Capital Southwest
Annual Report 2017

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FORM 10-K(Mark One)[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2017OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 814-00061 CAPITAL SOUTHWEST CORPORATION(Exact name of registrant as specified in its charter) Texas75-1072796(State or other jurisdiction of incorporationor organization)(I.R.S. EmployerIdentification No.) 5400 Lyndon B Johnson Freeway, Suite 1300, Dallas, Texas75240(Address of principal executive offices)(Zip Code) Registrant’s telephone number, including area code: (214) 238-5700 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: None Indicate 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 1934 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements forthe 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 to besubmitted 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 that theregistrant 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 best ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerginggrowth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer ☒ Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 2016 was $217,148,429 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 May 31, 2017 was 16,011,296. Documents Incorporated by ReferencePortions of the Proxy Statement for Annual Meeting of Shareholders to be held August 2, 2017 are incorporated by reference in this Annual Report on Form 10-K in response to Part III. Table of ContentsTABLE OF CONTENTS PART I PageItem 1. Business2Item 1A. Risk Factors20Item 1B. Unresolved Staff Comments33Item 2. Properties33Item 3. Legal Proceedings33Item 4. Mine Safety Disclosures33 PART II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases ofEquity Securities34Item 6. Selected Financial Data37Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations39Item 7A. Quantitative and Qualitative Disclosures About Market Risk51Item 8. Financial Statements and Supplementary Data53Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure105Item 9A. Controls and Procedures105Item 9B. Other Information106 PART III Item 10. Directors, Executive Officers and Corporate Governance107Item 11. Executive Compensation107Item 12. Security Ownership of Certain Beneficial Owners and Management and Related ShareholderMatters107Item 13. Certain Relationships and Related Transactions, and Director Independence108Item 14. Principal Accountant Fees and Services108 PART IV Item 15. Exhibits and Financial Statement Schedules109 Signatures 110 Table of ContentsCAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements regarding the plans and objectives ofmanagement 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 differentfrom future results, performance or achievements expressed or implied by any forward-looking statements. Forward-lookingstatements, which involve assumptions and describe our future plans, strategies and expectations are generally identifiableby use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or thenegative of these words or other variations on these words or comparable terminology. These forward-looking statementsinvolve risks and uncertainties and are based on assumptions that may be incorrect, and we cannot assure you that theprojections included in these forward-looking statements will come to pass. Accordingly, there are or will be importantfactors that could cause our actual results to differ materially from those expressed or implied by the forward-lookingstatements. We believe these factors include, but are not limited to, the following: ·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 theimpact of changes in laws or regulations 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 these and other factors that could cause our actual results to differ materially from forward-looking statements contained in this Annual Report, please see the discussion under “Risk Factors” in Item 1A. We havebased the forward-looking statements included in this Annual Report on Form 10-K on information available to us on thedate of this Annual Report on Form 10-K. You should not place undue reliance on these forward-looking statements andyou should carefully consider all of the factors identified in this report that could cause actual results to differ. We assumeno obligation to update any such forward-looking statements, unless we are required to do so by applicable law. 1 Table of Contents PART I Item 1. Business ORGANIZATION Capital Southwest Corporation (“CSWC”) is an investment company that specializes in providing customizedfinancing to middle market companies in a broad range of industry segments located primarily in the United States. Ourcommon stock currently trades on The Nasdaq Global Select Market under the ticker symbol “CSWC.” CSWC was organized as a Texas corporation on April 19, 1961. Until September 1969, we operated as a smallbusiness investment company (“SBIC”) licensed under the Small Business Investment Act of 1958. At that time, CSWCtransferred to our wholly-owned subsidiary, Capital Southwest Venture Corporation (“CSVC”), certain assets including ourlicense as a “SBIC”. CSVC was a closed-end, non-diversified investment company registered under the Investment CompanyAct of 1940, as amended (the “1940 Act”). Effective June 14, 2016, CSVC was dissolved and its SBIC license wassurrendered. All assets held in CSVC were transferred to CSWC upon dissolution. Prior to March 30, 1988, CSWC wasregistered as a closed-end, non-diversified investment company under the 1940 Act. On that date, we elected to be treated asa business development company (“BDC”) subject to the provisions of the 1940 Act, as amended by the Small BusinessIncentive Act of 1980. In order to remain a BDC, we must meet certain specified requirements under the 1940 Act, includinginvesting at least 70.0% 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 of1986 (the “Code”). As such, we are not required to pay corporate-level income tax on our investment income. We intend tomaintain our RIC status, which requires that we qualify annually as a RIC by meeting certain specified requirements. Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, is the managementcompany for CSWC. CSMC generally incurs all normal operating and administrative expenses, including, but not limited to,salaries and related benefits, rent, equipment and other 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 “TaxableSubsidiary”). The primary purpose of the Taxable Subsidiary is to permit CSWC to hold certain interests in portfoliocompanies that are organized as limited liability companies, or LLCs (or other forms of pass-through entities) and still allowus to satisfy the RIC tax requirement that at least 90.0% of our gross income for federal income tax purposes must consist ofqualifying investment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income. On September 30, 2015, we completed the spin-off (the “Share Distribution”) of CSW Industrials, Inc. (“CSWI”).CSWI is now an independent publicly traded company. The Share Distribution was effected through a tax-free, pro-ratadistribution of 100.0% of CSWI’s common stock to shareholders of the Company. Each Company shareholder received oneshare of CSWI common stock for every one share of Company common stock on the record date, September 18, 2015. Cashwas paid in lieu of any fractional shares of CSWI common stock. Following the Share Distribution, we have maintained operations as an internally-managed BDC and pursue acredit-focused investing strategy akin to similarly structured organizations. We intend to continue to provide capital tomiddle-market companies. In the future, we intend to invest primarily in debt securities, including senior debt, second lienand subordinated debt, and may also invest in preferred stock and common stock alongside our debt investments or throughwarrants. 2 Table of ContentsThe following diagram depicts CSWC’s organizational structure: Employees As of March 31, 2017, we had seventeen employees, each of whom was employed by our management company,CSMC. These employees include our corporate officers, investment and portfolio management professionals andadministrative staff. All of our employees are located in our principal executive offices in Dallas, Texas. Corporate Information Our principal executive offices are located at 5400 Lyndon B. Johnson Freeway, Suite 1300, Dallas, Texas75240. We maintain a website at www.capitalsouthwest.com. You can review the filings we have made with the Securitiesand Exchange Commission, the SEC, free of charge on EDGAR, the Electronic Data Gathering, Analysis, and RetrievalSystem of the SEC, accessible at http://www.sec.gov. We also make available free of charge on our website our AnnualReports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to those reports andany other reports filed or furnished 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 filing these reports with the SEC. Information 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 ofthis 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 FStreet, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by callingthe SEC at 1-800-732-0330. The SEC also maintains a website that contains the reports, proxy and information statementsand 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. Informationcontained on our website is not incorporated by reference into this Annual Report on Form 10-K, and you should notconsider that information to be part of this Annual Report on Form 10-K. OVERVIEW OF OUR BUSINESS We are a specialty lending company that provides customized financing to middle market companies locatedprimarily in the United States. Our principal investment objective is to produce attractive risk-adjusted returns by generatingcurrent 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 flexiblefinancing solutions to fund growth, changes of control, or other corporate events. In allocating future investments, we plan tocontinue investing primarily in senior and subordinated debt securities secured by security interests in portfolio companyassets, coupled with equity interests.3 Table of Contents We focus on investing in companies with histories of generating revenues and positive cash flow, establishedmarket positions and proven management teams with strong operating discipline. We target senior and subordinatedinvestments in lower middle market companies, as well as first and second lien syndicated loans in upper middle marketcompanies. Our target lower middle market (“LMM”) companies typically have annual earnings before interest, taxes,depreciation and amortization (“EBITDA”) between $3.0 million and $15.0 million and our lower middle marketinvestments generally range in size from $5.0 million to $20.0 million. Our upper middle market (“UMM”) investmentsgenerally include syndicated first and second lien loan investments in companies with EBITDA generally greater than $50.0million, and typically range in size from $3.0 million to $10.0 million. We make available significant managerial assistanceto the companies in which we invest as we believe that providing managerial assistance to an investee company is importantto its business development activities. Because we are internally managed, we do not pay external investment advisory fees, but instead directly incur theoperating costs associated with employing investment and portfolio management professionals. We believe that ourinternally managed structure provides us with a beneficial operating expense structure when compared to other publiclytraded and privately held investment firms which are externally managed, and our internally managed structure allows us theopportunity to leverage our non-interest operating expenses as we grow our investment portfolio. Recent Developments On April 3, 2017, CSWC paid regular dividends declared on February 28, 2017 in the amount of $3.0 million, or$0.19 per share, and special dividends declared in the amount of $4.2 million, or $0.26 per share. On May 10, 2017, CSWC announced that the Chairman of the Board, Joseph B. Armes has informed the Company’sBoard of Directors (the “Board”) of his decision not to stand for re-election at the Annual Meeting of Shareholders in August2017. The Company reported this along with the plan for replacing Mr. Armes in connection with the Company’s upcomingannual meeting on August 3, 2017 in an 8-K filed with the SEC on that day. On May 31, 2017, we announced that our board of directors had declared a $0.21 dividend per share for the quarterended June 30, 2017. The record date for the dividend is June 15, 2017. The payment date for the dividend is July 3, 2017. Our Business Strategy Our principal investment objective is to produce attractive risk-adjusted returns by generating current income fromour debt investments and realizing capital appreciation from our equity and equity-related investments. We have adopted thefollowing business strategies to achieve our investment objective: ·Leveraging the Experience of Our Management Team. Our senior management team has extensive experienceadvising, investing in and lending to middle market companies across changing market cycles. The members of ourmanagement team have diverse investment backgrounds, with prior experience at investment banks, commercialbanks, and business development companies in the capacity of senior officers. We believe this diverse experienceprovides us with an in-depth understanding of the strategic, financial and operational challenges and opportunitiesof the middle market companies in which we invest. We believe this understanding allows us to select and structurebetter investments and to efficiently monitor and provide managerial assistance to our portfolio companies. ·Applying Rigorous Underwriting Policies and Active Portfolio Management. Our senior management team hasimplemented rigorous underwriting policies that are followed in each transaction. These policies include a thoroughanalysis of each potential portfolio company’s competitive position, financial performance, management teamoperating discipline, growth potential and industry attractiveness, which we believe allows us to better assess thecompany’s prospects. After investing in a company, we monitor the investment closely, typically receivingmonthly, quarterly and annual financial statements. Senior management, together with the deal team andaccounting and finance departments, meets at least monthly to analyze and discuss in detail the company’sfinancial performance and industry trends. We believe that our initial and ongoing portfolio review process allowsus to monitor effectively the performance and prospects of our portfolio companies.4 Table of Contents ·Investing Across Multiple Companies, Industries, Regions and End Markets. We seek to maintain a portfolio ofinvestments that is appropriately diverse among various companies, industries, geographic regions and end markets.This portfolio balance is intended to mitigate the potential effects of negative economic events for particularcompanies, regions, industries and end markets. However, we may from time to time hold securities of a singleportfolio company that comprise more than 5.0% of our total assets and/or more than 10.0% of the outstandingvoting securities of the portfolio company. For that reason, we are classified as a non-diversified managementinvestment company under the 1940 Act. ·Utilizing Long-Standing Relationships to Source Deals. Our senior management team and investmentprofessionals maintain extensive relationships with entrepreneurs, financial sponsors, attorneys, accountants,investment bankers, commercial bankers and other non-bank providers of capital who refer prospective portfoliocompanies to us. These relationships historically have generated significant investment opportunities. We believethat our network of relationships will continue to produce attractive investment opportunities. ·Focusing on Underserved Markets. The middle market has traditionally been underserved. We believe thatoperating margin and growth pressures, as well as regulatory concerns, have caused many financial institutions tode-emphasize services to middle market companies in favor of larger corporate clients and more liquid capitalmarket transactions. We also invest in securities that would be rated below investment grade if they were rated. Webelieve these dynamics have resulted in the financing market for middle market companies being underserved,providing us with greater investment opportunities. ·Focus on Established Companies. We generally invest in companies with established market positions,experienced management teams and recurring cash flow streams. We believe that those companies generally possessbetter risk adjusted return profiles than earlier stage companies that are building their management teams andestablishing their revenue base. We also believe that established companies in our target size range generallyprovide opportunities for capital appreciation. ·Providing Customized Financing Solutions. We offer a variety of financing structures and have the flexibility tostructure our investments to meet the needs of our portfolio companies. Often we invest in senior and subordinateddebt securities, coupled with equity interests. We believe our ability to customize financing structures makes us anattractive partner to middle market companies. INVESTMENT CRITERIA AND OBJECTIVES Our investment team has identified the following investment criteria that we believe are important in evaluatingprospective investment opportunities. However, not all of these criteria have been or will be met in connection with each ofour investments: ·Companies with Positive and Sustainable Cash Flow: We generally seek to invest in established companies withsound historical financial performance. ·Excellent Management: Management teams with a proven record of achievement, exceptional ability, unyieldingdetermination and integrity. We believe management teams with these attributes are more likely to manage thecompanies in a manner that protects and enhances value. ·Industry: We primarily focus on companies having competitive advantages in their respective markets and/oroperating in industries with barriers to entry, which may help protect their market position. ·Strong Private Equity Sponsors: We focus on developing relationships with leading private equity firms in orderto partner with these firms and provide them capital to support the acquisition and growth of their portfoliocompanies. 5 Table of Contents·Appropriate Risk-Adjusted Returns: We focus on and price opportunities to generate returns that are attractive ona risk-adjusted basis, taking into consideration factors, in addition to the ones depicted above, including creditstructure, 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 itsappropriateness within our existing portfolio. Acquisition candidates for our existing portfolio companies may belocated worldwide. Investment Process We have an investment committee that is responsible for all aspects of our investment process relating toinvestments made by CSWC. The current members of the investment committee are Bowen Diehl, Michael Sarner, DouglasKelley and Joseph Armes. Following Mr. Armes’ anticipated departure from the board of directors of CSWC (the “Board ofDirectors”) at our upcoming 2017 annual meeting of shareholders, director David R. Brooks will replace Mr. Armes on theinvestment committee. Our investment strategy involves a team approach, whereby our investment team screens potential transactionsbefore they are presented to the investment committee for approval. Transactions that are either above a certain hold size oroutside our general investment policy will also be reviewed and approved by the Board of Directors. Our investment teamgenerally categorizes the investment process into six distinctive stages: ·Deal Generation/Origination: Deal generation and origination is maximized through long-standing and extensiverelationships with private equity firms, leveraged loan syndication desks, brokers, commercial and investmentbankers, entrepreneurs, service providers such as lawyers and accountants, and current and former portfoliocompanies and investors. ·Screening: Once it is determined that a potential investment has met our investment criteria, we will screen theinvestment by performing preliminary due diligence, which could include discussions with the private equity firm,management team, loan syndication desk, etc. Upon successful screening of the proposed investment, theinvestment team makes a recommendation to move forward and prepares an initial screening memo for the CSWCinvestment committee. We then issue either a non-binding term sheet (in the case of a directly originatedtransaction), or submit an order to the loan syndication desk (in the case of a large-market syndicated loantransaction). ·Term Sheet: In a directly originated transaction, the non-binding term sheet will typically include the keyeconomic terms of our investment proposal, along with exclusivity, confidentiality, and expense reimbursementprovisions, among other terms relevant to the particular investment. Upon acceptance of the term sheet, we willbegin our formal due diligence process. In a syndicated loan transaction, rather than a formal term sheet, we willsubmit an order for an allocation to the syndicated loan desk. ·Due Diligence: Due diligence is performed under the direction of our senior investment professionals, and involvesour entire investment team as well as certain external resources, who together perform due diligence to understandthe relationships among the prospective portfolio company’s business plan, operations, financial performance, andlegal risks. On our directly originated transactions, our due diligence will often include (1) conducting site visitswith management and key personnel; (2) performing a detailed review of historical and projected financialstatements, often with 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 backgroundcheck; (5) reviewing material contracts; (6) conducting an industry, market and strategy analysis; and (7) obtaininga 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. Insyndicated loan transactions, our due diligence may exclude direct customer and supplier interviews, and be limitedto review of reports from the financial sponsor or syndication agent for industry and market analysis, and legal andenvironmental diligence. 6 Table of Contents·Document and Close: Upon completion of a satisfactory due diligence review, our investment team presents itswritten findings to the investment committee. For transactions that are either over a certain hold size, or outside ourgeneral investment policy, the investment team will present the transaction to our Board of Directors forapproval. Upon approval for the investment, we re-confirm our regulatory company compliance, process andfinalize all required legal documents and fund the investment. ·Post-Investment: We continuously monitor the status and progress of our portfolio companies, as well as ourinvestment thesis developed at the time of investment. We offer managerial assistance to our portfolio companiesand provide them access to our investment experience, direct industry expertise and contacts. The same investmentteam leader that was involved in the investment process will continue to be involved in the portfolio company post-investment. This approach provides continuity of knowledge and allows the investment team to maintain a strongbusiness relationship with the financial sponsor and key management of our portfolio companies. As part of themonitoring process, members of our investment team will analyze monthly, quarterly and annual financialstatements against previous periods, review financial projections, meet with the financial sponsor and management(when necessary), attend board meetings (when appropriate) and review all compliance certificates and covenants. We utilize an internally developed investment rating system to rate the performance and monitor the expected levelof returns for each debt investment in our portfolio. The investment rating system takes into account both quantitative andqualitative factors of the portfolio company and the investments held therein, including each investment’s expected level ofreturns and the collectability of our debt investments, comparisons to competitors and other industry participants and theportfolio company’s future outlook. The ratings are not intended to reflect the performance or expected level of returns ofour equity investments. ·Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing materiallyabove underwriting expectations and the trends and risk factors are generally favorable. ·Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trendsand risk factors are generally favorable to neutral. ·Investment Rating 3 involves an investment performing below underwriting expectations and the trends and riskfactors are generally neutral to negative. The portfolio company or investment may be out of compliance withfinancial 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, thetrends and risk factors are generally negative and the risk of the investment has increased substantially. Interest andprincipal payments on our investment are likely to be impaired. Determination of Net Asset Value and Portfolio Valuation Process We determine our net asset value (“NAV”) per share on a quarterly basis. The NAV per share is equal to our totalassets minus liabilities divided by the 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 accordancewith Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) and avaluation process approved by our Board of Directors and in accordance with the 1940 Act. Our valuation policy is intendedto 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 ourinvestments. Our Board of Directors is ultimately responsible for overseeing, reviewing and approving, in good faith, ourdetermination of the fair value of each investment in our portfolio. The valuation process is led by the finance department inconjunction with the investment teams. Valuations of each portfolio security are prepared quarterly by the finance7 Table of Contentsdepartment using updated portfolio company financial and operational information. Each investment valuation is alsosubject to review by the executive officers and investment teams. In conjunction with the internal valuation process, we have engaged multiple independent consulting firms thatspecialize in financial due diligence, valuation and business advisory services to provide third-party valuation reviews of themajority of our investments on a quarterly basis. Our Board of Directors is ultimately responsible for determining the fairvalue of our investments in good faith. COMPETITION We compete for attractive investment opportunities with other financial institutions, including businessdevelopment companies, junior capital lenders, and banks. We believe we are able to be competitive with these entitiesprimarily on the basis of the experience and contacts of our management team and our responsive and efficient investmentanalysis and decision-making processes. However, many of our competitors are substantially larger and have considerablygreater financial, technical and marketing resources than we do. Furthermore, our competitors may have a lower cost of fundsand many have access to funding sources that are not available to us. In addition, certain of our competitors may have higherrisk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, establishmore relationships and build their market shares. In addition, many of our competitors are not subject to the regulatoryrestrictions that the 1940 Act imposes on us as a BDC. See “Risk Factors—Risks Related to Our Business and Structure—Weoperate 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 results of operations. In addition, because of this competition, we may be unable to take advantageof attractive investment opportunities and may be unable to identify and make investments that satisfy our investmentobjectives or meet our investment goals. DIVIDEND REINVESTMENT PLAN We have adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalfof our shareholders. Under the DRIP, if we declare a dividend, registered shareholders who have opted into the DRIP as of thedividend record date will have their dividend automatically reinvested into additional shares of our common stock. Theshare requirements of the DRIP may be satisfied through the issuance of new shares of common stock or through open marketpurchases 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. Sharespurchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicableshares purchased by the DRIP plan administrator, before any associated brokerage or other costs. ELECTION TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY CSWC is a closed-end, non-diversified management investment company. CSWC has elected to be treated as a BDCunder the 1940 Act. In addition, we have elected for CSWC to be treated as a RIC under Subchapter M of the Code. Ourelection to be regulated as a BDC and our election to be treated as a RIC for federal income tax purposes have a significantimpact on our operations. Some of the most important effects on our operations of our election to be regulated as a BDC andour 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 ourconsolidated statements of operations. In accordance with the requirements of Article 6 of Regulation S-X, we report all of our investments, including debtinvestments, at market value or, for investments that do not have a readily available market value, at their “fairvalue” as determined in good faith by our Board of Directors. Changes in these values are reported through ourstatements of operations under the caption of “net unrealized appreciation (depreciation) on investments.” See“Determination of Net Asset Value and Portfolio Valuation Process” above. 