinary income excluding net capital gain) will be taxable as ordinary income to U.S. shareholders to the extent of ourcurrent or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions paid by us tonon-corporate U.S. shareholders (including individuals) are attributable to dividends from U.S. corporations and certain qualified foreign corporations, suchdistributions generally will be eligible for taxation at rates applicable to “qualifying dividends” at a maximum federal income tax rate of 20% provided thatwe properly report such distribution as “qualified dividend income” in a written statement furnished to our shareholders and certain holding period and otherrequirements are satisfied. In this regard, it is not anticipated that a significant portion of distributions paid by us will be attributable to qualifying dividends;therefore, our distributions generally will not qualify for the preferential rates applicable to qualified dividend income. Distributions of our net capital gain(which generally is our net long-term capital gain in excess of net short-term capital loss) properly designated by us as “capital gain dividends” will betaxable to a U.S. shareholder as long-term capital gain (at a maximum federal income tax rate of 20% in the case of individuals, trusts or estates), regardless ofthe U.S. shareholder’s holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional common stock.Distributions in excess of our current and accumulated earnings and profits first will reduce a U.S. shareholder’s adjusted tax basis in such shareholder’scommon stock and, after the adjusted basis is reduced to zero, will constitute capital gain to such U.S. shareholder.In lieu of actually distributing our realized net capital gains, we may retain some or all of our long-term capital gain and elect to be deemed to havemade a distribution of the retained portion to our shareholders (a “deemed distribution”) under the “designated undistributed capital gains” rule of the Code.In that case, among other consequences, we will pay tax on the retained amount, each U.S. shareholder will be required to include his, her or its proportionateshare of the deemed distribution in income as if it had been actually distributed to the U.S. shareholder, and the U.S. shareholder will be entitled to claim acredit equal to his, her or its allocable share of the tax paid thereon by us. The amount of the deemed distribution net of such tax will be added to the U.S.shareholder’s tax basis for his, her or its common stock. Since we expect to pay tax on any retained capital gain at our regular corporate tax rate, and sincethat rate is in excess of the maximum rate currently payable by individuals on net capital gain, the amount of tax that individual shareholders will be treatedas having paid and for which they will receive a credit will exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed asa credit against the U.S. shareholder’s other U.S. federal income tax obligations or may be refunded to the extent it exceeds a shareholder’s liability for U.S.federal income tax. A shareholder that is not subject to U.S. federal income tax or otherwise required to file a U.S. federal income tax return would be requiredto file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to utilize the deemed distributionapproach, we must provide written notice to our shareholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treatany of our investment company taxable income as a “deemed distribution.”We could be subject to the alternative minimum tax, or the AMT, but any items that are treated differently for AMT purposes must be apportionedbetween us and our shareholders and this may affect U.S. shareholders’ AMT liabilities. Although regulations explaining the precise method ofapportionment have not yet been issued, such items will generally be apportioned in the same proportion that distributions paid to each shareholder bear toour taxable income (determined without regard to the dividends paid deduction), unless a different method for a particular item is warranted under thecircumstances. 17Table of ContentsFor purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of capital gain dividendspaid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during thetaxable year in question. If we make such an election, the U.S. shareholder will still be treated as receiving the dividend in the taxable year in which thedistribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to shareholders of record on aspecified date in any such month and actually paid during January of the following year, will be treated as if it had been received by our U.S. shareholders onDecember 31 of the year in which the dividend was declared.If an investor purchases shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value ofthe distribution, and the investor will be subject to tax on the distribution even though it represents a return of his, her or its investment.A U.S. shareholder generally will recognize taxable gain or loss if the shareholder sells or otherwise disposes of his, her or its shares of our commonstock. The amount of gain or loss will be measured by the difference between such shareholder’s adjusted tax basis in the common stock sold and the amountof the proceeds received in exchange. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if theshareholder has held his, her or its shares for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital lossarising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of theamount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any lossrecognized upon a disposition of shares of our common stock may be disallowed if other substantially identical shares are purchased (whether throughreinvestment of distributions or otherwise) within 30 days before or after the disposition. The ability to otherwise deduct capital loss may be subject to otherlimitations under the Code.In general, non-corporate U.S. shareholders, including individuals, trusts and estates, are subject to U.S. federal income tax at a maximum rate of15% on their net capital gain, or the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year, including a long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals.Corporate U.S. shareholders currently are subject to U.S. federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income.Non-corporate shareholders with net capital loss for a year (which we define as capital loss in excess of capital gain) generally may deduct up to $3,000 ofsuch losses against their ordinary income each year; any net capital loss of a noncorporate shareholder in excess of $3,000 generally may be carried forwardand used in subsequent years as provided in the Code. Corporate shareholders generally may not deduct any net capital loss for a year, but may carry backsuch losses for three years or carry forward such losses for five years.Certain U.S. shareholders who are individuals, estates or trusts generally are subject to a 3.8% Medicare tax on, among other things, dividends on,and capital gain from the sale or other disposition of, shares of our common stock.A “publicly offered” RIC is a RIC whose shares are either (1) continuously offered pursuant to a public offering, (2) regularly traded on anestablished securities market or (3) held by at least 500 persons at all times during the taxable year. If we are not a publicly offered RIC for any period, a non-corporate shareholder’s pro rata portion of our affected expenses, including our management fees, will be treated as an additional dividend to the shareholderand will be deductible by such shareholder only to the extent permitted under the limitations described below. For non-corporate shareholders, includingindividuals, trusts, and estates, significant limitations generally apply to the deductibility of certain expenses of a non-publicly offered RIC, includingadvisory fees. In particular, these expenses, referred to as miscellaneous itemized deductions, are deductible only to individuals to the extent they exceed 2%of such a shareholder’s adjusted gross income, and are not deductible for AMT purposes. Because we anticipate that shares of our common stock willcontinue to be regularly traded on an established securities market, we believe that we will continue to qualify as a “publicly offered regulated investmentcompany.”We will send to each of our U.S. shareholders, as promptly as possible after the end of each calendar year, a written statement detailing, on a per shareand per distribution basis, the amounts includible in such U.S. shareholder’s taxable income for such year as ordinary income and as long-term capital gain.In addition, the U.S. federal tax status of each year’s distributions generally will be reported to the IRS. Distributions paid by us generally will not be eligiblefor the dividends-received deduction or the preferential tax rate applicable to qualifying dividends. Distributions may also be subject to additional state,local and foreign taxes depending on a U.S. shareholder’s particular situation. 18Table of ContentsWe may be required to withhold U.S. federal income tax, or backup withholding at a rate of 28.0%, from all taxable distributions to any non-corporate U.S. shareholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such shareholder is exempt frombackup withholding or (2) with respect to whom the IRS notifies us that such shareholder has failed to properly report certain interest and dividend income tothe IRS and to respond to notices to that effect. An individual’s taxpayer identification number is his or her social security number. Backup withholding taxis not an additional tax, and any amount withheld may be refunded or credited against the U.S. shareholder’s U.S. federal income tax liability, provided thatproper information is timely provided to the IRS.For taxable years beginning after December 31, 2013, if certain disclosure requirements related to U.S. accounts or ownership are not satisfied, a U.S.federal withholding tax at a 30.0% rate will be imposed on dividends received by U.S. shareholders that own their stock through foreign accounts or foreignintermediaries. In addition, for taxable years beginning after December 31, 2016, if certain disclosure requirements related to U.S. accounts or ownership arenot satisfied, a U.S. federal withholding tax at a 30.0% rate will be imposed on proceeds of sale in respect of our stock received by U.S. shareholders that owntheir stock through foreign accounts or foreign intermediaries. We will not pay any additional amounts in respect of any amounts withheld.Under U.S. Treasury regulations, if a shareholder recognizes a loss with respect to shares of our stock of $2 million or more for an individual, Scorporation, trust or a partnership with at least one non-corporate partner or $10 million or more for a shareholder that is either a corporation or a partnershipwith only corporate partners in any single taxable year (or a greater loss over a combination of years), the shareholder must file with the IRS a disclosurestatement on IRS Form 8886 (or successor form). Direct shareholders of portfolio securities in many cases are exempted from this reporting requirement, butunder current guidance, shareholders of a RIC are not exempted. Future guidance may extend the current exception from this reporting requirement toshareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’streatment of the loss is proper. Significant monetary penalties apply to a failure to comply with this reporting requirement. States may also have a similarreporting requirement. Shareholders should consult their own tax advisors to determine the applicability of these regulations in light of their individualcircumstances.Taxation of Non-U.S. ShareholdersWhether an investment in the shares is appropriate for a Non-U.S. shareholder will depend upon that person’s particular circumstances. Aninvestment in the shares by a Non-U.S. shareholder may have adverse tax consequences. Non-U.S. shareholders should consult their tax advisers beforeinvesting in our common stock.Distributions of our “investment company taxable income” to Non-U.S. shareholders that are not “effectively connected” with a U.S. trade orbusiness carried on by the Non-U.S. shareholder, will generally be subject to withholding of U.S. federal income tax at a rate of 30% (or lower rate providedby an applicable treaty) to the extent of our current and accumulated earnings and profits, unless an applicable exception applies.Actual or deemed distributions of our net capital gain to a Non-U.S. shareholder, and gains realized by a Non-U.S. shareholder upon the sale of ourcommon stock, that are not effectively connected with a U.S. trade or business carried on by the Non-U.S. shareholder, will generally not be subject to U.S.federal withholding tax and generally will not be subject to U.S. federal income tax unless the Non-U.S. shareholder is a nonresident alien individual and isphysically present in the United States for more than 182 days during the taxable year and meets certain other requirements. However, withholding of U.S.federal income tax at a rate of 30.0% on capital gain of nonresident alien individuals who are physically present in the United States for more than the 182day period only applies in exceptional cases because any individual present in the United States for more than 182 days during the taxable year is generallytreated as a resident for U.S. income tax purposes; in that case, he or she would be subject to U.S. income tax on his or her worldwide income at the graduatedrates applicable to U.S. citizens, rather than the 30% U.S. federal withholding tax. 19Table of ContentsIf we distribute our net capital gain in the form of deemed rather than actual distributions (which we may do in the future), a Non-U.S. shareholderwill be entitled to a U.S. federal income tax credit or tax refund equal to the shareholder’s allocable share of the tax we pay on the capital gain deemed tohave been distributed. In order to obtain the refund, the Non-U.S. shareholder must obtain a U.S. taxpayer identification number and file a U.S. federal incometax return even if the Non-U.S. shareholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income taxreturn. Accordingly, investment in the shares may not be appropriate for a Non-U.S. shareholder.Distributions of our “investment company taxable income” and net capital gain (including deemed distributions) to Non-U.S. shareholders, and gainrealized by Non-U.S. shareholders upon the sale of our common stock that is “effectively connected” with a U.S. trade or business carried on by the Non-U.S.shareholder (or if an income tax treaty applies, attributable to a “permanent establishment” in the United States), will be subject to U.S. federal income tax atthe graduated rates applicable to U.S. citizens, residents and domestic corporations. Corporate Non-U.S. shareholders may also be subject to an additionalbranch profits tax at a rate of 30% imposed by the Code (or lower rate provided by an applicable treaty). In the case of a non-corporate Non-U.S. shareholder,we may be required to withhold U.S. federal income tax from distributions that are otherwise exempt from withholding tax (or taxable at a reduced rate)unless the Non-U.S. shareholder certifies his or her foreign status under penalties of perjury or otherwise establishes an exemption.The tax consequences to a Non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may differ from those described herein.Non-U.S. shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in our shares.Dividends distributed by CSWC as a regulated investment company may constitute interest-related dividends under Sections 871(k) and 881(e) ofthe Code to the extent paid out of U.S. source earnings that would have qualified for an exemption from U.S. nonresident withholding tax if a non-U.S.resident received such earnings directly. This provision of the Code had expired for tax years beginning after December 31, 2014. This provision wasextended retroactively for the 2015 tax year and made permanent prospectively. As a result, ordinary dividends paid in the future by CSWC may beconsidered interest-related dividends and as such are not subject to U.S. nonresident withholding tax for non-U.S. residents.A Non-U.S. shareholder who is a nonresident alien individual may be subject to information reporting and backup withholding of U.S. federalincome tax on dividends unless the Non-U.S. shareholder provides us or the dividend paying agent with an IRS Form W-8BEN (or an acceptable substituteform) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. shareholder or otherwise establishes an exemption frombackup withholding.Generally, for taxable years beginning after December 31, 2013, if certain disclosure requirements related to U.S. accounts or ownership are notsatisfied, a U.S. federal withholding tax of 30.0% may be imposed on dividends received by foreign shareholders, or U.S. shareholders that own their stockthrough foreign accounts or foreign intermediaries. For certain investors that held their stock prior to July 1, 2014, transition rules may apply to deferapplicable of these rules until July 1, 2016. In addition, for taxable years beginning after December 31, 2016, if certain disclosure requirements related to U.S.accounts or ownership are not satisfied, a U.S. federal withholding tax at a 30% rate may also be imposed on gross proceeds of sale in respect of stockreceived by foreign shareholders and U.S. shareholders that own their stock through foreign accounts or foreign intermediaries. Any such withholding wouldbe subtracted from amounts otherwise due to shareholders and are not reimbursable by the Company.Non-U.S. persons should consult their own tax advisors with respect to the U.S. federal income tax and withholding tax, and state, local and foreigntax consequences of an investment in the shares.Possible Legislative or Other Actions Affecting Tax ConsiderationsProspective investors should recognize that the present U.S. federal income tax treatment of an investment in our stock may be modified bylegislative, judicial or administrative action at any time, and that any such action may affect investments and commitments previously made. The rulesdealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process any by the IRS and the U.S. TreasuryDepartment, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Revisions in U.S. federal taxlaws and interpretations thereof could affect the tax consequences of an investment in our stock. 20Table of ContentsState and Local Tax TreatmentThe state and local tax treatment may differ from federal income tax treatment.The discussion set forth herein does not constitute tax advice, and potential investors should consult their own tax advisors concerning the taxconsiderations relevant to their particular situation.THE NASDAQ GLOBAL SELECT MARKET CORPORATE GOVERNANCE REGULATIONSThe NASDAQ Global Select Market (“NASDAQ”) has adopted corporate governance listing standards with which listed companies must comply inorder to remain listed. We believe that we are in compliance with these corporate governance listing standards. We intend to monitor our compliance withfuture listing standards and to take all necessary actions to ensure that we remain in compliance.SECURITIES ACT OF 1934 AND SARBANES-OXLEY ACT COMPLIANCEWe are subject to the reporting and disclosure requirements of the Exchange Act, including the filing of quarterly, annual and current reports, proxystatements and other required items. In addition, we are subject to the Sarbanes-Oxley Act of 2002 and regulations promulgated thereunder, which imposes awide variety of regulatory requirements on publicly-held companies and their insiders. For example:·Pursuant to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer are required to certify the accuracy ofthe financial statements contained in our periodic reports;·Pursuant to Item 307 of Regulation S-K, our periodic reports are required to disclose our conclusions about the effectiveness of our disclosurecontrols and procedures;·Pursuant to Rule 13a-15 of the Exchange Act, our management is required to prepare a report on its assessment of our internal control overfinancial reporting, and we engage an independent registered public accounting firm to separately audit our internal control over financialreporting; and ·Pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there weresignificant changes in our internal control over financial reporting or in other factors that could significantly affect these controls subsequentto the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 21Table of ContentsItem 1A.Risk FactorsInvesting in our common stock involves a number of significant risks. In addition to other information contained in this Annual Report on Form10-K, investors should consider the following information before making an investment in our common stock. The risks and uncertainties described belowcould adversely affect the material risks we face. Risks and uncertainties not presently known to us, or not presently deemed material by us, may also impairour operations and performance. If any of the following risks actually occur, our business, financial condition or results of operations could be materiallyadversely affected. If that happens, the trading price of our common stock could decline, and you may lose all or part of your investment.RISKS RELATED TO OUR BUSINESS AND STRUCTUREOur investment portfolio is and will continue to be recorded at fair value. Our Board of Directors has final responsibility for overseeing, reviewing andapproving, in good faith, our fair value determination. As a result of recording our investments at fair value, there is and will continue to be subjectivityas to the value of our portfolio investments. Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair valueas determined by us, with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, our fair valuedetermination. Typically, there is not a public market for the securities of the privately held companies in which we have invested and will continue toinvest. As a result, we value these securities quarterly at fair value based on inputs from management and our investment team, along with the oversight,review and approval of our Board of Directors.The determination of fair value and consequently, the amount of unrealized gains and losses in our portfolio, are to a certain degree, subjective anddependent on a valuation process approved by our Board of Directors. Certain factors that may be considered in determining the fair value of ourinvestments include external events, such as private mergers, sales and acquisitions involving comparable companies. Because of the inherent uncertainty ofthe valuation of portfolio securities which do not have readily ascertainable market values, our fair value determinations may differ materially from thevalues a third party would be willing to pay for our securities or the values which would be applicable to unrestricted securities having a public market. Dueto this uncertainty, our fair value determinations may cause our net asset value on a given date to materially understate or overstate the value that we mayultimately realize on one or more of our investments. As a result, investors purchasing our common stock based on an overstated net asset value may pay ahigher price than the value of our investments might warrant. Conversely, investors selling shares during a period in which the net asset value understates thevalue of our investments may receive a lower price for their shares than the value of our investments might warrant.Our financial condition and results of operations will depend on our ability to effectively allocate and manage capital.Our ability to achieve our investment objective of maximizing risk-adjusted returns to shareholders depends on our ability to effectively allocateand manage capital. Capital allocation depends, in part, upon our investment team’s ability to identify, evaluate, invest in and monitor companies that meetour investment criteria.Accomplishing our investment objectives is largely a function of our investment team’s management of the investment process and our access toinvestments offering attractive risk adjusted returns. In addition, members of our investment team are called upon, from time to time, to provide managerialassistance to some of our portfolio companies.The results of our operations depend on many factors, including the availability of opportunities for investment, readily accessible short and long-term funding alternatives in the financial markets and economic conditions. Our ability to make new investments at attractive relative valuations is also afunction of our marketing and our management of the investment process. If we fail to invest our capital effectively, our return on equity may be negativelyimpacted, which could have a material adverse effect on the price of the shares of our common stock. 22Table of ContentsWe operate in a highly competitive market for investment opportunities.We compete for attractive investment opportunities with other financial institutions, including business development companies, junior capitallenders, and banks. Some of these competitors are substantially larger and have greater financial, technical and marketing resources, and some are subject todifferent, and frequently less stringent, regulations. Our spin-off of 63.5% of our total net asset value increased any size advantages our competitors mayenjoy. Our competitors may have a lower cost of funds and may have access to funding sources that are not available to us. Furthermore, many of ourcompetitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. As a result of this competition, we may not be able totake advantage of attractive investment opportunities from time to time, and there can be no assurance that we will be able to identify and make investmentsthat satisfy our objectives. A significant increase in the number and/or size of our competitors in our target market could force us to accept less attractiveinvestment terms. We cannot assure you that the competitive pressures we face will not have a materially adverse effect on our business, financial conditionand results of operation.The capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely affect debt and equitycapital markets in the United States, which may have a negative impact on our business and operations.The U.S. capital markets experienced increased volatility and disruption over the past several years, leading to increased investor uncertainty anddepressed levels of consumer and commercial spending. Disruptions in the capital markets increased the spread between the yields realized on risk-free andhigher risk securities, resulting in illiquidity in parts of the capital markets. We cannot provide any assurance that these conditions will not worsen. If theseconditions continue or worsen, the prolonged period of market illiquidity may have an adverse effect on our business, financial condition, and results ofoperations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lendersnot to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results.In addition, significant changes or volatility in the capital markets may also have a negative effect on the valuations of our investments. While mostof our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are soldin a principal market to market participants (even if we plan on holding an investment through its maturity). Significant changes in the capital markets mayalso affect the pace of our investment activity and the potential for liquidity events involving our investments. Thus, the illiquidity of our investments maymake it difficult for us to sell our investments to access capital if required, and as a result, we could realize significantly less than the value at which we haverecorded our investments if we were required to sell them for liquidity purposes. An inability to raise or access capital could have a material adverse effect onour business, financial condition or results of operations.If the Share Distribution is ultimately determined to be taxable for U.S. federal income tax purposes, our shareholders could incur significant U.S.federal income tax liabilities. A condition to the Share Distribution was CSWC’s receipt of an opinion from the accounting firm of KPMG substantially to the effect that the ShareDistribution should qualify as tax free under Sections 355, 368(a)(1)(D) and related provisions of the Code. An opinion of an accounting firm is not bindingon the Internal Revenue Service (“IRS”). Accordingly, the IRS may reach conclusions with respect to the Share Distribution that are different from theconclusions reached in the opinion. The opinion relied on certain facts, assumptions, representations and undertakings from CSWC and CSWI regarding thepast and future conduct of the companies’ respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter KPMG’sconclusions. If the Share Distribution ultimately is determined to be taxable, it could be treated as a taxable dividend to you for U.S. federal income tax purposesand you could incur significant U.S. federal income tax liabilities. In addition, CSWC would recognize a taxable gain to the extent that the fair market valueof CSWI common stock exceeds CSWC’s tax basis in that stock on the date of the Share Distribution. 23Table of ContentsAny unrealized losses we experience may be an indication of future realized losses, which could reduce our income available to make distributions.As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at the fair value as determined in goodfaith by our Board of Directors pursuant to a valuation methodology approved by our Board of Directors. Decreases in the market values or fair values of ourinvestments will be recorded as unrealized losses. An unrealized loss could be an indication of a portfolio company’s inability to meet its repaymentobligations or generate cash flow. This could result in realized losses in the future and ultimately in reductions of our income available to pay dividends orinterest and principal on our securities and could have a material adverse effect on your investment.Our historical financial statements are not necessarily representative of the results we would have achieved as a stand-alone publicly-traded companyand therefore may not be indicative of our future performance. Capital Southwest spun off 63.5% of our net asset value to shareholders and divested other major investments during the past three years. Weemerged from these divestitures and the spin-off with a significantly different company profile. Our historical financial statements included in this Form 10-K for the periods are not necessarily representative of the results we would have achieved as a stand-alone publicly traded company with a smaller marketfootprint. Accordingly, this data may not be indicative of our future performance, or necessarily reflect what our financial position and results of operationsor cash flows would have been, had we operated as a separate, stand-alone publicly-traded entity during all of the periods presented.Prior to the spin-off, we had not previously operated with a primary focus on debt investments. Prior to the spin-off, we had not previously operated with a primary focus on debt investments, and our management has limited experience, as agroup, in operating our business as a stand-alone entity. Following the spin-off, we are now responsible for arranging our own funding, managing all of ourown administrative and employee arrangements and supervising all of our legal and financial affairs, including publicly reported financial statements. Weanticipate that our success in these endeavors will depend substantially upon the ability of our Board of Directors, senior management and other keyemployees to work together to implement our focused debt investment strategy. Accordingly, there is no assurance that as an independent company, our aggregate results of operations will continue at the same level as in the pastor we will fully implement our business strategy, which could have a material adverse effect on our business, results of operations, financial condition andcash flows.Adverse market and economic conditions could cause harm to our operating results.Past recessions have had a significant negative impact on the operating performance and fair value of our portfolio investments. Many of ourportfolio companies could be adversely impacted again by any future economic downturn or recession and may be unable to be sold at a price that wouldallow us to recover our investment, or may be unable to operate during a recession. Such portfolio company performance could have a material adverse effecton our business, financial condition and results of operations.Our success depends on attracting and retaining qualified personnel in a competitive environment.Sourcing, selection, structuring and closing our investments depends upon the diligence and skill of our management. Our management’scapabilities may significantly impact our results of operations. Our success requires that we retain investment and operations personnel in a competitiveenvironment. Our ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors, including but notlimited to, our ability to offer competitive wages, benefits and professional growth opportunities.The competitive environment for qualified personnel may require us to take certain measures to ensure that we are able to attract and retainexperienced personnel. Such measures may include increasing the attractiveness of our overall compensation packages, altering the structure of ourcompensation packages through the use of additional forms of compensation or other steps. The inability to attract and retain experienced personnel couldpotentially have an adverse effect on our business. 24Table of ContentsOur business model depends to a significant extent upon strong referral relationships. Our inability to maintain or develop these relationships, as wellas the failure of these relationships to generate investment opportunities, could adversely affect our business.We expect that members of our management team will maintain their relationships with intermediaries, financial institutions, investment bankers,commercial bankers, financial advisors, attorneys, accountants, consultants and other individuals within our network, and we will rely to a significant extentupon these relationships to provide us with potential investment opportunities. If our management team fails to maintain its existing relationships ordevelop new relationships with sources of investment opportunities, we will not be able to effectively allocate capital. Individuals with whom members ofour management team have relationships are not obligated to provide us with investment opportunities, and therefore, there is no assurance that theserelationships will generate investment opportunities for us. In addition, following the spin-off, we may face new challenges in maintaining or cultivatingthese relationships and investment opportunities due to our smaller size.In connection with CSWI’s separation from CSWC, CSWI has indemnified us for certain liabilities. However, there can be no assurance that theseindemnities will be sufficient to insure us against the full amount of such liabilities or that CSWI’s ability to satisfy its indemnification obligation will notbe impaired in the future. CSWI agreed to indemnify us for certain liabilities, including certain tax liabilities. However, third parties could seek to hold us responsible for anyof the liabilities that CSWI will agree to retain, and there can be no assurance that CSWI will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from CSWI any amounts for which we are held liable, we may be temporarily required to bear theselosses while seeking recovery from CSWI. Potential indemnification liabilities of CSWC to CSWI could materially adversely affect us. Future agreements between CSWC and CSWI may provide for indemnification obligations designed to make CSWC financially responsible forliabilities that may exist relating to or arising out of its business activities, whether incurred prior to or after the Share Distribution. If CSWC is required toindemnify CSWI for any reason, CSWC may be subject to substantial liabilities. We may not be able to engage in certain corporate transactions due to the Share Distribution. Our ability to engage in significant equity transactions is limited due to the Share Distribution in order to preserve the tax-free status of the ShareDistribution to CSWC for U.S. federal income tax purposes. Even if the Share Distribution otherwise qualifies for tax-free treatment to CSWC's shareholdersunder Section 355 of the Code, it may be taxable to CSWC under section 355(e) of the Code if 50% or more, by vote or value, of shares of our common stockor CSWC’s common stock are acquired or issued as part of a plan or series of related transactions that includes the Share Distribution. For this purpose, anyacquisitions or issuances of CSWC’s common stock within two years before the Share Distribution, and any acquisitions or issuances of our common stock orCSWI’s common stock within two years after the Share Distribution, generally are presumed to be part of such a plan, although we or CSWI may be able torebut that presumption. If an acquisition or issuance of shares of our common stock or CSWI’s common stock triggers the application of Section 355(e) of theCode, CSWC would recognize a taxable gain to the extent the fair market value of CSWI’s common stock exceeds our tax basis in CSWI’s common stock atthe time of the Share Distribution. Potential liabilities may arise due to fraudulent transfer considerations, which would adversely affect our financial condition and our results ofoperations.In connection with the Share Distribution, we undertook several corporate restructuring transactions which, along with the Share Distribution, maybe subject to federal and state fraudulent conveyance and transfer laws. If, under these laws, a court were to determine that, at the time of the ShareDistribution, any entity involved in these restructuring transactions or the Share Distribution: (1) was insolvent; (2) was rendered insolvent by reason of theShare Distribution; (3) had remaining assets constituting unreasonably small capital; or (4) intended to incur, or believed it would incur, debts beyond itsability to pay these debts as they matured, then the court could void the Share Distribution, in whole or in part, as a fraudulent conveyance or transfer. Thecourt could require us to fund liabilities of the other company for the benefit of creditors. 25Table of ContentsWe will be subject to corporate-level income tax if we are unable to qualify as a Regulated Investment Company under Subchapter M of the Code.To maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source and asset diversificationrequirements:·The annual distribution requirement for a RIC will be satisfied if we distribute to our shareholders on an annual basis at least 90% of our net ordinaryincome and realized short-term capital gains in excess of realized net long-term capital losses. Depending on the level of taxable income earned in atax year, we may choose to carry forward taxable income in excess of current year distributions into the next year and pay a 4.0% excise tax on suchincome. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the yearthat generated such taxable income.·The source of income requirement will be satisfied if we obtain at least 90% of our gross income for each taxable year from dividends, interest,payments with respect to certain securities loans, gains from the sale or other disposition of stock or other securities or foreign currencies or otherincome derived with respect to our business of investing in such stock, securities or currencies and net income derived from an interest in a“qualified publicly traded partnership” (as defined in the Code), or the 90% Income Test.·The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxableyear. To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S Government securities, securitiesof other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than10% of the outstanding voting securities of the issuer (which for these purposes includes the equity securities of a “qualified publicly tradedpartnership”). In addition, no more than 25% of the value of our assets can be invested in the securities, other than U.S Government securities orsecurities of other RICs, (1) of one issuer (2) of two or more issuers that are controlled, as determined under applicable tax rules, by us and that areengaged in the same or similar or related trades or businesses or (3) of one or more “qualified publicly traded partnerships,” or the DiversificationTests.Failure to meet these requirements may result in us having to dispose of certain unqualified investments quickly in order to prevent the loss of RICstatus. If we fail to maintain RIC tax treatment for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduceour net assets, the amount of income available for distribution and the amount of our distributions. In addition, to the extent we had unrealized gains, wewould have to establish deferred tax liabilities for taxes, which would reduce our net asset value accordingly. In addition, our shareholders would lose thetax credit realized when we, as a RIC, decide to retain the net realized capital gain and make deemed distributions of net realized capital gains, and pay taxeson behalf of our shareholders at the end of the tax year. The loss of this pass-through tax treatment could have a material adverse effect on the total return ofan investment in our common stock.Even if the Company qualifies as a Regulated Investment Company, it may face tax liabilities that reduce its cash flow.Even if the Company qualifies for taxation as a RIC, it may be subject to certain U.S. federal, state and local taxes on its income and assets. Inaddition, we may hold some of our assets through our Taxable Subsidiary, which is not consolidated for U.S. federal income tax purposes, or any othertaxable subsidiary we may form. Any taxes paid by such subsidiary corporations would decrease the cash available for distribution to the Company’sstockholders.Previously proposed legislation may allow us to incur additional leverage.As a BDC, under the 1940 Act we generally are not permitted to incur indebtedness unless immediately after any borrowing we have an assetcoverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Legislation introduced in the U.S.House of Representatives during the 114th Congress, which will meet from January 3, 2015 through January 3, 2017, proposed to modify this section of the1940 Act and increase the amount of debt that BDCs may incur by modifying the asset coverage percentage from 200% to 150%. If this legislation is passed,we may be able to incur additional indebtedness in the future and, therefore, your risk of an investment in our securities may increase. 26Table of ContentsIn addition, in December 2015, the 2016 omnibus spending bill approved by Congress and signed into law by the President increased the amount ofSBA-guaranteed debentures that affiliated SBIC funds can have outstanding from $225.0 million to $350.0 million. If we incur any SBA-guaranteedindebtedness in the future, your risk of an investment in our securities may increase.Efforts to comply with the Sarbanes-Oxley Act involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affectus.We are subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the related rules and regulations promulgated by the SEC. Amongother requirements, under Section 404 of the Sarbanes-Oxley Act and rules and regulations of the SEC thereunder, our management is required to report onour internal controls over financial reporting. We are required to review on an annual basis our internal controls over financial reporting, and on a quarterlyand annual basis to evaluate and disclose significant changes in our internal controls over financial reporting. We have and expect to continue to incursignificant expenses related to compliance with the Sarbanes-Oxley Act, which will negatively impact our financial performance and our ability to makedistributions. In addition, this process results in a diversion of management’s time and attention. In the event that we are unable to maintain compliance withthe Sarbanes-Oxley Act and related rules, we may be adversely affected.Our investments could be concentrated in relatively few portfolio companies.From time to time our investment could be concentrated in relatively few portfolio companies for a number of reasons, including performance, ourgrowth plans and different investment timelines. The concentration of our total assets in certain investments may fluctuate as the relative net asset values ofthese investments change relative to the net asset values of other investments in our portfolio and as we continue to make investments. Financial disruption,decreased revenues or changes in the business of any investment in which our assets are concentrated may have a material adverse effect on our financialcondition, operating results and cash flows.Our ability to enter into transactions with our affiliates is restricted.We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of ourindependent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is ouraffiliate for purposes of the 1940 Act, and we generally are prohibited from buying or selling any security from or to an affiliate, absent the prior approval ofour independent directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the sameportfolio company (whether at the same or different times), without prior approval of our independent directors and, in some cases, the SEC. If a personacquires more than 25% of our voting securities, we are prohibited from buying or selling any security from or to that person or certain of that person'saffiliates, or entering into prohibited joint transactions with that person, absent the prior approval of the SEC. Similar restrictions limit our ability to transactbusiness with our officers or directors or their affiliates. Regulations governing our operation as a BDC affect our ability to, and the way in which we raiseadditional capital.Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure by us to comply with these laws orregulations, could negatively affect the profitability of our operations.Changes in the laws or regulations or the interpretations of the laws and regulations that govern BDCs, RICs or non-depository commercial lenderscould significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject tojudicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures toportfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws, regulations or decisionschange, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, wemay have to incur significant expenses in order to comply or we might have to restrict our operations. In addition, if we do not comply with applicable laws,regulations and decisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of whichcould have a material adverse effect upon our business, results of operations or financial condition. 27Table of ContentsIf we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business development company or be precludedfrom investing according to our current business strategy.As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70%of our total assets are qualifying assets.We currently have more than 70% of qualifying assets. However, we may be precluded from investing in what we believe are attractive investmentsif those investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we couldlose our status as a BDC, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rulescould prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position).A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility.If we fail to maintain our status as a BDC, we might be regulated as a closed-end investment company that is required to register under theInvestment Company Act, which would subject us to additional regulatory restrictions and significantly decrease our operating flexibility. In addition, anysuch failure could cause an event of default under our outstanding indebtedness, which could have a material adverse effect on our business, financialcondition or results of operations.Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business.We and our portfolio companies are subject to laws and regulations at the local, state and federal level. These laws and regulations, as well as theirinterpretation, may be changed from time to time. Accordingly, any changes in these laws and regulations or failure to comply with them could have amaterial adverse effect on our business. Certain of these laws and regulations pertain specifically to BDCs such as us.We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect themarket price of our common stock and our ability to pay dividends.Our business is highly dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems,including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Ourfinancial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as aresult of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:·Sudden electrical or telecommunications outages;·Natural disasters such as earthquakes, tornadoes and hurricanes;·Disease pandemics;·Events arising from local or larger scale political or social matters, including terrorist acts; and·Cyber attacks. 28Table of ContentsIf we are unable to maintain the availability of our electronic data systems and safeguard the security of our data, our ability to conduct business maybe compromised, which could impair our liquidity, disrupt our business, damage our reputation and cause losses.Cybersecurity refers to the combination of technologies, processes, and procedures established to protect information technology systems and datafrom unauthorized access, attack, or damage. We are subject to cybersecurity risks. Information cybersecurity risks have significantly increased in recentyears and, while we have not experienced any material losses relating to cyber attacks or other information security breaches, we could suffer such losses inthe future. Our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and otherevents that could have a security impact. If one or more of such events occur, this potentially could jeopardize confidential and other information, includingnonpublic personal information and sensitive business data, processed and stored in, and transmitted through, our computer systems and networks, orotherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. This could result in significant losses,reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results of operations. Privacyand information security laws and regulation changes, and compliance with those changes, may result in cost increases due to system changes and thedevelopment of new administrative processes. In addition, we may be required to expend significant additional resources to modify our protective measuresand to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We currently do not maintain insurancecoverage relating to cybersecurity risks, and we may be required to expend significant additional resources to modify our protective measures or toinvestigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are not fully insured.Third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions, and theserelationships allow for the storage and processing of our information, as well as customer, counterparty, employee and borrower information. While weengage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data,or other cybersecurity incidents, with increased costs and other consequences, including those described above.Terrorist attacks, acts of war or natural disasters may affect any market for our common stock, impact the businesses in which we invest and harm ourbusiness, operating results and financial condition.Terrorist attacks, acts of war or natural disasters may disrupt our operations, as well as the operations of the businesses in which we invest. Theseevents have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terroristactivities, military or security operations, or natural disasters could further weaken the domestic or global economy. These events could create additionaluncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on ourbusiness, operating results and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.RISKS RELATED TO OUR INVESTMENTSOur investments in portfolio companies involve a number of significant risks:·Portfolio companies are more likely to depend on the management talents and efforts of a small group of key employees. Therefore, the death,disability, resignation, termination, or significant under-performance of one or more of these persons could have a material adverse impact on ourportfolio company and, in turn, on us.·Portfolio companies may have unpredictable operating results, could become parties to litigation, may be engaged in rapidly changing businesseswith products subject to a substantial risk of obsolescence and may require substantial additional capital to support their operations, financeexpansion or maintain their competitive position. 29Table of Contents·Most of our acquisition targets are private companies. Private companies may not have readily publicly available information about theirbusinesses, operations and financial condition. Consequently, we rely on the ability of our management team and investment professionals to obtainadequate information to evaluate the potential returns from making acquisitions for both CSWC and our existing portfolio companies. If we areunable to uncover all material information about these acquisition targets, we may not make a fully informed investment decision and may lose allor part of our investment.·Portfolio companies may have shorter operating histories, narrower product lines, smaller market shares and/or more significant customerconcentration than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as generaleconomic downturns.·Portfolio companies may have limited financial resources and may be unable to meet their obligations under their debt instruments that we hold,which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees fromsubsidiaries or affiliates of our portfolio companies that we may have obtained in connection with our investment, as well as a correspondingdecrease in the value of the equity components of our investments.In addition, in the course of providing significant managerial assistance to certain of our portfolio companies, certain of our officers and directorsmay serve as directors on the boards of these companies. To the extent that litigation arises out of our investments in these companies, our officers anddirectors may be named as defendants in such litigation, which could result in an expenditure of funds for claims in excess of our directors’ and officers’insurance coverage (through our indemnification of our officers and directors) and the diversion of management’s time and resources.There may be circumstances in which our debt investments could be subordinated to claims of other creditors or we could be subject to lender liabilityclaims.Even though we may have structured certain of our investments as secured loans, if one of our portfolio companies were to go bankrupt, dependingon the facts and circumstances, and based upon principles of equitable subordination as defined by existing case law, a bankruptcy court could subordinateall or a portion of our claim to that of other creditors and transfer any lien securing our subordinated claim to the bankruptcy estate. The principles ofequitable subordination defined by case law have generally indicated that a claim may be subordinated only if its holder is guilty of misconduct or where thesenior loan is re-characterized as an equity investment and the senior lender has actually provided significant managerial assistance to the bankrupt debtor.We may also be subject to lender liability claims for actions taken by us with respect to a borrower's business or instances where we exercise control over theborrower. It is possible that we could become subject to a lender's liability claim, including as a result of actions taken in rendering significant managerialassistance or actions to compel and collect payments from the borrower outside the ordinary course of business.The lack of liquidity in our investments may adversely affect our business.We invest, and will continue to invest, in portfolio companies whose securities are not publicly traded. These securities are generally subject to legaland other restrictions on resale or will otherwise be less liquid than publicly traded securities. As a result, we do not expect to achieve liquidity in ourinvestments in the near-term. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we arerequired to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded theseinvestments and, as a result, we may suffer losses.Our investments in equity securities involve a substantial degree of risk.We may purchase common stock and other equity securities, including warrants. Although equity securities have historically generated higheraverage total returns than fixed-income securities over the long term, equity securities have also experienced significantly more volatility in those returns.The equity securities we acquire may fail to appreciate and may decline in value or become worthless, and our ability to recover our investment depends onour portfolio company’s success. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result ofadditional issuances, inability to access additional capital and failure to pay current distributions. Investments in preferred securities involve special risks,such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights. 30Table of ContentsAs a Regulated Investment Company, we may have certain regulatory restrictions that could preclude us from making additional investments in ourportfolio companies.We may not have the ability to make additional investments in our portfolio companies. After our initial investment in a portfolio company, wemay be called upon from time to time to provide additional funds to that company or have the opportunity to increase our investment or make follow-oninvestments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on aportfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or mayreduce the expected return on the investment.Certain of our portfolio companies are leveraged.Some of our portfolio companies have incurred some indebtedness in relation to their overall capital base. Such indebtedness often has terms thatwill require the balance of the loan to be refinanced when it matures. If portfolio companies cannot generate adequate cash flow to meet the principal andinterest payments on their indebtedness, the value of our investments could be reduced or eliminated through foreclosure on the portfolio company’s assetsor by the portfolio company’s reorganization or bankruptcy.Changes in interest rates may affect our cost of capital, the value of investments and net investment income.Some of our debt investments will bear interest at variable rates and the interest income from these investments could be negatively affected bydecreases in market interest rates. In addition, an increase in interest rates would make it more expensive for us to use debt to finance our investments. As aresult, a significant increase in market interest rates could increase our cost of capital, which would reduce our net investment income. Also, an increase ininterest rates available to investors could make an investment in our securities less attractive than alternative investments, a situation which could reduce thevalue of our securities. Conversely, a decrease in interest rates may have an adverse impact on our returns by requiring us to seek lower yields on our debtinvestments and by increasing the risk that our portfolio companies will prepay our debt investments, resulting in the need to redeploy capital at potentiallylower rates. A decrease in market interest rates may also adversely impact our returns on idle funds, which would reduce our net investment income. Inaddition, certain of our debt investments and debt liabilities may bear interest at fixed rates. To the extent that our fixed rate assets and liabilities are notperfectly hedged, our net investment income may decrease based on changes in market interest rates. An increase in market interest rates may also decreasethe fair value of our fixed rate investments, as these may be less attractive securities in a rising rate environment.Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, we willgenerally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments willtypically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any futureinvestment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materiallyadversely affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments could negatively impact ourreturn on equity, which could result in a decline in the market price of our securities.Defaults by our portfolio companies could harm our operating results.Portfolio companies may fail to satisfy financial, operating or other covenants imposed by us or other lenders, which could lead to a default and,potentially, termination of its loans and foreclosure on its secured assets. These events could trigger cross-defaults under other agreements and jeopardize theportfolio company’s ability to meet its obligations, including under the debt or equity securities we hold. We may also incur expenses to the extentnecessary to recover upon a default or to negotiate new terms with the defaulting portfolio company. 31Table of ContentsSecond priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with firstpriority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.Certain loans that we make are secured by a second priority security interest in the same collateral pledged by a portfolio company to secure seniordebt owed by the portfolio company to commercial banks or other traditional lenders. Often the senior lender has procured covenants from the portfoliocompany prohibiting the incurrence of additional secured debt without the senior lender’s consent. Prior to and as a condition of permitting the portfoliocompany to borrow money from us secured by the same collateral pledged to the senior lender, the senior lender will require assurances that it will control thedisposition of any collateral in the event of bankruptcy or other default. In many cases, the senior lender will require us to enter into an “intercreditoragreement” prior to permitting the portfolio company to borrow from us. Typically the intercreditor agreements we are requested to execute expresslysubordinate our debt instruments to those held by the senior lender and further provide that the senior lender shall control: (1) the commencement offoreclosure or other proceedings to liquidate and collect on the collateral; (2) the nature, timing and conduct of foreclosure or other collection proceedings;(3) the amendment of any collateral document; (4) the release of the security interests in respect of any collateral; and (5) the waiver of defaults under anysecurity agreement. Because of the control we may cede to senior lenders under intercreditor agreements we may enter, we may be unable to realize theproceeds of any collateral securing some of our loans.Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in those companies.We invest primarily in the secured term debt of middle market companies and equity issued by middle market companies. Our portfolio companiesmay have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, these debt instrumentsmay entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debtinstruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders ofdebt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive anydistribution. After repaying its senior creditors, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the caseof debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holdingsuch debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.We may not realize gains from our equity investments. Certain investments that we have made in the past and may make in the future include warrants or other equity securities. Investments in equitysecurities involve a number of significant risks, including the risk of further dilution as a result of additional issuances, inability to access additional capitaland failure to pay current distributions. Investments in preferred securities involve special risks, such as the risk of deferred distributions, credit risk,illiquidity and limited voting rights. In addition, we may from time to time make non-control, equity investments in portfolio companies. Our goal isultimately to realize gains upon our disposition of these equity interests. However, the equity interests we receive may not appreciate in value and, in fact,may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of anyequity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does nothave a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. Weoften seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer; however, we may be unable to exercisethese put rights for the consideration provided in our investment documents if the issuer is in financial distress. 