8 Table of Contents·We intend to distribute substantially all of our income to our shareholders. We generally will be required to payincome taxes only on the portion of our taxable income we do not distribute to shareholders (actually orconstructively). As a RIC, so long as we meet certain minimum distribution, source of income and asset diversification requirements,we generally are required to pay U.S. federal income taxes only on the portion of our taxable income and gains wedo not distribute (actually or constructively) and certain built-in gains. We intend to distribute to our shareholderssubstantially all of our income. We may, however, make deemed distributions to our shareholders of any retainednet long-term capital gains. If this happens, our shareholders will be treated as if they received an actual distributionof the net capital gains and reinvested the net after-tax proceeds in us. Our shareholders also may be eligible toclaim 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.” Wemet the minimum distribution requirements for tax years 2014, 2015 and 2016 and continually monitor ourdistribution requirements with the goal of ensuring compliance with the Code. In addition, we have a wholly-owned taxable subsidiary, or the Taxable Subsidiary, which holds a portion of one ormore of our portfolio investments that are listed on the Consolidated Schedule of Investments. The TaxableSubsidiary is consolidated for financial reporting purposes in accordance with U.S. Generally Accepted AccountingPrinciples (“GAAP”), so that our consolidated financial statements reflect our investments in the portfoliocompanies owned by the Taxable Subsidiary. The purpose of the Taxable Subsidiary is to permit us to hold certaininterests in portfolio companies that are organized as limited liability companies, or LLCs (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 incometax purposes must consist of qualifying investment income. Absent the Taxable Subsidiary, a proportionate amountof any gross income of a partnership or LLC (or other pass-through entity) portfolio investment would flow throughdirectly to us. To the extent that such income did not consist of investment income, it could jeopardize our abilityto qualify as a RIC and therefore cause us to incur significant amounts of corporate-level U.S. federal income taxes.Where interests in LLCs (or other pass-through entities) are owned by the Taxable Subsidiary, the income from thoseinterests is taxed to the Taxable Subsidiary and does not flow through to us, thereby helping us preserve our RICstatus and resultant tax advantages. The Taxable Subsidiary is not consolidated for U.S. federal income tax purposesand may generate income tax expense as a result of their ownership of the portfolio companies. This income taxexpense, if any, is reflected in our Consolidated Statements 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 thispurpose, senior securities include all borrowings and any preferred stock we may issue in the future. Additionally,our ability to utilize leverage as a means of financing our portfolio of investments may be limited by this assetcoverage test. While the use of leverage may enhance returns if we meet our investment objective, our returns maybe 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. Inaddition, we are required to comply with other applicable provisions of the 1940 Act, including those requiring theadoption of a code of ethics, fidelity bonding and investment custody arrangements. See “Regulation as a BusinessDevelopment Company” below. Regulation as a Business Development Company We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictionsrelating to transactions between BDCs and their affiliates and principal underwriters as well as their respective affiliates. 9 Table of ContentsThe 1940 Act requires that a majority of the members of the board of directors of a BDC be persons other than “interestedpersons,” as defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our businessso 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) 67.0% or more of thevoting securities of holders present or represented by proxy at a meeting if the holders of more than 50.0% of our outstandingvoting securities are present or represented by proxy or (2) more than 50.0% of our voting securities. The following is a brief description of the 1940 Act provisions applicable to BDCs, which is qualified in its entiretyby reference to the full text of the 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 capitaland making significant managerial assistance available to companies that do not have ready access to conventionalfinancial channels. Companies that satisfy certain additional criteria are defined as “eligible portfolio companies.” In general, in order to qualify as a BDC, a company must: (1) be a domestic company; (2) have registered a class ofits securities pursuant to Section 12 of the Exchange Act; (3) operate for the purpose of investing in the securities ofcertain types of eligible portfolio companies, including early stage or emerging companies and businesses sufferingor just recovering from financial distress (see following paragraph); (4) make available significant managerialassistance to such portfolio companies; and (5) file a proper notice of election with the SEC. ·An eligible portfolio company generally is a domestic company that is not an investment company or is excludedfrom investment company status pursuant to exclusions for certain types of financial companies (such as brokeragefirms, banks, insurance companies and investment banking firms) and that: (1) does not have a class of securitieslisted on a national securities exchange; (2) has a class of equity securities listed on a national securities exchangewith a market capitalization of less than $250.0 million; or (3) is controlled by the BDC itself or together withothers and has a representative on the board of directors of the company controlled by the BDC. The 1940 Actpresumes that a person has “control” of a portfolio company if that person owns at least 25.0% of its outstandingvoting securities. ·As a BDC, we are required to provide and maintain a bond issued by a reputable fidelity insurancecompany. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability tous or our shareholders arising from willful malfeasance, bad faith, gross negligence or reckless disregard of theduties involved in the conduct of that person’s office. ·We are required to adopt and implement written policies and procedures reasonably designed to prevent violationof the federal securities laws, review these policies and procedures annually for their adequacy and the effectivenessof their implementation and designate a chief compliance officer to be responsible for administering these policiesand procedures. Qualifying Assets The 1940 Act provides that we may not make an investment in non-qualifying assets unless at the time of theinvestment at least 70% of the value of our total assets (measured as of the date of our most recently filed financialstatements) consists of qualifying assets (the “70% test”). Qualifying assets include: (1) securities of eligible portfoliocompanies; (2) securities of certain companies that were eligible portfolio companies at the time we initially acquired theirsecurities and in which we retain a substantial interest; (3) securities of certain controlled companies; (4) securities of certainbankrupt, insolvent or distressed companies; (5) securities received in exchange for or distributed in or with respect to any ofthe foregoing; and (6) cash items, U.S. government securities and high-quality short-term debt. The SEC has adopted a rulepermitting a BDC to invest its funds in certain money market funds. The 1940 Act also places certain restrictions on thenature of the transactions in which, and the persons from whom, securities can be purchased and be considered qualifyingassets.10 Table of Contents Managerial Assistance to Portfolio Companies In order to count portfolio securities as qualifying assets for the purpose of the 70% test, we must either control theissuer of the securities or must offer to make available to the issuer of the securities significant managerialassistance. However, where we purchase securities in conjunction with one or more other persons acting together, one of theother persons in the group may make available such managerial assistance. Making available managerial assistance means,among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, ifaccepted, provides, significant guidance and counsel concerning the management, operations or business objectives andpolicies of a portfolio company. Idle Fund Investments We 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 anddiversified bond funds. We refer to these investments as idle fund investments. Senior Securities We are permitted by the 1940 Act, under specific conditions, to issue multiple classes of debt and a single class ofpreferred stock if our asset coverage, as defined by the 1940 Act, is at least 200.0% after such issuance of debt or preferredstock (i.e. senior securities may not be in excess of our net assets). Under specific conditions, we are also permitted by the1940 Act to issue warrants. Common Stock As a BDC, the 1940 Act generally limits our ability to issue and sell our common stock at a price below our NAV pershare, exclusive of any distributing commission or discount, without shareholder approval. Shares of our common stock havetraded below our NAV per share. While our common stock continues to trade at a price below our NAV per share, there are noassurances that we can issue or sell shares of our common stock if needed to fund our business. In addition, even in certaininstances where we could issue or sell shares of our common stock at a price below our NAV per share, such issuance couldresult in dilution in our NAV per share, which could result in a decline of our stock price. Code of Ethics We adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personalinvestments and restricts certain personal securities transactions. Personnel subject to the code may invest in securities fortheir personal investment accounts including securities that may be purchased or held by us, so long as those investments aremade in accordance with the code’s requirements. Certain transactions involving certain persons closely related to us,including our directors, officers and employees, may require approval of the SEC. However, the 1940 Act ordinarily does notrestrict transactions between us and our portfolio companies. Compliance Policies and Procedures We have adopted and implemented written policies and procedures reasonably designed to prevent violation of theU.S. federal securities laws, and are required to review these compliance policies and procedures annually for their adequacyand the effectiveness of their implementation, and to designate a Chief Compliance Officer to be responsible foradministering these policies and procedures. Michael S. Sarner serves as our Chief Compliance Officer. MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a general summary of the material U.S. federal income tax considerations applicable tous and to an investment in our shares. This summary does not purport to be a complete description of the income taxconsiderations applicable to us or to investors in such an investment. For example, we have not described tax consequences11 Table of Contentsthat we assume to be generally known by investors or certain considerations that may be relevant to certain types of holderssubject to special treatment under U.S. federal income tax laws, including shareholders subject to the alternative minimumtax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, financial institutions, U.S.shareholders (as defined below) whose functional currency is not the U.S. dollar, persons who mark-to-market our shares andpersons who hold our shares as part of a “straddle,” “hedge” or “conversion” transaction. This summary assumes thatinvestors hold shares of our common stock as capital assets (within the meaning of the Code). The discussion is based uponthe Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this Annual Report onForm 10-K and all of which are subject to change, possibly retroactively, which could affect the continuing validity of thisdiscussion. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does notdiscuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities orcertain other investment assets. For purposes of our discussion, a “U.S. shareholder” means a beneficial owner of shares of our common stock that isfor U.S. federal income tax purposes: ·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 inor under the laws of the United States 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 moreU.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in placeto 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 stockthat is neither a U.S. shareholder nor a partnership (including an entity treated as a partnership for U.S. federal income taxpurposes). If an entity treated as a partnership for U.S. federal income tax purposes (a “partnership”) holds shares of ourcommon stock, the tax treatment of a partner or member of the partnership will generally depend upon the status of thepartner or member and the activities of the partnership. A prospective shareholder that is a partner or member in a partnershipholding shares of our common stock should consult his, her or its tax advisors with respect to the purchase, ownership anddisposition 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 dependon the facts of his, her or its particular situation. We encourage investors to consult their own tax advisors regarding thespecific consequences of such an investment, including tax reporting requirements, the applicability of U.S. federal, state,local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes inthe tax laws. Taxation as a Regulated Investment Company Election to be Taxed as a RIC We have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally are not subject tocorporate-level U.S. federal income taxes on any income that we distribute to our shareholders from our tax earnings andprofits. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversificationrequirements (as described below). In addition, in order to obtain RIC tax treatment, we must distribute to our shareholders,for each taxable year, at least 90.0% of our “investment company taxable income,” which is generally our net ordinaryincome plus the excess, if any, of realized net short-term capital gain over realized net long-term capital loss, or the AnnualDistribution Requirement. Even if we qualify as a RIC, we generally will be subject to corporate-level U.S. federal income taxon our undistributed taxable income and could be subject to U.S. federal excise, state, local and foreign taxes.12 Table of Contents Taxation as a RIC Provided that we qualify as a RIC, we will not be subject to U.S. federal income tax on the portion of our investmentcompany taxable income and net capital gain (which we define as net long-term capital gain in excess of net short-termcapital loss) that we timely distribute to shareholders. We will be subject to U.S. federal income tax at the regular corporaterates 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 wedistribute in a timely manner an amount 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 period ended October 31 and (3) any income recognized, but notdistributed, 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 atall times during each taxable year; ·Derive in each taxable year at least 90.0% of our gross income from dividends, interest, payments with respectto certain securities loans, gains from the sale or other disposition of stock or other securities or foreigncurrencies or other income derived with respect to our business of investing in such stock, securities orcurrencies and net income derived from an interest in a “qualified publicly traded partnership” (as defined inthe Code), or the 90% Income Test; and ·Diversify our holdings so that at the end of each quarter of the taxable year: oat least 50.0% of the value of our assets consists of cash, cash equivalents, U.S. Governmentsecurities, securities of other RICs, and other securities if such other securities of any one issuer donot represent more than 5.0% of the value of our assets or more than 10.0% of the outstanding votingsecurities of the issuer (which for these purposes includes the equity securities of a “qualifiedpublicly traded partnership”); and ono more than 25.0% of the value of our assets is invested in the securities, other than U.S.Government securities or securities of other RICs, (1) of one issuer (2) of two or more issuers that arecontrolled, as determined under applicable tax rules, by us and that are engaged in the same orsimilar or related trades or businesses or (3) of one or more “qualified publicly traded partnerships,”or the Diversification Tests. To the extent that we invest in entities treated as partnerships for U.S. federal income tax purposes (other than a“qualified publicly traded partnership”), we generally must include the items of gross income derived by the partnerships forpurposes of the 90% Income Test, and the income that is derived from a partnership (other than a “qualified publicly tradedpartnership”) will be treated as qualifying income for purposes of the 90% Income Test only to the extent that such income isattributable to items of income of the partnership which would be qualifying income if realized by us directly. In addition,we generally must take into account our proportionate share of the assets held by partnerships (other than a “qualifiedpublicly traded partnership”) in which we are a partner for purposes of the Diversification Tests. In order to meet the 90% Income Test, we have established a wholly owned subsidiary to hold assets from which wedo not anticipate earning dividend, interest or other income under the 90% Income Test (the “Taxable Subsidiary”). We mayestablish additional subsidiaries for the same purpose in the future. Any investments held through a Taxable Subsidiarygenerally are subject to U.S. federal income and other taxes, and therefore we can expect to achieve a reduced after-tax yieldon such investments. 13 Table of ContentsWe may be required to recognize taxable income in circumstances in which we do not receive a correspondingpayment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issuediscount (including debt instruments with payment-in-kind interest or, in certain cases, increasing interest rates or issuedwith warrants), we must include in income each year a portion of the original issue discount or payment-in-kind interest thataccrues over the life of the obligation, regardless of whether cash representing such income is received by us in the sametaxable year. We anticipate that a portion of our income may constitute original issue discount or other income required to beincluded in taxable income prior to receipt of cash. Because any original issue discount or other amounts accrued will be included in our investment company taxableincome for the year of the accrual, we may be required to make a distribution to our shareholders in order to satisfy theAnnual Distribution Requirement, even though we will not have received any corresponding cash amount. As a result, wemay have difficulty meeting the annual distribution requirement necessary to obtain and maintain RIC tax treatment underthe 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 cashfrom other sources, we may fail to qualify 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 our investment in the portfolio company. Any such restructuring may result in unusablecapital losses and future non-cash income. Any restructuring may also result in our recognition of a substantial amount ofnon-qualifying income for purposes of the 90% Income Test, such as cancellation of indebtedness income in connection withthe work-out of a leveraged investment (which, while not free from doubt, may be treated as non-qualifying income) or thereceipt of other non-qualifying income. Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrantsgenerally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending onhow 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, andtherefore, our yield on any such securities may be reduced by such non-U.S. taxes. Shareholders will generally not be entitledto claim a credit or deduction with respect to non-U.S. taxes paid by us. We are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. Under the 1940Act, we are not permitted to make distributions to our shareholders while our debt obligations and other senior securities areoutstanding 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 ofour portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose ofassets in order to meet the Annual Distribution Requirement or to avoid the excise tax, we may make such dispositions attimes 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, wewill be subject to tax in that year on all of our taxable income, regardless of whether we make any distributions to ourshareholders. In that case, all of such income will be subject to corporate-level U.S. federal income tax, reducing the amountavailable 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 ourinvestment company taxable income in other taxable years. U.S. federal income tax law generally permits a RIC to carryforward (1) the excess of its net short-term capital loss over its net long-term capital gain for a given year as a short-termcapital loss arising on the first day of the following year and (2) the excess of its net long-term capital loss over 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 transactionswe engage in may cause our ability to use any capital loss carryforwards, and unrealized losses once realized, to be limitedunder Section 382 of the Code. Certain of our investment practices may be subject to special and complex U.S. federalincome tax provisions that may, among other things, (1) disallow, suspend or otherwise limit the allowance of certain lossesor deductions, (2) convert lower taxed long-term capital gain and qualified dividend income into higher14 Table of Contentstaxed short-term capital gain or ordinary income, (3) convert an ordinary loss or a deduction into a capital loss (thedeductibility 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 securities is deemed to occur, (6) adversely alter thecharacterization of certain complex financial transactions and (7) produce income that will not be qualifying income forpurposes of the 90% Income Test. We will monitor our transactions and may make certain tax elections in order to mitigatethe effect of these provisions. As described above, to the extent that we invest in equity securities of entities that are treated as partnerships forU.S. federal income tax purposes, the effect of such investments for purposes of the 90% Income Test and the DiversificationTests will depend on whether or not the partnership is a “qualified publicly traded partnership” (as defined in the Code). Ifthe entity is a “qualified publicly traded partnership,” the net income derived from such investments will be qualifyingincome for purposes of the 90% Income Test and will be “securities” for purposes of the Diversification Tests. If the entity isnot treated as a “qualified publicly traded partnership,” however, the consequences of an investment in the partnership willdepend upon the amount and type of income and assets of the partnership allocable to us. The income derived from suchinvestments may not be qualifying income for purposes of the 90% Income Test and, therefore, could adversely affect ourqualification as a RIC. We intend to monitor our investments in equity securities of entities that are treated as partnerships forU.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 beclear or may be subject to recharacterization by the IRS. To the extent the tax treatment of such securities or the income fromsuch securities differs from the expected tax treatment, it could affect the timing or character of income recognized, requiringus to purchase or sell securities, or otherwise change our portfolio, in order to comply with the tax rules applicable to RICsunder the Code. We may distribute taxable dividends that are payable in cash or shares of our common stock at the election of eachshareholder. Under certain applicable provisions of the Code and the Treasury regulations, distributions payable in cash or inshares of stock at the election of shareholders are treated as taxable dividends. The Internal Revenue Service has issuedprivate rulings indicating that this rule will apply even where the total amount of cash that may be distributed is limited tono more than 20.0% of the total distribution. Under these rulings, if too many shareholders elect to receive their distributionsin cash, each such shareholder would receive a pro rata share of the total cash to be distributed and would receive theremainder of their distribution in shares of stock. If we decide to make any distributions consistent with these rulings that arepayable in part in our stock, taxable shareholders receiving such dividends will be required to include the full amount of thedividend (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain tothe extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulatedearnings and profits for United States federal income tax purposes. As a result, a U.S. shareholder may be required to pay taxwith respect to such dividends in excess of any cash received. If a U.S. shareholder sells the stock it receives in order to paythis tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on themarket price of our stock at the time of the sale. Furthermore, with respect to non-U.S. shareholders, we may be required towithhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable instock. In addition, if a significant number of our shareholders determine to sell shares of our stock in order to pay taxes owedon dividends, it may put downward pressure on the trading price of our stock. Failure to Obtain RIC Tax Treatment If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may neverthelesscontinue to qualify as a RIC for that year if certain relief provisions are applicable (which may, among other things, requireus to pay certain corporate-level federal taxes or to dispose of certain assets). If we were unable to obtain tax treatment as a RIC, we would be subject to tax on all of our taxable income at regularcorporate rates. We would not be able to deduct distributions to shareholders, nor would they be required to be made.Distributions would generally be taxable to our shareholders as dividend income to the extent of our current andaccumulated earnings and profits (in the case of non-corporate U.S. shareholders, generally at a maximum federal income taxrate applicable to qualified dividend income of 20.0%). Subject to certain limitations under the Code, corporate15 Table of Contentsdistributees would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulatedearnings and profits would be treated first as a return of capital to the extent of the shareholder’s tax basis, and any remainingdistributions 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, wewould be subject to corporate-level taxation on any built-in gain recognized during the succeeding 5-year period unless wemade a special election to recognize all that built-in gain upon our re-qualification as a RIC and to pay the corporate-leveltax on that built-in gain. Taxation of U.S. Shareholders Whether an investment in shares of our common stock is appropriate for a U.S. shareholder will depend upon thatperson’s particular circumstances. An investment in shares of our common stock by a U.S. shareholder may have adverse taxconsequences. The following summary generally describes certain U.S. federal income tax consequences of an investment inshares of our common stock by taxable U.S. shareholders and not by U.S. shareholders that are generally exempt from U.S.federal income taxation. U.S. shareholders should consult their own tax advisors before making an investment in ourcommon stock. Distributions by us generally are taxable to U.S. shareholders as ordinary income or capital gain. Distributions of our“investment company taxable income” (which generally is our ordinary income excluding net capital gain) will be taxable asordinary income to U.S. shareholders to the extent of our current or accumulated earnings and profits, whether paid in cash orreinvested in additional common stock. To the extent such distributions paid by us to non-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 federalincome tax rate of 20.0% provided that we properly report such distribution as “qualified dividend income” in a writtenstatement furnished to our shareholders and certain holding period and other requirements are satisfied. In this regard, it isnot 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 ofour net capital gain (which generally is our net long-term capital gain in excess of net short-term capital loss) properlydesignated by us as “capital gain dividends” will be taxable to a U.S. shareholder as long-term capital gain (at a maximumfederal income tax rate of 20.0% in the case of individuals, trusts or estates), regardless of the U.S. shareholder’s holdingperiod 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 taxbasis in such shareholder’s common stock and, after the adjusted basis is reduced to zero, will constitute capital gain to suchU.S. shareholder. In lieu of actually distributing our realized net capital gains, we may retain some or all of our long-term capital gainand elect to be deemed to have made 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 taxon the retained amount, each U.S. shareholder will be required to include his, her or its proportionate share of the deemeddistribution in income as if it had been actually distributed to the U.S. shareholder, and the U.S. shareholder will be entitledto claim a credit equal to his, her or its allocable share of the tax paid thereon by us. The amount of the deemed distributionnet 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 taxon any retained capital gain at our regular corporate tax rate, and since that rate is in excess of the maximum rate currentlypayable by individuals on net capital gain, the amount of tax that individual shareholders will be treated as having paid andfor which they will receive a credit will exceed the tax they owe on the retained net capital gain. Such excess generally maybe claimed as a credit against the U.S. shareholder’s other U.S. federal income tax obligations or may be refunded to theextent it exceeds a shareholder’s liability for U.S. federal income tax. A shareholder that is not subject to U.S. federal incometax or otherwise required to file a U.S. federal income tax return would be required to file a U.S. federal income tax return onthe appropriate form in order to claim a refund for the taxes we paid. In order to utilize the deemed distribution approach, wemust provide written notice to our shareholders prior to the expiration of 60 days after the close of the relevant taxable year.We cannot treat any of our investment company taxable income as a “deemed distribution.” 16 Table of ContentsWe could be subject to the alternative minimum tax, or the AMT, but any items that are treated differently for AMTpurposes must be apportioned between us and our shareholders and this may affect U.S. shareholders’ AMT liabilities.Although regulations explaining the precise method of apportionment have not yet been issued, such items will generally beapportioned in the same proportion that distributions paid to each shareholder bear to our taxable income (determinedwithout regard to the dividends paid deduction), unless a different method for a particular item is warranted under thecircumstances. For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) theamount of capital gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paidduring the following taxable year as if it had been paid during the taxable year in question. If we make such an election, theU.S. shareholder will still be treated as receiving the dividend in the taxable year in which the distribution 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 beenreceived by our U.S. shareholders on December 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 theshares will include the value of the distribution, and the investor will be subject to tax on the distribution even though itrepresents 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 common stock. The amount of gain or loss will be measured by the difference between suchshareholder’s adjusted tax basis in the common stock sold and the amount of the proceeds received in exchange. Any gainarising from such sale or disposition generally will be treated as long-term capital gain or loss if the shareholder 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 capitalloss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-termcapital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received,with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our commonstock may be disallowed if other substantially identical shares are purchased (whether through reinvestment of distributionsor otherwise) within 30 days before or after the disposition. The ability to otherwise deduct capital loss may be subject toother limitations under the Code. In general, non-corporate U.S. shareholders, including individuals, trusts and estates, are subject to U.S. federalincome tax at a maximum rate of 20.0% on their net capital gain, or the excess of realized net long-term capital gain overrealized net short-term capital loss for a taxable year, including a long-term capital gain derived from an investment in ourshares. 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 35.0% rate also applied toordinary income. Non-corporate shareholders with net capital loss for a year (which we define as capital loss in excess ofcapital gain) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital lossof a noncorporate shareholder in excess of $3,000 generally may be carried forward and used in subsequent years as providedin the Code. Corporate shareholders generally may not deduct any net capital loss for a year, but may carry back such lossesfor 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 surtax onthe lesser of (1) the U.S. shareholder’s “net investment income” (or “undistributed net investment income” in the case of anestate or trust) for the relevant taxable year and (2) the excess of the U.S shareholder’s modified adjusted gross income for thetaxable year over a certain threshold (which in the case of individuals is between $125,000 and $250,000, depending on theindividual’s circumstances). A U.S. shareholder’s net investment income generally includes its dividends on, and capital gainfrom 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 an established securities market or (3) held by at least 500 persons at all times during the taxable year. Ifwe 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 shareholder and will be deductible17 Table of Contentsby such shareholder only to the extent permitted under the limitations described below. For non-corporate shareholders,including individuals, trusts, and estates, significant limitations generally apply to the deductibility of certain expenses of anon-publicly offered RIC, including advisory fees. In particular, these expenses, referred to as miscellaneous itemizeddeductions, are deductible only to individuals to the extent they exceed 2.0% of such a shareholder’s adjusted gross income,and are not deductible for AMT purposes. Because we anticipate that shares of our common stock will continue to beregularly traded on an established securities market, we believe that we will continue to qualify as a “publicly offeredregulated investment company.” We will send to each of our U.S. shareholders, as promptly as possible after the end of each calendar year, a writtenstatement detailing, on a per share and per distribution basis, the amounts includible in such U.S. shareholder’s taxableincome for such year as ordinary income and as long-term capital gain. In addition, the U.S. federal tax status of each year’sdistributions generally will be reported to the IRS. Distributions paid by us generally will not be eligible for the dividends-received deduction or the preferential tax rate applicable to qualifying dividends. Distributions may also be subject toadditional state, local and foreign taxes depending on a U.S. shareholder’s particular situation. We may be required to withhold U.S. federal income tax, or backup withholding at a rate of 28.0%, from all taxabledistributions to any U.S. shareholder (1) who fails to furnish us with a correct taxpayer identification number or a certificatethat such shareholder is exempt from backup withholding (e.g., because it is a corporation) or (2) with respect to whom theIRS notifies us that such shareholder has failed to properly report certain interest and dividend income to the IRS and torespond to notices to that effect. An individual’s taxpayer identification number is his or her social security number. Backupwithholding tax is not an additional tax, and any amount withheld may be refunded or credited against the U.S. shareholder’sU.S. federal income tax liability, provided that proper information is timely provided to the IRS. Under U.S. Treasury regulations, if a shareholder recognizes a loss with respect to shares of our stock of $2.0 millionor more for an individual, S corporation, trust or a partnership with at least one non-corporate partner or $10.0 million ormore for a shareholder that is either a corporation or a partnership with only corporate partners in any single taxable year (or agreater loss over a combination of years), the shareholder must file with the IRS a disclosure statement on IRS Form 8886 (orsuccessor 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 thisreporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does notaffect the legal determination of whether the taxpayer’s treatment of the loss is proper. Significant monetary penalties applyto a failure to comply with this reporting requirement. States may also have a similar reporting requirement. Shareholdersshould consult their own tax advisors to determine the applicability of these regulations in light of their individualcircumstances. Taxation of Non-U.S. Shareholders Whether an investment in the shares is appropriate for a Non-U.S. shareholder will depend upon that person’sparticular circumstances. An investment in the shares by a Non-U.S. shareholder may have adverse tax consequences. Non-U.S. shareholders should consult their tax advisers before investing in our common stock. Distributions of our “investment company taxable income” to Non-U.S. shareholders that are not “effectivelyconnected” with a U.S. trade or business carried on by the Non-U.S. shareholder, will generally be subject to withholding ofU.S. federal income tax at a rate of 30.0% (or lower rate provided by an applicable treaty) to the extent of our current andaccumulated 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 our common stock, that are not effectively connected with a U.S. trade or business carried on bythe Non-U.S. shareholder, will generally not be subject to U.S. federal withholding tax and generally will not be subject toU.S. federal income tax unless the Non-U.S. shareholder is a nonresident alien individual and is physically present in theUnited States for more than 182 days during the taxable year and meets certain other requirements. However, withholding ofU.S. federal income tax at a rate of 30.0% on capital gain of nonresident alien individuals who are physically present in theUnited States for more than the 182 day period only applies in exceptional cases because any individual present in theUnited States for more than 182 days during the taxable year is generally treated as a resident for U.S. income18 Table of Contentstax 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 30.0% U.S. federal withholding tax. If we distribute our net capital gain in the form of deemed rather than actual distributions (which we may do in thefuture), a Non-U.S. shareholder will be entitled to a U.S. federal income tax credit or tax refund equal to the shareholder’sallocable share of the tax we pay on the capital gain deemed to have 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 income tax 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 incometax return. 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) toNon-U.S. shareholders, and gain realized by Non-U.S. shareholders upon the sale of our common stock that is “effectivelyconnected” 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 at the graduatedrates applicable to U.S. citizens, residents and domestic corporations. Corporate Non-U.S. shareholders may also be subject toan additional branch profits tax at a rate of 30.0% imposed by the Code (or lower rate provided by an applicable treaty). Inthe case of a non-corporate Non-U.S. shareholder, we may be required to withhold U.S. federal income tax from distributionsthat are otherwise exempt from withholding tax (or taxable at a reduced rate) unless the Non-U.S. shareholder certifies his orher 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 differfrom those described herein. Non-U.S. shareholders are advised to consult their own tax advisers with respect to the particulartax consequences to them of an investment in our shares. Dividends distributed by CSWC as a regulated investment company may constitute interest-related dividends underSections 871(k) and 881(e) of the Code to the extent paid out of U.S. source earnings that would have qualified for anexemption from U.S. nonresident withholding tax if a non-U.S. resident received such earnings directly. This provision of theCode had expired for tax years beginning after December 31, 2014. This provision was extended retroactively for the 2015tax year and made permanent prospectively. As a result, ordinary dividends paid in the future by CSWC may be consideredinterest-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 backupwithholding of U.S. federal income tax on dividends unless the Non-U.S. shareholder provides us or the dividend payingagent with an IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable (or an acceptable substitute form) or otherwise meetsdocumentary evidence requirements for establishing that it is a Non-U.S. shareholder or otherwise establishes an exemptionfrom backup withholding. Non-U.S. persons should consult their own tax advisors with respect to the U.S. federal income tax and withholdingtax, and state, local and foreign tax consequences of an investment in the shares. FATCA Pursuant to Sections 1471 through 1474 of the Code and the Treasury Regulations and administrative guidanceissued thereunder (“FATCA”), foreign financial institutions (which term includes most foreign hedge funds, private equityfunds, mutual funds, securitization vehicles and other investment vehicles) and certain other foreign entities generally mustcomply with certain information reporting rules with respect to their U.S. account holders and investors or confront a 30%withholding tax on U.S.-source payments made to them (whether received as a beneficial owner or as an intermediary foranother party). A foreign financial institution or such other foreign entity that does not comply with the FATCA reportingrequirements will generally be subject to a 30% withholding tax with respect to any “withholdable payments.” For thispurpose, withholdable payments generally include our dividends and, beginning after December 1, 2018, also include theentire gross proceeds from the sale or other disposition of our common stock, even if the payment would otherwise not besubject to U.S. nonresident withholding tax (e.g., because it is capital gain). Foreign financial institutions located injurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to19 Table of Contentsdifferent rules. We will not pay any additional amounts to in respect of any amounts withheld pursuant to FATCA. Undercertain circumstances, a shareholder might be eligible for refunds or credits of such taxes. Possible Legislative or Other Actions Affecting Tax Considerations Prospective investors should recognize that the present U.S. federal income tax treatment of an investment in ourstock may be modified by legislative, judicial or administrative action at any time, and that any such action may affectinvestments and commitments previously made. The rules dealing with U.S. federal income taxation are constantly underreview by persons involved in the legislative process any by the IRS and the U.S. Treasury Department, resulting in revisionsof 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. State and Local Tax Treatment The 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 taxadvisors concerning the tax considerations relevant to their particular situation. THE NASDAQ GLOBAL SELECT MARKET CORPORATE GOVERNANCE REGULATIONS The NASDAQ Global Select Market (“NASDAQ”) has adopted corporate governance listing standards with whichlisted companies must comply in order to remain listed. We believe that we are in compliance with these corporategovernance listing standards. We intend to monitor our compliance with future listing standards and to take all necessaryactions to ensure that we remain in compliance. SECURITIES ACT OF 1934 AND SARBANES-OXLEY ACT COMPLIANCE We are subject to the reporting and disclosure requirements of the Exchange Act, including the filing of quarterly,annual and current reports, proxy statements and other required items. In addition, we are subject to the Sarbanes-Oxley Actof 2002 and regulations promulgated thereunder, which imposes a wide variety of regulatory requirements on publicly-heldcompanies and their insiders. For example: ·Pursuant to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer are requiredto certify the accuracy of the 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 theeffectiveness of our disclosure controls and procedures; ·Pursuant to Rule 13a-15 of the Exchange Act, our management is required to prepare a report on its assessment ofour internal control over financial reporting, and we engage an independent registered public accounting firm toseparately audit our internal control over financial reporting; and ·Pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclosewhether there were significant changes in our internal control over financial reporting or in other factors that couldsignificantly affect these controls subsequent to the date of their evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses. Item 1A. Risk Factors Investing in our common stock involves a number of significant risks. In addition to other information contained inthis Annual Report on Form 10-K, investors should consider the following information before making an investment in ourcommon stock. The risks and uncertainties described below could materially adversely affect our business, financialconditions and results of operations. Risks and uncertainties not presently known to us, or not presently deemed material20 Table of Contentsby us, may also impair our operations and performance. If any of the following risks, or risks not presently known to us,actually occur, 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 STRUCTURE Our investment portfolio is and will continue to be recorded at fair value. Our Board of Directors has finalresponsibility for overseeing, reviewing and approving, in good faith, our fair value determination. As a result ofrecording our investments at fair value, there is and will continue to be subjectivity as to the value of our portfolioinvestments. Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readilyavailable market value, at fair value as determined by us, with our Board of Directors having final responsibility foroverseeing, reviewing and approving, in good faith, our fair value determination. Typically, there is not a public market forthe securities of the privately held companies in which we have invested and will continue to invest. As a result, we valuethese 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 toa certain degree, subjective and dependent on a valuation process approved by our Board of Directors. Certain factors thatmay be considered in determining the fair value of our investments include external events, such as private mergers, sales andacquisitions involving comparable companies. Because of the inherent uncertainty of the valuation of portfolio securitieswhich do not have readily ascertainable market values, our fair value determinations may differ materially from the values athird party would be willing to pay for our securities or the values which would be applicable to unrestricted securitieshaving a public market. Due to this uncertainty, our fair value determinations may cause our net asset value on a given dateto materially understate or overstate the value that we may ultimately 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 a higher price than the value of ourinvestments 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 ourability to effectively allocate and manage capital. Capital allocation depends, in part, upon our investment team’s ability toidentify, evaluate, invest in and monitor companies that meet our investment criteria. Accomplishing our investment objectives is largely a function of our investment team’s management of theinvestment process and our access to investments offering attractive risk adjusted returns. In addition, members of ourinvestment team are called upon, from time to time, to provide managerial assistance 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 tomake new investments at attractive relative valuations is also a function of our marketing and our management of theinvestment process. If we fail to invest our capital effectively, our return on equity may be negatively impacted, which couldhave a material adverse effect on the price of the shares of our common stock. We operate in a highly competitive market for investment opportunities. We compete for attractive investment opportunities with other financial institutions, including businessdevelopment companies, junior capital lenders, and banks. Some of these competitors are substantially larger and havegreater financial, technical and marketing resources, and some are subject to different, and frequently less stringent,regulations. Our competitors may have a lower cost of funds and may have access to funding sources that are not available tous. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us21 Table of Contentsas a BDC. As a result of this competition, we may not be able to take advantage of attractive investment opportunities fromtime to time, and there can be no assurance that we will be able to identify and make investments that satisfy ourobjectives. A significant increase in the number and/or size of our competitors in our target market could force us to acceptless attractive investment terms. We cannot assure you that the competitive pressures we face will not have a materiallyadverse effect on our business, financial condition and results of operation. The capital markets may experience periods of disruption and instability. Such market conditions may materially andadversely affect debt and equity capital markets in the United States, which may have a negative impact on our businessand operations. The U.S. capital markets experienced increased volatility and disruption over the past several years, leading toincreased investor uncertainty and depressed levels of consumer and commercial spending. Disruptions in the capital marketsincreased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of thecapital markets. We cannot provide any assurance that these conditions will not worsen. If these conditions continue orworsen, the prolonged period of market illiquidity may have an adverse effect on our business, financial condition, andresults of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capitalmarkets or result in a decision by lenders not 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 valuationsof our investments. While most of our investments are not publicly traded, applicable accounting standards require us toassume as part of our valuation process that our investments are sold in a principal market to market participants (even if weplan on holding an investment through its maturity). Significant changes in the capital markets may also affect the pace ofour investment activity and the potential for liquidity events involving our investments. Thus, the illiquidity of ourinvestments may make it difficult for us to sell our investments to access capital if required, and as a result, we could realizesignificantly less than the value at which we have recorded our investments if we were required to sell them for liquiditypurposes. An inability to raise or access capital could have a material adverse effect on our business, financial condition orresults of operations. If the Share Distribution is ultimately determined to be taxable for U.S. federal income tax purposes, our shareholderscould 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 KPMGsubstantially to the effect that the Share Distribution should qualify as tax free under Sections 355, 368(a)(1)(D) and relatedprovisions of the Code. An opinion of an accounting firm is not binding on the Internal Revenue Service (“IRS”).Accordingly, the IRS may reach conclusions with respect to the Share Distribution that are different from the conclusionsreached in the opinion. The opinion relied on certain facts, assumptions, representations and undertakings from CSWC andCSWI regarding the past and future conduct of the companies’ respective businesses and other matters, which, if incomplete,incorrect or not satisfied, could alter KPMG’s conclusions. If the Share Distribution ultimately is determined to be taxable, it could be treated as a taxable dividend to you forU.S. federal income tax purposes and you could incur significant U.S. federal income tax liabilities. In addition, CSWCwould recognize a taxable gain to the extent that the fair market value of CSWI common stock exceeds CSWC’s tax basis inthat stock on the date of the Share Distribution. Any unrealized losses we experience may be an indication of future realized losses, which could reduce our incomeavailable 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 fairvalue as determined in good faith by our Board of Directors pursuant to a valuation methodology approved by our Board ofDirectors. Decreases in the market values or fair values of our investments will be recorded as unrealized losses. Anunrealized loss could be an indication of a portfolio company’s inability to meet its repayment obligations or generate cashflow. This could result in realized losses in the future and ultimately in reductions of our income available to pay dividendsor interest and principal on our securities and could have a material adverse effect on your investment.22 Table of Contents Our historical financial statements are not necessarily representative of the results we would have achieved as a stand-alone publicly-traded company and therefore may not be indicative of our future performance. Capital Southwest spun off 63.5% of our net asset value to shareholders in the Share Distribution and divested othermajor investments during the past three years. We emerged from these divestitures and the Share Distribution with asignificantly different company profile. Our historical financial statements included in this Form 10-K for historical periodsare not necessarily representative of the results we would have achieved as a stand-alone publicly traded company with asmaller market footprint. Accordingly, this data may not be indicative of our future performance, or necessarily reflect whatour financial position and results of operations or cash flows would have been, had we operated as a separate, stand-alonepublicly-traded entity during all of the periods presented. 