32Table of ContentsRISKS RELATED TO OUR COMMON STOCKInvesting in shares of our common stock may involve an above average degree of risk.The investments we make in accordance with our investment objectives may result in a higher amount of risk, volatility or loss of principal thanalternative investment options. Our investments in portfolio companies may be highly speculative, and therefore, an investment in our common stock maynot be suitable for investors with lower risk tolerance.Our common stock often trades at a discount from net asset value.Our common stock is listed on NASDAQ. Shareholders desiring liquidity may sell their shares on NASDAQ at current market value, which has oftenbeen below net asset value. Shares of closed-end investment companies frequently trade at discounts from net asset value, which is a risk separate anddistinct from the risk that a fund’s performance will cause its net asset value to decrease.The market price of our common stock may fluctuate significantly.The market price and marketability of shares of our common stock may from time to time be significantly affected by numerous factors, including:·Market conditions;·Our investment results;·Trading volume of our stock;·Our investment results;·Departure of our key personnel;·Changes in regulatory policies, accounting pronouncements or tax guidelines, particularly with respect to RICs, BDCs or SBICs; and·Other influences and events over which we have no control and that may not be directly related to us.We may not pay any dividends. While we intend to pay dividends to our shareholders out of taxable income available for distribution, there can be no assurance that we will do so.Any dividends that we do pay may be payable in cash, in our stock, or in stock in any of our holdings or in a combination of all three. All dividends will bepaid at the discretion of our Board of Directors and will depend upon our financial condition, maintenance of our RIC status, and compliance with applicableBDC regulations.We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.We may distribute taxable dividends that are payable in part in our stock. Under certain applicable provisions of the Code and the Treasuryregulations, distributions payable by us in cash or in shares of stock (at the shareholders election) would satisfy the Annual Distribution Requirement. TheIRS has issued private letter rulings providing that a dividend payable in stock or in cash at the election of the shareholders will be treated as a taxabledividend eligible for the dividends paid deduction provided that at least 20% of the total dividend is payable in cash and certain other requirements aresatisfied. Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-termcapital gain to the extent such dividend is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits forU.S. federal income tax purposes. As a result, a U.S. shareholder may be required to pay tax with respect to such dividends in excess of any cash received. If aU.S. shareholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income withrespect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. shareholders, we may berequired to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividends payable in stock. In addition, if asignificant number of our shareholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on thetrading price of our stock. 33Table of ContentsItem 1B.Unresolved Staff CommentsWe have no unresolved comments from the staff of the SEC.Item 2.PropertiesWe do not own any real estate or other physical properties. We maintain our offices at 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas75240, where we lease approximately 9,261 square feet of office space pursuant to a lease agreement expiring in January 2022. We believe that our offices areadequate to meet our current and expected future needs.Item 3.Legal ProceedingsWe may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, thirdparties may try to seek to impose liability on us in connection with the activities of our portfolio companies. As of the date hereof, we are not a party to, andnone of our assets are subject to, any material pending legal proceedings and are not aware of any claims that could have a materially adverse effect on ourfinancial position, results of operations or cash flows.Item 4.Mine Safety DisclosuresNot applicable. 34Table of ContentsPART IIItem 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity SecuritiesPRICE RANGE OF COMMON STOCK AND HOLDERSMarket InformationOur common stock is traded on NASDAQ under the symbol “CSWC.” The following high and low selling prices for shares during each quarter ofthe last two fiscal years were taken from quotations provided to the Company by NASDAQ. The prices on and before September 30, 2015 have not beenadjusted to reflect the Share Distribution.Quarter Ended High Low March 31, 2016 $15.25 $13.19 December 31, 2015 17.45 13.43 September 30, 2015 50.49 42.76 June 30, 2015 51.95 46.26 March 31, 2015 $50.44 $37.79 December 31, 2014 41.12 33.91 September 30, 2014 41.87 34.35 June 30, 2014 36.57 32.01 On June 10, 2016, the last sale price of our common stock on the NASDAQ was $13.81 per share, and there were approximately 500 holders of recordof the common stock which did not include shareholders for whom shares are held in “nominee” or “street name.”Shares of BDCs may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares ofcommon stock will trade at a discount from net asset value per share or at premiums that are unsustainable over the long term are separate and distinct fromthe risk that our net asset value per share will decrease. It is not possible to predict whether our common stock will trade at, above, or below net asset valueper share.DISTRIBUTIONSWe intend to make distributions on a quarterly basis to our shareholders of substantially all of our taxable income. In lieu of cash, we may makedeemed distributions of certain net capital gains to our shareholders.The payment dates (including the dividend declared on June 7, 2016 to be paid on July 1, 2016) and amounts of cash dividends per share on a post-split basis for the past five years are as follows:Payment Date Cash Dividend May 31, 2011 $0.10 November 30, 2011 0.10 May 31, 2012 0.10 June 8, 2012 4.40 November 30, 2012 0.10 March 28, 2013 0.69 May 31, 2013 0.10 November 29, 2013 0.10 May 30, 2014 0.10 November 28, 2014 0.10 June 10, 2015 0.10 April 1, 2016 0.04 July 1, 2016 0.06 35Table of ContentsThe amounts and timing of cash dividend payments have generally been dictated by requirements of the Code regarding the distribution of taxablenet investment income (ordinary income) of regulated investment companies. Instead of distributing realized long-term capital gains to shareholders, theCompany has ordinarily elected to retain these gains to fund future investments.On March 1, 2016, we entered into a share repurchase agreement with Cantor Fitzgerald & Co. This agreement established a plan in compliance withthe requirements of Rules 10b5-1(c)(1)(i)(B) and 10b-18 under the Securities Exchange Act of 1934. The plan was established pursuant to a $10 million sharerepurchase program that the Board approved on January 20, 2016. This agreement became effective immediately and shall terminate on the earliest of (1) thedate on which a total of $10 million worth of common shares have been purchased under the plan; (2) the date on which the terms set forth in the purchaseinstructions have been met; or (3) the date that is one trading day after the date on which insider notifies broker in writing that this agreement shall terminate.Distribution Policy We generally intend to make distributions on a quarterly basis to our shareholders of substantially all of our taxable income. In order to avoidcertain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of (1) 98.0% of our ordinary incomefor the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one year period ended October 31, and (3) any ordinary income and netcapital gains for the preceding year that were not distributed during that year. We will not be subject to excise taxes on amounts on which we are required topay corporate income tax (such as retained net capital gains). In order to obtain the tax benefits applicable to RICs, we will be required to distribute to ourshareholders with respect to each taxable year at least 90.0% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses. We may retain for investment realized net long-term capital gains in excess of realized net short-term capital losses. We may make deemeddistributions to our shareholders of any retained net capital gains. If this happens, our shareholders will be treated as if they received an actual distribution ofthe capital gains we retain and then reinvested the net after-tax proceeds in our common stock. Our shareholders also may be eligible to claim a tax credit (or,in certain circumstances, a tax refund) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. Please refer to“Business — Material U.S. Federal Income Tax Considerations” included in Item 1 of Part I of this Annual Report for further information regarding theconsequences of our retention of net capital gains. We may, in the future, make actual distributions to our shareholders of some or all realized net long-termcapital gains in excess of realized net short-term capital losses. We can offer no assurance that we will achieve results that will permit the payment of any cashdistributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverageratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See “Business — Regulation of Business DevelopmentCompanies” included in Item 1 of Part I of this Annual Report. We have adopted a dividend reinvestment plan, or DRIP, which provides for reinvestment of our distributions on behalf of our common shareholdersif opted into by a common shareholder. See “Business — Dividend Reinvestment Plan” included in Item I of Part I of this Annual Report on Form 10-K. Shareholders who receive dividends in the form of stock generally are subject to the same federal, state and local tax consequences as areshareholders who elect to receive their dividends in cash. A shareholder’s basis for determining gain or loss upon the sale of stock received in a dividend fromus will be equal to the total dollar amount of the dividend payable to the shareholder. Any stock received in a dividend will have a holding period for taxpurposes commencing on the day following the day on which the shares are credited to the U.S. shareholder’s account. Our ability to make distributions will be limited by the asset coverage requirements under the 1940 Act. For a more detailed discussion, see“Regulation of Business Development Companies” included in Item 1 of Part I of this Annual Report on Form 10-K. 36Plan Category Number ofsecurities to beissued upon exerciseof outstandingoptions, warrantsand rights Weighted averageexercise price ofoutstanding options,warrants and rights Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 362,513 $11.21 348,540 Equity compensation plans not approved by security holders - - - Total 362,513 $11.21 348,540 Table of ContentsSecurities Authorized for Issuance Under our Equity Incentive PlanThe following table provides information regarding the number of shares of restricted stock authorized and available under the 2009 Stock IncentivePlan, 2010 Restricted Stock Award Plan and Spin-Off Compensation Plan. Performance GraphThe following graph compares our cumulative total shareholder return during the last five years (based on the market price of our common stock andassuming reinvestment of all dividends and tax credits on retained long-term capital gains) with the NASDAQ Total Return Index, the Russell 2000 TotalReturn Index and the KBW Regional Bank Total Return Index. 37Table of ContentsItem 6.Selected Financial DataThe following table provides selected financial data relating to our historical financial condition and results of operations as of and for each ofthe years ended March 31, 2012 through 2016. This data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the consolidated financial statements and related notes.Selected Consolidated Financial Data(In thousands except per share data) Year Ended March 31, 2016 2015 2014 2013 2012 Income statement data: Investment income: Total interest, fee and dividend income $8,689 $9,791 $12,475 $10,691 $9,212 Interest income from cash and cash equivalents 386 122 67 71 52 Other income 85 35 65 73 70 Total investment income 9,160 9,948 12,607 10,835 9,334 Operating expenses: Compensation-related expenses 9,515 6,440 5,489 5,628 4,703 General, administrative and other 11,610 5,683 2,963 2,710 1,969 Total operating expenses 21,125 12,123 8,452 8,338 6,672 (Loss) income before income taxes (11,965) (2,175) 4,155 2,497 2,662 Income tax (benefit) expense (1,278) 270 (739) 590 118 Net investment (loss) income (10,687) (2,445) 4,894 1,907 2,544 Net realized gains (losses): Non-control/Non-affiliate investments (9,575) 8,226 14,048 2,660 22,806 Affiliate investments (1,458) 157,213 - 66,037 (45)Control investments 231 (1,175) - 20,861 (10,934)Net realized (losses) gains on investments (10,802) 164,264 14,084 89,558 11,827 Net unrealized appreciation (depreciation) on investments 16,089 (108,377) 93,032 16,367 78,635 Net realized and unrealized gains (losses) on investments 5,287 55,887 107,116 105,925 90,462 Net (decrease) increase in net assets resulting from operations $(5,400) $53,442 $112,010 $107,832 $93,006 Net investment (loss) income per share - basic and diluted $(0.68) $(0.16) $0.32 $0.13 $0.17 Net earnings per share $(0.35) $3.44 $7.32 $7.09 $6.18 Net asset value per common share $17.34 $49.30 $49.98 $43.30 $41.86 Total dividends/distributions declared per common share $0.14 $0.20 $0.20 $5.29 $0.20 Weighted average number of shares outstanding - basic 15,636 15,492 15,278 15,177 15,016 Weighted average number of shares outstanding - diluted 15,724 15,531 15,298 15,207 15,038 38Table of Contents Year Ended March 31, 2016 2015 2014 2013 2012 Balance sheet data: Assets: Investments at fair value $178,436 $535,536 $677,920 $574,187 $558,546 Cash and cash equivalents 95,969 225,797 88,163 81,767 64,895 Interest, escrow and other receivables 6,405 4,418 1,371 2,756 1,961 Net pension assets - 10,294 10,962 8,762 7,349 Deferred tax asset 2,342 - - - - Other assets 1,341 827 278 200 238 Total assets $284,493 $776,872 $778,694 $667,672 $632,989 Liabilities: Accounts payable and other liabilities $9,653 $4,923 $3,263 $3,102 $688 Accrued restoration plan liability 2,205 3,119 3,103 2,650 1,568 Deferred income taxes - 1,412 1,940 2,143 2,027 Total liabilities 11,858 9,454 8,306 7,895 4,283 Net assets 272,635 767,418 770,388 659,777 628,706 Total liabilities and net assets $284,493 $776,872 $778,694 $667,672 $632,989 Other data: Number of portfolio companies 23 22 27 28 30 Expense ratios (as percentage of average net assets): Total expenses 4.48% 1.59% 1.18% 1.36% 1.07% 39Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion should be read in conjunction with our financial statements and the notes thereto included elsewhere in this AnnualReport on Form 10-K. Statements we make in the following discussion which express a belief, expectation or intention, as well as those that are nothistorical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, orindustry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks anduncertainties we have referred to under the headings “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” in Part I of thisreport.OVERVIEWCapital Southwest Corporation (“CSWC”) is an investment company that specializes in providing customized financing to middle marketcompanies in a broad range of investment segments located primarily in the United States. Our principal investment objective is to produce attractive risk-adjusted returns by generating current income from our debt investments and capital appreciation from our equity and equity related investments. Ourinvestment strategy is to partner with business owners, management teams and financial sponsors to provide flexible financing solutions to fund growth,changes of control, or other corporate events. We invest primarily in senior and subordinated debt securities secured by security interests in portfoliocompany assets, coupled with equity interests.We focus on investing in companies with histories of generating revenues and positive cash flow, established market positions and provenmanagement teams with strong operating discipline. We target senior and subordinated investments in the lower middle market and private loan transactions(club deals), as well as first and second lien syndicated loans in larger middle market companies. Our target lower middle market companies typically haveannual earnings before interest, taxes, depreciation and amortization (“EBITDA”) between $3.0 million and $15.0 million. Our target club deal companiestypically have annual EBITDA between $15.0 million and $50.0 million. We believe that these companies have less access to capital and that the market forsuch capital is underserved relative to larger companies. Companies of this size are generally privately held and are less well known to traditional capitalsources such as commercial and investment banks. Our target investment in syndicated first and second lien loan investments are in large middle marketcompanies that typically have annual EBITDA that is greater than $50 million. We make available significant managerial assistance to the companies inwhich we invest when we believe that providing managerial assistance to an investee company is critical to its business development activities.SPIN-OFF OF CSW INDUSTRIALS, INC.On September 30, 2015, we completed the spin-off (the “Share Distribution”) of CSW Industrials, Inc. (“CSWI”). CSWI is now an independentpublicly traded company. CSWI’s common stock trades on the Nasdaq Global Select Market under the symbol “CSWI.” The Share Distribution was effectedthrough a tax-free, pro-rata distribution of 100.0% of CSWI’s common stock to shareholders of the Company. Each Company shareholder received one shareof CSWI common stock for every one share of Company common stock on the record date, September 18, 2015. Cash was paid in lieu of any fractional sharesof CSWI common stock.CSWI’s assets and businesses consist of the Company’s former industrial products, coatings, sealants & adhesives and specialty chemicalsbusinesses and include all the equity interests of The RectorSeal Corporation, The Whitmore Manufacturing Company, Balco, Inc., and CapStar HoldingsCorporation.Effective October 1, 2015 with the completion of the Share Distribution, Bowen S. Diehl was appointed President and Chief Executive Officer of ourCompany, and Michael S. Sarner was appointed Chief Financial Officer, Chief Compliance Officer, Secretary and Treasurer.Following the Share Distribution, we have maintained operations as an internally-managed BDC and pursue a credit-focused investing strategy akinto similarly structured organizations. We intend to continue to provide capital to middle-market companies. In the future, we intend to invest primarily indebt securities, including senior debt, second lien and subordinated debt, and may also invest in preferred stock and common stock alongside our debtinvestments or through warrants. 40Table of ContentsFORMATION AND LAUNCH OF A SENIOR LOAN FUND WITH MAIN STREET CAPITAL CORPORATIONOn September 9, 2015, we entered into an agreement to form and co-manage I-45 SLF LLC (“I-45”), a senior loan fund that invests primarily insyndicated senior secured loans in the upper middle market, with Main Street Capital Corporation (“Main Street”). The initial equity capital commitment toI-45 SLF totaled $85.0 million, consisting of $68.0 million from us and $17.0 million from Main Street. We own 80.0% of I-45 SLF and have a profitsinterest of 75.6%, while Main Street owns 20.0% and has a profits interest of 24.4%. I-45 SLF's Board of Managers makes all investment and operationaldecisions for the fund, and consists of equal representation from our Company and Main Street.PORTFOLIO COMPOSITIONThe total value of our investment portfolio was $178.4 million as of March 31, 2016, as compared to $535.5 million as of March 31, 2015. As ofMarch 31, 2016, we had investments in 23 portfolio companies with an aggregate cost of $150.1 million. As of March 31, 2015, we had investments in 22portfolio companies with an aggregate cost of $64.9 million.As of March 31, 2016 and March 31, 2015, our investment portfolio consisted of the following investments: Cost Percentage ofTotal Portfolio Fair Value Percentage ofTotal Portfolio (dollars in millions) March 31, 2016: 1st lien notes $39.3 26.2% $39.5 22.1%2nd lien notes 39.0 26.0 38.2 21.4 Subordinated debt 15.1 10.1 15.1 8.5 Preferred equity, common equity & warrants 19.9 13.2 49.3 27.6 I-45 SLF, LLC 36.8 24.5 36.3 20.4 $150.1 100.0% $178.4 100.0% March 31, 2015: 2nd lien notes $6.9 10.6% $6.9 1.3%Subordinated debt 4.1 6.3 2.9 0.5 Preferred & common equity 44.4 68.4 517.3 96.6 Partnership interest 9.5 14.7 8.4 1.6 $64.9 100.0% $535.5 100.0%During the quarter ended December 31, 2015, we established an internally developed investment rating system to rate the performance and monitorthe expected level of returns for each debt investment in our portfolio. The investment rating system takes into account both quantitative and qualitativefactors of the portfolio company and the investments held therein, including each investment’s expected level of returns and the collectability of our debtinvestments, comparisons to competitors and other industry participants and the portfolio company's future outlook. The ratings are not intended to reflectthe performance or expected level of returns of our equity investments.·Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing above underwriting expectations and thetrends and risk factors are favorable. ·Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the risk factors are neutral to favorable. ·Investment Rating 3 involves an investment performing below underwriting expectations and indicates that the investment requires closermonitoring. The portfolio company or investment may be out of compliance with financial covenants and interest payments may be impaired,however principal payments are generally not past due. 41Table of Contents·Investment Rating 4 indicates that the investment is performing materially below underwriting expectations and the risk of the investment hasincreased substantially. Interest and principal payments on our investment are likely to be impaired. The following table shows the distribution of our debt portfolio investments on the 1 to 4 investment rating scale at fair value as of March 31, 2016: As of March 31, 2016 Investment Rating Debt Investments at Fair Value Percentage ofTotal Portfolio (dollars in thousands) 1 $4,626 2.6%2 88,205 49.4 3 - - 4 - - Total $92,831 52.0%Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. When we do not expect the debtorto be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan ordebt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability andintent to pay contractual amounts due.As of March 31, 2016, we did not have any investments on non-accrual status. As of March 31, 2015, we had one investment on non-accrual status.Investment ActivityDuring the year ended March 31, 2016, we made seventeen new investments totaling $123.0 million. We received contractual principal repaymentstotaling approximately $0.5 million. We received proceeds related to a debt investment in one portfolio company of $0.2 million and wrote off theremainder, resulting in a realized loss of $1.2 million. We received proceeds related to the sales of certain partnership interests totaling $5.2 million andrecognized net realized losses on those sales totaling $4.3 million. In addition, we received proceeds related to the sales of certain equity securities of ourportfolio companies totaling $14.2 million and recognized net realized losses on those sales totaling $5.3 million in the year ended March 31, 2016.During the year ended March 31, 2015, we made one new investment totaling $6.9 million, an additional debt investment in one existing portfoliocompany of $0.1 million and additional equity investments in three existing portfolio companies totaling approximately $0.4 million. We wrote off a debtinvestment in one portfolio and recognized a realized loss on the write-off of $7.4 million. We received proceeds related to the sales of partnership intereststotaling $1.0 million and recognized net realized losses on those sales totaling $1.4 million. In addition, we received proceeds related to the sales of certainequity securities of our portfolio companies totaling $204.7 million and recognized net realized gains on those sales totaling $173.1 million in the yearended March 31, 2015. 42Table of ContentsTotal portfolio investment activity for the years ended March 31, 2016 and 2015 was as follows (in thousands):March 31, 2016 1st LienNotes 2nd LienNotes SubordinatedDebt Preferredequity,commonequity & warrants I-45 SLF,LLC PartnershipInterest Total Fair value, beginning of period $- $6,895 $2,906 $517,306 $- $8,429 $535,536 New investments 39,795 32,025 12,348 2,046 36,800 - 123,014 Proceeds from sales of investments (12) (5) (150) (14,267) - (5,221) (19,655)Cost of investments spun off - - - (6,981) - - (6,981)Principal repayments received (523) - - - - - (523)Accretion of loan discounts 20 57 19 - - - 96 Realized gain (loss) 12 5 (1,187) (5,312) - (4,320) (10,802)Unrealized gain (loss) 199 (750) 1,178 14,813 (463) 1,112 16,089 Decrease in unrealized appreciationrelated to spin-off investments - - - (458,338) - - (458,338)Fair value, end of period $39,491 $38,227 $15,114 $49,267 $36,337 $- $178,436 Weighted average yield on debtinvestments at end of period 10.67%Weighted average yield on totalinvestments at end of period 9.46%March 31, 2015 1st LienNotes 2nd LienNotes SubordinatedDebt Preferred &CommonEquity I-45 SLF,LLC PartnershipInterest Total Fair value, beginning of period $- $- $2,707 $665,708 $- $9,505 $677,920 New investments - 6,895 225 1 - 300 7,421 Proceeds from sales ofinvestments - - - (204,680) - (1,012) (205,692)Accretion of loan discounts - - - - - - - Realized gain (loss) - - (7,397) 173,058 - (1,397) 164,264 Unrealized gain (loss) - - 7,371 (116,781) - 1,033 (108,377)Fair value, end of period $- $6,895 $2,906 $517,306 $- $8,429 $535,536 Weighted average yield on debtinvestments at end of period 3.14%Weighted average yield on totalinvestments at end of period 0.46%RESULTS OF OPERATIONSThe composite measure of our financial performance in the Consolidated Statements of Operations is captioned “(Decrease) increase in net assetsfrom operations” and consists of three elements. The first is “Net investment (loss) income,” which is the difference between income from interest, dividendsand fees and our combined operating and interest expenses, net of applicable income taxes. The second element is “Net realized (loss) gain on investments,”which is the difference between the proceeds received from the disposition of portfolio securities and their stated cost, net of applicable income tax expensebased on our tax year. The third element is the “Net increase (decrease) in unrealized appreciation of investments,” which is the net change in the market orfair value of our investment portfolio, compared with stated cost. It should be noted that the “Net realized (loss) gain on investments” and “Net increase(decrease) in unrealized appreciation of investments” are directly related in that when an appreciated portfolio security is sold to realize a gain, acorresponding decrease in net unrealized appreciation occurs by transferring the gain associated with the transaction from being “unrealized” to being“realized.” Conversely, when a loss is realized on a depreciated portfolio security, an increase in net unrealized appreciation occurs. 43Table of ContentsComparison of years ended March 31, 2016 and March 31, 2015 Year Ended March 31, Net Change 2016 2015 Amount % (in thousands) Total investment income $9,160 $9,948 $(788) (7.9%)Total operating expenses (21,125) (12,123) (9,002) 74.3%Income tax (benefit) expense (1,278) 270 (1,548) Net investment loss (10,687) (2,445) (8,242) 337.1%Net realized (loss) gain on investments before income tax (10,802) 164,264 (175,066) Net increase (decrease) in net unrealized appreciation oninvestments 16,089 (108,377) 124,466 Net (decrease) increase in net assets from operations $(5,400) $53,442 $(58,842) (110.1%)Investment IncomeTotal investment income consisted of interest income, management fees, dividend income and other income for each applicable period. For the yearended March 31, 2016, total investment income was $9.2 million, a $0.8 million, or 7.9%, decrease over total investment income of $9.9 million for the yearended March 31, 2015. This decrease was primarily attributable to a $5.5 million or 61.0%, decrease in dividend income principally due to the eliminationof dividend income from The RectorSeal Corporation as a result of the spin-off of CSWI. This decrease was offset by dividend income of $1.8 million fromMedia Recovery, Inc. and approximately $4.5 million of interest income generated from our debt investments. Total investment income also includes interestincome we earn from the short-term investment of cash funds, and the annual amount of such income varies based upon the average level of funds investedduring the year and fluctuations in short-term interest rates. During the three years ended March 31, 2016, we had interest income from cash and cashequivalents of $385,752 in 2016, $122,225 in 2015 and $66,949 in 2014.We receive management fees primarily from our controlled affiliated investments which aggregated $656,200 in 2016, $559,800 in 2015, and$559,800 in 2014. We also received other miscellaneous income of approximately $84,000, $35,000, and $65,000 during the years ended March 31, 2016,2015 and 2014, respectively, related primarily to other portfolio company activity.Operating ExpensesTotal operating expenses increased $9.0 million, or 74.3%, during the year ended March 31, 2016, as compared to the year ended March 31, 2015.Due to the nature of our business as an investment company, the majority of our operating expenses are related to employee and director compensation, officeexpenses, legal, professional and accounting fees and pension expenses. The increase in 2016 is primarily due to expenses of $7.0 million related to the spin-off of CSWI, as well as expenses of $1.3 million related to the spin-off compensation plan. Additionally, total compensation expenses of $7.0 million includeapproximately $1.6 million of compensation expense for employees who transferred to CSWI following the spin-off transaction.Net Investment Income/LossPrimarily as a result of the $0.8 million decrease in total investment income and the $9.0 million increase in expenses, net investment loss for thefiscal year ended March 31, 2016 was $10.7 million compared to net investment loss of $2.4 million during the fiscal year ended March 31, 2015. 44Table of ContentsIncrease/Decrease in Net Assets from OperationsDuring the fiscal year ended March 31, 2016, we recognized a total net realized loss of $10.8 million consisting of the difference between $19.7million of proceeds from disposition of investments and $30.5 million of cost from investments derived from the following sources: Year Ended March 31, 2016 Proceeds Cost Realized gain (loss) 360 Holdings III Corp. $1,374 $- $1,374 Alamo Group, Inc. 36,872 - 36,872 Atlantic Capital Bancshares, Inc 3,956,401 3,000,000 956,401 Ballast Point Ventures II, LP 3,507,598 2,634,790 872,808 BankCap Partners GP, L.P. 1,596,999 5,071,514 (3,474,515)Boxx Technologies, Inc. 2,184,184 1,500,000 684,184 CapitalSouth Partners Fund 50,000 433,403 (383,403)Diamond State Ventures, LP 32,150 - 32,150 First Capital Group of Texas 20,000 778,894 (758,894)Humac Company 231,000 - 231,000 iMemories, Inc. 150,030 6,414,986 (6,264,956)Instawares Holding Company, LLC 5,000,000 5,000,000 - StarTech Seed Fund II 14,000 622,783 (608,783)TaxAct 10,555 - 10,555 Water Pik, Inc. 5,482 - 5,482 Wellogix, Inc. 2,858,105 5,000,000 (2,141,895)Total realized loss $19,654,750 $30,456,370 $(10,801,620)Income taxes paid (2,947,944)Total realized loss, net of taxes $(13,749,564)In addition, for the fiscal year ended March 31, 2016, we recorded a net increase in unrealized appreciation of investments of $16.1 million,consisting of net unrealized appreciation on our current portfolio of $7.6 million and net unrealized appreciation reclassification adjustments of $8.5 millionrelated to the realized gains and losses noted above.During the fiscal year ended March 31, 2015, we sold our interests in Alamo Group, Inc., which generated a realized gain of $112.9 million. We alsosold our interests in Encore Wire Corporation, which resulted in a realized gain of $44.3 million. We also sold our ownership in KBI Biopharma, Inc., for cashproceeds of $18.9 million and a realized gain of $14.4 million. In addition, we sold our interests in Trax Holdings, Inc. for cash proceeds of $16.1 million,resulting in a realized gain of $7.9 million. These gains were offset by a $14.8 million realized loss from the sale of Cinatra Clean Technologies, Inc., a $1.2million realized loss related to the liquidation of Discovery Alliance, LLC, and a realized loss of $0.2 million from the liquidation of Tristate CapitalHoldings, Inc. In addition, for the fiscal year ended March 31, 2015, we recorded net unrealized depreciation of $108.4 million, consisting of net unrealizedappreciation on our current portfolio of $98.6 million and net unrealized depreciation reclassification adjustments of $207.0 million related to the realizedgains and losses noted above.As a result of these events, our net decrease in net assets from operations during the year ended March 31, 2016 was $5.4 million as compared to anincrease in net assets from operations of $53.4 million for the year ended March 31, 2015. 