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 portfolioinvestments. Many of our portfolio companies could be adversely impacted again by any future economic downturn orrecession and may be unable to be sold at a price that would allow us to recover our investment, or may be unable to operateduring a recession. Such portfolio company performance could have a material adverse effect on our business, financialcondition 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 ourmanagement. Our management’s capabilities may significantly impact our results of operations. Our success requires that weretain investment and operations personnel in a competitive environment. Our ability to attract and retain personnel with therequisite credentials, experience and skills depends on several factors, including but not limited to, our ability to offercompetitive wages, benefits and professional growth opportunities. The competitive environment for qualified personnel may require us to take certain measures to ensure that we areable to attract and retain experienced personnel. Such measures may include increasing the attractiveness of our overallcompensation packages, altering the structure of our compensation packages through the use of additional forms ofcompensation or other steps. The inability to attract and retain experienced personnel could potentially have an adverseeffect on our business. Our business model depends to a significant extent upon strong referral relationships. Our inability to maintain ordevelop these relationships, as well as the failure of these relationships to generate investment opportunities, couldadversely affect our business. We expect that members of our management team will maintain their relationships with intermediaries, financialinstitutions, investment bankers, commercial bankers, financial advisors, attorneys, accountants, consultants and otherindividuals within our network, and we will rely to a significant extent upon these relationships to provide us with potentialinvestment opportunities. If our management team fails to maintain its existing relationships or develop new relationshipswith sources of investment opportunities, we will not be able to effectively allocate capital. Individuals with whom membersof our management team have relationships are not obligated to provide us with investment opportunities, and therefore,there is no assurance that these relationships will generate investment opportunities for us. In addition to regulatory limitations on our ability to raise capital, our Credit Facility contains various covenants,which, if not complied with, could accelerate our repayment obligations under the Credit Facility, thereby materiallyand adversely affecting our liquidity, financial condition, results of operations and ability to pay distributions. We will have a continuing need for capital to finance our investments. We are party to a senior secured creditfacility (the “Credit Facility”), dated as of August 30, 2016, which provides us with a revolving credit line of up to $100.0million, which has $25.0 million drawn as of March 31, 2017. The Credit Facility contains customary terms and conditions,23 Table of Contentsincluding, without limitation, affirmative and negative covenants such as information reporting requirements, minimumconsolidated net worth, minimum consolidated interest coverage ratio, minimum regulatory asset coverage, and maintenanceof RIC and BDC status. The Credit Facility also contains customary events of default with customary cure and notice,including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breachof covenants, bankruptcy, and change of control. The Credit Facility permits us to fund additional loans and investments aslong as we are within the conditions set out in the Credit Facility. Our continued compliance with these covenants dependson many factors, some of which are beyond our control, and there are no assurances that we will continue to comply withthese covenants. Our failure to satisfy these covenants could result in foreclosure by our lenders, which would accelerate ourrepayment obligations under the facility and thereby have a material adverse effect on our business, liquidity, financialcondition, results of operations and ability to pay distributions to our stockholders. Because we borrow money to make investments, the potential for gain or loss on amounts invested in us is magnified andmay increase the risk of investing in us. Borrowings to fund investments, also known as leverage, magnify the potential for loss on investments in ourindebtedness and gain or loss on investments in our equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities. We may borrow from banks and other lenders, includingunder our Credit Facility, and may issue debt securities or enter into other types of borrowing arrangements in the future. Ifthe value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise wouldhave had we not leveraged our business. Similarly, any decrease in our income would cause net investment income to declinemore sharply than it would have had we not leveraged our business. Such a decline could negatively affect our ability to paycommon stock dividends, scheduled debt payments or other payments related to our securities. Use of leverage is generallyconsidered a speculative investment technique. As of March 31, 2017, we had $25.0 million debt outstanding under our Credit Facility. Borrowings under theCredit Facility bear interest, on a per annum basis at a rate equal to the applicable LIBOR rate (1.13% as of March 31, 2017)plus 3.25%. For the first six months following the close of the Credit Facility, we paid unused commitment fees of 0.50% perannum on the unused lender commitments under the Credit Facility. Subsequent to that period, the unused commitment feeis 0.50% to 1.50% based on utilization. The Credit Facility is secured by substantially all of our assets. If we are unable tomeet the financial obligations under the Credit Facility, the lenders under the Credit Facility may exercise its remedies underthe Credit Facility as the result of a default by us. Our ability to achieve our investment objective may depend in part on our ability to access additional leverage onfavorable terms by borrowing from banks or insurance companies or by issuing debt securities and there can be no assurancethat such additional leverage can in fact be achieved. All of our assets are subject to security interests under our secured Credit Facility and if we default on our obligationsunder the Credit Facility, we may suffer adverse consequences, including foreclosure on our assets. All of our assets are currently pledged as collateral under our Credit Facility. If we default on our obligations underthe Credit Facility, the lenders party thereto may have the right to foreclose upon and sell, or otherwise transfer, the collateralsubject to their security interests. In such event, we may be forced to sell our investments to raise funds to repay ouroutstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we would notconsider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectivelyoperate our business in the manner in which we have historically operated. As a result, we could be forced to curtail or ceasenew investment activities and lower or eliminate the dividends that we have historically paid to our stockholders. Inaddition, if the lenders exercise their right to sell the assets pledged under our Credit Facility, such sales may be completed atdistressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment ofthe amounts outstanding under the Credit Facility. 24 Table of ContentsIn connection with CSWI’s separation from CSWC, CSWI has indemnified us for certain liabilities. However, there canbe no assurance that these indemnities will be sufficient to insure us against the full amount of such liabilities or thatCSWI’s ability to satisfy its indemnification obligation will not be impaired in the future. CSWI agreed to indemnify us for certain liabilities, including certain tax liabilities. However, third parties couldseek to hold us responsible for any of the liabilities that CSWI will agree to retain, and there can be no assurance that CSWIwill be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering fromCSWI any amounts for which we are held liable, we may be temporarily required to bear these losses while seeking recoveryfrom 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 CSWCfinancially responsible for liabilities that may exist relating to or arising out of its business activities, whether incurred priorto or after the Share Distribution. If CSWC is required to indemnify CSWI for any reason, CSWC may be subject tosubstantial 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 preservethe tax-free status of the Share Distribution to CSWC for U.S. federal income tax purposes. Even if the Share Distributionotherwise qualifies for tax-free treatment to CSWC’s shareholders under Section 355 of the Code, it may be taxable to CSWCunder section 355(e) of the Code if 50.0% or more, by vote or value, of shares of our common stock or CSWI’s common stockare acquired or issued as part of a plan or series of related transactions that includes the Share Distribution. For this purpose,any acquisitions or issuances of CSWC’s common stock within two years before the Share Distribution, and any acquisitionsor issuances of our common stock or CSWI’s common stock within two years after the Share Distribution, generally arepresumed to be part of such a plan, although we or CSWI may be able to rebut that presumption. If an acquisition or issuanceof shares of our common stock or CSWI’s common stock triggers the application of Section 355(e) of the Code, CSWC wouldrecognize a taxable gain to the extent the fair market value of CSWI’s common stock exceeds our tax basis in CSWI’scommon stock at the time of the Share Distribution. Potential liabilities may arise due to fraudulent transfer considerations, which would adversely affect our financialcondition and our results of operations. In connection with the Share Distribution, we undertook several corporate restructuring transactions which, alongwith the Share Distribution, may be 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 Share Distribution, any entity involved in these restructuring transactions orthe Share Distribution: (1) was insolvent; (2) was rendered insolvent by reason of the Share Distribution; (3) had remainingassets constituting unreasonably small capital; or (4) intended to incur, or believed it would incur, debts beyond its ability topay these debts as they matured, then the court could void the Share Distribution, in whole or in part, as a fraudulentconveyance or transfer. The court could require us to fund liabilities of the other company for the benefit of creditors. We will be subject to corporate-level income tax if we are unable to qualify as a Regulated Investment Company underSubchapter M of the Code. To maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source andasset diversification requirements: ·The annual distribution requirement for a RIC will be satisfied if we distribute to our shareholders on an annualbasis at least 90.0% of our net ordinary income and realized short-term capital gains in excess of realized net long-term capital losses. Depending on the level of taxable income earned in a tax year, we may choose to carry forwardtaxable income in excess of current year distributions into the next year and pay a 4.0% excise tax on25 Table of Contentssuch income. Any such carryover taxable income must be distributed through a dividend declared prior to filing thefinal tax return related to the year that generated such taxable income. ·The source of income requirement will be satisfied if we obtain at least 90.0% of our gross income for each taxableyear from dividends, interest, payments with respect to certain securities loans, gains from the sale or otherdisposition 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 publiclytraded 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 endof each quarter of our taxable year. To satisfy this requirement, at least 50.0% of the value of our assets must consistof cash, cash equivalents, U.S Government securities, securities of other RICs, and other securities if such othersecurities of any one issuer do not represent more than 5.0% of the value of our assets or more than 10.0% of theoutstanding voting securities of the issuer (which for these purposes includes the equity securities of a “qualifiedpublicly traded partnership”). In addition, no more than 25.0% of the value of our assets can be invested in thesecurities, other than U.S Government securities or securities of other RICs, (1) of one issuer (2) of two or moreissuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same orsimilar or related trades or businesses or (3) of one or more “qualified publicly traded partnerships,” or theDiversification Tests. Failure to meet these requirements may result in us having to dispose of certain unqualified investments quickly inorder to prevent the loss of RIC status. If we fail to maintain RIC tax treatment for any reason and are subject to corporateincome tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available fordistribution and the amount of our distributions. In addition, to the extent we had unrealized gains, we would have toestablish deferred tax liabilities for taxes, which would reduce our net asset value accordingly. In addition, our shareholderswould lose the tax credit realized when we, as a RIC, decide to retain the net realized capital gain and make deemeddistributions of net realized capital gains, and pay taxes on behalf of our shareholders at the end of the tax year. The loss ofthis pass-through tax treatment could have a material adverse effect on the total return of an 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 onits income and assets. In addition, we may hold some of our assets through our Taxable Subsidiary, which is not consolidatedfor U.S. federal income tax purposes, or any other taxable subsidiary we may form. Any taxes paid by our subsidiarycorporations would decrease the cash available for distribution to the Company’s stockholders. 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 anyborrowing we have an asset coverage for total borrowings of at least 200.0% (i.e., the amount of debt may not exceed 50.0%of the value of our assets). Legislation introduced in the U.S. House of Representatives, proposed to modify this section ofthe 1940 Act and increase the amount of debt that BDCs may incur by modifying the asset coverage percentage from 200.0%to 150.0%. If this legislation is passed, we may be able to incur additional indebtedness in the future and, therefore, your riskof 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 affect us. We are subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the related rules and regulationspromulgated by the SEC. Among other requirements, under Section 404 of the Sarbanes-Oxley Act and rules and regulationsof the SEC thereunder, our management is required to report on our internal controls over financial reporting. We are requiredto review on an annual basis our internal controls over financial reporting, and on a quarterly26 Table of Contentsand annual basis to evaluate and disclose significant changes in our internal controls over financial reporting. We have andexpect to continue to incur significant expenses related to compliance with the Sarbanes-Oxley Act, which will negativelyimpact our financial performance and our ability to make distributions. In addition, this process results in a diversion ofmanagement’s time and attention. In the event that we are unable to maintain compliance with the Sarbanes-Oxley Act andrelated rules, we may be adversely affected. Our investments could be concentrated in relatively few portfolio companies. Beyond our RIC asset diversification requirements, we do not have fixed guidelines for diversification, and fromtime to time our investments could be concentrated in relatively few portfolio companies for a number of reasons, includingperformance, our growth plans and different investment timelines. The concentration of our total assets in certain investmentsmay fluctuate as the relative net asset values of these investments change relative to the net asset values of other investmentsin our portfolio and as we continue to make investments. Financial disruption, decreased revenues or changes in the businessof any investment in which our assets are concentrated may have a material adverse effect on our financial condition,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 withoutthe prior approval of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly,5.0% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act, and we generally areprohibited from buying or selling any security from or to an affiliate, absent the prior approval of our independent directors.The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in thesame portfolio company (whether at the same or different times), without prior approval of our independent directors and, insome cases, the SEC. If a person acquires more than 25.0% of our voting securities, we are prohibited from buying or sellingany security from or to that person or certain of that person’s affiliates, or entering into prohibited joint transactions with thatperson, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers ordirectors 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 byus to comply with these laws or regulations, 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 lenders could significantly affect our operations and our cost of doing business. We are subject tofederal, state and local laws and regulations and are subject to judicial and administrative decisions that affect ouroperations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfoliocompanies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws,regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringentrequirements than those in which we currently conduct business, we may have to incur significant expenses in order tocomply or we might have to restrict our operations. In addition, if we do not comply with applicable laws, regulations anddecisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties,any of which could have a material adverse effect upon our business, results of operations or financial condition. If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business developmentcompany or be precluded from 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 effectto such acquisition, at least 70.0% of our total assets are qualifying assets. We currently have more than 70.0% of qualifying assets. However, we may be precluded from investing in what webelieve are attractive investments if those investments are not qualifying assets for purposes of the 1940 Act. If we do notinvest a sufficient portion of our assets in qualifying assets, we could lose our status as a BDC, which would have a27 Table of Contentsmaterial adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent usfrom 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 isrequired to register under the Investment Company Act, which would subject us to additional regulatory restrictions andsignificantly decrease our operating flexibility. In addition, any such failure could cause an event of default under ouroutstanding indebtedness, which could have a material adverse effect on our business, financial condition or results ofoperations. Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations mayadversely affect our business. We and our portfolio companies are subject to laws and regulations at the local, state and federal level. These lawsand regulations, as well as their interpretation, may be changed from time to time. Accordingly, any changes in these lawsand regulations or failure to comply with them could have a material adverse effect on our business. Certain of these lawsand regulations pertain specifically to BDCs such as us. We are highly dependent on information systems and systems failures could significantly disrupt our business, whichmay, in turn, negatively affect the market 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 orinterruption 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. Our financial, accounting, data processing, backup or other operatingsystems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors includingevents 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. If we are unable to maintain the availability of our electronic data systems and safeguard the security of our data, ourability to conduct business may be compromised, which could impair our liquidity, disrupt our business, damage ourreputation and cause losses. Cybersecurity refers to the combination of technologies, processes, and procedures established to protectinformation technology systems and data from unauthorized access, attack, or damage. We are subject to cybersecurity risks.Information cybersecurity risks have significantly increased in recent years and, while we have not experienced any materiallosses relating to cyber attacks or other information security breaches, we could suffer such losses in the future. Our computersystems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code andother events that could have a security impact. If one or more of such events occur, this potentially could jeopardizeconfidential and other information, including nonpublic personal information and sensitive business data, processed andstored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions inour operations or the operations of our customers or counterparties. This could result in significant losses, reputationaldamage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results ofoperations. Privacy and information security laws and regulation changes, and compliance with those changes, may result incost increases due to system changes and the development of new administrative processes. In addition, we28 Table of Contentsmay be required to expend significant additional resources to modify our protective measures and to investigate andremediate vulnerabilities or other exposures arising from operational and security risks. We currently do not maintaininsurance coverage relating to cybersecurity risks, and we may be required to expend significant additional resources tomodify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject tolitigation 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. Weoutsource certain functions, and these relationships allow for the storage and processing of our information, as well ascustomer, counterparty, employee and borrower information. While we engage in actions to reduce our exposure resultingfrom outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or othercybersecurity 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 inwhich we invest and harm our business, operating results and financial condition. Terrorist attacks, acts of war or natural disasters may disrupt our operations, as well as the operations of thebusinesses in which we invest. These events have created, and continue to create, economic and political uncertainties andhave contributed to global economic instability. Future terrorist activities, military or security operations, or naturaldisasters could further weaken the domestic or global economy. These events could create additional uncertainties, whichmay negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverseimpact on our business, operating results and financial condition. Losses from terrorist attacks and natural disasters aregenerally uninsurable. RISKS RELATED TO OUR INVESTMENTS Our 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 keyemployees. Therefore, the death, disability, resignation, termination, or significant under-performance of one ormore of these persons could have a material adverse impact on our portfolio company and, in turn, on us. ·Portfolio companies may have unpredictable operating results, could become parties to litigation, may be engagedin rapidly changing businesses with products subject to a substantial risk of obsolescence and may requiresubstantial additional capital to support their operations, finance expansion or maintain their competitive position. ·Most of our acquisition targets are private companies. Private companies may not have readily publicly availableinformation about their businesses, operations and financial condition. Consequently, we rely on the ability of ourmanagement team and investment professionals to obtain adequate information to evaluate the potential returnsfrom making acquisitions for both CSWC and our existing portfolio companies. If we are unable to uncover allmaterial information about these acquisition targets, we may not make a fully informed investment decision andmay lose all or part of our investment. ·Portfolio companies may have shorter operating histories, narrower product lines, smaller market shares and/or moresignificant customer concentration than larger businesses, which tend to render them more vulnerable tocompetitors’ actions and market conditions, as well as general economic downturns. ·Portfolio companies may have limited financial resources and may be unable to meet their obligations under theirdebt instruments that we hold, which may be accompanied by a deterioration in the value of any collateral and areduction in the likelihood of us realizing any guarantees from subsidiaries or affiliates of our portfolio companiesthat we may have obtained in connection with our investment, as well as a corresponding decrease in the value ofthe 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 directors may serve as directors on the boards of these companies. To the extent that litigation29 Table of Contentsarises out of our investments in these companies, our officers and directors 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 (throughour 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 wecould be subject to lender liability claims. Even though we may have structured certain of our investments as secured loans, if one of our portfolio companieswere to go bankrupt, depending on the facts and circumstances, and based upon principles of equitable subordination asdefined by existing case law, a bankruptcy court could subordinate all or a portion of our claim to that of other creditors andtransfer any lien securing our subordinated claim to the bankruptcy estate. The principles of equitable subordination definedby 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 managerialassistance to the bankrupt debtor. We may also be subject to lender liability claims for actions taken by us with respect to aborrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to alender’s liability claim, including as a result of actions taken in rendering significant managerial assistance or actions tocompel 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. Thesesecurities are generally subject to legal and other restrictions on resale or will otherwise be less liquid than publicly tradedsecurities. As a result, we do not expect to achieve liquidity in our investments in the near-term. The illiquidity of theseinvestments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate allor a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recordedthese investments 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 havehistorically generated higher average total returns than fixed-income securities over the long term, equity securities have alsoexperienced significantly more volatility in those returns. The equity securities we acquire may fail to appreciate and maydecline in value or become worthless, and our ability to recover our investment depends on our 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 preferredsecurities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights. As a Regulated Investment Company, we may have certain regulatory restrictions that could preclude us from makingadditional investments in our portfolio companies. We may not have the ability to make additional investments in our portfolio companies. After our initialinvestment in a portfolio company, we may be called upon from time to time to provide additional funds to that company orhave the opportunity to increase our investment or make follow-on investments. Any decisions not to make a follow-oninvestment or any inability on our part to make such an investment may have a negative impact on a portfolio company inneed of such an investment, may result in a missed opportunity for us to increase our participation in a successful operationor may reduce the expected return on the investment. 