45Table of ContentsComparison of years ended March 31, 2015 and March 31, 2014 Year Ended March 31, Net Change 2015 2014 Amount % (in thousands) Total investment income $9,948 $12,607 $(2,659) (21.1%)Total operating expenses (12,123) (8,452) (3,671) 43.4%Income tax expense (benefit) 270 (739) 1,009 Net investment (loss) income (2,445) 4,894 (7,339) (150.0%)Net realized gain on investments before income tax 164,264 14,084 150,180 Net (decrease) increase in unrealized appreciation of investments (108,377) 93,032 (201,409) Net increase in net assets from operations $53,442 $112,010 $(58,568) (52.3%)Investment IncomeFor the year ended March 31, 2015, total investment income was $9.9 million, a $2.6 million, or 21.1%, decrease over total investment income of$12.6 million for the year ended March 31, 2014. This decrease was primarily attributable to a $2.5 million, or 21.5%, decrease in dividend incomeprincipally due to a one-time dividend of $1.7 million received from Wellogix during the year ended March 31, 2014 and a reduction of $0.4 million individend income from publicly traded securities due to our divestures of these securities during the year ended March 31, 2015.As compared to the fiscal year ended March 31, 2014, management fees for the year ended March 31, 2015 decreased by $31,500 or 5.3% as TraxHoldings, Inc. management fees ceased pursuant to the terms of its Series B financing.Operating ExpensesTotal operating expenses increased by $3.7 million, or 43.4% during the year ended March 31, 2015 as compared to the year ended March 31, 2014.The increase in 2015 was primarily due to an increase of $2.4 million in professional fees, of which $1.8 million was related to the spin-off of CSWI, and theremaining $0.6 million was related to legal fees incurred in conjunction with Alamo Group’s secondary offering and our review of strategic alternatives. Theincrease in total operating expenses was also due to an additional $1.7 million stock option expense in connection with the executive compensation plan.These increases were offset by a decrease of $0.7 million in salaries due to certain staffing changes in fiscal year 2014.Net Investment Income/LossAs a result of the $2.6 million decrease in total investment income and the $3.7 million increase in expenses, net investment loss for the fiscal yearended March 31, 2015 was $2.4 million compared to net investment income of $4.9 million during the fiscal year ended March 31, 2014.Increase/Decrease in Net Assets from OperationsDuring the fiscal year ended March 31, 2015, we recognized a total realized gain of $164.2 million. We sold our interests in Alamo Group, Inc.,which generated a realized gain of $112.9 million. We also sold our interests in Encore Wire Corporation, which resulted in a realized gain of $44.3 million,and in KBI Biopharma, Inc., which produced a realized gain of $14.4 million. In addition, we sold our interests in Trax Holdings, Inc. for cash proceeds of$16.1 million, resulting in a realized gain of $7.9 million. These gains were offset by a $14.8 million realized loss from the sale of Cinatra CleanTechnologies, Inc., a $1.2 million realized loss related to the liquidation of Discovery Alliance, LLC, and a realized loss of $0.2 million from the liquidationof Tristate Capital Holdings, Inc. In addition, for the fiscal year ended March 31, 2015, we recorded net unrealized depreciation of $108.4 million, consistingof net unrealized appreciation on our current portfolio of $98.6 million and net unrealized depreciation reclassification adjustments of $207.0 million relatedto the realized gains and losses noted above. 46Table of ContentsDuring the fiscal year ended March 31, 2014, we recognized total realized gains of $14.1 million. We had realized gains of $12.6 million from thesale of Hologic, Inc.’s common stock, $0.7 million from the redemption of TCI Holdings Inc.’s preferred stock, and $0.7 million from the sale of our interestin PalletOne. In addition, for the fiscal year ended March 31, 2014, we recorded net unrealized appreciation of $93.0 million, consisting of net unrealizedappreciation on our current portfolio of $107.0 million and net unrealized depreciation reclassification adjustments of $13.9 million related to realized gainsnoted above.FINANCIAL LIQUIDITY AND CAPITAL RESOURCESAt March 31, 2016, we had cash and cash equivalents of approximately $96.0 million.With the exception of one capital gain distribution made in the form of cash dividends during the fiscal year ended March 31, 2016, two capital gaindistributions made in the form of cash dividends during fiscal year ended March 31, 2013 and a capital gain distribution made in the form of a distribution ofthe stock of a portfolio company in the fiscal year ended March 31, 1996, we have historically elected to retain all gains realized during our more than 50years of operation. Retention of future gains is viewed as an important source of funds to sustain our investment activity.Management believes that our cash and cash equivalents and funds available from other sources described above are adequate to meet our expectedcash requirements. The disposition of investments from time to time may also be a source of funds for future investment activities.CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATESThe preparation of our financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periodscovered by the financial statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. On an on-going basis, we evaluate our estimates, including those related to the matters below. These estimates are based on the information that is currently availableto us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimatesunder different assumptions or conditions. A discussion of our critical accounting policies follows.Valuation of InvestmentsThe most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our investment portfolioand the related amounts of unrealized appreciation and depreciation. As of March 31, 2016 and 2015, our investment portfolio at fair value representedapproximately 63% and 69% of our total assets, respectively. We are required to report our investments at fair value. We follow the provisions of FASB ASC820, Fair Value Measurements and Disclosures ("ASC 820"). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fairvalue hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. ASC 820requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypotheticalmarket. See Note 5 — “Fair Value Measurements” in the notes to consolidated financial statements for a detailed discussion of our investment portfoliovaluation process and procedures.Due to the inherent uncertainty in the valuation process, our determination of fair value for our investment portfolio may differ materially from thevalues that would have been determined had a ready market for the securities actually existed. In addition, changes in the market environment, portfoliocompany performance, and other events may occur over the lives of the investments that may cause the gains or losses ultimately realized on theseinvestments to be materially different than the valuations currently assigned. We determine the fair value of each individual investment and record changesin fair value as unrealized appreciation or depreciation. 47Table of ContentsOur Board of Directors has the final responsibility for reviewing and approving, in good faith, our determination of the fair value for our investmentportfolio and our valuation procedures, consistent with 1940 Act requirements. We believe our investment portfolio as of March 31, 2016 and 2015approximates fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates. Revenue RecognitionInterest and Dividend IncomeInterest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. Dividend income is recognized onthe date dividends are declared. Discounts/premiums received to par on loans purchased are capitalized and accreted or amortized into income over the life ofthe loan. Any remaining discount/premium is accreted or amortized into income upon prepayment of the loan. In accordance with our valuation policy,accrued interest and dividend income is evaluated periodically for collectability. When we do not expect the debtor to be able to service all of its debt orother obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrual status, andcease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. Ifa loan or debt security’s status significantly improves regarding ability to service debt or other obligations, it will be restored to accrual basis.Recently Issued Accounting StandardsIn February 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation (ASC Topic 810): Amendments to the ConsolidationAnalysis (“ASU 2015-02”). ASU 2015-02 significantly changes the consolidation analysis required under GAAP and ends the deferral of the amendments tothe VIE guidance in ASU 2009-17 (FAS 166) for investments in certain investment companies. Now all legal entities that are VIEs are evaluated forconsolidation under the same criteria. Under this update, limited partnerships (or similar entities) that provide the limited partners with substantive kick-outor participating rights will be considered voting interest entities. For these entities, the investor that holds the majority of the substantive kick-out orparticipating rights will consolidate the VIE. This has the effect of reducing the likelihood that a general partner will consolidate a limited partnership orsimilar entity. ASU 2015-02 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015 and early adoption ispermitted. In accordance with this new guidance, we did not consolidate I-45 SLF, LLC based on the voting model as we only control 50% of the votingrights of this entity and, accordingly, share power over the entity equally in all respects with our joint venture partner. We adopted this guidance during thequarter ended December 31, 2015.In May 2015, the FASB issued ASU 2015-07, Fair Value Measurements – Disclosures for Certain Entities that Calculate Net Asset Value perShare. This amendment updates guidance intended to eliminate the diversity in practice surrounding how investments measured at net asset value under thepractical expedient with future redemption dates have been categorized in the fair value hierarchy. Under the updated guidance, investments for which fairvalue is measured at net asset value per share using the practical expedient should no longer be categorized in the fair value hierarchy, while investments forwhich fair value is measured at net asset value per share but the practical expedient is not applied should continue to be categorized in the fair valuehierarchy. The updated guidance requires retrospective adoption for all periods presented and is effective for interim and annual reporting periods beginningafter December 15, 2015, with early adoption permitted. We elected to adopt this guidance during the quarter ended December 31, 2015. As a result,investments measured at net asset value per share using the practical expedient are no longer categorized in the fair value hierarchy. In addition, our fairvalue hierarchy table as of March 31, 2015 has been adjusted to reflect the adoption of ASU 2015-07 on a retrospective basis. 48Table of ContentsCONTRACTUAL OBLIGATIONSAs shown below, we had the following contractual obligations as of March 31, 2016. For information on our capital commitments, see Note 12 ofthe Notes to Consolidated Financial Statements. Payments Due By Period(In thousands) Contractual Obligations Total 1 Year 2-3 Years More Than3 Years Operating lease obligations $1,468 $230 $488 $750 RECENT DEVELOPMENTSIn April 2016, we exited our investment in Freedom Truck Finance and received principal and accrued interest payments totaling $6.0 million. OnJune 7, 2016, we announced our board of directors had declared a $0.06 dividend per share for the quarter ended for June 30, 2016. The record date for thedividend is June 20, 2016. The payment date for the dividend is July 1, 2016.Item 7A.Quantitative and Qualitative Disclosures about Market RiskOur investment portfolio consists of debt and equity securities of private companies. We are subject to financial market risks, including changes ininterest rates for debt securities of private companies. Changes in interest rates may affect our interest income from portfolio investments and idle fundinvestments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and tocontinually monitor these risks. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extentof any debt investments that include floating interest rates. The majority of our debt investments are made with either fixed interest rates or floating rates thatare subject to contractual minimum interest rates for the term of the investment. As of March 31, 2016, approximately 82.6% of our debt investment portfolio(at fair value) bore interest at floating rates, 92.1% of which were subject to contractual minimum interest rates. The performance of our equity securities isalso a function of our portfolio companies’ profitability, which may be affected by economic cycles, competitive forces, and production costs including laborrates, raw material prices and certain basic commodity prices. All of these factors may have an adverse effect on the value of our investments and on our netasset value. As of March 31, 2016, none of our idle fund investments bore interest at floating rates. 49Table of ContentsItem 8.Financial Statements and Supplementary DataIndex to Financial Statements PageReports of Independent Registered Public Accounting Firm51Consolidated Statements of Assets and Liabilities as of March 31, 2016 and 201553Consolidated Statements of Operations for Years Ended March 31, 2016, 2015 and 201454Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2016, 2015 and 201455Consolidated Statements of Cash Flows for Years Ended March 31, 2016, 2015 and 201456Consolidated Schedules of Investments as of March 31, 2016 and 201558Notes to Consolidated Financial Statements64 50Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersCapital Southwest Corporation We have audited the accompanying consolidated statements of assets and liabilities of Capital Southwest Corporation (a Texas Corporation) and subsidiaries(the “Company”), including the consolidated schedules of investments, as of March 31, 2016 and 2015, and the related consolidated statements ofoperations, changes in net assets, and cash flows for each of the three years in the period ended March 31, 2016 and the selected per share data and ratios foreach of the five years in the period ended March 31, 2016. Our audits of the basic consolidated financial statements included the Schedule of Investments Inand Advances to Affiliates listed in the index appearing under Item 15(2). These financial statements, per share data and ratios, and financial statementschedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements, per share data andratios, and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures includedverification by confirmation of securities as of March 31, 2016 and 2015, by correspondence with the portfolio companies and custodians, or by otherappropriate auditing procedures where replies were not received. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements, including the consolidated schedule of investments referred to above present fairly, in all materialrespects, the financial position of Capital Southwest Corporation and subsidiaries as of March 31, 2016 and 2015, and the results of their operations, changesin their net assets, and their cash flows for each of the three years in the period ended March 31, 2016, and the selected per share data and ratios for each of thefive years in the period ended March 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in ouropinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal controlover financial reporting as of March 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO), and our report dated June 14, 2016 expressed an unqualified opinion thereon. /s/ Grant Thornton LLPDallas, TexasJune 14, 2016 51Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersCapital Southwest Corporation We have audited the internal control over financial reporting of Capital Southwest Corporation (a Texas Corporation) and subsidiaries (the “Company”) as ofMarch 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overFinancial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2016, based on criteriaestablished in the 2013 Internal Control—Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statementsof assets and liabilities, including the consolidated schedules of investments as of March 31, 2016 and 2015 and the related consolidated statements ofoperations, changes in net assets, and cash flows for each of the three years in the period ended March 31, 2016 and the selected per share data and ratios foreach of the five years in the period ended March 31, 2015, and our report dated June 14, 2016 expressed an unqualified opinion on those financialstatements./s/ Grant Thornton LLP Dallas, TexasJune 14, 2016 52Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES(In thousands except shares and per share data) March 31,2016 March 31,2015 Assets Investments at fair value: Non-control/Non-affiliate investments (Cost: March 31, 2016 - $101,538, March 31, 2015 - $12,396) $99,279 $37,776 Affiliate investments (Cost: March 31, 2016 - $6,356, March 31, 2015 - $6,944) 10,618 8,345 Control investments (Cost: March 31, 2016 - $42,215, March 31, 2015 - $45,620) 68,539 489,415 Total investments (Cost: March 31, 2016 - $150,110, March 31, 2015 - $64,960) 178,436 535,536 Cash and cash equivalents 95,969 225,797 Receivables Dividends and interest 1,752 77 Escrow 3,424 2,854 Other 219 1,392 Income tax receivable 1,010 95 Net pension assets - 10,294 Deferred tax asset 2,342 - Other assets 1,341 827 Total assets $284,493 $776,872 Liabilities Other liabilities $5,713 $4,923 Payable for unsettled transaction 3,940 - Accrued restoration plan liability 2,205 3,119 Deferred income taxes - 1,412 Total liabilities 11,858 9,454 Net Assets Common stock, $0.25 par value: authorized, 25,000,000 shares; issued, 18,065,518 shares at March 31, 2016 and17,904,844 shares at March 31, 2015 4,516 4,476 Additional capital 262,539 298,338 Accumulated net investment (loss) income (307) (4,390)Accumulated net realized gain 1,498 22,355 Unrealized appreciation of investments 28,326 470,576 Treasury stock - at cost, 2,339,512 shares (23,937) (23,937)Total net assets 272,635 767,418 Total liabilities and net assets $284,493 $776,872 Net asset value per share (15,726,006 shares outstanding at March 31, 2016 and 15,565,332 shares outstanding atMarch 31, 2015) $17.34 $49.30 The accompanying Notes are an integral part of these Consolidated Financial Statements. 53Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands except shares and per share data) Years Ended March 31, 2016 2015 2014 Investment income: Interest and dividends Non-control/Non-affiliate investments $4,409 $356 $439 Affiliate investments 135 581 2,826 Control investments 3,489 8,294 8,650 Interest income from cash and cash equivalents 386 122 67 Fees and other income 741 595 625 Total investment income 9,160 9,948 12,607 Operating expenses: Compensation 7,031 5,413 6,121 Spin-off compensation plan 1,303 - - Share-based compensation (benefit) 1,181 1,027 (632)Net pension (benefit) expense (99) (280) 176 Spin-off professional fees 7,040 1,819 - General and administrative 4,669 4,144 2,787 Total operating expenses 21,125 12,123 8,452 (Loss) income before income taxes (11,965) (2,175) 4,155 Income tax (benefit) expense (1,278) 270 (739) Net investment (loss) income $(10,687) $(2,445) $4,894 Realized (loss) gain: Non-control/Non-affiliate investments (9,575) 8,226 14,084 Affiliate investments (1,458) 157,213 - Control investments 231 (1,175) - Total net realized (loss) gain on investments before income tax (10,802) 164,264 14,084 Net increase (decrease) in unrealized appreciation of investments 16,089 (108,377) 93,032 Net realized and unrealized gain on investments $5,287 $55,887 $107,116 Net (decrease) increase in net assets from operations $(5,400) $53,442 $112,010 Net investment (loss) income per share – basic and diluted $(.68) $(.16) $.32 Net (decrease) increase in net assets from operations – basic and diluted $(.35) $3.44 $7.32 Weighted average shares outstanding - basic 15,635,597 15,491,870 15,227,581 Weighted average shares outstanding – diluted 15,723,617 15,530,974 15,298,343 The accompanying Notes are an integral part of these Consolidated Financial Statements. 54Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS(In thousands) Years Ended March 31, 2016 2015 2014 Operations: Net investment (loss) income $(10,687) $(2,445) $4,894 Net realized (loss) gain on investments (10,802) 164,264 14,084 Net increase (decrease) in unrealized appreciation of investments 16,089 (108,377) 93,032 Net (decrease) increase in net assets from operations (5,400) 53,442 112,010 Distributions from: Undistributed net investment income (625) (3,083) (3,050)Net realized gains (1,544) - - Taxes incurred on deemed capital gain distributions (2,948) (54,370) (3,787)Distributions of CSW Industrials, Inc. Decrease in unrealized appreciation related to spin-off investments (458,338) - - Distribution from additional capital (27,540) - - Capital share transactions: Change in pension plan funded status - (789) 1,250 Exercise of employee stock options 431 803 4,820 Share-based compensation expense (benefit) 1,181 1,027 (632)(Decrease) increase in net assets (494,783) (2,970) 110,611 Net assets, beginning of period 767,418 770,388 659,777 Net assets, end of period $272,635 $767,418 $770,388 The accompanying Notes are an integral part of these Consolidated Financial Statements. 55Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Years Ended March 31, 2016 2015 2014 Cash flows from operating activities Net (decrease) increase in net assets from operations $(5,400) $53,442 $112,010 Adjustments to reconcile net (decrease) increase in net assets from operations to net cash provided byoperating activities: Purchases and originations of investments (123,014) (7,421) (12,607)Net proceeds from disposition of and return of capital on investments 19,643 205,692 15,990 Principal repayments on debt investments 523 - - Payment of accreted original issue discounts 12 - - Depreciation and amortization 86 55 23 Net pension (benefit) expense (308) (530) 176 Realized loss (gain) on investments before income tax 10,802 (164,264) (14,084)Net (increase) decrease in unrealized appreciation of investments (16,089) 108,377 (93,032)Accretion of discounts on investments (96) - - Stock option and restricted awards expense (benefit) 1,181 1,027 (632)Deferred income tax benefit (1,278) - - (Increase) decrease in dividend and interest receivable (1,675) 705 1,683 (Increase) decrease in escrow receivables (570) (3,687) - Decrease (increase) in other receivables 1,173 (137) (131)(Increase) decrease in tax receivable (915) 72 (167)Increase in other assets (601) (604) (100)(Decrease) increase in other liabilities 165 2,085 (513)Increase in payable for unsettled transaction 3,940 - - Decrease in deferred income taxes 915 (528) (203)Net cash (used in) provided by operating activities (111,506) 194,284 8,413 Cash flows from financing activities Taxes incurred on deemed capital gain distribution (2,948) (54,370) (3,787)Distributions from undistributed net investment income - (3,083) (3,050)Distributions from undistributed net realized gain (1,544) - - Proceeds from exercise of employee stock options 431 803 4,820 Spin-off Compensation Plan distribution (1,261) - - Cash distribution to CSW Industrials (13,000) - - Net cash (used in) provided by financing activities (18,322) (56,650) (2,017)Net (decrease) increase in cash and cash equivalents (129,828) 137,634 6,396 Cash and cash equivalents at beginning of period 225,797 88,163 81,767 Cash and cash equivalents at end of period $95,969 $225,797 $88,163 Supplemental disclosure of cash flow information: Income taxes paid $- $362 $350 56Summary of Non-Cash Financing Activities Cost of Investments spun-off1 $6,981 $- $- Decrease in unrealized appreciation due to spin-off of CSWI1 (458,338) - - Net pension assets1 9,687 - - Change in deferred tax liabilities1 3,391 - - Dividend declared, not yet paid 625 1These non-cash items are related to the spin-off of CSW Industrials, Inc. at September 30, 2015.Other non-cash transactions: a.In March 2014, the $5,279,112 investment in Cinatra Clean Technologies, Inc. debt security and $1,579,056 accrued interest were converted intoPreferred Stock. b.In March 2015, we received net proceeds of $18,922,619 and 861,561 shares of common stock in kSep, Inc. from the sale of our preferred shares ofKBI Biopharma, Inc. c.In March 2015, we received net proceeds of $16,085,826 and 211,368 shares of common stock in Trax Data Refinery, Inc. from the sale of ourpreferred shares of Trax Holdings, Inc. These transactions had the following non-cash effect on our Consolidated Statements of Assets and Liabilities: 2016 2015 2014 Total Investments $- $1,261 $6,858 The accompanying Notes are an integral part of these Consolidated Financial Statements. 57Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTSMarch 31, 2016Portfolio Company1 Type ofInvestment Industry CurrentInterestRate2 Maturity Principal Cost FairValue3 Non-control/Non-affiliateInvestments4 360 HOLDINGS III CORP. Senior secured debt Consumer products& retail L+9.00%(Floor 1.00%) 10/1/2021 $6,965,000 $6,695,926 $6,721,225 ARGON MEDICALDEVICES Senior secured debt Healthcare products L+9.50%(Floor 1.00%) 12/23/2021 5,000,000 4,854,244 4,962,500 BDF ACQUISITIONCORP. Senior secured debt Consumer products& retail L+8.00%(Floor 1.00%) 2/12/2022 5,000,000 4,803,167 4,825,000 CAST AND CREWPAYROLL, LLC Senior secured debt Media, marketing &entertainment L+7.75%(Floor 1.00%) 8/12/2023 5,000,000 4,970,378 4,725,000 DEEPWATERCORROSIONSERVICES, INC. 127,004 shares ofSeries A convertiblepreferred stock Energy services(upstream) - - - 8,000,000 5,046,000 DIGITAL RIVER, INC. Senior secured debt Software & ITservices L+6.50%(Floor 1.00%) 2/12/2021 4,632,285 4,598,218 4,626,495 FREEDOM TRUCKFINANCE, LLC5,6 Senior secured debt Financial services Prime plus9.75%(Floor 3.25%) 4/15/2016 5,839,504 5,839,504 5,839,504 HYGEA HOLDINGS Senior secured debt Healthcare services L+9.25%2/22/2016 8,000,000 7,298,715 7,298,715 Warrants - - - 546,000 546,000 7,844,715 7,844,715 IMAGINE! PRINTSOLUTIONS, INC. Senior secured debt Media, marketing &entertainment L+6.00%(Floor 1.00%) 3/30/2022 4,000,000 3,940,000 3,940,000 LTI HOLDINGS, INC. Senior secured debt Industrial products L+9.25%(Floor 1.00%) 4/30/2023 7,000,000 6,837,644 6,298,099 PREPAID LEGALSERVICES. INC. Senior secured debt Consumer services L+9.00%(Floor 1.25%) 7/1/2020 5,000,000 4,944,630 4,950,000 RESEARCH NOWGROUP, INC. Senior secured debt Business services L+8.75%(Floor 1.00%) 3/18/2022 7,000,000 6,906,072 6,790,000 ROYAL HOLDINGS, INC. Senior secured debt Specialty chemicals L+7.50%(Floor 1.00%) 6/19/2023 1,000,000 992,994 955,000 TAXACT, INC. Senior secured debt Financial services L+6.00%(Floor 1.00%) 3/1/2022 4,500,000 4,405,601 4,432,500 TITANLINER, INC. Senior subordinateddebt 8.50% 6/30/2017 2,747,000 2,747,000 2,747,000 339,277 shares ofSeries A convertiblepreferred stock Energy services(upstream) - - - 3,204,222 3,352,000 5,951,222 6,099,000 The accompanying Notes are an integral part of these Consolidated Financial Statements. 58Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTSMarch 31, 2016TRAX DATAREFINERY, INC. Common stock Software & ITservices - - - 817,781 1,916,000 VIVID SEATS Senior secured debt Media, marketing &entertainment L+6.00%(Floor 1.00%) 3/1/2022 7,000,000 6,514,058 6,632,500 WATER PIK, INC. Senior secured debt Consumer products& retail L+8.75%(Floor 1.00%) 1/8/2021 4,780,702 4,667,815 4,720,943 WINZERCORPORATION Senior subordinateddebt Distribution 11.00%5/31/2021 8,100,000 7,954,440 7,954,440 Total Non-control/Non-affiliate Investments $101,538,409 $99,278,921 Affiliate Investments7 CHANDLER SIGNS,LP Senior subordinateddebt Business services 12.00%7/4/2021 4,500,000 $4,412,800 $4,412,800 1,500,000 units ofClass A-1 commonstock - - - 1,500,000 2,529,000 5,912,800 6,941,800 kSEP HOLDINGS, INC. 861,591 shares ofcommon stock Healthcare products - - - 443,518 3,676,000 Total AffiliateInvestments $6,356,318 $10,617,800 Control Investments8 I-45 SLF, LLC6, 9, 10 80% LLC equityinterest Multi-sectorholdings - - - $36,800,000 $36,337,174 MEDIA RECOVERY,INC.10 800,000 shares ofSeries A convertiblepreferred stock Industrial products - - - 800,000 4,757,452 4,000,002 shares ofcommon stock - - - 4,615,000 27,444,548 5,415,000 32,202,000 Total ControlInvestments $42,215,000 $68,539,174 TOTALINVESTMENTS11 $150,109,727 $178,435,895 The accompanying Notes are an integral part of these Consolidated Financial Statements. 59CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTSMarch 31, 2016 1All debt investments are income-producing, unless otherwise noted. Equity investments are non-income producing, unless otherwise noted.2Some investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“Prime”)which reset daily, monthly, quarterly, or semiannually. For each investment, the Company has provided the spread over LIBOR or Prime and thecurrent contractual interest rate in effect at March 31, 2016. Certain investments are subject to a LIBOR or Prime interest rate floor.3Investments are carried at fair value in accordance with the Investment Company Act of 1940 (the “1940 Act”) and Financial Accounting StandardsBoard (“FASB”) Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures. We determine in good faith the fairvalue of our Investment portfolio pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by our Board ofDirectors. See Note 5 to the consolidated financial statements.4Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments. AtMarch 31, 2016, approximately 55.6% of the Company’s investment assets were non-control investments.5The investment has $1.7 million unfunded commitment.6Indicates assets that are considered “non-qualifying assets” under section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% oftotal assets at the time of acquisition of any additional non-qualifying assets.7Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and theinvestments are not classified as control investments. At March 31, 2016, approximately 6.0% of the Company’s investment assets were affiliateinvestments.8Control investments are defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or where greater than50% of the board representation is maintained. At March 31, 2016, approximately 38.4% of the Company’s investment assets were controlinvestments.9The investment has approximately $31.2 million unfunded commitment.10Income producing through dividends on distributions.11The cumulative gross unrealized appreciation for federal income tax purposes is approximately $28.4 million; cumulative gross unrealizeddepreciation for federal income tax purposes is $4.3 million. Cumulative net unrealized appreciation is $32.7 million, based on a tax cost of $150.1million. The accompanying Notes are an integral part of these Consolidated Financial Statements. 60Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS11March 31, 2015Portfolio Company1 Type ofInvestment Industry CurrentInterest Rate2 Maturity Principal Cost FairValue3 Non-control/Non-affiliate Investments4 ATLANTIC CAPITALBANCSHARES, INC.5 300,000 shares ofcommon stock Financial services - - - $3,000,000 $3,779,000 BALLAST POINTVENTURES II, L.P.5 2.1% Limitedpartnership interest Multi-sectorholdings - - - 2,634,790 3,288,000 BANKCAP PARTNERSFUND I, L.P.5 5.5% Limitedpartnership interest Multi-sectorholdings - - - 5,071,514 4,771,000 CAPITALSOUTHPARTNERS FUND III,L.P.5 1.9% Limitedpartnership interest Multi-sectorholdings - - - 433,403 232,000 DEEPWATERCORROSIONSERVICES, INC. 127,004 shares ofSeries AConvertiblePreferred Stock Energy services(upstream) - - - 8,000,000 2,532,000 DIAMOND STATEVENTURES, L.P.5 1.4% Limitedpartnership interest Multi-sectorholdings - - - – 16,000 FIRST CAPITALGROUP OF TEXASIII, L.P.5 3.0% Limitedpartnership interest Multi-sectorholdings - - - 778,895 108,000 iMEMORIES, INC.6 17,391,304 sharesof Series Bconvertiblepreferred stock Software & ITservices - - - 4,000,000 – 4,684,967 shares ofSeries Cconvertiblepreferred stock - - - 1,078,479 – Convertibledebt6 10.00% 7/31/2016 1,188,000 1,188,000 – Senior secureddebt6 18.00% 7/31/2016 148,507 148,507 159,000 6,414,986 159,000 INSTAWARESHOLDINGCOMPANY, LLC 3,846,154 shares ofClass D convertiblepreferred stock Software & ITservices - - - 5,000,000 5,000,000 RESEARCH NOWGROUP, INC. Senior secured debt Business services L+8.75%(Floor 1.00%) 3/18/2022 7,000,000 6,895,231 6,895,231 The accompanying Notes are an integral part of these Consolidated Financial Statements. 61Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS11March 31, 2015STARTECH SEEDFUND II5 3.2% Limitedpartnership interest Multi-sectorholdings - - - 622,783 14,000 TITANLINER, INC. 339,277 shares ofSeries A convertiblepreferred stock Energy services(upstream) - - - 3,204,222 5,939,000 Senior subordinateddebt 8.50% 6/30/2017 2,747,000 2,747,000 2,747,000 5,951,222 8,686,000 TRAX DATAREFINERY, INC. 211,368 shares ofcommon stock Software & ITservices - - - 817,781 2,296,000 Total Non-Control/Non-Affiliate Investments $45,620,605 $37,776,231 Affiliate Investments7 BOXXTECHNOLOGIES,INC. 3,125,354 shares ofSeries B convertiblepreferred stock Technologyproducts &components - - - $1,500,000 $2,362,000 kSEP HOLDINGS, INC. 861,591 shares ofcommon stock Healthcare products - - - 443,518 1,863,000 WELLOGIX, INC. 4,788,371 shares ofSeries A-1convertibleparticipatingpreferred stock Software & ITservices - - - 5,000,000 4,120,000 Total AffiliateInvestments $6,943,518 $8,345,000 Control Investments8 BALCO, INC. 445,000 shares ofcommon stock and60,920 shares ClassB non-votingcommon stock Building &infrastructureproducts - - - $624,920 $5,100,000 CAPSTAR HOLDINGSCORPORATION 500 shares ofcommon stock and1,000,000 shares ofpreferred stock Real estate - - - 4,703,619 10,871,000 The accompanying Notes are an integral part of these Consolidated Financial Statements. 62Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIESCONSOLIDATED SCHEDULE OF INVESTMENTS11March 31, 2015 HUMAC COMPANY5 1,041,000 shares ofcommon stock Financial services - - - – 244,000 MEDIA RECOVERY,INC.9 800,000 shares ofSeries A convertiblepreferred stock Industrial products - - - 800,000 4,300,000 4,000,002 shares ofcommon stock - - - 4,615,000 21,700,000 5,415,000 26,000,000 THE RECTORSEALCORPORATION 27,907 shares ofcommon stock Specialty chemicals - - - 52,600 358,200,000 THE WHITMOREMANUFACTURINGCOMPANY 80 shares ofcommon stock Specialty chemicals - - - 1,600,000 89,000,000 Total ControlInvestments $12,396,139 $489,415,000 TOTALINVESTMENTS10 $64,960,262 $535,536,231 1All debt investments are income-producing, unless otherwise noted. Equity investments are non-income producing, unless otherwise noted.2Some investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“Prime”)which reset daily, monthly, quarterly, or semiannually. For each investment, the Company has provided the spread over LIBOR or Prime and thecurrent contractual interest rate in effect at March 31, 2015. Certain investments are subject to a LIBOR or Prime interest rate floor.3Investments are carried at fair value in accordance with the Investment Company Act of 1940 (the “1940 Act”) and Financial Accounting StandardsBoard (“FASB”) Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures. We determine in good faith the fairvalue of our Investment portfolio pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by our Board ofDirectors. See Note 5 to the consolidated financial statements.4Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments. AtMarch 31, 2015, approximately 7.1% of the Company’s investment assets are non-control investments.5Indicates assets that the Company believes do not represent “qualifying assets” under section 55(a) of the 1940 Act. Qualifying assets mustrepresent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets.6Investment was on non-accrual status as of March 31, 2015, meaning the Company has ceased recognizing interest income on the investment.7Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% of the voting securities are owned and theinvestments are not classified as control investments. At March 31, 2015, approximately 1.5% of the Company’s investment assets are affiliateinvestments.8Control investments are defined by the 1940 Act as investments in which more than 25% of the voting securities are owned or maintains greater than50% of the board representation. At March 31, 2015, approximately 91.4% of the Company’s investment assets are control investments.9Income producing through dividends on distributions.10The cumulative gross unrealized appreciation for federal income tax purposes is approximately $487.0 million; cumulative gross unrealizeddepreciation for federal income tax purposes is $13.5 million. Cumulative net unrealized appreciation is $473.5 million, based on a tax cost of$62.0 million.11Changes to the Consolidated Schedule of Investments at March 31, 2015 are presentation changes only to conform to current period presentation. The accompanying Notes are an integral part of these Consolidated Financial Statements. 63Table of ContentsNotes to Consolidated Financial Statements1.ORGANIZATION AND BASIS OF PRESENTATIONOrganizationCapital Southwest Corporation (“CSWC”) is an investment company that specializes in providing customized financing to middle marketcompanies in a broad range of industry segments located primarily in the United States. Our common stock current trades on The Nasdaq Global SelectMarket under the ticker symbol “CSWC.”CSWC was organized as a Texas corporation on April 19, 1961. Until September 1969, we operated as a small business investment company(“SBIC”) licensed under the Small Business Investment Act of 1958. At that time, CSWC transferred to our wholly-owned subsidiary, Capital SouthwestVenture Corporation (“CSVC”), certain assets including our license as a “SBIC”. CSVC is a closed-end, non-diversified investment company registeredunder the Investment Company Act of 1940, as amended (the “1940 Act”). Prior to March 30, 1988, CSWC was registered as a closed-end, non-diversifiedinvestment company under the 1940 Act. On that date, we elected to be treated as a business development company (“BDC”) subject to the provisions of the1940 Act, as amended by the Small Business Incentive Act of 1980. In order to remain a BDC, we must meet certain specified requirements under the 1940Act, including investing at least 70% of our assets in eligible portfolio companies and limiting the amount of leverage we incur.We are also a regulated investment company (“RIC”) under Subchapter M of the U.S. Internal Revenue Code of 1986 (the “Code”). As such, we arenot required to pay corporate-level income tax on our investment income. We intend to maintain our RIC status, which requires that we qualify annually as aRIC by meeting certain specified requirements. Because CSWC wholly owns CSVC, the portfolios of CSWC and CSVC are referred to collectively as “our,”“we” and “us.”Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, is the management company for CSWC and CSVC. CSMC generally incurs all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment andother administrative costs required for day-to-day operations.CSWC also has a newly formed direct wholly owned subsidiary that has been elected to be a taxable entity (the “Taxable Subsidiary”). The primarypurpose of the Taxable Subsidiary is to permit CSWC to hold equity investments in portfolio companies which are “pass-through” entities for tax purposes.The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income.We focus on investing in companies with track records of generating revenues and positive cash flow, established market positions and provenmanagement teams with strong operating discipline. We target senior and subordinated investments in the lower middle market and private loan transactions(club deals), as well as first and second lien syndicated loans in larger middle market companies. Our target lower middle market companies typically haveannual earnings before interest, taxes, depreciation and amortization (“EBITDA”) between $3 million and $15 million. Our target club deal companiestypically have annual EBITDA between $15 million and $50 million. Our target companies for syndicated first and second lien loan investments are in largemiddle market companies that typically have annual EBITDA that is greater than $50 million. We make available significant managerial assistance to thecompanies in which we invest when we believe that providing managerial assistance to an investee company is critical to its business development activities.On December 2, 2014, Capital Southwest Corporation (“CSWC” or the “Company”) announced that its board of directors (the “Board of Directors”)had unanimously approved a plan to spin off certain of its controlled assets into a standalone publicly traded industrial growth company through adistribution to our shareholders of all of the shares of common stock of the new spin-off company that would hold, directly or indirectly, the controlled assets(the “Share Distribution”). On September 30, 2015, we completed the spin-off of CSW Industrials, Inc. (“CSWI”). CSWI is now an independent publiclytraded company. CSWI’s common stock trades on the Nasdaq Global Select Market under the ticker symbol “CSWI.” The Share Distribution was effectedthrough a tax-free, pro-rata distribution of 100% of CSWI’s common stock to shareholders of the Company. Each Company shareholder received one share ofCSWI common stock for every one share of Company common stock on the record date, September 18, 2015. Cash was paid in lieu of any fractional shares ofCSWI common stock. 64Table of ContentsCSWI’s assets and businesses consist of the Company’s former industrial products, coatings, sealants & adhesives and specialty chemicalsbusinesses and include all the equity interests of The RectorSeal Corporation, The Whitmore Manufacturing Company, Balco, Inc., and CapStar HoldingsCorporation.Effective October 1, 2015 with the completion of the Share Distribution, Bowen S. Diehl was appointed President and Chief Executive Officer of ourCompany, and Michael S. Sarner was appointed Chief Financial Officer, Chief Compliance Officer, Secretary and Treasurer.Following the Share Distribution, we have maintained operations as an internally-managed BDC and pursue a credit-focused investing strategy akinto similarly structured organizations. We intend to continue to provide capital to middle-market companies. In the future, we intend to invest primarily indebt securities, including senior secured debt and subordinated debt, and may also invest in preferred stock and common stock alongside our debtinvestments or through warrants. We also invest in broadly syndicated first and second lien loans in large middle market companies. We remain a RIC under Subchapter M of the U.S. Internal Revenue Code of 1986. See Note 6 below for a discussion of CSWC’s status as an RIC. Basis of PresentationThe consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ofAmerica (“GAAP”). We meet the definition of an investment company and follow the accounting and reporting guidance in the Financial AccountingStandards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 – Financial Services – Investment Companies (“ASC Topic 946”). Underrules and regulations applicable to investment companies, we are precluded from consolidating any entity other than another investment company. One ofthe exceptions to this general principle occurs if the investment company has an investment in an operating company that provides services to theinvestment company. Accordingly, the consolidated financial statements include CSMC, our management company, and the Taxable Subsidiary.Portfolio Investment ClassificationWe classify our investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control investments” are defined asinvestments in which we own more than 25% of the voting securities or have rights to maintain greater than 50% of the board representation; “Affiliateinvestments” are defined as investments in which we own between 5% and 25% of the voting securities; and “Non-control/Non-affiliate investments” aredefined as investments that are neither “Control Investments” nor “Affiliate Investments.”Under the 1940 Act, a BDC must meet certain requirements, including investing at least 70% of our assets in qualifying assets. The principalcategories of qualifying assets relevant to our business are any of the following:(1) Securities purchased in transactions not involving any public offering from the issuer of those securities, which issuer (subject to certain limitedexceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligibleportfolio company, or from any other person, subject to any rules that may be prescribed by the SEC.(2) Securities of any eligible portfolio company that we control.(3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or intransactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities wasunable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements. 65Table of Contents(4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for the securities and wealready own 60% of the outstanding equity of the eligible portfolio company.(5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise ofwarrants or rights relating to those securities.(6) Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. 2.CORRECTION OF IMMATERIAL ERROR In the fourth quarter of 2016, the Company discovered and corrected immaterial errors relating to the classification of taxes incurred on deemedcapital gain distribution reported on the Consolidated Statements of Cash Flows for the years ended March 31, 2015 and 2014. Previously, taxes incurred ondeemed capital gain distributions were classified as cash outflows from operating activities, but should have been classified as cash outflows from financingactivities. These reclassifications had no effect on total net assets, net asset value per share, the Consolidated Statements of Operations or the Statements ofChanges in Net Assets. The change had no effect on (1) overall net increase in cash and cash equivalents, (2) cash and cash equivalents at the beginning ofthe period, or (3) cash and cash equivalents at the end of the period in the Consolidated Statements of Cash Flows. Accordingly, the Company has correctedits Consolidated Statements of Cash Flows for the years ended March 31, 2015 and 2014. The effect of recording the adjustments to the accompanyingConsolidated Statements of Cash Flows is as follows (amounts in thousands): As PreviouslyReportedMarch 31, 2015 Adjustment As AdjustedMarch 31,2015 As PreviouslyReportedMarch 31, 2014 Adjustment As AdjustedMarch 31,2014 Net cash (used in) provided by operating activities $139,914 $54,370 $194,284 $4,626 $3,787 $8,413 Net cash (used in) provided by financing activities $(2,280) $(54,370) $(56,650) $1,770 $(3,787) $(2,017) 3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe following is a summary of significant accounting policies followed in the preparation of the consolidated financial statements of CSWC.Fair Value Measurements We apply fair value to substantially all of our financial instruments in accordance with ASC Topic 820 – Fair ValueMeasurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework used to measure fair value, and requiresdisclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency ofvaluation inputs. See Note 5 to the consolidated financial statements for further discussion regarding the fair value measurements and hierarchy.ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. We believe that thecarrying amounts of its financial instruments such as cash, receivables and payables approximate the fair value of these items due to the short maturity ofthese instruments.Investments Investments are stated at fair value and are reviewed and approved by our Board of Directors as described in Notes 4 and 5 below. Investments are recorded on a trade date basis.Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation Realized gains or losses are measured by the differencebetween the net proceeds from the sale or redemption of an investment or a financial instrument and the cost basis of the investment or financial investment,without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period net of recoveries andrealized gains or losses from in-kind redemptions. Net change in unrealized appreciation or depreciation reflects the net change in the fair value of theinvestment portfolio and financial instruments and the reclassification of any prior period unrealized appreciation or depreciation on exited investments andfinancial instruments to realized gains or losses.Cash and Cash Equivalents Cash and cash equivalents consist of deposits at financial institutions. We deposit our cash balances in financialinstitutions and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. Cash and cash equivalentsare carried at cost, which approximates fair value. At March 31, 2016, cash balances totaling $93.7 million exceeded FDIC insurance limits, subjecting us torisk related to the uninsured balance. All of our cash deposits are held at large established high credit quality financial institutions and management believesthat the risk of loss associated with any uninsured balances is remote.Segment Information We operate and manage our business in a singular segment. As an investment company, we invest in portfolio companies invarious industries and geographic areas as discussed in Note 4.Consolidation As permitted under Regulation S-X and ASC Topic 946, we generally do not consolidate our investment in a portfolio companyother than an investment company subsidiary or a controlled operating company whose business consists of providing services to CSWC. Accordingly, weconsolidated the results of CSWC’s wholly-owned subsidiaries, CSVC, the Taxable Subsidiary and CSWC’s wholly-owned management company, CSMC.All intercompany balances have been eliminated upon consolidation.Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions thataffect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. We have identified investmentvaluation and revenue recognition as our most critical accounting estimates. 66Table of ContentsInterest and Dividend Income Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to be collected. Dividend income is recognized on the date dividends are declared. Discounts/premiums received to par on loans purchased are capitalized and accreted oramortized into income over the life of the loan. Any remaining discount/premium is accreted or amortized into income upon prepayment of the loan. Inaccordance with our valuation policy, accrued interest and dividend income is evaluated periodically for collectability. When we do not expect the debtorto be able to service all of its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing the loan ordebt security on non-accrual status, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability andintent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding its ability to service debt or other obligations, itwill be restored to accrual basis. As of March 31, 2016, we do not have any investments on non-accrual status. As of March 31, 2015, we had one investmenton non-accrual status.To maintain RIC tax treatment, non-cash sources of income such as accretion of interest income may need to be paid out to shareholders in the formof distributions, even though CSWC may not have collected the interest income. For the year ended March 31, 2016, approximately 1.0% of CSWC’s totalinvestment income was attributable to non-cash interest income for the accretion of discounts associated with debt investments, net of any premiumreduction. For the year ended March 31, 2015, CSWC has no investment income attributable to interest income for the accretion of discounts associated withdebt investments.Federal Income Taxes CSWC and CSVC have elected and intend to comply with the requirements of the Code necessary to qualify as RICs. Bymeeting these requirements, they will not be subject to corporate federal income taxes on ordinary income distributed to shareholders. In order to qualify as aRIC, each company is required to timely distribute to its shareholders at least 90% of investment company taxable income, as defined by the IRC, each year. Investment company taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in therecognition of income and expenses. Investment company taxable income generally excludes net unrealized appreciation or depreciation, as investmentgains and losses are not included in investment company taxable income until they are realized.In addition to the requirement that we must annually distribute at least 90% of our investment company taxable income, we may either distribute orretain our realized net capital gains from investments, but any net capital gains not distributed may be subject to corporate level tax. During the twelvemonths ended March 31, 2016, we distributed capital gains in the amount of $1,543,833 and retained capital gains of $8,422,697. During the twelve monthsended March 31, 2015, we did not distribute any capital gains to our shareholders. When we retain the capital gains, they are classified as a “deemeddistribution” to our shareholders and are subject to our corporate tax rate of 35%. As an investment company that qualifies as a RIC under the IRC, federalincome taxes payable on security gains that we elect to retain are accrued only on the last day of our tax year, December 31. Any capital gains actuallydistributed to shareholders are generally taxable to the shareholders as long-term capital gains. For the tax year ended December 31, 2015, we elected toretain capital gains of $8,422,697, on which we incurred federal taxes on behalf of our shareholders in the amount of $2,947,944. For the tax year endedDecember 31, 2014, we elected to retain capital gains of $155,342,875, on which we incurred federal taxes on behalf of our shareholders in the amount of$54,370,006. See Note 6 for further discussion.CSMC, a wholly owned subsidiary of CSWC, and the Taxable Subsidiary are not RICs and are required to pay taxes at the current corporate rate of34%. For tax purposes, CSMC has elected to be treated as a taxable entity, and therefore is not consolidated for tax purposes and is taxed at normal corporatetax rates based on its taxable income and, as a result of its activities, may generate income tax expense or benefit. The taxable income, or loss, of CSMC maydiffer from its book income, or loss, due to temporary book and tax timing differences and permanent differences. This income tax expense, or benefit, if any,and the related tax assets and liabilities, are reflected in our consolidated financial statements.Management evaluates tax positions taken or expected to be taken in the course of preparing the Company’s financial statements to determinewhether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions with respect to tax at the Companylevel not deemed to meet the “more-likely-than-not” threshold would be recorded as an expense in the current year. Management’s conclusions regarding taxpositions will be subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws,regulations and interpretations thereof. The Company has concluded that it does not have any uncertain tax positions that meet the recognition ofmeasurement criteria of ASC 740 for the current period. Also, we account for interest and, if applicable, penalties for any uncertain tax positions as acomponent of income tax expense. No interest or penalty expense was recorded during the years ended March 31, 2016, 2015 and 2014. 67Table of ContentsDeferred Taxes Deferred tax assets and liabilities are recorded for losses or income at our taxable subsidiaries using statutory tax rates. A valuationallowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. SeeNote 6 for further discussion. Stock-Based Compensation We account for our stock-based compensation using the fair value method, as prescribed by FASB ASC Topic 718,Compensation – Stock Compensation. Accordingly, we recognize stock-based compensation cost on a straight-line basis for all share-based payments awardsgranted to employees. The fair value of stock options are determined on the date of grant using the Black-Scholes pricing model and are expensed over thevesting period of the related stock options. For restricted stock awards, we measured the grant date fair value based upon the market price of our commonstock on the date of the grant. We utilized Monte Carlo simulation to develop grant date fair value for any restricted awards that are affected by marketcondition. For both restricted stock awards and market condition affected restricted awards, we will amortize this fair value to shared-based compensationexpense over the vesting term. For individual incentive awards, the option value of individual cash incentive awards is calculated based on the changes innet asset value of our company. In connection with the spin-off of CSWI, we entered into an Employee Matters Agreement with CSWI. Under this agreement,the value of individual incentive cash awards shall be determined based upon the net asset value of CSWC as of June 30, 2015. See Note 9 for furtherdiscussion.Earnings per Share Earnings per share calculations are computed utilizing the weighted-average number of shares of common stock and fully dilutedshares outstanding for the period. In accordance with FASB ASC Topic 260, Earnings per Share, the unvested shares of restricted stock awarded pursuant toCSWC’s equity compensation plans are participating securities and are included in the basic and diluted earnings per share calculation. At the years endedMarch 31, 2016, 2015 and 2014, weighted-average basic shares were adjusted for the diluted effect of stock-based awards of 88,020, 39,104 and 20,762,respectively.Shareholder Distributions Distributions to common shareholders are recorded on the ex-dividend date. The amount of distributions, if any, isdetermined by the Board of Directors each quarter.Presentation Presentation of certain amounts on the Consolidated Statements of Operations for the prior year comparative financial statements isupdated to conform to the current period presentation. This mainly includes disclosure of amounts at a more disaggregated level.Recently Issued or Adopted Accounting Standards In February 2015, the FASB issued Accounting Standards Update 2015-02, Consolidation (ASCTopic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 significantly changes the consolidation analysis required underGAAP and ends the deferral of the amendments to the VIE guidance in ASU 2009-17 (FAS 166) for investments in certain investment companies. Now alllegal entities that are VIEs are evaluated for consolidation under the same criteria. Under this update, limited partnerships (or similar entities) that provide thelimited partners with substantive kick-out or participating rights will be considered voting interest entities. For these entities, the investor that holds themajority of the substantive kick-out or participating rights will consolidate the VIE. This has the effect of reducing the likelihood that a general partner willconsolidate a limited partnership or similar entity. ASU 2015-02 is effective for interim and annual reporting periods in fiscal years that begin after December15, 2015 and early adoption is permitted. In accordance with this new guidance, we did not consolidate I-45 SLF, LLC based on the voting model as we onlycontrol 50% of the voting rights of this entity and, accordingly, share power over the entity equally in all respects with our joint venture partner. We adoptedthis guidance during the quarter ended December 31, 2015.In May 2015, the FASB issued ASU 2015-07, Fair Value Measurements – Disclosures for Certain Entities that Calculate Net Asset Value perShare. This amendment updates guidance intended to eliminate the diversity in practice surrounding how investments measured at net asset value under thepractical expedient with future redemption dates have been categorized in the fair value hierarchy. Under the updated guidance, investments for which fairvalue is measured at net asset value per share using the practical expedient should no longer be categorized in the fair value hierarchy, while investments forwhich fair value is measured at net asset value per share but the practical expedient is not applied should continue to be categorized in the fair valuehierarchy. The updated guidance requires retrospective adoption for all periods presented and is effective for interim and annual reporting periods beginningafter December 15, 2015, with early adoption permitted. We elected to adopt this guidance during the quarter ended December 31, 2015. As a result,investments measured at net asset value per share using the practical expedient are no longer categorized in the fair value hierarchy. In addition, our fairvalue hierarchy table as of March 31, 2015 has been adjusted to reflect the adoption of ASU 2015-07 on a retrospective basis. 68Table of Contents4.INVESTMENTSThe following tables show the composition of the investment portfolio, at cost and fair value (with corresponding percentage of total portfolioinvestments), as of March 31, 2016 and 2015: Cost Percentage ofTotal Portfolio Fair Value Percentage ofTotal Portfolio (dollars in millions) March 31, 2016: 1st lien notes $39.3 26.2% $39.5 22.1%2nd lien notes 39.0 26.0 38.2 21.4 Subordinated debt 15.1 10.1 15.1 8.5 Preferred equity, common equity & warrants 19.9 13.2 49.3 27.6 I-45 SLF, LLC 36.8 24.5 36.3 20.4 $150.1 100.0% $178.4 100.0% March 31, 2015: 2nd lien notes $6.9 10.6% $6.9 1.3%Subordinated debt 4.1 6.3 2.9 0.5 Preferred & common equity 44.4 68.4 517.3 96.6 Partnership interests 9.5 14.7 8.4 1.6 $64.9 100.0% $535.5 100.0%The following tables show the composition of the investment portfolio by industry, at cost and fair value (with corresponding percentage of totalportfolio investments), as of March 31, 2016 and 2015: Cost Percentage of Total Portfolio Fair Value Percentage ofTotal Portfolio March 31, 2016: I-45 SLF, LLC1 $36.8 24.5% $36.3 20.4%Consumer Products and Retail 16.2 10.8 16.3 9.1 Media, Marketing, & Entertainment 15.4 10.3 15.3 8.6 Energy Services (Upstream) 14.0 9.3 11.1 6.2 Business Services 12.8 8.5 13.7 7.7 Industrial Products 12.3 8.2 38.5 21.5 Financial Services 10.2 6.8 10.3 5.8 Distribution 8.0 5.3 8.0 4.5 Healthcare Services 7.8 5.2 7.8 4.4 Software & IT Services 5.4 3.6 6.5 3.7 Healthcare Products 5.3 3.5 8.6 4.8 Consumer Services 4.9 3.3 5.0 2.8 Specialty Chemicals 1.0 0.7 1.0 0.5 $150.1 100.0% $178.4 100.0% 69Table of ContentsMarch 31, 2015: Software & IT Services $17.2 26.5% $11.5 2.1%Energy Services (Upstream) 14.0 21.6 11.2 2.1 Multi-sector Holdings 9.5 14.6 8.6 1.6 Business Services 6.9 10.7 6.9 1.3 Industrial Products 5.4 8.3 26.0 4.9 Real Estate 4.7 7.3 10.9 2.0 Financial Services 3.0 4.6 3.8 0.7 Specialty Chemicals 1.7 2.6 447.2 83.5 Technology Products & Components 1.5 2.3 2.4 0.4 Building & Infrastructure Products 0.6 0.9 5.1 1.0 Healthcare Products 0.4 0.6 1.9 0.4 $64.9 100.0% $535.5 100.0%1 I-45 SLF, LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loans in the upper middle market. The portfoliocompanies in I-45 include multi-sector holdings, which are similar to those in which CSWC invests directly. See Note 16 for further discussion.The following tables summarize the composition of the investment portfolio by geographic region of the United States, at cost and fair value (withcorresponding percentage of total portfolio investments), as of March 31, 2016 and 2015: Cost Percentage of Total Portfolio Fair Value Percentage ofTotal Portfolio (dollars in millions) March 31, 2016: Southwest $55.8 37.2% $80.8 45.3%I-45 SLF, LLC1 36.8 24.5 36.3 20.4 West 24.0 16.0 24.4 13.7 Midwest 20.4 13.6 20.6 11.4 South 8.3 5.5 11.5 6.5 Northeast 4.8 3.2 4.8 2.7 $150.1 100.0% $178.4 100.0%March 31, 2015: Southwest $45.7 70.3% $503.9 94.1%South 8.4 13.0 10.6 2.0 Northeast 5.5 8.5 5.0 0.9 West 4.7 7.2 10.9 2.0 Midwest 0.6 1.0 5.1 1.0 $64.9 100.0% $535.5 100.0%1 I-45 SLF, LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loans in the upper middle market. The portfoliocompanies in I-45 are located within the geographic regions listed above. See Note 16 for further discussion.5.FAIR VALUE MEASUREMENTSInvestment Valuation ProcessThe valuation process is led by the finance department in conjunction with the investment team. The process includes a monthly review of eachinvestment by the executive officers of CSWC. Valuations of each portfolio security are prepared quarterly by the finance department using updatedfinancial and other operational information collected by the investment teams. Each investment valuation is then subject to review by the executive officersand investment teams. In conjunction with the internal valuation process, we have also engaged an independent consulting firm specializing in financial duediligence, valuation, ABL services, and business advisory services to provide a third-party valuation review of certain investments. The third-party valuationfirm provides a range of values for selected investments which is presented to CSWC’s executive officers and Board of Directors. 