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 investmentscould be negatively affected by decreases in market interest rates. In addition, an increase in interest rates would make itmore expensive for us to use debt to finance our investments. As a result, a significant increase in market interest rates couldincrease our cost of capital, which would reduce our net investment income. Also, an increase in interest rates30 Table of Contentsavailable to investors could make an investment in our securities less attractive than alternative investments, a situationwhich could reduce the value of our securities. Conversely, a decrease in interest rates may have an adverse impact on ourreturns by requiring us to seek lower yields on our debt investments and by increasing the risk that our portfolio companieswill prepay our debt investments, resulting in the need to redeploy capital at potentially lower rates. A decrease in marketinterest 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 rateassets and liabilities are not perfectly hedged, our net investment income may decrease based on changes in market interestrates. An increase in market interest rates may also decrease the fair value of our fixed rate investments, as these may be lessattractive securities in a rising rate environment. Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations andreduce 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 will generally reinvest these proceeds in temporary investments, pending their future investment in newportfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaidand we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio companymay also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adverselyaffected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments couldnegatively impact our return 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, whichcould lead to a default and, potentially, acceleration of its loans and foreclosure on its secured assets. These events couldtrigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations,including under the debt or equity securities we hold. We may also incur expenses to the extent necessary to recover upon adefault or to negotiate new terms with the defaulting portfolio company. Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control bysenior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay infull 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 aportfolio company to secure senior debt owed by the portfolio company to commercial banks or other traditional lenders.Often the senior lender has procured covenants from the portfolio company prohibiting the incurrence of additional secureddebt without the senior lender’s consent. Prior to and as a condition of permitting the portfolio company to borrow moneyfrom us secured by the same collateral pledged to the senior lender, the senior lender will require assurances that it willcontrol the disposition of any collateral in the event of bankruptcy or other default. In many cases, the senior lender willrequire us to enter into an “intercreditor agreement” prior to permitting the portfolio company to borrow from us. Typicallythe intercreditor agreements we are requested to execute expressly subordinate our debt instruments to those held by thesenior lender and further provide that the senior lender shall control: (1) the commencement of foreclosure or otherproceedings to liquidate and collect on the collateral; (2) the nature, timing and conduct of foreclosure or other collectionproceedings; (3) the amendment of any collateral document; (4) the release of the security interests in respect of anycollateral; and (5) the waiver of defaults under any security agreement. Because of the control we may cede to senior lendersunder intercreditor agreements we may enter, we may be unable to realize the proceeds of any collateral securing some of ourloans. 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 marketcompanies. Our portfolio companies may 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 instruments may entitle the holders to receive payment of interest31 Table of Contentsor principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in whichwe invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company,holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receivepayment in full before we receive any distribution. After repaying its senior creditors, the portfolio company may not haveany remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments inwhich we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in theevent 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 equitysecurities. Investments in equity securities involve a number of significant risks, including the risk of further dilution as aresult of additional issuances, inability to access additional capital and failure to pay current distributions. Investments inpreferred securities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited votingrights. 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 notappreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equityinterests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any otherlosses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event,such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests.We often 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 exercise these put rights for the consideration provided in our investment documents if theissuer is in financial distress. RISKS RELATED TO OUR COMMON STOCK Investing 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 than alternative investment options. Our investments in portfolio companies may be highlyspeculative, and therefore, an investment in our common stock may not 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 atcurrent market value, which has often been below net asset value. Shares of closed-end investment companies frequentlytrade at discounts from net asset value, which is a risk separate and distinct from the risk that a fund’s performance will causeits 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 affectedby numerous factors, including: ·Market conditions;·Our investment results;·Trading volume of our stock;·Our investment results;·Departure of our key personnel;32 Table of Contents·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 beno 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 ourholdings or in a combination of all three. All dividends will be paid at the discretion of our Board of Directors and willdepend upon our financial condition, maintenance of our RIC status, and compliance with applicable BDC 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 ofthe cash you receive. We may distribute taxable dividends that are payable in part in our stock. Under certain applicable provisions ofthe Code and the Treasury regulations, distributions payable by us in cash or in shares of stock (at the shareholders election)would satisfy the Annual Distribution Requirement. The IRS has issued private letter rulings providing that a dividendpayable in stock or in cash at the election of the shareholders will be treated as a taxable dividend eligible for the dividendspaid deduction provided that at least 20.0% 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 asordinary income (or as long-term capital gain to the extent such dividend is properly reported as a capital gain dividend) tothe extent of our current and accumulated earnings and profits for U.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 a U.S. shareholdersells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included inincome with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, withrespect to non-U.S. shareholders, we may be required to withhold U.S. tax with respect to such dividends, including in respectof all or a portion of such dividends payable in stock. In addition, if a significant number of our shareholders determine tosell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of ourstock. Item 1B. Unresolved Staff Comments We have no unresolved comments from the staff of the SEC. Item 2. Properties We do not own any real estate or other physical properties. We maintain our offices at 5400 Lyndon B. JohnsonFreeway, Suite 1300, Dallas, Texas 75240, where we lease approximately 9,261 square feet of office space pursuant to a leaseagreement expiring in January 2022. We believe that our offices are adequate to meet our current and expected future needs. Item 3. Legal Proceedings We may, from time to time, be involved in litigation arising out of our operations in the normal course of business orotherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of ourportfolio companies. As of the date hereof, we are not a party to, and none of our assets are subject to, any material pendinglegal proceedings and are not aware of any claims that could have a materially adverse effect on our financial position,results of operations or cash flows. Item 4. Mine Safety Disclosures Not applicable.33 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of EquitySecurities PRICE RANGE OF COMMON STOCK AND HOLDERS Market Information Our common stock is traded on NASDAQ under the symbol “CSWC.” The following high and low selling prices forshares during each quarter of the last two fiscal years were taken from quotations provided to the Company by NASDAQ. Theprices on and before September 30, 2015 have not been adjusted to reflect the Share Distribution. Quarter Ended High Low March 31, 2017 $16.91 $15.04 December 31, 2016 16.86 13.81 September 30, 2016 15.05 13.75 June 30, 2016 14.37 13.49 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 On May 31, 2017, the last sale price of our common stock on the NASDAQ was $15.81 per share, and there wereapproximately 500 holders of record of 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 of common stock will trade at a discount from net asset value per share or at premiums that areunsustainable over the long term are separate and distinct from the risk that our net asset value per share will decrease. It isnot possible to predict whether our common stock will trade at, above, or below net asset value per share. DISTRIBUTIONS We intend to make distributions on a quarterly basis to our shareholders of substantially all of our taxable income.In lieu of cash, we may make deemed distributions of certain net capital gains to our shareholders. 34 Table of ContentsThe payment dates (including the dividend declared on May 31, 2017 to be paid on July 3, 2017) and amounts ofcash dividends per share on a post-split basis for the past five years are as follows: Payment Date Cash Dividend 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 October 1, 2016 0.11 January 3, 2017 0.17 April 3, 2017 0.45 July 3, 2017 0.21 1On April 3, 2017, CSWC paid a regular dividend of 0.19 per share and a special dividend of 0.26 per share. The amounts and timing of cash dividend payments have generally been dictated by requirements of the Coderegarding the distribution of taxable net investment income (ordinary income) of regulated investment companies. On March 1, 2016, we entered into a share repurchase agreement with Cantor Fitzgerald & Co. This agreementestablished a plan in compliance with the requirements of Rules 10b5-1(c)(1)(i)(B) and 10b-18 under the SecuritiesExchange Act of 1934. The plan was established pursuant to a $10 million share repurchase program that the Board approvedon January 20, 2016. This agreement became effective immediately and shall terminate on the earliest of: (1) the date onwhich a total of $10 million worth of common shares have been purchased under the plan; (2) the date on which the terms setforth in the purchase instructions have been met; or (3) the date that is one trading day after the date on which insider notifiesbroker in writing that this agreement shall terminate. As of March 31, 2017 and 2016, no shares have been purchased underthe plan. Distribution Policy We generally intend to make distributions on a quarterly basis to our shareholders of substantially all of our taxableincome. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount atleast equal to the sum of (1) 98.0% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess ofcapital losses for the one year period ended each October 31, and (3) any ordinary income and net capital gains for thepreceding year that were not distributed during that year. We will not be subject to excise taxes on amounts on which we arerequired to pay corporate income tax (such as retained net capital gains). In order to obtain the tax benefits applicable toRICs, we will be required to distribute to our shareholders with respect to each taxable year at least 90.0% of our ordinaryincome and realized net short-term capital gains in excess of realized net long-term capital losses. We may retain forinvestment 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 theyreceived an actual distribution of the capital gains we retain and then reinvested the net after-tax proceeds in our commonstock. Our shareholders also may be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to theirallocable 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 ofsome or all realized net long-term capital gains in excess of realized net short-term capital losses. We can offer no assurancethat we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will beprohibited from making distributions if doing so causes us to fail to maintain35 1Table of Contentsthe asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See“Business — Election to be Regulated as a Business Development Company and Regulated Investment Company –Regulation as a Business Development Company” 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 onbehalf of our common shareholders if 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 taxconsequences as are shareholders who elect to receive their dividends in cash. A shareholder’s basis for determining gain orloss upon the sale of stock received in a dividend from us will be equal to the total dollar amount of the dividend payable tothe shareholder. Any stock received in a dividend will have a holding period for tax purposes commencing on the dayfollowing 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 moredetailed discussion, see “Business — Election to be Regulated as a Business Development Company and RegulatedInvestment Company – Regulation as a Business Development Company” included in Item 1 of Part I of this Annual Reporton Form 10-K. Performance Graph The following graph compares our cumulative total shareholder return during the last five years (based on themarket price of our common stock and assuming reinvestment of all dividends, prior to any tax effect) with the NASDAQTotal Return Index, the Russell 2000 Total Return Index and the KBW Regional Bank Total Return Index. The graphassumes initial investment of $100 on March 31, 2012 and reinvestment of dividends. 36 Table of Contents Item 6. Selected Financial Data The following table provides selected financial data relating to our historical financial condition and results ofoperations as of and for each of the years ended March 31, 2013 through 2017. This data should be read in conjunction withItem 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidatedfinancial statements and related notes. Selected Consolidated Financial Data(In thousands except per share data) Year ended March 31, 2017 2016 2015 2014 2013 Income statement data: Investment income: Interest and dividends: $22,324 $8,033 $9,231 $11,915 $10,100 Interest income from cash and cash equivalents 166 386 122 67 71 Fees and other income 984 741 595 625 664 Total investment income 23,474 9,160 9,948 12,607 10,835 Operating expenses: Compensation-related expenses 8,217 9,515 6,440 5,489 5,628 Interest expense 989 - - - - General, administrative and other 4,601 11,610 5,683 2,963 2,710 Total operating expenses 13,807 21,125 12,123 8,452 8,338 Income (loss) before income taxes 9,667 (11,965) (2,175) 4,155 2,497 Income tax expense (benefit) 1,779 (1,278) 270 (739) 590 Net investment income (loss) 7,888 (10,687) (2,445) 4,894 1,907 Net realized gains (losses): Non-control/Non-affiliate investments 3,992 (9,575) 8,226 14,084 2,660 Affiliate investments 3,876 (1,458) 157,213 - 66,037 Control investments 28 231 (1,175) - 20,861 Net realized gains (losses) on investments 7,896 (10,802) 164,264 14,084 89,558 Net unrealized appreciation (depreciation) on investments 7,690 16,089 (108,377) 93,032 16,367 Net realized and unrealized gains (losses) on investments 15,586 5,287 55,887 107,116 105,925 Net increase (decrease) in net assets resulting from operations $23,474 $(5,400) $53,442 $112,010 $107,832 Net investment income (loss) per share - basic and diluted $0.50 $(0.68) $(0.16) $0.32 $0.13 Net realized earnings per share - basic and diluted $1.00 $(1.37) $10.45 $1.24 $6.03 Net increase (decrease) in net assets from operations - basicand diluted $1.48 $(0.35) $3.44 $7.32 $7.09 Net asset value per common share $17.80 $17.34 $49.30 $49.98 $43.30 Total dividends/distributions declared per common share $0.79 $0.14 $0.20 $0.20 $5.29 Weighted average number of shares outstanding - basic 15,825 15,636 15,492 15,278 15,177 Weighted average number of shares outstanding – diluted 15,877 15,724 15,531 15,298 15,207 1“Net realized earnings per share – basic and diluted” is calculated as the sum of “Net investment income (loss)” and “Net realized gain(loss) on investments” divided by weighted average shares outstanding – basic and diluted. 37 1Table of Contents Year ended March 31, 2017 2016 2015 2014 2013 Balance sheet data: Assets: Investments at fair value $286,880 $178,436 $535,536 $677,920 $574,187 Cash and cash equivalents 22,386 95,969 225,797 88,163 81,767 Interest, escrow and other receivables 4,308 6,405 4,418 1,371 2,756 Net pension assets - - 10,294 10,962 8,762 Deferred tax asset 2,017 2,342 - - - Other assets 10,161 1,341 827 278 200 Total assets $325,752 $284,493 $776,872 $778,694 $667,672 Liabilities: Credit facility $25,000 $- $- $- $- Other liabilities 5,996 9,028 4,923 3,263 3,102 Dividends payable 7,191 625 - - - Accrued restoration plan liability 2,170 2,205 3,119 3,103 2,650 Deferred income taxes 323 - 1,412 1,940 2,143 Total liabilities 40,680 11,858 9,454 8,306 7,895 Net assets 285,072 272,635 767,418 770,388 659,777 Total liabilities and net assets $325,752 $284,493 $776,872 $778,694 $667,672 Other data: Number of portfolio companies 28 23 22 27 28 Expense ratios (as percentage of average net assets): Total expenses, excluding interest expense 4.59% 4.48% 1.59% 1.18% 1.36% 38 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and the notesthereto included elsewhere in this Annual Report on Form 10-K. Statements we make in the following discussion whichexpress a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements thatare subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results,could differ materially from those we express in the following discussion as a result of a variety of factors, including therisks and uncertainties we have referred to under the headings “Cautionary Statement Concerning Forward-LookingStatements” and “Risk Factors” in Part I of this report. OVERVIEW Capital Southwest Corporation (“CSWC” or the “Company”) is an investment company that specializes inproviding customized debt and equity financing to lower middle market (“LMM”) companies and debt capital to uppermiddle market (“UMM”) companies in a broad range of investment segments located primarily in the United States. Ourprincipal investment objective is to produce attractive risk-adjusted returns by generating current income from our debtinvestments and capital appreciation from our equity and equity related investments. Our investment strategy is to partnerwith 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 bysecurity interests in portfolio company assets, coupled with equity interests. We focus on investing in companies with histories of generating revenues and positive cash flow, establishedmarket positions and proven management teams with strong operating discipline. We target senior and subordinatedinvestments in lower middle market companies, as well as first and second lien syndicated loans in upper middle marketcompanies. Our target LMM companies typically have annual EBITDA between $3.0 million and $15.0 million, and ourLMM investments generally range in size from $5.0 million to $20.0 million. Our UMM investments generally includesyndicated first and second lien loans in companies with EBITDA generally greater than $50.0 million, and typically rangein size from $3.0 million to $10.0 million. We seek to fill the financing gap for LMM businesses, which, historically, have had more limited access tofinancing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunityfor us to meet the financing needs of LMM companies while also negotiating favorable transaction terms and equityparticipations. Our ability to invest across a company’s capital structure, from secured loans to equity securities, allows us tooffer portfolio companies a comprehensive suite of financing options. Providing customized financing solutions is importantto LMM companies. We generally seek to partner directly with entrepreneurs, management teams and business owners inmaking our investments. Our LMM debt investments are generally secured by a first lien on the assets of the portfoliocompany and typically have a term of between five and seven years from the original investment date. We believe that ourinvestment strategy with respect to LMM companies has limited correlation to the broader debt and equity markets. Our investments in UMM companies primarily consist of direct investments in or secondary purchases of interestbearing debt securities in privately held companies that are generally larger in size than the LMM companies included in ourportfolio. Our UMM debt investments are generally secured by either a first or second priority lien on the assets of theportfolio company and typically have an expected duration of between three and seven years from the original investmentdate.39 Table of ContentsFORMATION AND LAUNCH OF A SENIOR LOAN FUND WITH MAIN STREET CAPITAL CORPORATION On September 9, 2015, we entered into an agreement to form and co-manage I-45 SLF LLC (“I-45”), a senior loanfund that invests primarily in syndicated senior secured loans in UMM companies, with Main Street Capital Corporation(“Main Street”). The initial equity capital commitment to I-45 SLF totaled $85.0 million, consisting of $68.0 million from usand $17.0 million from Main Street. We own 80.0% of I-45 SLF and have a profits interest of 75.6%, while Main Street owns20.0% and has a profits interest of 24.4%. I-45 SLF’s Board of Managers makes all investment and operational decisions forthe fund, and consists of equal representation from our Company and Main Street. PORTFOLIO COMPOSITION Our LMM investments primarily consist of secured debt, subordinated debt, equity warrants and direct equityinvestments in privately held, LMM companies based in the United States. Our LMM portfolio companies generally haveannual EBITDA between $3.0 million and $15.0 million, and our LMM investments typically range in size from $5.0 millionto $20.0 million. The LMM debt investments are typically secured by either a first or second priority lien on the assets of theportfolio company, generally bear interest at floating rates, and generally have a term of between five and seven years fromthe original investment date. Our UMM investments primarily consist of direct investments in or secondary purchases of interest-bearing debtsecurities in privately held companies based in the United States that are generally larger in size than the LMM companiesincluded in our portfolio with EBITDA generally greater than $50.0 million. Our UMM investments typically range in sizefrom $3.0 million to $10.0 million. Our UMM debt investments are generally secured by ether a first or second priority lienon the assets of the portfolio company and typically have a term of between three and seven years from the originalinvestment date. The total value of our investment portfolio was $286.9 million as of March 31, 2017, as compared to $178.4 millionas of March 31, 2016. As of March 31, 2017, we had investments in 28 portfolio companies with an aggregate cost of $250.5million. As of March 31, 2016, we had investments in 23 portfolio companies with an aggregate cost of $150.1 million. The following tables provide a summary of our investments in UMM and LMM companies as of March 31, 2017and 2016 (excluding our investment in I-45): As of March 31, 2017 UMM LMM (a) (dollars in millions)Number of portfolio companies 17 10Fair value $97,180 $126,305Cost $95,918 $93,822% of portfolio at cost - debt 100.0% 74.8%% of portfolio at cost - equity - 25.2%% of debt investments at cost secured by first priority lien 51.2% 61.5%Weighted average annual effective yield (b) 9.6% 11.4%Weighted average EBITDA (c) $101.3 $7.4Weighted average leverage through CSWC security (c)(d) 4.0 3.1(a)At March 31, 2017, we had equity ownership in approximately 70.0% of our LMM investments, and the average fully diluted equityownership in those portfolio companies was approximately 34.6%.(b)The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of March31, 2017, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debtinvestments on non-accrual status. Weighted-average annual effective yield is higher than what an investor in shares in our common stockwill realize on its investment because it does not reflect our expenses or any sales load paid by an investor.(c)Weighted average metrics are calculated using investment cost basis weighting. (d)Includes CSWC debt investments only.40 Table of Contents As of March 31, 2016 UMM LMM (a) (dollars in millions)Number of portfolio companies 13 9Fair value $64,579 $77,519Cost $65,131 $48,179% of portfolio at cost - debt 100.0% 58.6%% of portfolio at cost - equity - 41.4%% of debt investments at cost secured by first priority lien 41.7% 27.3%Weighted average annual effective yield (b) 9.6% 11.7%Weighted average EBITDA (c)(d) $72.5 $8.2Weighted average leverage through CSWC security (c)(e) 4.7 3.0 (a)At March 31, 2016, we had equity ownership in approximately 77.8% of our LMM investments, and the average fully diluted equityownership in those portfolio companies was approximately 28.5%.(b)The weighted-average annual effective yields were computed using the effective interest rates for all debt investments at cost as of March31, 2016, including accretion of original issue discount but excluding fees payable upon repayment of the debt instruments and any debtinvestments on non-accrual status. Weighted-average annual effective yield is higher than what an investor in shares in our common stockwill realize on its investment because it does not reflect our expenses or any sales load paid by an investor.