70Table of ContentsCSWC also uses a standard internal investment rating system in connection with its investment oversight, portfolio management, and investmentvaluation procedures for its debt portfolio. This system takes into account both quantitative and qualitative factors of the portfolio company and theinvestments held therein.There is no single standard for determining fair value in good faith, as fair value depends upon the specific circumstances of each individualinvestment. While management believes our valuation methodologies and assumptions are appropriate and consistent with those of market participants, therecorded fair values of our investments may differ significantly from fair values that would have been used had an active market for the securities existed. Inaddition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimatelyrealized on these investments to be different than the valuations currently assigned. The Board of Directors has the ultimate responsibility for reviewing andapproving, in good faith, the fair value of CSWC’s investments in accordance with the 1940 Act.Fair Value HierarchyCSWC has established and documented processes for determining the fair values of portfolio company investments on a recurring basis inaccordance with the 1940 Act and ASC Topic 820. As required by ASC Topic 820, when the inputs used to measure fair value fall within different levels ofthe hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair valuemeasurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level3). Therefore, unrealized appreciation and depreciation related to such investments categorized within the Level 3 tables below may include changes in fairvalue that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). CSWC conducts reviews of fair value hierarchyclassifications on a quarterly basis. We also use judgment and consider factors specific to the investment in determining the significance of an input to a fairvalue measurement.The three levels of valuation inputs established by ASC Topic 820 are as follows:·Level 1: Investments whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities.·Level 2: Investments whose values are based on quoted prices for similar assets and liabilities in active markets, and inputs that are observable forthe asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.·Level 3: Investments whose values are based on unobservable inputs that are significant to the overall fair value measurement.As of March 31, 2016 and 2015, 100% of the CSWC investment portfolio consisted of debt and equity instruments of privately held companies forwhich quoted prices or other inputs falling within the categories of Level 1 and Level 2 are generally not available. Therefore, CSWC determines the fairvalue its investments (excluding investments for which fair value is measured at net asset value) in good faith using Level 3 inputs, pursuant to a valuationpolicy and process that is established by the management of CSWC with the assistance of third-party valuation advisors and subsequently approved by ourBoard of Directors.Investment Valuation InputsASC Topic 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date and excludes transaction costs. Under ASC Topic 820, the fair value measurement alsoassumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous marketfor the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity forthe asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed that the reporting entity has access to the market asof the measurement date. 71Table of ContentsThe Level 3 inputs to CSWC’s valuation process reflect our best estimate of the assumptions that would be used by market participants in pricingthe investment in a transaction in the principal or most advantageous market for the asset.The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:•Financial information obtained from each portfolio company, including unaudited statements of operations and balance sheets for the mostrecent period available as compared to budgeted numbers;•Current and projected financial condition of the portfolio company;•Current and projected ability of the portfolio company to service its debt obligations;•Type and amount of collateral, if any, underlying the investment;•Current financial ratios (e.g., fixed charge coverage ratio, interest coverage ratio and net debt/EBITDA ratio) applicable to the investment;•Current liquidity of the investment and related financial ratios (e.g., current ratio and quick ratio);•Indicative dealer quotations from brokers, banks, and other market participants;•Market yields on other securities of similar risk;•Pending debt or capital restructuring of the portfolio company;•Projected operating results of the portfolio company;•Current information regarding any offers to purchase the investment;•Current ability of the portfolio company to raise any additional financing as needed;•Changes in the economic environment which may have a material impact on the operating results of the portfolio company;•Internal occurrences that may have an impact (both positive and negative) on the operating performance of the portfolio company;•Qualitative assessment of key management;•Contractual rights, obligations or restrictions associated with the investment; and•Other factors deemed relevant.CSWC uses several different valuation approaches depending on the security type including the Market Approach, the Income Approach, theEnterprise Value Waterfall Approach, and the NAV Valuation Method.Market ApproachMarket Approach is a qualitative and quantitative analysis of the aforementioned unobservable inputs. It is a combination of the Enterprise ValueApproach and Income Approach as described in detail below. For debt investments recently originated or where the value has not departed significantly fromits cost, we generally rely on our cost basis or recent transaction price to determine the fair value, unless a material event has occurred since origination.Income ApproachIn valuing debt securities, we use an Income Approach model, which considers some or all of the factors listed above to develop an expectation ofthe yield that a hypothetical market participant would require when purchasing each debt investment (the “Required Market Yield”). The Required MarketYield is calculated in a multi-step process. First, using quarterly market data from our third-party valuation provider we estimate the current market yield ofsimilar debt securities. Next, based on the factors described above we modify the current market yield for each security to come up with a unique RequiredMarket Yield for each of our investments. The resulting Required Market Yield is a significant Level 3 input to the Income Approach model. Forinvestments where the factors listed above have not fluctuated significantly from the date the investment was made or have not fluctuated significantly fromCSWC’s expectations as of the date the investment was made, and where there have been no significant fluctuations in the market pricing for suchinvestments, we may conclude that the Required Market Yield is equal to the stated rate on the investment and therefore, the debt security is appropriatelypriced. In instances where CSWC determines that the Required Market Yield is different from the stated rate on the investment, we discount the contractualcash flows on the debt instrument using the Required Market Yield in order to estimate the fair value of the debt security. 72Table of ContentsUnder the income approach, CSWC also determines the appropriateness of the use of third-party broker quotes, if any, as a significant Level 3 inputin determining fair value. CSWC may validate the estimated Required Market Yield based on its understanding of the level of actual transactions used bythe broker to develop the quote, whether the quote was an indicative price or binding offer, the depth and consistency of broker quotes, and the correlation ofchanges in broker quotes with underlying performance of the portfolio company and other market indices.Fair value measurements using the Income Approach model can be sensitive to significant changes in one or more of the inputs. A significantincrease (decrease) in the Required Market Yield for a particular debt security may result in a lower (higher) fair value for that security.Enterprise Value Waterfall ApproachIn valuing equity securities (including warrants), CSWC estimates fair value using an Enterprise Value Waterfall valuation model. CSWC estimatesthe enterprise value of a portfolio company and then allocates the enterprise value to the portfolio company’s securities in order of their relative liquidationpreference. In addition, CSWC assumes that any outstanding debt or other securities that are senior to CSWC’s equity securities are required to be repaid atpar. Additionally, we estimate the fair value of a limited number of our debt securities using the Enterprise Value Waterfall approach, primarily when we ownboth debt and equity investments in the same portfolio company.To estimate the enterprise value of the portfolio company, CSWC uses a weighted valuation model based on public comparable companies,observable transactions and discounted cash flow analyses. A main input into the valuation model is a measure of the portfolio company’s financialperformance, which generally is either earnings before interest, taxes, depreciation and amortization, as adjusted (“Adjusted EBITDA”) or revenues. Inaddition, we consider other factors, including but not limited to (1) offers from third parties to purchase the portfolio company, and (2) the implied value ofrecent investments in the equity securities of the portfolio company. For certain non-performing assets, we may utilize the liquidation or collateral value ofthe portfolio company's assets in its estimation of enterprise value.The significant Level 3 inputs to the Enterprise Value Waterfall model are (1) an appropriate multiple derived from the comparable publiccompanies and transactions, (2) discount rate assumptions used in the discounted cash flow model and (3) a measure of the portfolio company’s financialperformance, which generally is either Adjusted EBITDA or revenues. Inputs can be based on historical operating results, projections of future operatingresults or a combination thereof. The operating results of a portfolio company may be unaudited, projected or pro forma financial information and mayrequire adjustments for certain non-recurring items. CSWC also may consult with the portfolio company’s senior management to obtain updates on theportfolio company’s performance, including information such as industry trends, new product development, loss of customers and other operational issues.Fair value measurements using the Enterprise Value Waterfall model can be sensitive to significant changes in one or more of the inputs. A significantincrease (decrease) in either the multiple, Adjusted EBITDA or revenues for a particular equity security would result in a higher (lower) fair value for thatsecurity.NAV Valuation MethodUnder the NAV valuation method, for an investment in an investment fund that does not have a readily determinable fair value, CSWC measures thefair value of the investment predominately based on the NAV of the investment fund as of the measurement date. However, in determining the fair value ofthe investment, we may consider whether adjustments to the NAV are necessary in certain circumstances, based on the analysis of any restrictions onredemption of our investment as of the measurement date, recent actual sales or redemptions of interests in the investment fund, expected future cash flowsavailable to equity holders, or other uncertainties surrounding CSWC’s ability to realize the full NAV of its interests in the investment fund. 73Table of ContentsThe table below presents the Valuation Techniques and Significant Level 3 Inputs (ranges and weighted averages) used in the valuation of CSWC’sdebt and equity securities at March 31, 2016 and March 31, 2015. The table is not intended to be all inclusive, but instead captures the significantunobservable inputs relevant to our determination of fair value.TypeValuationTechnique Fair Value at3/31/2016 (inmillions) SignificantUnobservableInputs Range WeightedAverage Equity InvestmentsEnterprise Value WaterfallApproach $49.3 EBITDA Multiple 3.50x - 7.60x 6.78x Revenue Multiple 3.70x 3.70x Discount Rate 12.92% - 18.62% 14.0% Debt InvestmentsIncome Approach 68.6 Discount Rate 6.00% - 11.50% N/A Third Party Broker Quote N/A N/A Market Approach 24.2 Cost N/A N/A 92.8 Total Level 3 Investments $142.1 TypeValuationTechnique Fair Value at3/31/2015 (inmillions) SignificantUnobservableInputs Range WeightedAverage Equity InvestmentsMarket Approach $494.1 EBITDA Multiple 3.00x - 7.75x 7.15x Market Approach 4.2 Recent Transaction Price N/A N/A Market Approach 15.0 Cash and Asset Value N/A N/A Market Approach 3.8 Multiple of Tangible BookValue 1.43x 1.43x Market Approach 0.2 Market Value of Held forSecurities N/A N/A 517.3 Debt InvestmentsFace Value 6.9 Recent Transaction Price N/A N/A Market Approach 2.7 Expected Cash Flow N/A N/A Liquidation Value 0.2 9.8 Total Level 3 Investments $527.1 74Table of ContentsThe following fair value hierarchy tables set forth our investment portfolio by level as of March 31, 2016 and March 31, 2015 (in millions): Fair Value Measurementsat March 31, 2016 Using Asset Category Total Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservable Inputs(Level 3) 1st lien notes $39.5 $− $− $39.5 2nd lien notes 38.2 − − 38.2 Subordinated debt 15.1 − − 15.1 Preferred equity, common equity & warrants 49.3 − − 49.3 Investments measured at net asset value1 36.3 − − − Total Investments $178.4 $− $− $142.1 Fair Value Measurementsat March 31, 2015 Using Asset Category Total Quoted Prices inActive Marketsfor IdenticalAssets(Level 1) Significant OtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) 2nd lien notes $6.9 $− $− $6.9 Subordinated debt 2.9 − − 2.9 Preferred & common equity 517.3 − − 517.3 Partnership interests1 8.4 − − − Total Investments $535.5 $− $− $527.1 1Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. Thefair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in Consolidated Statements of Assets and Liabilities.Changes in Fair Value LevelsWe monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy.Changes in economic conditions or model based valuation techniques may require the transfer of financial instruments from one fair value to another. Werecognize transfer of financial instruments between levels at the end of each quarterly reporting period. During the years ended March 31, 2016 and 2015, wehad no transfers between levels. 75Table of ContentsThe following table provides a summary of changes in the fair value of investments measured using Level 3 inputs during the years ended March 31,2016 and 2015 (in millions): Fair Value3/31/15 Net UnrealizedAppreciation (Depreciation) UnrealizedDepreciationdue to spin-offof CSWI Purchases of Investments1 Divestitures Distributions Fair Value at3/31/16 1st lien notes $− $0.2 $− $39.3 $− $− $39.5 2nd lien notes 6.9 (0.7) − 32.0 − − 38.2 Subordinated debt 2.9 1.1 − 12.4 (1.3) − 15.1 Preferred equity,common equity &warrants 517.3 14.8 (458.3) 2.0 (19.5) (7.0)* 49.3 Total Investments $527.1 $15.4 $(458.3) $85.7 $(20.8) $(7.0) $142.1 *Represents the costs basis of the The RectorSeal, Corporation, The Whitmore Manufacturing Company, Balco, Inc. and CapStar Holdings Corporation that were spun off to CSWIndustrials, Inc. at September 30, 2015.1 Includes purchases of new investments, as well as discount accretion on existing investments. Fair Value3/31/14 Net UnrealizedAppreciation (Depreciation) Purchases ofInvestments Divestitures Distributions Fair Value at3/31/15 2nd lien notes $− $− $6.9 $− $− $6.9 Subordinated debt 2.7 0.1 0.1 − − 2.9 Preferred & common equity 445.7 98.3 1.3 (28.0) − 517.3 Total Investments $448.4 $98.4 $8.3 $(28.0) $− $527.1 The total unrealized gains included in earnings that related to assets still held at the report date for the years ended March 31, 2016 and 2015 were$7,576,689 and $98,553,053, respectively.6.INCOME TAXESWe have elected to be treated as a RIC under Subchapter M of the IRC and have a tax year end of December 31. In order to qualify as a RIC, wemust annually distribute at least 90% of our investment company taxable income, as defined by the IRC, to our shareholders in a timely manner. Investmentcompany income generally includes net short-term capital gains but excludes net long-term capital gains. A RIC is not subject to federal income tax on theportion of its ordinary income and long-term capital gains that is distributed to its shareholders, including “deemed distributions” discussed below. Aspermitted by the IRC, a RIC can designate dividends paid in the subsequent tax year as dividends of current year ordinary income and net long-term gains ifthose dividends are both declared by the extended due date of the RIC’s federal income tax return and paid to shareholders by the last day of the subsequenttax year.We have distributed or intend to distribute sufficient dividends to eliminate taxable income for our completed tax years. If we fail to satisfy the 90%distribution requirement or otherwise fail to qualify as a RIC in any tax year, we would be subject to tax in that year on all of our taxable income, regardlessof whether we made any distributions to our shareholders. During the tax year ended December 31, 2015, we did not pay ordinary dividends. For the tax yearended December 31, 2014, we declared and paid ordinary dividends in the amount of $3,082,911.Additionally, we are subject to a nondeductible federal excise tax of 4% if we do not distribute at least 98% of our investment company ordinarytaxable income before the end of our tax year. For the tax year ended December 31, 2015, we incurred a net investment loss on a tax basis. For the tax yearended December 31, 2014, we distributed 100% of our investment company ordinary taxable income. As a result, we have no tax provision for income taxeson ordinary taxable income for the tax years ended December 31, 2015 and 2014. 76Table of ContentsA RIC may elect to retain its long-term capital gains by designating them as a “deemed distribution” to its shareholders and paying a federal tax rateof 35% on the long-term capital gains for the benefit of its shareholders. Shareholders then report their share of the retained capital gains on their income taxreturns as if it had been received and report a tax credit for tax paid on their behalf by the RIC. Shareholders then add the amount of the “deemeddistribution” net of such tax to the basis of their shares.During our tax year ended December 31, 2015, we had long-term capital gains of $9,966,530 for tax purposes, of which $1,543,833 was distributedto shareholders as a capital gain dividend. The total undistributed capital gain totaled $8,422,697, which we elected to retain and treat as deemeddistributions to our shareholders. In order to make the election to retain capital gains, we incurred federal taxes on behalf of our shareholders in the amount of$2,947,944 for the tax year ended December 31, 2015.During our tax year ended December 31, 2014, we had net long-term capital gains of $155,342,875 for tax purposes, which we elected to retain andtreat as deemed distributions to our shareholders. For the tax year ended December 31, 2014, we incurred federal taxes on behalf of our shareholders in theamount of $54,370,006.The following table sets forth a summary of our net realized gains for book purposes on transactions by category:Net Realized Gains on Transactions In For the Tax Year Ended December 31 Investment Securities of 2015 2014 Control investments $231,000 $− Affiliate investments (1,457,711) 157,128,306 Non-control/Non-affiliate investments 12,758,384 (1,189,983)Net realized gain on investments $11,531,673 $155,938,323 Capital gain distribution (1,543,833) − Taxes incurred on deemed capital gain distribution 2,947,944 54,370,006 Net realized gains on investments (for book purposes; after tax) $7,039,896 $101,568,317 Net realized gains on investments (for tax purposes; after tax) $5,474,753 $100,972,869 For the tax years ended December 31, 2015 and 2014, CSWC and CSVC qualified to be taxed as RICs. However, either company’s ability to meetcertain portfolio diversification requirements of RICs in future years may not be controllable by the company.CSMC, a wholly-owned subsidiary of CSWC, is not a RIC and is required to pay taxes at the current corporate rate. For tax purposes, CSMC haselected to be treated as a taxable entity, and therefore is not consolidated for tax purposes and is taxed at normal corporate tax rates based on its taxableincome and, as a result of its activities, may generate income tax expense or benefit. The taxable income, or loss, of CSMC may differ from its book income,or loss, due to temporary book and tax timing differences and permanent differences. This income tax expense, or benefit, if any, and the related tax assetsand liabilities, are reflected in our consolidated financial statements. CSMC records individual incentive award and bonus accruals on a quarterly basis.Deferred taxes related to the changes in the qualified defined pension plan, Restoration Plan, individual incentive award and bonus accruals are also recordedon a quarterly basis. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred taxasset will not be realized. Establishing a valuation allowance of a deferred tax asset requires management to make estimates related to expectations of futuretaxable income. Estimates of future taxable income are based on forecasted cash flows from the management company’s operations. As of March 31, 2016,CSMC had a deferred tax asset of $3.2 million, our valuation allowance was $0.9 million and our net deferred tax asset was $2.3 million. We believe that it ismore likely than not that we will be able to utilize $2.3 million of our deferred tax assets as of March 31, 2016. We will continue to assess our ability torealize our existing deferred tax assets. As of March 31, 2016 and March 31, 2015, CSMC has a deferred tax asset (liability) of $2,341,895 and ($1,411,920),respectively. 77Table of ContentsThe following table sets forth the significant components of the deferred tax assets and liabilities as of March 31, 2016 and 2015 (amounts inthousands): Years ended 2016 2015 Deferred tax asset: Net operating loss carryforwards $1,381 $- Compensation 874 741 Pension liability 750 1,092 Other 203 370 Total deferred tax asset 3,208 2,203 Less valuation allowance (866) - Total net deferred tax asset 2,342 2,203 Deferred tax liabilities: Pension benefit - (3,603)Other - (12)Total deferred tax liabilities - (3,615)Total net deferred tax assets (liabilities) $2,342 $(1,412)In addition, we have a wholly-owned taxable subsidiary, or the Taxable Subsidiary, which holds a portion of one or more of our portfolioinvestments that are listed on the Consolidated Schedule of Investments. The Taxable Subsidiary is consolidated for financial reporting purposes inaccordance with GAAP, so that our consolidated financial statements reflect our investments in the portfolio companies owned by the Taxable Subsidiary.The purpose of the Taxable Subsidiary is to permit us to hold certain interests in portfolio companies that are organized as limited liability companies, orLLCs (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90.0% of our gross income for federal income tax purposesmust consist of qualifying investment income. Absent the Taxable Subsidiary, a proportionate amount of any gross income of a partnership or LLC (or otherpass-through entity) portfolio investment would flow through directly to us. To the extent that our income did not consist of investment income, it couldjeopardize our ability to qualify as a RIC and therefore cause us to incur significant amounts of corporate-level U.S. federal income taxes. Where interests inLLCs (or other pass-through entities) are owned by the Taxable Subsidiary, however, the income from those interests is taxed to the Taxable Subsidiary anddoes not flow through to us, thereby helping us preserve our RIC status and resultant tax advantages. The Taxable Subsidiary is not consolidated for U.S.federal income tax purposes and may generate income tax expense as a result of their ownership of the portfolio companies. This income tax expense, if any,is reflected in our Statement of Operations.7.ACCUMULATED NET REALIZED GAINS (LOSSES) ON INVESTMENTSDistributions made by RICs often differ from aggregate GAAP-basis undistributed net investment income and accumulated net realized gains (totalGAAP-basis net realized gains). The principal cause is that required minimum fund distributions are based on income and gain amounts determined inaccordance with federal income tax regulations, rather than GAAP. The differences created can be temporary, meaning that they will reverse in the future, orthey can be permanent. In subsequent periods, when all or a portion of a temporary difference becomes a permanent difference, the amount of the permanentdifference will be reclassified to “additional capital.” During the year ended March 31, 2016, we reclassified for book purposes amounts arising frompermanent book/tax differences as follows (amounts in thousands): Year EndedMarch 31, 2016 Additional capital $(16,877)Accumulated net investment loss $15,395 Accumulated net realized gains $1,482 We incur federal taxes on behalf of our shareholders as a result of our election to retain long-term capital gains. We had $1,498,184 and $22,355,353of accumulated long term capital gains, as of March 31, 2016 and March 31, 2015, respectively. In accordance with the RIC rules, we elected to retain ourlong-term capital gains for the tax year ended December 31, 2015, incur the applicable income taxes of $2,947,944, and designate the after-tax gain as“deemed distributions” to shareholders. “Deemed distributions” are reclassified from accumulated net realized gains in additional paid in capital at the endof December. 78Table of Contents8.SPIN-OFF COMPENSATION PLANOn August 28, 2014, our Board of Directors adopted a compensation plan consisting of grants of nonqualified stock options, restricted stock andcash incentive awards to certain officers of the Company at the time. The plan was intended to align the compensation of the Company’s key officers with theCompany’s strategic objective of increasing the market value of the Company’s shares through a transformative transaction for the benefit of the Company’sshareholders. Under the plan, Joseph B. Armes, former CEO of the Company, Kelly Tacke, former CFO of the Company, and Bowen S. Diehl, former CIO andcurrent CEO of the company, were eligible to receive an amount equal to six percent of the aggregate appreciation in the Company’s share price from August28, 2014 (using a base price of $36.16 per share) to 90 days after the completion of a transformative transaction (the “Trigger Event Date”). The first plancomponent consists of nonqualified options awarded to purchase 259,000 shares of common stock at an exercise price of $36.60 per share. The second plancomponent consists of awards of 127,000 shares of restricted stock, which have voting rights but do not have cash dividend rights. See Employee stock basedcompensation plans under footnote 9 for further discussion on the first two components of the Executive Compensation Plan. The final plan componentconsists of cash incentive payments awarded to each participant in an amount equal to the excess of each awardee’s allocable portion of the total paymentamount over the aggregate value as of the Trigger Event Date of the awardee’s restricted common stock and nonqualified option awards under the plan.On September 8, 2015, the Board designated the share distribution of CSWI as a transformative transaction for purposes of the spin-off compensationplan and amended the award agreements granted under the plan to provide for accelerated vesting of the awards held by a participant in the event of atermination of that participant’s service effected by the participant for good reason, by the employer without cause, or as a result of the disability or death ofthe participant. On September 30, 2015, we completed the tax-free spin-off of CSWI through a pro-rata share distribution of CSWI's common stock to CSWCshareholders of record on September 18, 2015.Effective immediately with the spin-off of CSWI, both Joseph B. Armes and Kelly Tacke became employees of CSWI and Bowen Diehl, ourPresident and Chief Executive Officer, continued to be an employee of our Company. The Company entered into an Employee Matters Agreement withCSWI. Under this agreement, we retained the cash incentive awards granted under the Spin-off Compensation Plan, and all liabilities with respect to the cashincentive awards remained liabilities of CSWC. The equity based awards vesting terms are as follows: (1) 1/3 on December 29, 2015; (2) 1/3 on December29, 2016; and (3) 1/3 on December 29, 2017.The total value accretion was six percent of the aggregate appreciation in the Company’s share price from $36.16 to the combined volume-weightedaverage prices of both CSWC and CSWI stock as of December 29, 2015. The cash component of the spin-off compensation plan was the difference betweenthe total value accretion and the aggregate value of the awardee’s restricted common stock and non-qualified option awards under the plan. The total cashliabilities for three participants under the plan totaled $6,115,093, of which $2,051,698 was fully vested as of December 29, 2015, and it was subsequentlypaid out in January 2016. The remaining two payments will be fully vested on December 29, 2016 and December 29, 2017. During the twelve months endedMarch 31, 2016, we recognized the cash component of spin-off compensation expense of $1,303,478, which represented the cash component of spin-offcompensation for Mr. Diehl and two transferred employees to CSWI prior to the spin-off of CSWI. During the twelve months ended March 31, 2016, we alsorecorded $1,261,144 directly to additional paid in capital for the cash component of spin-off compensation related to the two transferred employees to CSWI.9.EMPLOYEE STOCK BASED COMPENSATION PLANSStock OptionsOn July 20, 2009, shareholders approved our 2009 Stock Incentive Plan (the “2009 Plan”), which provides for the granting of stock options toemployees and officers and authorizes the issuance of common stock upon exercise of stock options for up to 560,000 shares. All options are granted at orabove market price, generally expire up to 10 years from the date of grant and are generally exercisable on or after the first anniversary of the date of grant infive annual installments. Options to purchase 155,000 shares at $19.19 per share were granted on October 19, 2009. Additionally, options to purchase80,000 shares at $23.95 per share were granted on March 22, 2010, options to purchase 60,000 shares at $22.05 per share were granted on July 19, 2010 andoptions to purchase 40,000 shares at $24.23 per share were granted on July 18, 2011. Options to purchase 30,000 shares at $37.02 per share, 25,000 shares at$33.52 and 30,000 shares at $34.91 were granted on July 15, 2013, January 20, 2014 and March 17, 2014, respectively. 79Table of ContentsOn August 28, 2014, our Board of Directors amended the 2009 Plan, as permitted pursuant to Section 18 of the 2009 Plan (the “First Amendment tothe 2009 Plan”). The First Amendment to the 2009 Plan provides that an award agreement may allow an award to remain outstanding after a spin-off orchange in control of one or more wholly-owned subsidiaries of the Company. In addition, on August 28, 2014, options to purchase 259,000 shares at $36.60per share were granted under the 2009 Plan, as amended. On September 8, 2015, the Board designated the Share Distribution as a transformative transactionfor purposes of the 2009 Plan and amended the award agreements granted under the 2009 Plan to provide for accelerated vesting of the awards held by aparticipant in the event of a termination of that participant’s service effected by the executive for good reason, by the employer without cause, or as a resultof the disability or death of the participant. A third of these options were vested on December 29, 2015, and the rest of the options will vest on December 29,2016 and December 29, 2017, respectively.We previously granted stock options under our 1999 Stock Option Plan (the “1999 Plan”), as approved by shareholders on July 19, 1999. The 1999Plan expired on April 19, 2009. Options previously granted under our 1999 Plan and outstanding on July 20, 2009 continue in effect and are governed bythe provisions of the 1999 Plan. All options granted under the 1999 Plan were granted at market price on the date of grant, generally expire up to 10 yearsfrom the date of grant and are generally exercisable on or after the first anniversary of the date of grant in five to ten annual installments. At March 31, 2016,there are no options to acquire shares of common stock outstanding under the 1999 Plan.At September 30, 2015, in connection with the spin-off of CSWI, we entered into an Employee Matters Agreement with CSWI, which provided thateach CSWC option that is outstanding immediately prior to September 30, 2015, shall be converted into both a Post-Separation CSWC Option and a CSWIOption and shall be subject to substantially the same terms and conditions (including with respect to vesting and expiration) after September 30, 2015.Certain adjustments, using volumetric weighted-average prices for the 10-day period immediately prior to and immediately following the distribution, weremade to the exercise price and number of shares of CSWC subject to the awards, with the intention of preserving the economic value of the awardsimmediately prior to the distribution for all CSWC employees. We compared the fair market value of our stock options on the day of the spin-off with thecombined fair value of our stock options and CSWI stock options the day after the completion of the spin-off transaction. The distribution-relatedadjustments did not have a material impact on compensation expense for the year ended March 31, 2016.At March 31, 2016, there are options to acquire 362,513 shares of common stock outstanding. The Compensation Committee does not intend togrant additional options under the 2009 Stock Incentive Plan or request shareholders’ approval of additional stock options to be added under the 2009 StockIncentive Plan. 80Table of ContentsThe following table summarizes activity in the 2009 Plan and the 1999 Plan as of March 31, 2016: Number of Shares WeightedAverageExercisePrice 2009 Plan Balance at March 31, 2013 170,908 $22.37 Granted 85,000 35.25 Exercised (69,108) 22.27 Canceled/Forfeited (63,000) 22.08 Balance at March 31, 2014 123,800 31.40 Granted 259,000 36.60 Exercised (6,800) 23.95 Canceled/Forfeited (4,000) 23.95 Balance at March 31, 2015 372,000 35.24 Granted – – Exercised (8,000) 23.37 Canceled/Forfeited – – Spin-off adjustments (1,487)* NA Balance at March 31, 2016 362,513 $11.21* 1999 Plan Balance at March 31, 2013 246,000 $33.00 Granted – – Exercised (108,000) 30.37 Canceled/Forfeited (100,000) 38.25 Balance at March 31, 2014 38,000 26.68 Granted – – Exercised (22,000) 29.10 Canceled/Forfeited – – Balance at March 31, 2015 16,000 23.37 Granted – – Exercised (15,974) 17.38 Canceled/Forfeited – – Spin-off adjustments (26)* Balance at March 31, 2016 – – Combined Balance at March 31, 2016 362,513 $11.21*March 31, 2016Weighted AverageRemaining Contractual Term AggregateIntrinsicValue Outstanding2.1 years $2,426,559 Exercisable1.9 years $968,416 *Certain adjustments were made to the exercise price and number of shares of Capital Southwest awards using volumetric weighted-average prices for the 10-day period immediatelyprior to and immediately following the distribution with the intention of preserving the economic value of the awards immediately prior to the distribution for all Capital Southwestemployees.We recognize compensation cost using the straight-line method for all share-based payments. The fair value of stock options is determined on thedate of grant using the Black-Scholes pricing model and is expensed over the requisite service period of the related stock options. Accordingly, for the yearsended March 31, 2016, 2015 and 2014, we recognized stock option compensation expense (benefit) of $423,971, $525,235, and ($732,530) respectively.As of March 31, 2016, the total remaining unrecognized compensation expense related to non-vested stock options was $391,290, which will beamortized over the weighted-average vesting period of approximately 2.1 years.At March 31, 2016, the range of exercise prices was $7.55 to $11.53 and the weighted-average remaining contractual life of outstanding options was2.1 years. The total number of shares of common stock exercisable under both the 2009 Plan and the 1999 Plan at March 31, 2016 was 139,759 shares with aweighted-average exercise price of $10.86. During the year ended March 31, 2016, no options were granted and 23,974 options were exercised with anaverage exercise price of $19.38.At March 31, 2015, the range of exercise prices was $19.19 to $37.02 and the weighted-average remaining contractual life of outstanding optionswas 2.5 years. The total number of options exercisable under both the 2009 Plan and the 1999 Plan at March 31, 2015, was 49,000 shares with a weighted-average exercise price of $27.04. During the year ended March 31, 2015, 259,000 options were granted and 28,800 options were exercised with an averageexercise price of $27.89.At March 31, 2016, 2015 and 2014, the number of options exercisable was 139,759, 49,000 and 46,800, respectively, and the weighted averageprice of those options was $10.86, $27.04 and $26.00, respectively. 81Table of ContentsStock AwardsPursuant to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (“2010 Plan”), our Board of Directors originally reserved 188,000shares of restricted stock for issuance to certain of our employees. At our annual shareholder meeting in August 2015, our shareholders approved an increaseof an additional 450,000 shares to our 2010 Plan. A restricted stock award is an award of shares of our common stock, which generally have full voting anddividend rights but are restricted with regard to sale or transfer. Restricted stock awards are independent of stock grants and are generally subject to forfeitureif employment terminates prior to these restrictions lapsing. Unless otherwise specified in the award agreement, these shares vest in equal annual installmentsover a four to five-year period from the grant date and are expensed over the vesting period starting on the grant date. On January 16, 2012, the Board ofDirectors granted 38,600 shares of restricted stock to key employees of the Company. On January 22, 2013, the Board of Directors granted 8,000 shares ofrestricted stock to officers of the Company. On July 15, 2013, The Board of Directors granted 5,000 shares of restricted stock to a key officer of the Company.On January 20, 2014, the Board of Directors granted 4,800 shares of restricted stock to key employees of the Company. On March 17, 2014, the Board ofDirectors granted 5,000 shares of restricted stock to a key employee of the Company.On August 28, 2014, our Board of Directors amended the 2010 Plan, as permitted pursuant to Section 14 of the 2010 Plan (the “First Amendment tothe 2010 Plan”). The First Amendment to the 2010 Plan provides that an award agreement may allow an award to remain outstanding after a spin-off orchange in control of one or more wholly-owned subsidiaries of the Company. In addition, on August 28, 2014, the Board of Directors granted 127,000 sharesof restricted stock under the Spin-Off Compensation Plan.On September 30, 2015, we completed the spin-off of CSWI. CSWI is now an independent publicly traded company. CSWI’s common stock tradeson the Nasdaq Global Select Market under the ticker symbol “CSWI.” The Share Distribution was effected through a tax-free, pro-rata distribution of 100% ofCSWI’s common stock to shareholders of our Company. Each holder of an outstanding Capital Southwest Restricted Stock Award immediately prior to theDistribution Date received, as of the Distribution Date, a CSWI Restricted Stock Award for the number of CSWI Shares as if the outstanding CapitalSouthwest Restricted Stock Award comprised fully vested Capital Southwest Shares as of the Distribution Date.Restricted stock awards previously granted under the Spin-Off Compensation Plan vest and become exercisable as follows: (1) 1/3 on December 29,2015; (2) 1/3 on December 29, 2016; and (3) 1/3 on December 29, 2017.In November 2015 and January 2016, our Board granted an additional 143,000 and 500 shares, respectively, of restricted stock to employees. Theseshares vest in equal annual installments over a four-year period.The following table summarizes the restricted stock available for issuance for the year ended March 31, 2016:Restricted stock available for issuance as of March 31, 2015 31,240 Additional restricted stock approved under the plan 450,000 Restricted stock granted during the twelve months ended March 31, 2016 (143,500)Restricted stock forfeited during the twelve months ended March 31, 2016 6,800 Restricted stock available for issuance as of March 31, 2016 344,540 We expense the cost of the restricted stock awards, which is determined to equal the fair value of the restricted stock award at the date of grant, on astraight-line basis over the requisite service period. For these purposes, the fair value of the restricted stock award is determined based upon the closing priceof our common stock on the date of the grant. Due to the spin-off transaction, the Company evaluated the value of the CSWC stock awards pre spin-off andthe combined value of CSWC and CSWI stock awards post spin-off and recorded additional incremental stock based compensation expenses. 82Table of ContentsFor the fiscal years ended March 31, 2016, 2015, and 2014 we recognized total share based compensation expense of $756,630, $502,185 and$101,022, respectively related to the restricted stock issued to our employees and officers.As of March 31, 2016, the total remaining unrecognized compensation expense related to non-vested restricted stock awards was $2,381,716, whichwill be amortized over the weighted-average vesting period of approximately 3.0 years.The following table summarizes the restricted stock outstanding as of March 31, 2016:Restricted Stock Awards Number of Shares WeightedAverage FairValue Per Shareat grant date WeightedAverageRemainingVesting Term(in Years) Unvested at March 31, 2014 24,680 $30.30 4.1 Granted 127,000¹ 15.19² 2.0 Vested (4,720) 30.51 − Forfeited (4,000) 22.98 − Unvested at March 31, 2015 142,960 $17.07 2.6 Granted 143,500 14.87 3.6 Vested (46,453) 17.93 − Forfeited (6,800) 17.84 − Unvested at March 31, 2016 233,207 $15.79 3.0 ¹See Note 8.²Monte Carlo simulation was utilized to develop the grant date fair value for the restricted stock awards under the executive compensation plan.Individual Incentive AwardsOn January 16, 2012, our Board of Directors approved the issuance of 104,000 individual cash incentive awards with a baseline for measuringincreases in net asset value per share of $36.74 (Net Asset Value at December 31, 2011) to provide deferred compensation to certain key employees. OnJanuary 22, 2013, the Board of Directors granted 16,200 individual cash incentive awards with a baseline net asset value per share of $41.34 (Net Asset Valueat December 31, 2012) to officers of the Company. On July 15, 2013, the Board of Directors granted 24,000 shares of individual cash incentive awards with abaseline net asset value per share of $43.80 (Net Asset Value at June 30, 2013) to a key officer of the Company. Additionally, the Board of Directors granted38,000 individual cash incentive awards with a baseline net asset value per share of $50.25 (Net Asset Value at December 31, 2013) to several key employeesof the Company in January 2014 and March 2014. Under the individual cash incentive award agreements, awards vest on the fifth anniversary of the awarddate. Upon exercise of an individual cash incentive award, the Company pays the recipient a cash payment in an amount equal to the net asset value per shareminus the baseline net asset value per share, adjusted for capital gain dividends declared.In connection with the spin-off of CSWI, we entered into an Employee Matters Agreement with CSWI. Under this agreement, the individual cashincentive award agreements were amended to provide that the value of each individual cash incentive award is determined based upon the net asset value ofCSWC as of June 30, 2015. The remaining terms of each individual incentive award agreement, including the vesting and payment terms, will remainunchanged. After the Distribution Date, CSWC retains all liabilities associated with all individual cash incentive awards granted by CSWC.There are currently 74,000 individual cash incentive awards outstanding as of March 31, 2016 and the estimated liability for individual cashincentive awards was $618,856 at March 31, 2016. During the twelve months ended March 31, 2015, a payment in the amount of $193,708 was paid out to avested employee. The estimated liability for individual cash incentive awards was $671,758 at March 31, 2015. During the twelve months ended March 31,2014, a payment in the amount of $520,730 was paid out to a vested employee. At March 31, 2014, our estimated liability for individual cash incentiveawards was $673,268. 83Table of ContentsThere were no individual cash incentive awards vested or granted during the twelve months ended March 31, 2016.Individual Cash Incentive Awards Number ofShares WeightedAverage GrantPrice Per Share WeightedAverageRemainingVesting Term(in Years) Unvested at March 31, 2015 82,000 $45.40 3.3 Granted − − − Vested − − − Forfeited or expired (8,000) 43.57 − Unvested at March 31, 2016 74,000 $45.60 2.3 10.OTHER EMPLOYEE COMPENSATIONWe established a 401(k) plan (“401K Plan”) effective October 1, 2015. All full-time employees are eligible to participate in the 401K Plan. The401K Plan permits employees to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum based on age andeligibility. During the quarter ended December 31, 2015, we made contributions to the 401K Plan of up to 3% of the Internal Revenue Service’s annualmaximum eligible compensation, which vests in equal installments over four years. Effective January 1, 2016, the 401K Plan was converted to a safe harborplan. We made contributions of up to 4.5% of the Internal Revenue Service’s annual maximum eligible compensation, all of which is fully vestedimmediately. During the year ended March 31, 2016, we made matching contributions of approximately $49,000.11.RETIREMENT PLANSUntil the spin-off of CSWI, CSWC sponsored a qualified defined benefit pension plan which covers its employees and employees of certain of itscontrolled affiliates. The following information about the plan represents amounts and information related to CSWC’s participation in the plan and ispresented as though CSWC sponsored a single-employer plan. Benefits are based on years of service and an average of the highest five consecutive years ofcompensation during the last 10 years of employment. The funding policy of the plan is to contribute annual amounts that are currently deductible for taxreporting purposes. No contribution was made to the plan during the three years ended March 31, 2016. The qualified defined benefit pension plan is closedto any employees hired or rehired on or after January 1, 2015. In connection with the spin-off of CSWI, we entered into an Employee Matters Agreement withCSWI on September 8, 2015. The Employee Matters Agreement was amended and restated on September 14, 2015. Under the Employee Matters Agreement,Capital Southwest Corporation and Capital Southwest Management Corporation withdrew as participating employers in the Plan and CSWI became theSponsoring Employer of the Qualified Retirement Plan and assumed all the liabilities, assets, and future funding obligations for providing benefits for thecovered Participants under the Qualified Retirement Plan.Additionally, CSWC sponsors an unfunded Retirement Restoration Plan, which is a nonqualified plan that provides for the payment, uponretirement, of the difference between the maximum annual payment permissible under the qualified retirement plan pursuant to federal limitations and theamount which would otherwise have been payable under the qualified plan. Effective September 30, 2015, the benefits accrued under the Restoration Plan onbehalf of CSWI employees, including employees who transferred from the Company to CSWI, were transferred to a non-qualified deferred compensation planestablished by CSWI. The Company retained all liabilities associated with benefits accrued under the Restoration Plan on behalf of individuals who remainemployees of the Company or Capital Southwest Management Corporation following September 30, 2015 or who terminated employment prior to September30, 2015 with vested benefits under the Restoration Plan. Unvested accrued benefits under the Restoration Plan were forfeited as of September 30, 2015. 84Table of ContentsThe following tables set forth the qualified plan’s net pension benefit, benefit obligation, fair value of plan assets, and amounts recognized in ourconsolidated statements of operations at March 31, 2016, 2015 and 2014, as well as amounts recognized in our consolidated statements of assets andliabilities at March 31, 2016 and 2015: Years ended March 31, 2016 2015 2014 Net pension benefit Service cost-benefits earned during the year $189,886 $199,097 $253,837 Interest cost on projected benefit obligation 173,120 347,933 291,699 Expected return on assets (578,273) (1,043,584) (906,816)Net amortization 4,689 25,284 68,813 Immediate recognition of benefit cost due to Plan Freeze at 9/30/2015 (71,946) – – Net pension benefit from qualified plan $(282,524) $(471,270) $(292,467) Years ended March 31, 2016 2015 2014 Change in benefit obligation Benefit obligation at beginning of year $8,328,554 $7,149,380 $6,421,611 Service cost 189,886 199,097 253,837 Interest cost 173,120 347,933 291,699 Actuarial gain (507,703) 930,588 306,173 Benefits paid (171,791) (298,444) (123,940)Curtailment recognition (409,285) – – Transferred to CSWI at 9/30/2015 (7,602,781) – – Benefit obligation at end of year $– $8,328,554 $7,149,380 Years ended March 31, 2016 2015 2014 Change in plan assets Fair value of plan assets at beginning of year $18,622,781 $18,112,073 $15,183,833 Actual return on plan assets (314,549) 809,152 3,052,180 Benefits paid (171,791) (298,444) (123,940)Transferred to CSWI at 9/30/2015 (18,136,441) – – Fair value of plan assets at end of year $– $18,622,781 $18,112,073 Years ended March 31, 2016 2015 Funded status and amounts recognized in consolidated statements of assets and liabilities Actuarial present value of benefit obligations: Accumulated benefit obligation $– $(7,149,380) Projected benefit obligation for service rendered to date – (8,328,554)Plan assets at fair value* – 18,622,781 Funded status – 10,294,227 Unrecognized net (gain)loss – (146,916)Unrecognized prior service costs – 103,825 ASC 715 adjustment – 43,091 Prepaid pension cost included in pension assets $– $10,294,227 *Includes approximately 238,252 shares of CSWC Common Stock at 3/31/2015. 85Table of ContentsThe following tables set forth the retirement restoration plan’s net pension benefit and benefit obligation amounts at March 31, 2016, 2015 and2014, as well as amounts recognized in our consolidated statements of assets and liabilities at March 31, 2016 and 2015: Years ended March 31, 2016 2015 2014 Net pension cost Service cost-benefits earned during the year $82,152 $17,795 $106,199 Interest cost on projected benefit obligation 138,344 142,579 197,366 Net amortization 44,485 31,154 164,649 Immediate recognition of benefit cost due to Plan Freeze at 9/30/2015 (81,697) – – Net pension cost from restoration plan $183,284 $191,528 $468,214 Years ended March 31, 2016 2015 2014 Change in benefit obligation Benefit obligation at beginning of year $3,119,234 $3,103,308 $2,649,966 Service cost 82,152 17,795 106,199 Interest cost 138,344 142,579 197,366 Actuarial gain 427,370 105,475 149,777 Benefits paid (199,938) (249,923) – Curtailment recognition (329,449) – – Other adjustments (177,051) – – Benefit obligation at end of year $3,060,662 $3,119,234 $3,103,308 Years ended March 31, 2016 2015 Amounts recognized in our consolidated statements of assets and liabilities Projected benefit obligation $(3,060,662) $(3,119,234)Unrecognized net gain 855,822 863,079 Unrecognized prior service costs – (89,804)ASC 715 adjustment – (773,275)Accrued pension cost included in pension liabilities $(2,204,840) $(3,119,234)The following assumptions were used in estimating the actuarial present value of the projected benefit obligations: Years ended March 31, 2016 2015 2014 Discount rate 4.25% 4.25% 5.00%Rate of compensation increases 5.00% 5.00% 5.00%The following assumptions were used in estimating the net periodic (income)/expense: Years ended March 31, 2016 2015 2014 Discount rate 4.25% 5.00% 4.50%Expected return on plan assets N/A 7.00% 7.00%Rate of compensation increases N/A 5.00% 5.00% 86Table of ContentsFollowing are the expected benefit payments for the next five years and in the aggregate for the years 2022-2026:(In thousands) 2017 2018 2019 2020 2021 2022-2026 Restoration Plan $212 $214 $215 $214 $214 $1,122 During the plan year ended March 31, 2016, the discount rate was changed from 5.00% to 4.25%. The expected rate of return on assets assumptionwas determined based on the anticipated performance of the various asset classes in the plan’s portfolio and the allocation of assets to each class. Theanticipated asset class return is developed using historical and predicted asset return performance, considering the investments underlying each asset classand expected investment performance based on forecasts of inflation, interest rates and market indices for fixed income and equity securities. Plan AssetsIn connection with the spin-off of CSWI, CSWI became the Sponsoring Employer of the Qualified Retirement Plan and assumed all of the PlanAssets and future funding obligations for providing benefits for the covered Participants under the Qualified Retirement Plan. The pension plan isadministered and managed by the trustees of the plan that has fiduciary responsibility for the plan’s management. All assets are held in the custody ofNorthern Trust. The plan assets are invested using a total return approach whereby a mix of equity securities, debt securities and other investments are usedto preserve asset values, diversify risk and achieve our targeted investment return benchmark. Investment performance and asset allocation are measured andmonitored on an ongoing basis.Plan assets are managed in a balanced portfolio comprised of two major components: an equity portion and a fixed income portion. The expectedrole of plan equity investments is to maximize the long-term real growth of the plan’s assets, while the role of fixed income investments is to generate currentincome, provide for more stable periodic returns and provide some protection against prolonged decline in the market value of the plan’s equity investments.The current target allocations for managed plan assets are 25%-43% equity, 40%-66% for fixed income, and 5%-15% for alternatives. Equityinvestments include U.S. and foreign equities, as well as publicly traded and non-publicly traded mutual funds. Fixed income securities include long-duration government obligations, government agency obligations and corporate obligations. Alternatives includes real estate and infrastructure, naturalresources and commodities, hedge funds and private equity.CSWC’s pension plan asset allocation at March 31, 2015 are as follows: Percentage of PlanAssets atMarch 31, 2015 Asset Category Equity securities 57.9%Fixed income securities 35.7%Other 2.9%Cash and cash equivalents 3.5% 100.0%Below are the details of the pension plan asset for Capital Southwest Corporation and its affiliates, of which Capital Southwest Corporation assetswere $0 and $18,622,781 as of March 31, 2016 and 2015, respectively. As of September 30, 2015, the Qualified Pension Plan was assumed by CSWI, and theCompany’s net pension assets were transferred to CSWI. The following fair value hierarchy table sets forth our pension plan investment portfolio by level asof March 31, 2015 (in millions): 87Table of Contents Fair Value Measurements at Reporting Date Using Asset Category Total Quoted Pricesin ActiveMarkets forIdentical AssetsLevel I SignificantOtherObservableInputs Level 2 SignificantObservableInputs Level 3 Equity securities (a) $35.7 $19.5 $16.2 $– Fixed income securities (b) 22.0 2.1 19.9 – Cash and cash equivalents 2.2 2.2 – – Other 1.8 1.1 0.7 – Total $61.7 $24.9 $36.8 $– There were no plan assets valued using significant unobservable inputs (level 3) as of March 31, 2015. (a)This category includes investment in equity securities of large, medium and small companies and equity investments in foreign companies. Mutual funds included inthis category are valued using the net asset value per unit as of the valuation date. These investments include shares of our common stock. At March 31, 2015, ourcommon stock represented 17.7% of the plan assets.(b)This category includes investments in investment grade fixed income instruments, primarily U.S. government obligations.12.COMMITMENTS AND CONTINGENCIESOn September 9, 2015, we entered into an agreement to co-manage I-45 SLF LLC (the “Joint Venture” or “I-45 SLF”) with Main Street CapitalCorporation (“Main Street”). Both companies have equal voting rights on the Joint Venture’s Board of Managers. We have committed to provide$68,000,000 of equity to the Joint Venture, with Main Street providing $17,000,000. The Joint Venture invests primarily in syndicated senior secured loansin the upper middle market. We contributed $36,800,000 and currently have commitments outstanding of $31,200,000 as of March 31, 2016.We also committed $7,500,000 to lead the last-out portion of a unitranche asset-based credit facility for Freedom Truck Finance, LLC (“FreedomTruck Finance”), a Dallas-based secondary truck finance company specializing in the acquisition and management of sub-prime commercial truck loans toindependent owner operators. Triumph Commercial Finance, a division of TBK Bank, SSB (member of Triumph Bancorp, Inc. (Nasdaq:TBK) led the first-outtranche of the facility and serves as administrative agent. We funded $5,839,504 and had $1,660,496 commitment outstanding as of March 31, 2016.As of March 31, 2016, we had $32,860,496 of aggregate commitments outstanding in Freedom Truck Finance and the joint venture with MainStreet.We lease office space under an operating lease which requires annual base rentals of approximately $250,000. For the three years ended March 31,2016, total rental expense was $185,778 in 2016, $207,162 in 2015, and $142,521 in 2014, and the rent commitments for the next five years as of March 31,2016 are as follows:Year ending March 31, Rent Commitment 2017 229,982 2018 239,242 2019 248,503 2020 257,765 2021 267,026 Thereafter 225,737 Total $1,468,255 88Table of Contents13.SOURCES OF INCOME Investment Income Realized Gain(Loss) onInvestments beforeIncome Taxes Year endedMarch 31, 2016 Interest Dividends OtherIncome Non-control/Non-affiliate investments $4,408,912 $110 $130,586 $(9,574,909)Affiliate investments 134,800 − − (1,457,711)Control investments − 3,489,205 530,000 231,000 Other sources, including temporary investments 385,752 − 80,576 − $4,929,464 $3,489,315 $741,162 $(10,801,620) Investment Income Realized Gain(Loss) onInvestments beforeIncome Taxes Year endedMarch 31, 2015 Interest Dividends OtherIncome Non-control/Non-affiliate investments $288,292 $67,309 $75,000 $8,225,962 Affiliate investments − 581,021 − 157,213,916 Control investments − 8,294,500 484,800 (1,175,287)Other sources, including temporary investments 122,225 − 35,185 − $410,517 $8,942,830 $594,985 $164,264,591 Investment Income Realized Gain(Loss) onInvestments beforeIncome Taxes Year endedMarch 31, 2014 Interest Dividends OtherIncome Non-control/Non-affiliate investments $259,377 $179,728 $89,189 $14,084,087 Affiliate investments 250,811 2,575,038 48,800 − Control investments − 8,650,000 485,267 − Other sources, including temporary investments 66,949 − 1,386 − $577,137 $11,404,766 $624,642 $14,084,087 89Table of Contents14.SELECTED QUARTERLY FINANCIAL DATAThe following presents a summary of the unaudited quarterly consolidated financial information for the years ended March 31, 2016 and 2015 (in thousandsexcept per share amounts):2016 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total Net investment income (loss) $(2,830) $(9,335) $(20) $1,498 $(10,687)Net realized gain (loss) on investments 749 (3,396) (8,170) 15 (10,802)Net increase (decrease) in unrealizedappreciation of investments 4,245 3,783 7,060 1,001 16,089 Net increase (decrease) in net assets fromoperations 2,164 (8,948) (1,130) 2,514 (5,400)Net investment (loss) income per share (0.18) (0.60) (0.00) 0.10 (0.68)Net increase (decrease) in net assets fromoperations per share 0.14 (0.58) (0.07) 0.16 (0.35)2015 FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total Net investment income (loss) $(1,483) $(1,239) $4,429 $(4,152) $(2,445)Net realized gain (loss) on investments (15,713) 46,393 111,229 22,356 164,265 Net increase (decrease) in unrealizedappreciation of investments 36,917 (75,744) (84,964) 15,414 (108,377)Net increase (decrease) in net assets fromoperations 19,721 (30,590) 30,694 33,617 53,442 Net investment (loss) income per share (0.10) (0.08) 0.28 (0.26) (0.16)Net increase (decrease) in net assets fromoperations per share 1.19 (2.38) (1.62) 2.13 (0.68) 90Table of Contents15.SELECTED PER SHARE DATA AND RATIOSThe following presents a summary of the selected per share data for the years ended March 31, 2012 through 2016 (in thousands except per shareamounts): Years Ended March 31 Per Share Data 2016 2015 2014 2013 2012 Investment income $.58 $.64 $.82 $.71 $.62 Operating expenses (1.34) (.78) (.55) (.55) (.44)Income taxes .08 (.02) .05 (.04) (.01)Net investment (loss) income (.68) (.16) .32 .12 .17 Distributions from undistributed netinvestment income (.04) (.20) (.20) (.20) (.20)Net realized (loss) gain, net of tax incurred ondeemed capital gain distributions (.88) 7.06 .66 5.81 .70 Dividends from capital gains (.10) – – (5.07) – Net increase (decrease) in unrealizedappreciation of investments 1.02 (6.96) 6.04 1.08 5.23 Distribution to CSWI (1.75) – – – – Decrease in unrealized appreciation due todistributions to CSWI (29.15) – – – – Exercise of employee stock options1 .03 (.04) (.18) (.24) – Forfeiture/ (Issuance) of restricted stock2 (.49) (.40) – (.10) – Share based compensation expense .08 .07 (.04) .03 .07 Net change in pension plan funded status – (.05) .08 .01 (.03)Increase (decrease) in net asset value (31.96) (.68) 6.68 1.44 5.94 Net asset value Beginning of year 49.30 49.98 43.30 41.86 35.92 End of year $17.34 $49.30 $49.98 $43.30 $41.86 Ratios and Supplemental Data Ratio of operating expenses to average netassets 4.48% 1.59% 1.18% 1.36% 1.07%Ratio of net investment income to average netassets (2.27%) (.32%) .68% .31% .41%Total investment return3 (20.7%) 8.4% 16.9% 27.0% 18.1%Total return based on change in NAV4 (2.2%) (1.0%) 15.9% 16.0% 17.1% Weighted-average fully diluted sharesoutstanding 15,724 15,531 15,298 15,207 15,038 Common shares outstanding at end of period 15,726 15,565 15,414 15,236 15,020 1Net decrease is due to the exercise of employee stock options at prices less than beginning of period net asset value.2Reflects impact of the different share amounts as a result of issuance or forfeiture of restricted stock during the period.3Total investment return based on purchase of stock at the current market price on the first day and a sale at the current market price on the last day of each period reported on thetable and assumes reinvestment of dividends at prices obtained by CSWC’s dividend reinvestment plan during the period. The return does not reflect any sales load that may be paidby an investor.4Total return based on change in net asset value was calculated using the sum of ending net asset value plus dividends to shareholders and other non-operating changes during theperiod, as divided by the beginning net asset value. 