(c)Weighted average metrics are calculated using investment cost basis weighting.(d)Excludes certain portfolio companies for which EBITDA is not a meaningful valuation metric.(e)Includes CSWC debt investments only. As of March 31, 2017 and March 31, 2016, our investment portfolio consisted of the following investments: Percentage of Percentage of Cost Total Portfolio Fair Value Total Portfolio (dollars in millions) March 31, 2017: 1st lien loans $106.8 42.6%$107.8 37.6%2nd lien loans 46.9 18.7 47.2 16.5 Subordinated debt 12.4 4.9 12.5 4.3 Preferred equity, common equity &warrants 23.6 9.5 56.0 19.5 I-45 SLF, LLC 60.8 24.3 63.4 22.1 $250.5 100.0%$286.9 100.0% March 31, 2016: 1st lien loans $39.3 26.2%$39.5 22.1%2nd lien loans 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%1Included in 1 lien loans are loans structured as first lien last out loans. These loans may in certain cases be subordinated in paymentpriority to other senior secured lenders. Portfolio Asset Quality We utilize an internally developed investment rating system to rate the performance and monitor the expected levelof returns for each debt investment in our portfolio. The investment rating system takes into account both quantitative41 1stTable of Contentsand qualitative factors of the portfolio company and the investments held therein, including each investment’s expectedlevel of returns and the collectability of our debt investments, comparisons to competitors and other industry participantsand the portfolio company’s future outlook. The ratings are not intended to reflect the performance or expected level ofreturns of our equity investments. ·Investment Rating 1 represents the least amount of risk in our portfolio. The investment is performing materiallyabove underwriting expectations and the trends and risk factors are generally favorable.·Investment Rating 2 indicates the investment is performing as expected at the time of underwriting and the trendsand risk factors are generally favorable to neutral. ·Investment Rating 3 involves an investment performing below underwriting expectations and the trends and riskfactors are generally neutral to negative. The portfolio company or investment may be out of compliance withfinancial 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, thetrends and risk factors are generally negative and the risk of the investment has increased substantially. Interest andprincipal 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 atfair value as of March 31, 2017 and 2016: As of March 31, 2017 Debt Investments at Percentage of Investment Rating Fair Value Debt Portfolio (dollars in thousands) 1 $ 12,173 7.3%2 155,276 92.7 3 - - 4 - - Total $167,449 100.0% As of March 31, 2016 Debt Investments at Percentage of Investment Rating Fair Value Debt Portfolio (dollars in thousands) 1 $4,626 5.0%2 88,205 95.0 3 - - 4 - - Total $92,831 100.0% Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to becollected. When we do not expect the debtor to be able to service all of its debt or other obligations, we will generallyestablish 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 topay contractual amounts due. As of March 31, 2017 and 2016, we did not have any investments on non-accrual status. 42 Table of ContentsInvestment Activity During the year ended March 31, 2017, we made investments in fourteen portfolio companies, including twofollow-ons in existing portfolio companies, totaling $145.8 million. We received proceeds from sales and repayments of debtinvestments in portfolio companies of $45.6 million. In addition, we received proceeds from sales and return of capital ofequity investments in portfolio companies totaling $7.7 million and recognized net realized gains on those sales totaling$7.2 million in the year ended March 31, 2017. During the year ended March 31, 2016, we made seventeen new investments totaling $123.0 million. We receivedcontractual principal repayments totaling approximately $0.5 million. We received proceeds related to a debt investment inone portfolio company of $0.2 million and wrote off the remainder, resulting in a realized loss of $1.2 million. We receivedproceeds related to the sales of certain partnership interests totaling $5.2 million and recognized net realized losses on thosesales totaling $4.3 million. In addition, we received proceeds related to the sales of certain equity securities of our portfoliocompanies totaling $14.2 million and recognized net realized losses on those sales totaling $5.3 million in the year endedMarch 31, 2016. 43 Table of ContentsTotal portfolio investment activity for the years ended March 31, 2017 and 2016 was as follows (in thousands): Preferred & 1st Lien 2nd Lien Subordinated Common I-45 SLF, Year ended March 31, 2017 Loans Loans Debt Equity LLC Total Fair value, beginning of period $39,491 $38,227 $15,114 $49,267 $36,337 $178,436 New investments 101,857 17,133 - 3,174 24,000 146,164 Proceeds from sales of investments - (2,507) - (7,955) - (10,462) Principal repayments received (36,168) (7,050) - (60) - (43,278) Accretion of loan discounts 303 97 34 - - 434 Realized gain (loss) 1,515 207 - 6,174 - 7,896 Unrealized gain (loss) 819 1,070 52 2,691 3,058 7,690 Conversion of security from debt to equity - - (2,715) 2,715 - - Fair value, end of period $107,817 $47,177 $12,485 $56,006 $63,395 $286,880 Weighted average yield on debtinvestments at end of period 10.28%Weighted average yield on totalinvestments at end of period 10.49% Preferred & 1st Lien 2nd Lien Subordinated Common Partnership I-45 SLF, Year ended March 31, 2016 Loans Loans Debt Equity Interest LLC 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 ofinvestments (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 1,112 (463) 16,089 Decrease in unrealizedappreciation related to spin-offinvestments - - - (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 ontotal investments at end ofperiod 9.46% RESULTS OF OPERATIONS The composite measure of our financial performance in the Consolidated Statements of Operations is captioned “Netincrease (decrease) in net assets from operations” and consists of three elements. The first is “Net investment income (loss),”which is the difference between income from interest, dividends and fees and our combined operating and interest expenses,net of applicable income taxes. The second element is “Net realized gain (loss) on investments,” which is the differencebetween the proceeds received from the disposition of portfolio securities and their stated cost, net of applicable income taxexpense based on our tax year. The third element is the “Net increase (decrease) in unrealized appreciation on investments,”which is the net change in the market or fair value of our investment portfolio, compared with stated cost. It should be notedthat the “Net realized gain (loss) on investments” and “Net increase (decrease) in unrealized appreciation on investments” aredirectly related in that when an appreciated portfolio security is sold to realize a gain, a corresponding decrease in netunrealized appreciation occurs by transferring the gain associated with the transaction from being44 Table of Contents“unrealized” to being “realized.” Conversely, when a loss is realized on a depreciated portfolio security, an increase in netunrealized appreciation occurs. Comparison of years ended March 31, 2017 and March 31, 2016 Year ended March 31, Net Change 2017 2016 Amount % (in thousands) Total investment income $23,474 $9,160 $14,314 156.3%Total operating expenses (13,807) (21,125) 7,318 34.6%Pre-tax net investment income (loss) 9,667 (11,965) 21,632 180.8%Income tax expense (benefit) 1,779 (1,278) 3,057 239.2%Net investment income (loss) 7,888 (10,687) 18,575 173.8%Net realized gain (loss) on investments before income tax 7,896 (10,802) 18,698 173.1%Net increase (decrease) in net unrealized appreciation on investments 7,690 16,089 (8,399) 52.2%Net increase (decrease) in net assets from operations $23,474 $(5,400) $28,874 (534.7)% Investment Income Total investment income consisted of interest income, management fees, dividend income and other income foreach applicable period. For the year ended March 31, 2017, total investment income was $23.5 million, a $14.3 million, or156.3%, increase over total investment income of $9.2 million for the year ended March 31, 2016. This increase wasprimarily due to a $7.9 million, or 176.0% increase in interest income generated from our debt investments, as well as anincrease of $6.4 million, or 182.0% increase in dividend income due to dividends received from I-45 SLF LLC and MediaRecovery, Inc. Total investment income also includes interest income 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 invested during the year and fluctuationsin short-term interest rates. During the two years ended March 31, we had interest income from cash and cash equivalents of$0.2 million in 2017 and $0.4 million in 2016. We receive management fees primarily from our controlled affiliate investments which aggregated $0.4 million in2017 and $0.7 million in 2016. We also received other miscellaneous income of approximately $0.6 million and $0.1million during the years ended March 31, 2017 and 2016, respectively, related primarily to other portfolio company activity. Operating Expenses For the year ended March 31, 2017, total operating expenses were $13.8 million, a $7.3 million, or 34.6%, decreaseover total operating expenses of $21.2 million for the year ended March 31, 2016. Due to the nature of our business as aninvestment company, the majority of our operating expenses are related to employee and director compensation, officeexpenses, legal, professional and accounting fees and pension expenses. The decrease from 2016 is primarily due toexpenses of $7.0 million related to the Share Distribution incurred during 2016. Net Investment Income/Loss Primarily as a result of the $14.3 million increase in total investment income and the $7.3 million decrease inexpenses, net investment income for the fiscal year ended March 31, 2017 was $7.9 million compared to net investment lossof $10.7 million during the fiscal year ended March 31, 2016. 45 Table of ContentsIncrease/Decrease in Net Assets from Operations During the fiscal year ended March 31, 2017, we recognized realized gains totaling $7.9 million which consisted ofnet gains on the partial repayments of 22 non-control/non-affiliate investments, prepayment of five non-control/non-affiliateinvestments and the sale of certain equity securities. In addition, during the fiscal year ended March 31, 2017, we recorded a net increase in unrealized appreciation oninvestments totaling $7.7 million, consisting of net unrealized appreciation on our current portfolio of $15.1 million, thereversal of $7.1 million of net unrealized appreciation recognized in prior periods due to the realized gains noted above, andnet unrealized depreciation related to deferred tax associated with the Taxable Subsidiary of $0.3 million. During the fiscal year ended March 31, 2016, we recognized a total net realized loss of $10.8 million consisting ofthe difference between $19.7 million of proceeds from disposition of investments and $30.5 million of cost from four partialrepayments of investments and the disposition of twelve investments. In addition, for the fiscal year ended March 31, 2016, we recorded a net increase in unrealized appreciation oninvestments of $16.1 million, consisting of net unrealized appreciation on our current portfolio of $7.6 million and netunrealized appreciation reclassification adjustments of $8.5 million related to the realized gains and losses noted above. As a result of these events, our net increase in net assets from operations during the year ended March 31, 2017 was$23.5 million as compared to a decrease in net assets from operations of $5.4 million for the year ended March 31, 2016.46 Table of Contents Comparison 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)%Pre-tax net investment (loss) income (11,965) (2,175) (9,790) (450.1)%Income tax (benefit) expense (1,278) 270 (1,548) 573.3%Net investment (loss) income (10,687) (2,445) (8,242) (337.1)%Net realized (loss) gain on investments before income tax (10,802) 164,264 (175,066) 106.6%Net increase (decrease) in net unrealized appreciation on investments 16,089 (108,377) 124,466 114.8%Net (decrease) increase in net assets from operations $(5,400) $53,442 $(58,842) (110.1)% Investment Income Total investment income consisted of interest income, management fees, dividend income and other income foreach applicable period. For the year ended March 31, 2016, total investment income was $9.2 million, a $0.8 million, or7.9%, decrease over total investment income of $9.9 million for the year ended March 31, 2015. This decrease was primarilyattributable to a $5.5 million or 61.0%, decrease in dividend income principally due to the elimination of dividend incomefrom The RectorSeal Corporation as a result of the Share Distribution. This decrease was offset by dividend income of $1.8million from Media Recovery, Inc. and approximately $4.5 million of interest income generated from our debt investments.Total investment income also includes interest income we earn from the short-term investment of cash funds, and the annualamount of such income varies based upon the average level of funds invested during the year and fluctuations in short-terminterest rates. During the two years ended March 31, 2016, we had interest income from cash and cash equivalents of $0.4million in 2016 and $0.1 million in 2015. We receive management fees primarily from our controlled affiliate investments which aggregated $0.7 million in2016 and $0.6 million in 2015. We also received other miscellaneous income of approximately $0.1 million and $0.04million during the years ended March 31, 2016 and 2015, respectively, related primarily to other portfolio company activity. Operating Expenses Total operating expenses increased by $9.0 million, or 74.3% during the year ended March 31, 2016 as compared tothe year ended March 31, 2015. The increase in 2016 was primarily due to expenses of $7.0 million related to the ShareDistribution, as well as expenses of $1.3 million related to the spin-off compensation plan. Additionally, total compensationexpenses of $7.0 million include approximately $1.6 million of compensation expense for employees who transferred toCSWI following the Share Distribution. Net Investment Income/Loss Primarily as a result of the $0.8 million decrease in total investment income and the $9.0 million increase inexpenses, net investment loss for the fiscal 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. Increase/Decrease in Net Assets from Operations During the fiscal year ended March 31, 2016, we recognized a total net realized loss of $10.8 million consisting ofthe difference between $19.7 million of proceeds from disposition of investments and $30.5 million of cost from investmentsderived from the aforementioned sources. 47 Table of ContentsIn addition, for the fiscal year ended March 31, 2016, we recorded a net increase in unrealized appreciationon investments of $16.1 million, consisting of net unrealized appreciation on our current portfolio of $7.6 million and netunrealized appreciation reclassification adjustments of $8.5 million related 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 realizedgain of $112.9 million. We also sold our interests in Encore Wire Corporation, which resulted in a realized gain of $44.3million. We also sold our ownership in KBI Biopharma, Inc., for cash proceeds of $18.9 million and a realized gain of $14.4million. In addition, we sold our interests in Trax Holdings, Inc. for cash proceeds of $16.1 million, resulting in a realizedgain of $7.9 million. These gains were offset by a $14.8 million realized loss from the sale of Cinatra Clean Technologies,Inc., a $1.2 million realized loss related to the liquidation of Discovery Alliance, LLC, and a realized loss of $0.2 millionfrom the liquidation of Tristate Capital Holdings, Inc. In addition, for the fiscal year ended March 31, 2015, we recorded netunrealized depreciation of $108.4 million, consisting of net unrealized appreciation on our current portfolio of $98.6 millionand net unrealized depreciation reclassification adjustments of $207.0 million related to the realized gains and losses notedabove. 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 an increase in net assets from operations of $53.4 million for the year ended March 31, 2015. FINANCIAL LIQUIDITY AND CAPITAL RESOURCES Management believes that the Company’s cash and cash equivalents, cash available from investments, andcommitments under the Credit Facility are adequate to meet its needs for the next twelve months. Cash At March 31, 2017, we had cash and cash equivalents of approximately $22.4 million. Financing Transactions In August of 2016 we entered into a senior secured credit facility (the “Credit Facility”), which provides additionalliquidity to support our investment and operational activities, includes total commitments of $100.0 million from adiversified group of five lenders and matures in August 2020. The Credit Facility also contains an accordion feature whichallows us to increase the total commitments under the facility up to $150.0 million from new and existing lenders on thesame terms and conditions as the existing commitments. Borrowings under the Credit Facility bear interest on a per annum basis at a rate equal to the applicable LIBOR rate(1.13% as of March 31, 2017) plus 3.25% with no LIBOR floor. For the first six months following the close of the CreditFacility, CSWC paid unused commitment fees of 0.50% per annum on the unused lender commitments under the CreditFacility. Subsequent to that period, the unused commitment fee is 0.50% to 1.50% based on utilization. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (1) certainreporting requirements, (2) maintaining RIC and BDC status, (3) maintaining a minimum shareholders’ equity, (4)maintaining a minimum consolidated net worth, (5) maintaining a regulatory asset coverage of not less than 200.0%, (6)maintaining a consolidated interest coverage ratio of at least 2.5 to 1.0, and (7) at any time the outstanding advances exceed90.0% of the borrowing base, maintaining a minimum liquidity of not less than 10.0% of the covered debt amount. The Credit Facility also contains customary events of default, including, without limitation, nonpayment,misrepresentation of representations and warranties in a material respect, breach of covenant, bankruptcy, and change ofcontrol, with customary cure and notice provisions. If the Company defaults on its obligations under the Credit Facility, thelenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests.48 Table of ContentsThe Credit Facility is secured by (1) substantially all of the present and future property and assets of the Companyand the guarantors and (2) 100.0% of the equity interests in the Company’s wholly-owned subsidiaries. As of March 31,2017, all of the Company’s assets were pledged as collateral for the Credit Facility. At March 31, 2017, CSWC had $25.0 million borrowings outstanding under the Credit Facility. CSWC recognizedinterest expense related to the Credit Facility, including unused commitment fees and amortization of deferred loan costs of$1.0 million for the year ended March 31, 2017. The weighted average interest rate on the Credit Facility was 4.3% as ofMarch 31, 2017. As of March 31, 2017, CSWC was in compliance with all financial covenants under the Credit Facility. Our primary use of funds will be investments in portfolio companies, operating expenses and cash distributions toholders of our common stock. CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES The preparation of our financial statements in accordance with U.S. GAAP requires management to make certainestimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses for the periods covered by the financial statements. We have identifiedinvestment valuation and revenue recognition as our most critical accounting estimates. On an on-going basis, we evaluateour estimates, including those related to the matters below. These estimates are based on the information that is currentlyavailable to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual resultscould differ materially from those estimates under different assumptions or conditions. A discussion of our criticalaccounting policies follows. Valuation of Investments The most significant determination inherent in the preparation of our consolidated financial statements is thevaluation of our investment portfolio and the related amounts of unrealized appreciation and depreciation. As of March 31,2017 and 2016, our investment portfolio at fair value represented approximately 88.0% and 63.0% of our total assets,respectively. We are required to report our investments at fair value. We follow the provisions of FASB ASC 820, Fair ValueMeasurements and Disclosures ("ASC 820"). ASC 820 defines fair value, establishes a framework for measuring fair value,establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosurerequirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be sold in theprincipal market to independent market participants, which may be a hypothetical market. See Note 4 — “Fair ValueMeasurements” 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 portfoliomay differ materially from the values that would have been determined had a ready market for the securities actually existed.In addition, changes in the market environment, portfolio company performance, and other events may occur over the livesof the investments that may cause the gains or losses ultimately realized on these investments to be materially different thanthe valuations currently assigned. We determine the fair value of each individual investment and record changes in fair valueas unrealized appreciation or depreciation. The Board of Directors of CSWC (the “Board of Directors”) has the final responsibility for reviewing and approving,in good faith, our determination of the fair value for our investment portfolio and our valuation procedures, consistent with1940 Act requirements. We believe our investment portfolio as of March 31, 2017 and 2016 approximates fair value as ofthose dates based on the markets in which we operate and other conditions in existence on those reporting dates. 49 Table of ContentsRevenue Recognition Interest and Dividend Income Interest and dividend income is recorded on an accrual basis to the extent amounts are expected to becollected. Dividend income is recognized on the date dividends are declared. Discounts/premiums received to par on loanspurchased are capitalized and accreted or amortized into income over the life of the loan. Any remaining discount/premiumis accreted or amortized into income upon prepayment of the loan. In accordance with our valuation policy, accrued interestand dividend income is evaluated periodically for collectability. When we do not expect the debtor to be able to service allof its debt or other obligations, we will generally establish a reserve against interest income receivable, thereby placing theloan or debt security on non-accrual status, and cease to recognize interest income on that loan or debt security until theborrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s statussignificantly improves regarding ability to service debt or other obligations, it will be restored to accrual basis. Recently Issued Accounting Standards In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying thePresentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized liability bepresented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debtdiscounts. It is effective for annual reporting periods beginning after December 15, 2015. Subsequently, in August 2015, theFASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement ofDebt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 allows debt issuance costs for lines ofcredit to be presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement,regardless of whether there are outstanding borrowings on the line-of-credit arrangement. We adopted this guidance duringthe quarter ended September 30, 2016. In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize on the balance sheet aright-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases withterms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess theamount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospectivetransition approach, which includes a number of optional practical expedients that entities may elect to apply. The newguidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. Early application ispermitted. CSWC is currently evaluating the impact the adoption of this new accounting standard will have on itsconsolidated financial statements, but the impact of the adoption is not expected to be material. In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to EmployeeShare-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based paymenttransactions, including the income tax consequences, classification of awards as either equity or liabilities, and classificationon the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016, andinterim periods therein. Early application is permitted. CSWC completed its assessment of the impact the adoption of thisnew accounting standard will have on its consolidated financial statements, and based on our assessment, determined therewould be no material change to the Company’s consolidated financial statements as a result of the adoption of ASU 2016-09. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09supersedes the revenue recognition requirements under SAC Topic 605, Revenue Recognition, and most industry-specificguidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognizerevenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration towhich an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is requiredto perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations inthe contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in thecontract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance willsignificantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capitalmarkets. Additionally, the guidance requires improved disclosures as to the nature,50 Table of Contentsamount, timing and uncertainty of revenue that is recognized. In May 2016, the FASB issued ASU No. 2016-12, Revenuefrom Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients. This ASU clarifiedguidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters.The FASB tentatively decided to defer the effective date of the new revenue standard for public entities under U.S. GAAP forone year. The new guidance will be effective for the annual reporting period beginning after December 15, 2017, includinginterim periods within that reporting period. Early adoption would be permitted for annual reporting periods beginning afterDecember 15, 2016. CSWC completed its initial assessment in evaluating the potential impact on its consolidated financialstatements and based on its initial assessment determined that its financial contracts are excluded from the scope of ASU2014-09. As a result of the scope exception for financial contracts, the Company's management has determined that there willbe no material changes to the recognition timing and classification of revenues and expenses; additionally, the Company'smanagement does not expect the adoption of ASU 2014-09 to have a significant impact to pretax income upon adoption.The Company will continue to evaluate the impacts of ASU 2014-09 through the date of adoption to ensure that its initialassessment continues to remain accurate. Additionally, the Company is continuing its assessment of ASU 2014-09’s impacton its consolidated financial statement disclosures. OFF-BALANCE SHEET ARRANGEMENTS We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet thefinancial needs of our portfolio companies. These instruments may include commitments to extend credit and fund equitycapital and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in thebalance sheet. At March 31, 2017, we had a total of approximately $7.2 million in outstanding commitments related toequity capital commitments to I-45 that had not been fully called. CONTRACTUAL OBLIGATIONS As shown below, we had the following contractual obligations as of March 31, 2017. For information on our capitalcommitments, see Note 12 of the Notes to Consolidated Financial Statements. Payments Due By Period (In thousands) Total 1 Year 2-3 Years More Than Contractual Obligations 3 Years Operating lease obligations $1,238 $239 $506 $493 RECENT DEVELOPMENTS On April 3, 2017, CSWC paid regular dividends declared on February 28, 2017 in the amount of $3.0 million, or$0.19 per share, and special dividends declared in the amount of $4.2 million, or $0.26 per share. On May 10, 2017, CSWC announced that the Chairman of the Board, Joseph B. Armes has informed the Company’sBoard of Directors (the “Board”) of his decision not to stand for re-election at the Annual Meeting of Shareholders in August2017. The Company reported this along with the plan for replacing Mr. Armes in connection with the Company’s upcomingannual meeting on August 3, 2017 in an 8-K filed with the SEC on that day. On May 31, 2017, we announced our Board of Directors had declared a $0.21 dividend per share for the quarterended for June 30, 2017. The record date for the dividend is June 15, 2017. The payment date for the dividend is July 3,2017 Item 7A. Quantitative and Qualitative Disclosures about Market Risk Our investment portfolio consists of debt and equity securities of private companies. We are subject to financialmarket risks, including changes in interest rates for debt securities of private companies. Changes in interest rates may affectour interest income from portfolio investments and idle fund investments. Our risk management systems and procedures aredesigned to identify and analyze our risk, to set appropriate policies and limits and to continually monitor51 Table of Contentsthese risks. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, tothe extent of any debt investments that include floating interest rates. The majority of our debt investments are made witheither fixed interest rates or floating rates that are subject to contractual minimum interest rates for the term of the investment.As of March 31, 2017, approximately 92.5% of our debt investment portfolio (at fair value) bore interest at floating rates,100.0% of which were subject to contractual minimum interest rates. As of March 31, 2017, none of our idle fundinvestments bore interest at floating rates. Our investment performance is also a function of the value of our equity securities of portfolio companies’, whichmay be affected by economic cycles, competitive forces, and production costs including labor rates, raw material prices andcertain basic commodity prices. All of these factors may have an adverse effect on the value of our investments and on ournet asset value. 52 Table of Contents Item 8. Financial Statements and Supplementary Data Index to Financial Statements PageReports of Independent Registered Public Accounting Firm 54Consolidated Statements of Assets and Liabilities as of March 31, 2017 and 2016 56Consolidated Statements of Operations for Years Ended March 31, 2017, 2016 and 2015 57Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2017, 2016 and2015 58Consolidated Statements of Cash Flows for Years Ended March 31, 2017, 2016 and 2015 59Consolidated Schedules of Investments as of March 31, 2017 and 2016 60Notes to Consolidated Financial Statements 66 53 Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and ShareholdersCapital Southwest CorporationWe have audited the accompanying consolidated statements of assets and liabilities of Capital Southwest Corporation (aTexas corporation) and subsidiaries (the “Company”), including the consolidated schedules of investments, as of March 31,2017 and 2016, and the related consolidated statements of operations, changes in net assets, and cash flows for each of thethree years in the period ended March 31, 2017 and the selected per share data and ratios for each of the five years in theperiod ended March 31, 2017. Our audits of the basic consolidated financial statements included the Schedule ofInvestments In and Advances to Affiliates listed in the index appearing under Item 15(2). These financial statements, pershare data and ratios, and financial statement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements, per share data and ratios, and financial statementschedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements, including the consolidated schedules of investments, referred to abovepresent fairly, in all material respects, the financial position of Capital Southwest Corporation and subsidiaries as of March31, 2017 and 2016, and the results of their operations, changes in their net assets and their cash flows for each of the threeyears in the period ended March 31, 2017, and the selected per share data and ratios for each of the five years in the periodended March 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also inour opinion, the related financial statement schedule, when considered in relation to the basic consolidated financialstatements 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 control over financial reporting as of March 31, 2017, based on criteria established in the 2013Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO), and our report dated June 1, 2017 expressed and unqualified opinion./s/ GRANT THORNTON LLPDallas, TexasJune 1, 2017 54 Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and ShareholdersCapital Southwest CorporationWe have audited the internal control over financial reporting of Capital Southwest Corporation (a Texas corporation) andsubsidiaries (the “Company”) as of March 31, 2017, based on criteria established in the 2013 Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’smanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Management’s Report on InternalControl over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, 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 of effectiveness to future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofMarch 31, 2017, based on criteria established 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 statements of assets and liabilities, including the consolidated schedules of investments as of March 31,2017 and 2016, and the related consolidated statements of operations, changes in net assets, and cash flows for each of thethree years in the period ended March 31, 2017, and the selected per share data and ratios for each of the five years in theperiod ended March 31, 2017, and our report dated June 1, 2017 expressed an unqualified opinion on those consolidatedfinancial statements, selected per share data and ratios./s/ GRANT THORNTON LLPDallas, TexasJune 1, 2017 55 Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES(In thousands except share and per share data) March 31, March 31, 2017 2016 Assets Investments at fair value: Non-control/Non-affiliate investments (Cost: March 31, 2017 - $172,437,March 31, 2016 - $101,538) $175,731 $99,279 Affiliate investments (Cost: March 31, 2017 - $5,925, March 31, 2016 - $6,356) 7,138 10,618 Control investments (Cost: March 31, 2017 - $72,178, March 31, 2016 - $42,215) 104,011 68,539 Total investments (Cost: March 31, 2017 - $250,540, March 31, 2016 - $150,110) 286,880 178,436 Cash and cash equivalents 22,386 95,969 Receivables: Dividends and interest 3,137 1,752 Escrow 545 3,424 Other 626 219 Income tax receivable - 1,010 Deferred tax asset 2,017 2,342 Debt issuance costs (net of accumulated amortization of $366 and $ - as of March 31, 2017and March 31, 2016, respectively) 2,137 - Other assets 8,024 1,341 Total assets $325,752 $284,493 Liabilities Credit facility $25,000 $- Other liabilities 5,996 5,088 Payable for unsettled transactions - 3,940 Dividends payable 7,191 625 Accrued restoration plan liability 2,170 2,205 Deferred income taxes 323 - Total liabilities 40,680 11,858 Net Assets Common stock, $0.25 par value per share: authorized, 25,000,000 shares; issued,18,350,808 shares at March 31, 2017 and 18,065,518 shares at March 31, 2016 4,588 4,516 Additional capital 261,472 262,539 Accumulated net investment loss (1,457) (307) Accumulated net realized gain 8,390 1,498 Unrealized appreciation on investments, net of income taxes 36,016 28,326 Treasury stock - at cost, 2,339,512 shares (23,937) (23,937) Total net assets 285,072 272,635 Total liabilities and net assets $325,752 $284,493 Net asset value per share (16,011,296 shares outstanding at March 31, 2017 and15,726,006 shares outstanding at March 31, 2016) $17.80 $17.34 The accompanying Notes are an integral part of these Consolidated Financial Statements.56 Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands except share and per share data) Years Ended March 31, 2017 2016 2015 Investment income: Interest and dividends: Non-control/Non-affiliate investments $11,759 $4,409 $356 Affiliate investments 723 135 581 Control investments 9,842 3,489 8,294 Interest income from cash and cash equivalents 166 386 122 Fees and other income 984 741 595 Total investment income 23,474 9,160 9,948 Operating expenses: Compensation 6,330 7,310 5,625 Spin-off compensation plan 690 1,303 - Share-based compensation 1,197 1,181 1,027 Interest 989 - - Net pension expense (benefit) 166 (99) (280) Spin-off professional fees - 7,040 1,819 General and administrative 4,435 4,390 3,932 Total operating expenses 13,807 21,125 12,123 Income (loss) before income taxes 9,667 (11,965) (2,175) Income tax expense (benefit) 1,779 (1,278) 270 Net investment income (loss) $7,888 $(10,687) $(2,445) Realized gain (loss): Non-control/Non-affiliate investments 3,992 (9,575) 8,226 Affiliate investments 3,876 (1,458) 157,213 Control investments 28 231 (1,175) Total net realized gain (loss) on investments before income tax 7,896 (10,802) 164,264 Unrealized appreciation (depreciation) on investments: Portfolio company investments 8,013 16,089 (108,377) Income tax provision (323) - - Total net increase (decrease) in unrealized appreciation on investments 7,690 16,089 (108,377) Net realized and unrealized gain (loss) on investments $15,586 $5,287 $55,887 Net increase (decrease) in net assets from operations $23,474 $(5,400) $53,442 Pre-tax net investment income (loss) per share - basic and diluted $0.61 $(0.76) $(0.14) Net investment income (loss) per share - basic and diluted $0.50 $(0.68) $(0.16) Net increase (decrease) in net assets from operations - basic and diluted $1.48 $(0.35) $3.44 Weighted average shares outstanding – basic 15,824,879 15,635,597 15,491,870 Weighted average shares outstanding – diluted 15,877,331 15,723,617 15,530,974 The accompanying Notes are an integral part of these Consolidated Financial Statements.57 Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS(In thousands) Years Ended March 31, 2017 2016 2015 Operations: Net investment income (loss) $7,888 $(10,687) $(2,445) Net realized (loss) gain on investments 7,896 (10,802) 164,264 Net increase (decrease) in unrealized appreciation on investments, net of tax 7,690 16,089 (108,377) Net increase (decrease) in net assets from operations 23,474 (5,400) 53,442 Distributions from: Undistributed net investment income (8,132) (625) (3,083) Realized gains (4,428) (1,544) - Taxes incurred on deemed capital gain distributions - (2,948) (54,370) Distributions of CSW Industrials, Inc. Decrease in unrealized appreciation related to spin-off investments - (458,338) - Distribution from additional capital for spin-off - (26,279) - Spin-Off Compensation Plan distribution, net of tax of $692 , $ - and $ - for theyears ended March 31, 2017, 2016 and 2015, respectively (1,175) (1,261) - Capital share transactions: Change in pension plan funded status (6) - (789) Exercise of employee stock options 1,507 431 803 Share-based compensation expense 1,197 1,181 1,027 Increase (decrease) in net assets 12,437 (494,783) (2,970) Net assets, beginning of period 272,635 767,418 770,388 Net assets, end of period $285,072 $272,635 $767,418 The accompanying Notes are an integral part of these Consolidated Financial Statements.58 Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Years Ended March 31, 2017 2016 2015 Cash flows from operating activities Net increase (decrease) in net assets from operations $23,474 $(5,400) $53,442 Adjustments to reconcile net increase (decrease) in net assets from operations to net cash (usedin) provided by operating activities: Purchases and originations of investments (145,778) (123,014) (7,421) Proceeds from sales and repayments of debt investments in portfolio companies 44,568 529 1,701 Proceeds from sales and return of capital of equity investments in portfolio companies 7,692 19,637 203,991 Payment of accreted original issue discounts 1,218 12 - Depreciation and amortization 459 86 55 Net pension benefit (41) (308) (530) Realized (gain) loss on investments before income tax (7,896) 10,802 (164,264) Net increase (decrease) in unrealized appreciation (depreciation) on investments (8,013) (16,089) 108,377 Accretion of discounts on investments (434) (96) - Payment-in-kind interest (63) - - Stock option and restricted awards expense 1,197 1,181 1,027 Deferred income taxes 1,813 (363) (528) Changes in other assets and liabilities: (Increase) decrease in dividend and interest receivable (1,385) (1,675) 705 Decrease (increase) in escrow receivables 2,860 (570) (3,687) (Increase) decrease in other receivables (127) 1,173 (137) Decrease (increase) in tax receivable 1,010 (915) 72 (Increase) decrease in other assets (6,775) (601) (604) Increase (decrease) in other liabilities 602 165 2,085 (Decrease) increase in payable for unsettled transaction (3,940) 3,940 - Net cash (used in) provided by operating activities (89,559) (111,506) 194,284 Cash flows from financing activities Proceeds from credit facility 25,000 - - Debt issuance costs paid (2,503) - - Taxes incurred on deemed capital gain distribution - (2,948) (54,370) Dividends to shareholders (5,994) (1,544) (3,083) Proceeds from exercise of employee stock options 1,507 431 803 Spin-off Compensation Plan distribution (2,034) (1,261) - Cash distribution to CSW Industrials, Inc. - (13,000) - Net cash provided by (used in) financing activities 15,976 (18,322) (56,650) Net (decrease) increase in cash and cash equivalents (73,583) (129,828) 137,634 Cash and cash equivalents at beginning of period 95,969 225,797 88,163 Cash and cash equivalents at end of period $22,386 $95,969 $225,797 Supplemental cash flow disclosures: Cash paid for income taxes $289 $2,948 $54,732 Cash paid for interest 325 - - Supplemental disclosure of noncash financing activities: Dividend declared, not yet paid $7,191 $625 $- Noncash adjustment to realized gain for escrow receivable 118 - - Cost of Investments spun-off - 6,981 - Decrease in unrealized appreciation due to spin-off of CSWI - 458,338 - Net pension assets - 9,687 - Change in deferred tax liabilities - 3,391 - Spin-off Compensation Plan distribution accrued, not yet paid 345 513 - 1.These non-cash items are related to the spin-off of CSW Industrials, Inc. at September 30, 2015. The accompanying Notes are an integral part of these Consolidated Financial Statements. 59 1111Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS March 31, 2017 Current Type of Interest Fair Portfolio Company Investment Industry Rate Maturity Principal Cost Value Non-control/Non-affiliateInvestments AG KINGS HOLDINGS First Lien Food, agriculture &beverage L+8.50%(Floor 1.00%) 8/10/2021 $9,900,000 $9,720,743 $9,900,000 AMERICANTELECONFERENCING First Lien Telecommunications L+6.50% (Floor 1.00%) 12/8/2021 6,733,503 6,559,616 6,720,709 Second Lien L+9.50% (Floor 1.00%) 6/6/2022 2,005,714 1,929,670 1,965,600 AMWARE FULFILLMENT First Lien Distribution L+9.50% (Floor 1.00%) 5/21/2019 13,065,000 12,858,885 12,934,350 ARGON MEDICALDEVICES Second Lien Healthcare products L+9.50% (Floor 1.00%) 6/23/2022 5,000,000 4,871,024 5,000,000 BINSWANGER CORP. First Lien Consumer products& retail L+8.00%(Floor 1.00%) 3/9/2022 13,251,760 12,988,847 12,988,848 900,000 shares of common stock 900,000 900,000 13,888,847 13,888,848 CALIFORNIA PIZZAKITCHEN First Lien Restaurants L+6.00%(Floor 1.00%) 8/23/2022 4,975,000 4,929,234 4,975,995 CAST AND CREWPAYROLL, LLC Second Lien Media, marketing &entertainment L+7.75% (Floor 1.00%) 8/12/2023 3,705,263 3,685,537 3,671,916 DEEPWATERCORROSION SERVICES,INC. 127,004 shares of Series Aconvertible preferred stock Energy services(upstream) - - - 8,000,000 9,956,000 DIGITAL RIVER, INC. First Lien Software & ITservices L+6.50% (Floor 1.00%) 2/12/2021 7,032,285 7,001,500 7,067,446 DIGITAL ROOM INC. Second Lien Paper & forestproducts L+10.00%(Floor 1.00%) 5/21/2023 7,000,000 6,864,682 6,864,682 DUNN PAPER, INC. Second Lien Paper & forestproducts L+8.75%(Floor 1.00%) 8/26/2023 3,000,000 2,942,972 2,970,000 ELITE SEM, INC. First Lien Media, marketing &entertainment L+8.50%(Floor 1.00%) 2/1/2022 12,150,000 11,864,161 11,864,161 1,000 shares of common stock 12% PIK - - 1,019,667 1,020,000 12,883,828 12,884,161 IMAGINE! PRINTSOLUTIONS, INC. First Lien Media, marketing &entertainment L+6.00% (Floor 1.00%) 3/30/2022 4,853,233 4,800,146 4,913,898 INFOGROUP INC. First Lien Software & ITservices L+5.50%(Floor 1.50%) 5/26/2018 4,895,007 4,822,951 4,890,112 LIGHTING RETROFITINTERNATIONAL First Lien Environmentalservices L+9.75% (Floor 0.5%) 9/28/2021 10,222,222 10,126,394 10,126,394 LTI HOLDINGS, INC. Second Lien Industrial products L+9.25% (Floor 1.00%) 4/17/2023 7,000,000 6,853,685 6,825,000 PREPAID LEGALSERVICES, INC. Second Lien Consumer services L+9.00% (Floor 1.25%) 7/1/2020 5,000,000 4,955,404 5,029,000 60 1234588Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS March 31, 2017 Current Type of Interest Fair Portfolio Company Investment Industry Rate Maturity Principal Cost Value REDBOX AUTOMATEDRETAIL First Lien Gaming &leisure L+7.50% (Floor 1.00%) 9/27/2021 8,750,000 8,505,558 8,761,375 RESEARCH NOWGROUP, INC. Second Lien Business services L+8.75% (Floor 1.00%) 3/18/2022 7,000,000 6,918,134 6,860,000 RESTAURANTTECHNOLOGIES, INC. Second Lien Restaurants L+8.75% (Floor 1.00%) 11/23/2023 3,500,000 3,449,262 3,482,500 TAXACT, INC. First Lien Financial services L+6.00% (Floor 1.00%) 12/31/2022 2,775,000 2,722,263 2,775,000 VISTAR MEDIA INC. First Lien Media,marketing &entertainment L+10.00%(Floor 1.00%) 2/16/2022 11,000,000 9,898,494 9,898,494 Warrants 886,000 886,000 10,784,494 10,784,494 WATER PIK, INC. Second Lien Consumerproducts & retail L+8.75% (Floor 1.00%) 2/8/2021 4,473,684 4,385,853 4,507,237 WINZERCORPORATION Senior subordinated debt Distribution 11.00% 6/1/2021 8,100,000 7,976,347 7,976,347 Total Non-control/Non-affiliate Investments $172,437,029 $175,731,064 Affiliate Investments CHANDLER SIGNS, LP Senior subordinated debt Business services 12.00% 7/4/2021 $4,500,000 $4,425,310 $4,477,500 1,500,000 units of Class A-1common stock - - - 1,500,000 2,661,000 5,925,310 7,138,500 Total Affiliate Investments $5,925,310 $7,138,500 Control Investments I-45 SLF LLC 80% LLC equity interest Multi-sectorholdings - - - $60,800,000 $63,394,679 MEDIA RECOVERY,INC. 800,000 shares of Series Aconvertible preferred stock Industrialproducts - - - 800,000 5,590,249 4,000,002 shares of common stock - - - 4,615,000 32,248,751 5,415,000 37,839,000 TITANLINER, INC. 1,189,609 shares of Series Bconvertible preferred stock Energy services(upstream) 6% PIK - - 2,758,528 2,777,000 339,277 shares of Series Aconvertible preferred stock - - - 3,204,222 - 5,962,750 2,777,000 Total Control Investments $72,177,750 $104,010,679 TOTAL INVESTMENTS $250,540,089 $286,880,243 1.All debt investments are income-producing, unless otherwise noted. Equity investments are non-income producing, unless otherwise noted.2.All of the Company’s investments, unless otherwise noted, are encumbered as security for the Company’s senior secured credit facility.61 123461379, 10, 111112Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS March 31, 20173.The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime (“P”) and resetdaily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effect atMarch 31, 2017. Certain investments are subject to a LIBOR or Prime interest rate floor. Certain investments, as noted, accrue payment-in-kind (“PIK”) interest.4.Investments are carried at fair value in accordance with the Investment Company Act of 1940 (the “1940 Act”) and Financial Accounting Standards Board (“FASB”)Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures. We determine in good faith the fair value of our Investment portfoliopursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by our Board of Directors. See Note 4 to the consolidated financialstatements.5.Non-control/Non-affiliate investments are generally defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments. At March31, 2017, approximately 61.3% of the Company’s investment assets were non-control/non-affiliate investments.6.Affiliate investments are generally defined by the 1940 Act as investments in which between 5.0% and 25.0% of the voting securities are owned and the investmentsare not classified as control investments. At March 31, 2017, approximately 2.5% of the Company’s investment assets were affiliate investments.7.Control investments are generally defined by the 1940 Act as investments in which more than 25.0% of the voting securities are owned or where greater than 50.0%of the board representation is maintained. At March 31, 2017, approximately 36.2% of the Company’s investment assets were control investments.8.The investment is structured as a first lien last out term loan and earns interest in addition to the stated rate.9.Indicates assets that are considered “non-qualifying assets” under section 55(a) of the 1940 Act. Qualifying assets must represent at least 70.0% of total assets at thetime of acquisition of any additional non-qualifying assets.10.The investment has approximately $7.2 million unfunded commitment as of March 31, 2017.11.Income producing through dividends on distributions.12.As of March 31, 2017, the cumulative gross unrealized appreciation for federal income tax purposes is approximately $40.1 million; cumulative gross unrealizeddepreciation for federal income tax purposes is $3.4 million. Cumulative net unrealized appreciation is $36.7 million, based on a tax cost of $250.1 million.13.Chandler Signs, LP Class A-1 common stock is held through a wholly-owned taxable subsidiary. 62 Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS March 31, 2016 Current Type of Interest Fair Portfolio Company Investment Industry Rate Maturity Principal Cost Value Non-control/Non-affiliateInvestments 360 HOLDINGS III CORP. First Lien Consumerproducts & retail L+9.00% (Floor 1.00%) 10/1/2021 $6,965,000 $6,695,926 $6,721,225 ARGON MEDICAL DEVICES Second Lien Healthcareproducts L+9.50% (Floor 1.00%) 6/23/2022 5,000,000 4,854,244 4,962,500 BDF ACQUISITION CORP. Second Lien Consumerproducts & retail L+8.00% (Floor 1.00%) 2/12/2022 5,000,000 4,803,167 4,825,000 CAST AND CREW PAYROLL,LLC Second Lien Media,marketing &entertainment L+7.75% (Floor 1.00%) 8/12/2023 5,000,000 4,970,378 4,725,000 DEEPWATER CORROSIONSERVICES, INC. 127,004 shares of Series Aconvertible preferred stock Energy services(upstream) - - - 8,000,000 5,046,000 DIGITAL RIVER, INC. First Lien Software & ITservices L+6.50% (Floor 1.00%) 2/12/2021 4,632,285 4,598,218 4,626,495 FREEDOM TRUCK FINANCE,LLC 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 First Lien Healthcareservices L+9.25% 2/22/2019 8,000,000 7,298,715 7,298,715 Warrants - - - 546,000 546,000 7,844,715 7,844,715 IMAGINE! PRINT SOLUTIONS,INC. First Lien Media,marketing &entertainment L+6.00% (Floor 1.00%) 3/30/2022 4,000,000 3,940,000 3,940,000 LTI HOLDINGS, INC. Second Lien Industrialproducts L+9.25% (Floor 1.00%) 4/17/2023 7,000,000 6,837,644 6,298,099 PREPAID LEGAL SERVICES,INC. Second Lien Consumerservices L+9.00% (Floor 1.25%) 7/1/2020 5,000,000 4,944,630 4,950,000 RESEARCH NOW GROUP,INC. Second Lien Business services L+8.75% (Floor 1.00%) 3/18/2022 7,000,000 6,906,072 6,790,000 ROYAL HOLDINGS, INC. Second Lien Specialtychemicals L+7.50% (Floor 1.00%) 6/19/2023 1,000,000 992,994 955,000 TAXACT, INC. First Lien Financial services L+6.00% (Floor 1.00%) 12/31/2022 4,500,000 4,405,601 4,432,500 TITANLINER, INC. Senior subordinated debt 8.50% 6/30/2017 2,747,000 2,747,000 2,747,000 339,277 shares of Series Aconvertible preferred stock Energy services(upstream) - - - 3,204,222 3,352,000 5,951,222 6,099,000 TRAX DATA REFINERY, INC. Common stock Software & ITservices - - - 817,781 1,916,000 VIVID SEATS First Lien Media,marketing &entertainment L+6.00% (Floor 1.00%) 3/1/2022 7,000,000 6,514,058 6,632,500 The accompanying Notes are an integral part of these Consolidated Financial Statements.63 12345,6Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS March 31, 2016 Current Type of Interest Fair Portfolio Company Investment Industry Rate Maturity Principal Cost Value WATER PIK, INC. Second Lien Consumerproducts & retail L+8.75% (Floor 1.00%) 2/8/2021 4,780,702 4,667,815 4,720,943 WINZER CORPORATION Senior subordinated debt Distribution 11.00% 5/31/2021 8,100,000 7,954,440 7,954,440 Total Non-control/Non-affiliateInvestments $101,538,409 $99,278,921 Affiliate Investments CHANDLER SIGNS, LP Senior subordinated debt Business services 12.00% 7/4/2021 $4,500,000 $4,412,800 $4,412,800 1,500,000 units of Class A-1common stock - - - 1,500,000 2,529,000 5,912,800 6,941,800 kSEP HOLDINGS, INC. 861,591 shares of common stock Healthcareproducts - - - 443,518 3,676,000 Total Affiliate Investments $6,356,318 $10,617,800 Control Investments I-45 SLF LLC 80% LLC equity interest Multi-sectorholdings - - - $36,800,000 $36,337,174 MEDIA RECOVERY, INC. 800,000 shares of Series Aconvertible preferred stock Industrialproducts - - - 800,000 4,757,452 4,000,002 shares of commonstock Specialtychemicals - - - 4,615,000 27,444,548 5,415,000 32,202,000 Total Control Investments $42,215,000 $68,539,174 TOTAL INVESTMENTS $150,109,727 $178,435,895 1.All debt investments are income-producing, unless otherwise noted. Equity investments are non-income producing, unless otherwise noted.2.The 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”)which reset daily, monthly, quarterly, or semiannually. For each investment, the Company has provided the spread over LIBOR or Prime and the current contractualinterest rate in effect at March 31, 2016. Certain investments are subject to a LIBOR or Prime interest rate floor.3.Investments are carried at fair value in accordance with the Investment Company Act of 1940 (the “1940 Act”) and Financial Accounting Standards Board (“FASB”)Accounting Standard Codification (“ASC”) 820, Fair Value Measurements and Disclosures. We determine in good faith the fair value of our Investment portfoliopursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by our Board of Directors. See Note 4 to the consolidated financialstatements.4.Non-control/Non-affiliate investments are generally defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments. At March31, 2016, approximately 55.6% of the Company’s investment assets are non-control/non-affiliate investments.5.The investment has $1.7 million unfunded commitment as of March 31, 2016.6.Indicates assets that the Company believes do not represent “qualifying assets” under section 55(a) of the 1940 Act. Qualifying assets must represent at least 70.0% oftotal assets at the time of acquisition of any additional non-qualifying assets.The accompanying Notes are an integral part of these Consolidated Financial Statements.64 12371386, 9, 101011Table of ContentsCAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF INVESTMENTS March 31, 2016 7.Affiliate investments are generally defined by the 1940 Act as investments in which between 5.0% and 25.0% of the voting securities are owned and the investmentsare not classified as control investments. At March 31, 2016, approximately 6.0% of the Company’s investment assets are affiliate investments.8.Control investments are generally defined by the 1940 Act as investments in which more than 25.0% of the voting securities are owned or maintains greater than50.0% of the board representation. At March 31, 2016, approximately 38.4% of the Company’s investment assets are control investments.9.The investment has approximately $31.2 million unfunded commitment as of March 31, 2016.10.Income producing through dividends on distributions.11.As of March 31, 2016, the