91Table of Contents16.SIGNIFICANT SUBSIDIARY Media Recovery, Inc. Media Recovery, Inc. (MRI), through its subsidiary ShockWatch, provides solutions that currently enable over 3,000 customers and some 200partners in 62 countries to detect mishandling that causes product damage and spoilage during transport and storage. The ShockWatch product portfolioincludes impact, tilt, temperature, vibration, and humidity detection systems and is widely used in the energy, transportation, aerospace, defense, food,pharmaceutical, medical device, consumer goods and manufacturing sectors. MRI completed the divestiture of DataSpan, Inc., a leading data storage,products, and management provider, to DataSpan Holdings in September 2014, and continued to provide post-closing services to DataSpan Holdings under atransition services agreement (“TSA”) through June 27, 2015. Our valuation is based primarily on adjusted EBITDA, which reflects certain adjustments tothe reported EBITDA, including nonrecurring expenses associated with fulfilling the obligations under the TSA, write off of obsolete inventory, executiveseverance and recruiting costs. At March 31, 2016, the fair value of Media Recovery, Inc. represented 11.3% of our total assets. Below is certain selected key financial data from itsBalance Sheet at March 31, 2016 and the twelve months ended March 31, 2016 Income Statement. March 31, 2016 Current Assets $11,242,247 Non-Current Assets 23,643,815 Current Liabilities 1,996,523 Non-Current Liabilities $2,239,678 Twelve months ended 3/31/2016 Revenue $20,764,570 Income from continuing operations 591,072 Net Income 471,762 I-45 SLF, LLC In September 2015, we entered into an LLC agreement with Main Street to form I-45 SLF LLC (“I-45 SLF”). I-45 SLF began investing in syndicatedsenior secured loans in the upper middle market during the quarter ended December 31, 2015. The initial equity capital commitment to I-45 SLF totaled $85million, consisting of $68 million from us and $17 million from Main Street. We own 80.0% of I-45 SLF and have a profits interest of 75.6%, while MainStreet owns 20.0% and has a profits interest of 24.4%. I-45 SLF’s Board of Managers make all investment and operational decisions for the fund, and consistof equal representation from CSWC and Main Street.As of March 31, 2016, I-45 SLF had total assets of $102.9 million. I-45 SLF currently has approximately $99.2 million of credit investments at fairvalue as of March 31, 2016. The portfolio companies in I-45 SLF are in industries similar to those in which we may invest directly. As of March 31, 2016,approximately $8.0 million were unsettled trades. For the year ended March 31, 2016, I-45 SLF declared total dividends of $1,775,474 million $264,600 waspaid out to CSWC in January 2016 and $1,077,658 was paid out in April 2016.Additionally, I-45 SLF closed on a $75 million 5-year senior secured credit facility with Deutsche Bank AG (“Deutsche Bank facility”). This facilityincludes an accordion feature which will allow I-45 to achieve leverage of up to 2x debt-to-equity. Borrowings under the facility are secured by all of theassets of I-45 SLF and bear interest at a rate equal to plus 2.5% per annum. Under the Deutsche Bank facility, $48 million has been drawn as of March 31,2016. In April 2016, I-45 SLF increased debt commitments outstanding by $25 million within the credit facility by adding another lender to the syndicate,bringing total debt commitments to $100 million.As of March 31, 2016, I-45 SLF had total equity commitments of $85 million, $68 million of which was from us and the remaining $17 million fromMain Street. Approximately $46 million was funded as of March 31, 2016, relating to these commitments, of which $36.8 million was from CSWC. 92Table of ContentsBelow is a summary of I-45 SLF’s portfolio, followed by a listing of the individual loans in I-45 SLF’s portfolio as of March 31, 2016: PortfolioCompany Industry InvestmentType MaturityDateCurrentInterestRate1,3 Principal Cost Fair Value2Ahead, LLCBusiness servicesFirst Lien11/2/2020L+ 6.50%$4,937,5004,800,7944,814,063ATX NetworksCorp.Technology products& componentsFirst Lien6/12/2021L+6.00%(Floor 1.00%)4,974,9374,915,8744,925,188BDF AcquisitionCorp.Consumer products &retailSecond Lien2/12/2022L+8.00%(Floor 1.00%)3,000,000 2,859,650 2,895,000CompuwareCorporationSoftware & ITservicesFirst Lien12/15/2019L+5.25%(Floor 1.00%) 2,922,0782,854,681 2,829,857CRGTAerospace & defenseFirst Lien12/19/2020L+6.50%(Floor 1.00%) 3,923,567 3,918,804 3,913,758Digital RiverSoftware & ITservicesFirst Lien2/12/2021L+6.50%(Floor 1.00%) 5,415,452 5,383,375 5,408,683Hunter DefenseTechnologiesAerospace & DefenseFirst Lien8/5/2019L+5.50%(Floor 1.00%)2,960,526 2,950,002 2,442,434ICSH, Inc.Containers &packagingFirst Lien12/31/2018L+5.75%(Floor 1.00%)4,974,243 4,953,875 4,941,503Imagine!Print SolutionsMedia, marketing &entertainmentFirst Lien3/30/2022L+6.00%(Floor 1.00%)3,000,000 2,947,500 3,011,250Integro Parent Inc.Business servicesFirst Lien11/2/2022L+5.75%(Floor 1.00%)4,988,2874,821,6254,813,697iPayment, Inc.Financial servicesFirst Lien5/8/2017L+5.25%(Floor 1.50%)5,000,000 4,904,057 4,778,150Jet Support Services,Inc.Aerospace & DefenseFirst Lien8/31/2021L+6.50%(Floor 1.00%)4,875,000 4,768,698 4,631,250Kendra ScottConsumer products &retailFirst Lien7/17/2020L+6.00%(Floor 1.00%) 4,899,684 4,892,037 4,887,434LTI Holdings, Inc.Industrial productsFirst Lien4/17/2022L+4.25%(Floor 1.00%)1,994,975 1,760,565 1,890,239 93Table of ContentsMediMedia USAHealthcare servicesFirst Lien11/20/2018L+6.75%(Floor 1.25%) 5,000,000 4,876,157 4,887,500Milk SpecialtiesFood, agriculture &beverageFirst Lien11/9/2018L+7.00%(Floor 1.25%) 3,686,288 3,681,983 3,693,200Mood MediaCorporationMedia, marketing &entertainmentFirst Lien5/1/2019L+6.00%(Floor 1.00%) 4,549,714 4,435,393 4,260,375New Media Holdings IILLCMedia, marketing &entertainmentFirst Lien6/4/2020L+6.25%(Floor 1.00%) 4,962,311 4,951,057 4,853,785Prepaid Legal Services,Inc.Consumer servicesFirst Lien7/1/2019L+5.25%(Floor 1.25%) 4,824,760 4,819,070 4,812,698 Second Lien 7/1/2020 L+9.00%(Floor 1.25%) 405,000 392,850 400,950Stardust FinanceHoldings, Inc.Buildings &infrastructureproductsFirst Lien3/13/2022L+5.50%(Floor 1.00%) 4,974,874 4,928,459 4,937,563TaxACTFinancial servicesFirst Lien12/31/2022L+6.00%(Floor 1.00%) 4,500,000 4,369,102 4,432,500US Joiner (IMECO andRAACI)Transportation &logisticsFirst Lien4/16/2020L+6.00%(Floor 1.00%) 2,992,366 2,940,000 2,947,481Vivid SeatsMedia, marketing &entertainmentFirst Lien3/1/2022L+6.00%(Floor 1.00%) 5,000,000 4,653,688 4,737,500Water Pik, Inc.Consumer products &retailFirst Lien7/9/2020L+4.75%(Floor 1.00%) 1,191,287 1,188,560 1,179,868 Second Lien1/9/2021L+8.75%(Floor 1.00%) 1,912,281 1,867,957 1,888,377 Total Investments $99,835,813$99,214,3031Represents the interest rate as of March 31, 2016. All interest rates are payable in cash, unless otherwise noted.2Represents the fair value determined utilizing a similar process as the Company in accordance with ASC 820. However, the fair value is determined by the Board ofManagers of the Joint Venture. It is not included in the Company’s Board of Directors’ valuation process described elsewhere herein.3The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“Prime”) whichreset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effectat March 31, 2016. Certain investments are subject to a LIBOR or Prime interest rate floor. 94Table of ContentsBelow is certain summarized financial information for I-45 SLF, LLC as of March 31, 2016 and for the period from Inception through March 31,2016 (amounts in thousands): As of March 31,2016 Selected Balance Sheet Information: Investments, at fair value (cost $99,836) $99,214 Cash and cash equivalents 2,181 Deferred financing costs 1,060 Interest receivable 436 Total assets $102,891 Senior credit facility payable $48,000 Payable for unsettled transactions 8,040 Other liabilities 1,494 Total liabilities $57,534 Members’ equity 45,357 Total liabilities and net assets $102,891 Period fromInception throughMarch 31, 2016 Selected Statement of Operations Information: Total revenues $2,401 Total expenses (689)Net investment income 1,712 Net unrealized depreciation (621)Net realized gains 42 Net increase in members’ equity resulting from operations $1,133 17.RELATED PARTY TRANSACTIONS As a BDC, we are obligated under the 1940 Act to make available to certain of our portfolio companies significant managerial assistance. “Makingavailable significant managerial assistance” refers to any arrangement whereby we provide significant guidance and counsel concerning the management,operations, or business objectives and policies of a portfolio company. We are also deemed to be providing managerial assistance to all portfolio companiesthat we control, either by ourselves or in conjunction with others. The nature and extent of significant managerial assistance provided by us will varyaccording to the particular needs of each portfolio company. During the years ended March 31, 2016 and 2015, we received management and others fees fromcertain of our portfolio companies totaling $0.7 million and $0.6 million, respectively, which were recognized as fees and others income on the ConsolidatedStatements of Operations. 18.SUBSEQUENT EVENTSOn April 1, 2016, CSWC paid dividends declared on March 1, 2016 in the amount of $625,415, or $0.04 per share.In April 2016, we exited our investment in Freedom Truck Finance. We received principal and accrued interest payments totaling $6,030,357.On June 7, 2016, we announced our Board of Directors had declared a $0.06 dividend per share for the quarter ended for June 30, 2016. The recorddate for the dividend is June 20, 2016. The payment date for the dividend is July 1, 2016. 95Table of ContentsSCHEDULE 12-14Schedule of Investments in and Advances to Affiliates(In thousands)Portfolio Company/Type of Investment (1) Amount ofInterest, Feesor DividendsCredited inIncome (2) Fair Valueat March31, 2015 GrossAdditions(3) GrossReductions (4) Fair Valueat March 31,2016 Control Investments The RectorSeal Corporation27,907 shares common stock $420 $358,200 $− $(358,200) $− The Whitmore Manufacturing Company80 shares common stock 60 89,000 − (89,000) − I-45 SLF LLC80% LLC equity interest 1,342 - 36,800 (463) 36,337 Media Recovery, Inc.800,000 shares Series A Convertible Preferred Stock,convertible into 800,000 shares common stock 641 4,300 457 − 4,757 4,000,002 shares common stock 1,331 21,700 5,745 − 27,445 Balco, Inc.445,000 shares common stock; 60,920 shares Class B non-voting common − 5,100 − (5,100) − CapStar Holdings Corporation500 shares common stock 8,560 − (8,560) − 1,000,000 shares preferred stock − 2,311 − (2,311) − Humac Company1,041,000 shares of common stock 1 244 − (244) − Total Control Investments $3,795 $489,415 $43,002 $(463,878) $68,539 96Table of ContentsPortfolio Company /Type of Investment (1) Amount ofInterest, Feesor DividendsCredited inIncome (2) Fair Valueat March 31, 2015 GrossAdditions (3) GrossReductions (4) Fair Value atMarch 31,2016 Affiliated Investments Boxx Technologies, Inc.3,125,354 shares Series B Convertible Preferred Stock,convertible into 3,125,354 shares of common stock at$0.50 per share − 2,362 − (2,362) − Chandler Signs, LPSenior secured debt 135 − 4,413 4,413 1,500,000 units of Class A-1 common stock − − 2,529 − 2,529 kSEP Holdings, Inc.861,591 shares of common stock − 1,863 1,813 3,676 Wellogix, Inc. 4,788,371 shares Series A-1 ConvertiblePreferred Stock, convertible into 4,788,371 shares ofcommon stock at $1.0441 per share - 4,120 − (4,120) − Total Affiliated Investments $135 $8,345 $8,755 $(6,482) $10,618 Total Control & Affiliated Investments $3,930 $497,760 $51,757 $(470,360) $79,157 This schedule should be read in conjunction with our Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes toConsolidated Financial Statements.(1)The principal amount and ownership detail as shown in the Consolidated Schedules of Investments.(2)Represents the total amount of interest, fees and dividends, credited to income for the portion of the year an investment was included in the Control orAffiliate categories, respectively.(3)Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments and accrued PIKinterest, and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealizedappreciation or net decreases in unrealized depreciation as well as movement of an existing portfolio company into this category and out of a differentcategory.(4)Gross reductions include in decreases in the cost basis of investments resulting from principal repayments or sales and exchanges of one or more existingsecurities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealizedappreciation as well as the movement of an existing portfolio company out of this category and into a different category. 97Table of ContentsItem 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and Procedures(a)Evaluation of Disclosure Controls and ProceduresCapital Southwest Corporation (the “Company”) maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to bedisclosed in the Company’s filings and submissions under the Exchange Act is recorded, processed, summarized and reported within the periods specified inthe rules and forms of the Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer of the Company, as appropriate, to allow timely discussions regarding therequired disclosure.We completed an evaluation under the supervision and with participation of the Company’s management, including the Chief Executive Officer andChief Financial Officer of the Company, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31,2016. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that as of March 31, 2016, ourdisclosure controls and procedures were effective to provide the reasonable assurance described above. The Company notes that the design of any system ofcontrols is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed inachieving the stated goals under all potential future conditions.(b)Management’s Report on Internal Control over Financial ReportingManagement of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined inExchange Act Rules 13a-15(f). Under the supervision and with the participation of management, including the Chief Executive Officer and Chief FinancialOfficer, the Company conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the criteriaestablished in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Based on the Company’s evaluation under the framework in the 2013 Internal Control — Integrated Framework, management concluded that theCompany’s internal control over financial reporting was effective as of March 31, 2016. Grant Thornton, LLP, the Company’s independent registered publicaccounting firm, has audited the effectiveness of the Company’s internal control over financial reporting as of March 31, 2016, as stated in its report which isincluded herein. (c)Changes in Internal Control over Financial ReportingThe Company underwent changes in key personnel beginning in the second quarter of its 2016 fiscal year. More specifically, the Company hired anew Chief Financial Officer, Treasurer and Assistant Controller. The Company underwent changes in controls beginning in the third quarter of its 2016 fiscalyear. These personnel additions and changes in controls (1) enhanced the review process of the cash flow statement based on the technical expertise of thenew employees, including enhancements to the Chief Financial Officer’s review, (2) allowed the Company to incorporate additional segregation of dutiesinto the review process, and (3) added a new and incremental control including the Treasurer’s review of the internal recording and public filing of the cashflow statement for accuracy and for reasonableness. All of these internal control modifications began in the third quarter of fiscal year 2016. Throughexecution of these controls in the third and fourth quarters of fiscal year 2016, management identified that the cash flows for taxes incurred on deemed capitalgain distributions were incorrectly included as operating cash flows in our previously issued financial statements. Based on the determination that theCompany had not properly classified cash outflows for taxes incurred on deemed capital gain distributions for fiscal years 2014 and 2015 in the statement ofcash flows, management determined that a material weakness in internal control existed through September 30, 2015 related to the preparation and review ofthe statement of cash flows, specifically relating to determining the proper classification of cash receipts and cash payments in the statement of cash flows. Asa result of the enhanced controls implemented in the third and fourth fiscal quarters, management believes that the material weakness was remediated as ofMarch 31, 2016. As described above, the Company concluded that its internal control over financial reporting was effective as of March 31, 2016 based, inpart, on the effectiveness of the changed and new controls.Other than changes that have been described above, there have been no changes in the Company’s internal control over financial reporting (asdefined in Rule 13(a)-15(f) of the Exchange Act) during the three months ended March 31, 2016 that have materially affected, or are reasonably likely tomaterially affect, our internal controls over financial reporting.(d)Limitations on ControlsBecause of its inherent limitations, management does not expect that our disclosure controls and our internal controls over financial reporting willprevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate. Any control system, no matterhow well designed and operated, is based upon certain assumptions and can only provide reasonable, not absolute, assurance that its objectives will be met.Further, no evaluation of controls can provide absolute assurance that misstatements due to errors or fraud will not occur or that all control issues andinstances of fraud, if any within the Company, have been detected. Item 9B.Other InformationNone. 98Table of ContentsPART IIIItem 10.Directors, Executive Officers and Corporate GovernanceThe information required by this Item 10 will be contained in the definitive proxy statement relating to our 2016 annual meeting of shareholdersunder the headings of “Election of Directors,” “Corporate Governance,” “Executive Officers” and “Section 16(a) Beneficial Ownership ReportingCompliance” to be filed with the Securities and Exchange Commission on or before July 29, 2016, and is incorporated herein by reference.We have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that applies to all our directors, officers and employees. We have madethe Code of Conduct and of Ethics available on our website at http://www.capitalsouthwest.com/governance. Shareholders may request a free copy of theCode of Conduct and Code of Ethics from: Michael Sarner, Corporate Secretary and Chief Compliance Officer, at our principal executive office.Item 11.Executive CompensationThe information required by this Item 11 will be contained in the definitive proxy statement relating to our 2016 annual meeting of shareholdersunder the headings of “Compensation of Executive Officers,” “Director Compensation,” “Compensation Discussion and Analysis” and “CompensationCommittee Report” to be filed with the Securities and Exchange Commission on or before July 29, 2016, and is incorporated herein by reference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Shareholder MattersThe information in the sections of our 2016 Proxy Statement captioned “Stock Ownership of Certain Beneficial Owners” is incorporated in this Item12 by reference.The table below sets forth certain information as of March 31, 2016 regarding the shares of our common stock available for grant or granted understock option plans that (1) were approved by our shareholders, and (2) were not approved by our shareholders.Plan Category Number ofSecurities to beIssued UponExercise ofOutstandingOptions, Warrantsand Rights Weighted-Average ExercisePrice ofOutstandingOptions, Warrantsand Rights Number ofSecuritiesRemainingAvailable forFuture IssuanceUnder EquityCompensationPlans Equity compensation plans approved by shareholders (1) 362,513 $11.21 348,540 Equity compensation plans not approved by shareholders (2) − − − Total 362,513 $11.21 348,540 1)Includes the 1999 Stock Option Plan, 2009 Stock Incentive Plan and 2010 Restricted Stock Award Plan. For a description of all plans, please referto Footnotes 8 and 9 contained in our consolidated financial statements.2)We have no equity compensation plans that were not approved by shareholders. 99Table of ContentsOther information required by this Item 12 will be contained in the definitive proxy statement relating to our 2016 annual meeting of shareholders under theheading of “Security Ownership of Certain Beneficial Owners and Management” to be filed with the Securities and Exchange Commission on or before July29, 2016, and is incorporated herein by reference.Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item 13 will be contained in the definitive proxy statement relating to our 2016 annual meeting of shareholdersunder the headings of “Certain Relationships and Related Transactions” and “Corporate Governance” to be filed with the Securities and ExchangeCommission on or before July 29, 2016, and is incorporated herein by reference.Item 14.Principal Accountant Fees and ServicesThe information required by this Item 14 will be contained in the definitive proxy statement relating to our 2016 annual meeting of shareholdersunder the heading of “Ratification and Appointment of Independent Registered Public Accounting Firm for the Year Ended March 31, 2016” to be filed withthe Securities and Exchange Commission on or before July 29, 2016, and is incorporated herein by reference. 100Table of ContentsPART IVItem 15.Exhibits and Financial Statement SchedulesThe following documents are filed or incorporated by reference as part of this Annual Report:1.Consolidated Financial Statements PageReports of Independent Registered Public Accounting Firm51Consolidated Statements of Assets and Liabilities as of March 31, 2016 and 201553Consolidated Statements of Operations for Years Ended March 31, 2016, 2015 and 201454Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2016, 2015 and 201455Consolidated Statements of Cash Flows for Years Ended March 31, 2016, 2015 and 201456Consolidated Schedules of Investments as of March 31, 2016 and 201558Notes to Consolidated Financial Statements642.Schedule of Investments in and Advances To AffiliatesReports of Independent Registered Public Accounting Firm3.ExhibitsA list of the exhibits required to be filed or furnished as part of this Annual Report on Form 10-K is set forth in the Exhibit Index, which immediatelyprecedes such exhibits, and is incorporated herein by reference. 101Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized. CAPITAL SOUTHWEST CORPORATION By:/s/ Bowen S. Diehl Bowen S. Diehl President and Chief Executive Officer Date: June 14, 2016 POWER OF ATTORNEYKNOW ALL MEN BY THESE PRESENTS that each of Capital Southwest Corporation and its Subsidiaries undersigned directors hereby constitutesand appoints Bowen S. Diehl, its or his true and lawful attorney-in-fact and agent, for it or him and in its or his name, place and stead, in any and allcapacities, with full power to act alone, to sign any and all amendments to this Report, and to file each such amendment to the Report, with all exhibitsthereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorney-in-factand agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to allintents and purposes as it or he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or causeto be done by virtue hereof.Pursuant to the requirement of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated:SignatureTitleDate /s/ Joseph B. ArmesChairman of the BoardJune 14, 2016Joseph B. Armes /s/ David R. BrooksDirectorJune 14, 2016David R. Brooks /s/ Jack D. FurstDirectorJune 14, 2016Jack D. Furst /s/ T. Duane MorganDirectorJune 14, 2016T. Duane Morgan /s/ William Thomas IIIDirectorJune 14, 2016William Thomas III /s/ John H. WilsonDirectorJune 14, 2016John H. Wilson /s/ Bowen S. DiehlPresident and Chief Executive OfficerJune 14, 2016Bowen S. Diehl /s/ Michael S. SarnerChief Financial OfficerJune 14, 2016Michael S. Sarner(Chief Financial/Accounting Officer) 102Table of ContentsEXHIBIT INDEXThe following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC. Asterisk denotes exhibitsfiled with this report. Double asterisk denotes exhibits furnished with this report.Exhibit No.Description 2.1Distribution Agreement, dated September 8, 2015, between the Company and CSW Industrials, Inc. (filed as Exhibit 2.1 toForm 8-K dated September 14, 2015). 3.1(a)Articles of Incorporation and Articles of Amendment to Articles of Incorporation, dated June 25, 1969 (filed as Exhibit 1(a)and 1(b) to Amendment No. 3 to Form N-2 for the fiscal year ended March 31, 1979). 3.1(b)Articles of Amendment to Articles of Incorporation, dated July 20, 1987 (filed as an exhibit to Form N-SAR for the six monthperiod ended September 30, 1987). 3.2By-Laws of the Company, as amended (filed as Exhibit 3.2 to Form 10-K for the fiscal year ended March 31, 2007). 4.1Specimen of Common Stock certificate (filed as Exhibit 4.1 to Form 10-K for the fiscal year ended March 31, 2002). 10.3Capital Southwest Corporation and Its Affiliates Restoration of Retirement Income Plan as amended and restated effectiveJanuary 1, 2008 (filed as Exhibit 10.3 to form 10-K for the fiscal year ended March 31, 2009). 10.6Form of Indemnification Agreement which has been established with all directors and executive officers of the Company(filed as Exhibit 10.9 to Form 8-K dated February 10, 1994). 10.7Capital Southwest Corporation 1999 Stock Option Plan (filed as Exhibit 10.10 to Form 10-K for the fiscal year ended March31, 2000). 10.8Severance Pay Agreement with William M. Ashbaugh (filed as Exhibit 10.1 to Form 8-K dated July 18, 2005). 10.15Retirement Plan for Employees of Capital Southwest Corporation and its Affiliates as amended and restated effective April 1,2011 (filed as Exhibit 10.15 to Form 10-K for the fiscal year ended March 31, 2012) 10.16Amendment One to Retirement Plan for employees of Capital Southwest Corporation and its affiliates as amended andrestated effective April 1, 2011(filed as Exhibit 10.16 to Form 10-K for the fiscal year ended March 31, 2013) 10.17Amendment Four to Retirement Plan for employees of Capital Southwest Corporation and its Affiliates as amended andrestated effective April 1, 2011 (filed as Exhibit 10.1 to Form 8-K dated August 6, 2015). 10.18Joseph B. Armes Revised Offer Letter (filed as Exhibit 99.2 to Form 8-K dated May 17, 2013). 10.19Capital Southwest Corporation 2009 Stock Incentive Plan (filed as Exhibit 10.1 to Form 10-Q for the quarterly period endedJune 30, 2011) 10.20Capital Southwest Corporation 2010 Restricted Stock Award Plan (filed as Exhibit 10.1 to Form 10-Q for the quarterly periodended June 30, 2011)103Table of ContentsExhibit No.Description 10.21First Amendment to the Capital Southwest Corporation 2009 Stock Incentive Plan (filed as Exhibit 10.1 to Form 10-Q for thequarterly period ended September 30, 2014) 10.22Second Amendment to the Capital Southwest Corporation 2009 Stock Incentive Plan (filed as Exhibit 10.1 to Form 8-K datedAugust 12, 2015). 10.23First Amendment to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (filed as Exhibit 10.1 to Form 10-Qfor the quarterly period ended September 30, 2014) 10.24Second Amendment to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (filed as Exhibit 10.2 to Form 8-K dated August 12, 2015). 10.25Form of Restricted Stock Award Agreement under the 2010 Restricted Stock Award Plan, as amended (filed as Exhibit 10.1 toForm 10-Q for the quarterly period ended September 30, 2014) 10.26Form of Non-Qualified Stock Option Agreement under the 2009 Stock Incentive Plan, as amended (filed as Exhibit 10.1 toForm 10-Q for the quarterly period ended September 30, 2014) 10.27Form of Cash Incentive Award Agreement (filed as Exhibit 10.1 to Form 10-Q for the quarterly period ended September 30,2014) 10.28Tax Matters Agreement, dated September 8, 2015, between the Company and CSW Industrials, Inc. (filed as Exhibit 10.1 toForm 8-K dated September 14, 2015). 10.29Amended and Restated Employee Matters Agreement, dated September 4, 2015, between the Company and CSW Industrials,Inc. (filed as Exhibit 10.2 to Form 8-K dated September 14, 2015). 10.30Form of Amended and Restated Non-Qualified Stock Option Agreement under the 2009 Stock Incentive Plan (CSWCEmployee Form) (filed as Exhibit 10.3 to Form 10-Q for the quarterly period ended September 30, 2015). 10.31Form of Amended and Restated Non-Qualified Stock Option Agreement under the 2009 Stock Incentive Plan (CSWIEmployee Form) (filed as Exhibit 10.4 to Form 10-Q for the quarterly period ended September 30, 2015). 10.32Form of Amended and Restated Incentive Stock Option Agreement under the 2009 Stock Incentive Plan (CSWC EmployeeForm) (filed as Exhibit 10.5 to Form 10-Q for the quarterly period ended September 30, 2015). 10.33Form of Amended and Restated Incentive Stock Option Agreement under the 2009 Stock Incentive Plan (CSWI EmployeeForm) (filed as Exhibit 10.6 to Form 10-Q for the quarterly period ended September 30, 2015). 10.34Form of Amended and Restated Non-Qualified Stock Option Agreement (Executive Compensation Plan – CSWC EmployeeForm) (filed as Exhibit 10.7 to Form 10-Q for the quarterly period ended September 30, 2015). 10.35Form of Amended and Restated Non-Qualified Stock Option Agreement (Executive Compensation Plan – CSWI EmployeeForm) (filed as Exhibit 10.8 to Form 10-Q for the quarterly period ended September 30, 2015). 10.36Form of Restricted Stock Agreement under the 2010 Restricted Stock Award Plan (CSWC Employee Form) (filed as Exhibit10.9 to Form 10-Q for the quarterly period ended September 30, 2015). 104Table of ContentsExhibit No.Description 10.37Form of Amended and Restated Restricted Stock Agreement under the 2010 Restricted Stock Award Plan (CSWI EmployeeForm) (filed as Exhibit 10.10 to Form 10-Q for the quarterly period ended September 30, 2015). 10.38Form of Amended and Restated Restricted Stock Award (Executive Compensation Plan – CSWC Employee Form) (filed asExhibit 10.11 to Form 10-Q for the quarterly period ended September 30, 2015). 10.39Form of Amended and Restated Restricted Stock Award (Executive Compensation Plan – CSWI Employee Form) (filed asExhibit 10.12 to Form 10-Q for the quarterly period ended September 30, 2015). 10.40Form of Amended and Restated Cash Incentive Award Agreement (Executive Compensation Plan) (filed as Exhibit 10.13 toForm 10-Q for the quarterly period ended September 30, 2015). 10.41I-45 SLF LLC Agreement dated September 9, 2015 (filed as Exhibit 10.14 to Form 10-Q for the quarterly period endedSeptember 30, 2015). 21.1 *List of subsidiaries of the Company. 23.1 *Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP. 31.1 *Certification of Chairman of the Board and President required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), filed herewith. 31.2 *Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act, filed herewith. 32.1 **Certification of Chairman of the Board and President required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act andSection 1350 of Chapter 63 of Title 18 of the United States Code, furnished herewith. 32.2 **Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350of Chapter 63 of Title 18 of the United States Code, furnished herewith. 99.1Audited Consolidated Financial Statements of Media Recovery, Inc. as of and for the years ended September 30, 2016 and2015.1 1Media Recover, Inc. has a 2016 fiscal year to be ended September 30, 2016. These financial statements will be filed by amendment within 90 days ofSeptember 30, 2016. 105Exhibit 21.1CAPITAL SOUTHWEST CORPORATIONList of Subsidiaries Name of SubsidiaryState of Incorporation Media Recovery, Inc.NevadaCapital Southwest Venture CorporationNevadaCapital Southwest Management CorporationNevadaCSWC Chandler Signs Holdings, Inc.Delaware Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We have issued our reports dated June 14, 2016, with respect to the consolidated financial statements, schedule, and internal control over financial reportingincluded in the Annual Report of Capital Southwest Corporation on Form 10-K for the year ended March 31, 2016. We consent to the incorporation byreference of said reports in the Registration Statements of Capital Southwest Corporation on Forms S-8 (File No. 333-207296, effective October 5, 2015; FileNo. 333-177433, effective October 21, 2011; File No. 333-177432, effective October 21, 2011; File No. 333-118681, effective August 31, 2004). /s/ Grant Thornton LLPDallas, TexasJune 14, 2016 Exhibit 31.1CERTIFICATIONS I, Bowen S. Diehl, certify that: 1.I have reviewed this annual report on Form 10-K of Capital Southwest Corporation (the “registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: June 14, 2016By:/s/ Bowen S. Diehl Bowen S. Diehl President and Chief Executive Officer Exhibit 31.2CERTIFICATIONS I, Michael S. Sarner, certify that: 1.I have reviewed this annual report on Form 10-K of Capital Southwest Corporation (the “registrant”); 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date: June 14, 2016By:/s/ Michael S. Sarner Michael S. Sarner Chief Financial Officer Exhibit 32.1Certification of the PresidentPursuant to 18 US.C. Section, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 I, Bowen S. Diehl, President of Capital Southwest Corporation, certify that, to my knowledge: 1.The Form 10-K for the year ended March 31, 2016, filed with the Securities and Exchange Commission on June 14, 2016 (“accompanied report”)fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2.The information contained in the accompanied report fairly presents, in all material respects, the consolidated financial condition and results ofoperations of Capital Southwest Corporation. Date: June 14, 2016By:/s/ Bowen S. Diehl Bowen S. Diehl President and Chief Executive Officer Exhibit 32.2Certification of the Chief Financial OfficerPursuant to 18 US.C. Section, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 I, Michael S. Sarner, Chief Financial Officer of Capital Southwest Corporation, certify that, to my knowledge: 1.The Form 10-K for the year ended March 31, 2016, filed with the Securities and Exchange Commission on June 14, 2016 (“accompanied report”)fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2.The information contained in the accompanied report fairly presents, in all material respects, the consolidated financial condition and results ofoperations of Capital Southwest Corporation. Date: June 14, 2016By:/s/ Michael S. Sarner Michael S. Sarner Chief Financial Officer 

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