cumulative gross unrealized appreciation for federal income tax purposes is approximately $35.4 million; cumulative gross unrealizeddepreciation for federal income tax purposes is $4.6 million. Cumulative net unrealized appreciation is $30.8 million, based on a tax cost of $147.7 million.12.Changes to the Consolidated Schedule of Investments at March 31, 2016 are presentation changes only to confirm to current period presentation.13.Chandler Signs, LP Class A-1 common stock is held through a wholly-owned taxable subsidiary. The accompanying Notes are an integral part of these Consolidated Financial Statements.65 Table of ContentsNotes to Consolidated Financial Statements 1. ORGANIZATION AND BASIS OF PRESENTATION Organization Capital Southwest Corporation (“CSWC”) is an investment company that specializes in providing customizedfinancing to middle market companies in a broad range of industry segments located primarily in the United States. Ourcommon stock currently trades on The Nasdaq Global Select Market under the ticker symbol “CSWC.” CSWC was organized as a Texas corporation on April 19, 1961. Until September 1969, we operated as a SmallBusiness Investment Company (“SBIC”) licensed under the Small Business Investment Act of 1958. At that time, CSWCtransferred to its then wholly-owned subsidiary, Capital Southwest Venture Corporation (“CSVC”), certain assets includingour license as a “SBIC”. CSVC was a closed-end, non-diversified investment company registered under the InvestmentCompany Act of 1940, as amended (the “1940 Act”). Effective June 14, 2016, CSVC was dissolved and its SBIC license wassurrendered. All assets held in CSVC were transferred to CSWC upon dissolution. Prior to March 30, 1988, CSWC wasregistered as a closed-end, non-diversified investment company under the 1940 Act. On that date, we elected to be treated asa business development company (“BDC”) subject to the provisions of the 1940 Act, as amended by the Small BusinessIncentive Act of 1980. In order to remain a BDC, we must meet certain specified requirements under the 1940 Act, includinginvesting 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 of1986 (the “Code”). As such, we are not required to pay corporate-level income tax on our investment income. We intend tomaintain our RIC status, which requires that we qualify annually as a RIC by meeting certain specified requirements. Capital Southwest Management Corporation (“CSMC”), a wholly-owned subsidiary of CSWC, is the managementcompany for CSWC. CSMC generally incurs all normal operating and administrative expenses, including, but not limited to,salaries and related benefits, rent, equipment and other 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 “TaxableSubsidiary”). The primary purpose of the Taxable Subsidiary is to permit CSWC to hold certain interests in portfoliocompanies that are organized as limited liability companies, or LLCs (or other forms of pass-through entities) and still allowus to satisfy the RIC tax requirement that at least 90.0% of our gross income for federal income tax purposes must consist ofqualifying investment income. The Taxable Subsidiary is taxed at normal corporate tax rates based on its taxable income. We focus on investing in companies with histories of generating revenues and positive cash flow, establishedmarket positions and proven management teams with strong operating discipline. We target senior and subordinatedinvestments in the lower middle market, as well as first and second lien syndicated loans in upper middle marketcompanies. Our target lower middle market (“LMM”) companies typically have annual earnings before interest, taxes,depreciation and amortization (“EBITDA”) between $3.0 million and $15.0 million, and our LMM investments generallyrange in size from $5.0 million to $20.0 million. Our upper middle market (“UMM”) investments generally includesyndicated first and second lien loans in companies with EBITDA generally greater than $50.0 million and typically range insize from $3.0 million to $10.0 million. We make available significant managerial assistance to the companies in which weinvest as we believe that providing managerial assistance to an investee company is critical to its business developmentactivities. On September 30, 2015, we completed the spin-off (the “Share Distribution”) of CSW Industrials, Inc. (“CSWI”).CSWI is now an independent publicly traded company. CSWI’s common stock trades on the Nasdaq Global Select Marketunder 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 the Company. Each Company shareholder received one share of CSWI common66 Table of Contentsstock for every one share of Company common stock on the record date, September 18, 2015. Cash was paid in lieu of anyfractional shares of CSWI common stock. Following the Share Distribution, we have maintained operations as an internally-managed BDC and pursue acredit-focused investing strategy akin to similarly structured organizations. We intend to continue to provide capital tomiddle-market companies. In the future, we intend to invest primarily in debt securities, including senior debt, second lienand subordinated debt, and may also invest in preferred stock and common stock alongside our debt investments or throughwarrants. Basis of Presentation The consolidated financial statements have been prepared in accordance with Generally Accepted AccountingPrinciples in the United States of America (“U.S. GAAP”). We meet the definition of an investment company and follow theaccounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting StandardsCodification (“ASC”) Topic 946 – Financial Services – Investment Companies (“ASC Topic 946”). Under rules andregulations applicable to investment companies, we are generally precluded from consolidating any entity other thananother investment company, subject to certain exceptions. One of the exceptions to this general principle occurs if theinvestment company has an investment in an operating company that provides services to the investmentcompany. Accordingly, the consolidated financial statements include CSMC, our management company, and the TaxableSubsidiary. Portfolio Investment Classification We classify our investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “ControlInvestments” are generally defined as investments in which we own more than 25.0% of the voting securities or have rightsto maintain greater than 50.0% of the board representation; “Affiliate investments” are generally defined as investments inwhich we own between 5.0% and 25.0% of the voting securities; and “Non-control/Non-affiliate investments” are generallydefined as investments that are neither “Control Investments” nor “Affiliate Investments.” Under the 1940 Act, a BDC must meet certain requirements, including investing at least 70.0% of our assets inqualifying assets. The principal categories 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, whichissuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been duringthe preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to any rulesthat 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 anaffiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganizationor if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due withoutmaterial assistance other than conventional lending or financing arrangements. (4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is noready market for the securities and we already own at least 60.0% of the outstanding equity of the eligible portfoliocompany. (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 of warrants or rights relating to those securities. (6) Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or lessfrom the time of investment. 67 Table of ContentsAdditionally, in order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things: (1) Continue to qualify as a BDC under the 1940 Act at all times during each taxable year; (2) Derive in each taxable year at least 90.0% of our gross income from dividends, interest, payments with respectto certain securities, loans, gains from the sale of stock or other securities, net income from certain “qualified publicly tradedpartnerships,” or other income derived with respect to our business of investing in such stock or securities (the “90% IncomeTest”); and (3) Diversify our holdings such that at the end of each quarter of the taxable year at least 50% of the value of ourassets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other securities if suchother securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of theoutstanding voting securities of the issuer; and no more than 25% of the value of our assets is invested in the securities, otherthan U.S. government securities or securities of other RICs, (i) of one issuer, (ii) of two or more issuers that are controlled, asdetermined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or(iii) of certain “qualified publicly traded partnerships” (collectively, the “Diversification Tests”). The two Diversification Tests must be satisfied quarterly. If a RIC satisfies the tests for one quarter, and then, duesolely to fluctuations in market value, fails to meet one of the tests in the next quarter, it retains RIC status. A RIC that fails tomeet the Diversification Tests as a result of a nonqualified acquisition may be subject to excess taxes unless the nonqualifiedacquisition is disposed of and the tests are satisfied within 30 days of the close of the quarter in which the tests are failed. This quarter we satisfied all RIC tests and have only 11.8% in nonqualified assets according to measurement criteriaestablished in IRC Section 851(d). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of the consolidatedfinancial statements of CSWC. Fair Value Measurements We account for substantially all of our financial instruments at fair value in accordancewith ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value,establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including thecategorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. ASCTopic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. Webelieve that the carrying amounts of our financial instruments such as cash, receivables and payables approximate the fairvalue of these items due to the short maturity of these instruments. This is considered a Level 1 valuation technique. Thecarrying value of our credit facility approximates fair value because the interest rate adjusts to the market interest rate (Level3 input). See Note 4 to the consolidated financial statements for further discussion regarding the fair value measurements andhierarchy. Investments Investments are stated at fair value and are reviewed and approved by our Board of Directors asdescribed in the Notes to the Consolidated Schedule of Investments and Notes 3 and 4 below. Investments are recorded on atrade date basis. Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation Realized gains or lossesare measured by the difference between the net proceeds from the sale or redemption of an investment or a financialinstrument and the cost basis of the investment or financial investment, without regard to unrealized appreciation ordepreciation previously recognized, and includes investments written off during the period net of recoveries and realizedgains or losses from in-kind redemptions. Net change in unrealized appreciation or depreciation reflects the net change inthe fair value of the investment portfolio and financial instruments and the reclassification of any prior period unrealizedappreciation or depreciation on exited investments and financial instruments to realized gains or losses.68 Table of Contents Cash and Cash Equivalents Cash and cash equivalents, which consist of cash and highly liquid investments with anoriginal maturity of three months or less at the date of purchase, are carried at cost, which approximates fair value. Cash andcash equivalents includes deposits at financial institutions. We deposit our cash balances in financial institutions and, attimes, such balances may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At March 31,2017 and 2016, cash balances totaling $19.6 million and $93.7 million, respectively, exceeded FDIC insurance limits,subjecting us to risk related to the uninsured balance. All of our cash deposits are held at large established high credit qualityfinancial institutions and management believes that 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, weinvest in portfolio companies in various industries and geographic areas as discussed in Note 3. Consolidation As permitted under Securities and Exchange Commission (“SEC”) Regulation S-X and ASC Topic946, we generally do not consolidate our investment in a portfolio company other than an investment company subsidiary ora controlled operating company whose business consists of providing services to CSWC. Accordingly, we consolidated theresults of CSWC’s wholly-owned subsidiaries, 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 U.S. GAAP requires management tomake estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actualresults could differ from those estimates. We have identified investment valuation and revenue recognition as our mostcritical accounting estimates. Interest and Dividend Income Interest and dividend income is recorded on an accrual basis to the extent amounts areexpected to be collected. Dividend income is recognized on the record date. Discounts/premiums received to par on loanspurchased are capitalized and accreted or amortized into income over the life of the loan using the effective interest method.Any remaining discount/premium is accreted or amortized into income upon prepayment of the loan. In accordance with ourvaluation policy, accrued interest and dividend income is evaluated periodically for collectability. When we do not expectthe debtor to be able to service all of its debt or other obligations, we will generally establish a reserve against interestincome receivable, thereby placing the loan or debt security on non-accrual status, and cease to recognize interest income onthat loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loanor debt security’s status significantly improves regarding its ability to service debt or other obligations, it will be restored toaccrual basis. As of March 31, 2017 and 2016, we did not have any investments on non-accrual status. To maintain RIC tax treatment, non-cash sources of income such as accretion of interest income may need to be paidout to shareholders in the form of distributions, even though CSWC may not have collected the interest income. For the yearended March 31, 2017, approximately 1.8% of CSWC’s total investment income was attributable to non-cash interestincome for the accretion of discounts associated with debt investments, net of any premium reduction. For the year endedMarch 31, 2016, approximately 1.0% of CSWC’s total investment income was attributable to non-cash interest income forthe accretion of discounts associated with debt investments, net of any premium reduction. Payment-in-Kind Interest The Company currently holds, and expects to hold in the future, some investments in itsportfolio that contain payment-in-kind (“PIK”) interest and dividend provisions. The PIK interest and dividends, computedat the contractual rate specified in each loan agreement, are added to the principal balance of the loan, rather than being paidto the Company in cash, and are recorded as interest and dividend income. Thus, the actual collection of PIK interest anddividends may be deferred until the time of debt principal repayment or disposition of equity investment. PIK interest anddividends, which are non-cash sources of income, are included in the Company’s taxable income and therefore affect theamount the Company is required to distribute to stockholders to maintain its qualification as a regulated investmentcompany (“RIC”) for federal income tax purposes, even though the Company has not yet collected the cash. Generally, whencurrent cash interest and/or principal payments on a loan become past due, or if the Company otherwise does not expect theborrower to be able to service its debt and other obligations, the Company will place the investment on non-accrual statusand will generally cease recognizing PIK interest and dividend income on that loan for financial69 Table of Contentsreporting purposes until all principal and interest have been brought current through payment or due to a restructuring suchthat the interest income is deemed to be collectible. The Company writes off any accrued and uncollected PIK interest anddividends when it is determined that the PIK interest and dividends are no longer collectible. For the year ended March 31,2017, approximately 0.3% of CSWC’s total investment income was attributable to non-cash PIK interest and dividendincome. Debt Issuance Costs Debt issuance costs include commitment fees and other costs related to CSWC’s senior securedcredit facility (as discussed further in Note 5). These costs have been capitalized and are amortized into interest expense overthe term of the credit facility. Federal Income Taxes CSWC has elected and intends to comply with the requirements of the Internal Revenue Code(“IRC”) necessary to qualify as a RIC. By meeting these requirements, we will not be subject to corporate federal incometaxes on ordinary income distributed to shareholders. In order to qualify as a RIC, the Company is required to timelydistribute to its shareholders at least 90.0% of investment company taxable income, as defined by the IRC, eachyear. Investment company taxable income generally differs from net income for financial reporting purposes due totemporary and permanent differences in the recognition of income and expenses. Investment company taxable incomegenerally excludes net unrealized appreciation or depreciation, as investment gains and losses are not included ininvestment company taxable income until they are realized. In addition to the requirement that we must annually distribute at least 90.0% of our investment company taxableincome, we may either distribute or retain our realized net capital gains from investments, but any net capital gains notdistributed may be subject to corporate level tax. If we retain the capital gains, they are classified as a “deemed distribution”to our shareholders and are subject to our corporate tax rate of 35.0%. As an investment company that qualifies as a RICunder the IRC, federal income taxes payable on security gains that we elect to retain are accrued only on the last day of ourtax year, December 31. Any capital gains actually distributed to shareholders are generally taxable to the shareholders aslong-term capital gains. 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 taxesat the current corporate rate of 34%. For tax purposes, CSMC and the Taxable Subsidiary have elected to be treated astaxable entities, and therefore are not consolidated for tax purposes and are taxed at normal corporate tax rates based ontaxable income and, as a result of their activities, may generate income tax expense or benefit. The taxable income, or loss, ofeach of CSMC and the Taxable Subsidiary may differ from its book income, or loss, due to temporary book and tax timingdifferences 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’sfinancial statements to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicabletax authority. Tax positions with respect to tax at the Company level not deemed to meet the “more-likely-than-not”threshold would be recorded as an expense in the current year. Management’s conclusions regarding tax positions will besubject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of taxlaws, regulations and interpretations thereof. The Company has concluded that it does not have any uncertain tax positionsthat meet the recognition of measurement criteria of ASC 740 for the current period. Also, we account for interest and, ifapplicable, penalties for any uncertain tax positions as a component of income tax expense. No interest or penalty expensewas recorded during the years ended March 31, 2017, 2016 and 2015. Deferred Taxes Deferred tax assets and liabilities are recorded for losses or income at our taxable subsidiaries usingstatutory tax rates. A valuation allowance is provided against deferred tax assets when it is more likely than not that someportion or all of the deferred tax asset will not be realized. See Note 6 for further discussion. Stock-Based Compensation We account for our stock-based compensation using the fair value method, asprescribed by FASB ASC Topic 718, Compensation – Stock Compensation. Accordingly, we recognize stock-basedcompensation cost on a straight-line basis for all share-based payments awards granted to employees. The fair value of stockoptions are determined on the date of grant using the Black-Scholes pricing model and are expensed over the requisiteservice period of the related stock options. For restricted stock awards, we measured the grant date fair value based upon70 Table of Contentsthe market price of our common stock on the date of the grant. For restricted stock awards, we will amortize this fair value toshare-based compensation expense over the vesting term. 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 sharecalculation. At the years ended March 31, 2017, 2016 and 2015, weighted-average basic shares were adjusted for the dilutedeffect of stock-based awards of 52,452, 88,020 and 39,104, respectively. For individual cash incentive awards, the optionvalue of the individual cash incentive awards is calculated based on the changes in net asset value of our Company. Inconnection with the Share Distribution, we entered into an Employee Matters Agreement (the “Employee MattersAgreement”) with CSWI. Under the Employee Matters Agreement, the value of individual cash incentive awards wasdetermined based upon the net asset value of CSWC as of June 30, 2015. See Note 9 for further discussion. Shareholder Distributions Distributions to common shareholders are recorded on the ex-dividend date. The amountof distributions, if any, is determined by the Board of Directors each quarter. Presentation Presentation of certain amounts on the Consolidated Financial Statements for the prior yearcomparative financial statements is updated to conform to the current period presentation. This mainly includes disclosureof amounts at a more disaggregated level. Recently Issued or Adopted Accounting Standards In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires thatdebt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carryingamount of that debt liability, consistent with debt discounts. It is effective for annual reporting periods beginning afterDecember 15, 2015. Subsequently, in August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.ASU 2015-15 allows debt issuance costs for lines of credit to be presented as an asset and subsequently amortized ratablyover the term of the line-of-credit arrangement, regardless of whether there are outstanding borrowings on the line-of-creditarrangement. We adopted this guidance during the quarter ended September 30, 2016. In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize on the balance sheet aright-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases withterms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess theamount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospectivetransition approach, which includes a number of optional practical expedients that entities may elect to apply. The newguidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. Early application ispermitted. CSWC is currently evaluating the impact the adoption of this new accounting standard will have on its financialstatements, but the impact of the adoption is not expected to be material. In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to EmployeeShare-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based paymenttransactions, including the income tax consequences, classification of awards as either equity or liabilities, and classificationon the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016, andinterim periods therein. Early application is permitted. CSWC completed its assessment of the impact the adoption of thisnew accounting standard will have on its consolidated financial statements, and based on our assessment, determined therewould be no material change to the Company’s consolidated financial statements as a result of the adoption of ASU 2016-09. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09supersedes the revenue recognition requirements under SAC Topic 605, Revenue Recognition, and most industry-specificguidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognizerevenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration towhich an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is requiredto perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations inthe contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in thecontract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance willsignificantly enhance comparability of revenue recognition practices across entities,71 Table of Contentsindustries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature,amount, timing and uncertainty of revenue that is recognized. In May 2016, the FASB issued ASU No. 2016-12, Revenuefrom Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients. This ASU clarifiedguidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters.The FASB tentatively decided to defer the effective date of the new revenue standard for public entities under U.S. GAAP forone year. The new guidance will be effective for the annual reporting period beginning after December 15, 2017, includinginterim periods within that reporting period. Early adoption would be permitted for annual reporting periods beginning afterDecember 15, 2016. CSWC completed its initial assessment in evaluating the potential impact on its consolidated financialstatements and based on its initial assessment determined that its financial contracts are excluded from the scope of ASU2014-09. As a result of the scope exception for financial contracts, the Company's management has determined that there willbe no material changes to the recognition timing and classification of revenues and expenses; additionally, the Company'smanagement does not expect the adoption of ASU 2014-09 to have a significant impact to pretax income upon adoption.The Company will continue to evaluate the impacts of ASU 2014-09 through the date of adoption to ensure that its initialassessment continues to remain accurate. Additionally, the Company is continuing its assessment of ASU 2014-09’s impacton its consolidated financial statement disclosures. 3. INVESTMENTS The following tables show the composition of the investment portfolio, at cost and fair value (with correspondingpercentage of total portfolio investments), as of March 31, 2017 and 2016: Percentage of Percentage of Cost Total Portfolio Fair Value Total Portfolio (dollars in millions) March 31, 2017: 1st lien loans $106.8 42.6% $107.8 37.6%2nd lien loans 46.9 18.7 47.2 16.5 Subordinated debt 12.4 4.9 12.5 4.3 Preferred equity, commonequity & warrants 23.6 9.5 56.0 19.5 I-45 SLF, LLC 60.8 24.3 63.4 22.1 $250.5 100.0% $286.9 100.0% March 31, 2016: 1st lien loans $39.3 26.2% $39.5 22.1%2nd lien loans 39.0 26.0 38.2 21.4 Subordinated debt 15.1 10.1 15.1 8.5 Preferred equity, commonequity & 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%1Included in 1 lien loans are loans structured as first lien last out loans. These loans may in certain cases be subordinated in paymentpriority to other senior secured lenders.2I-45 SLF, LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loansin the upper middle market. The portfolio companies held by I-45 represent a diverse set of industry classifications, which are similar tothose in which CSWC invests directly. See Note 18 for further discussion. 72 122stTable of ContentsThe following tables show the composition of the investment portfolio by industry, at cost and fair value (withcorresponding percentage of total portfolio investments), as of March 31, 2017 and 2016: Percentage of Percentage of Cost Total Portfolio Fair Value Total Portfolio (dollars in millions) March 31, 2017: I-45 SLF, LLC $60.8 24.3% $63.4 22.1%Media, Marketing, & Entertainment 32.2 12.8 32.3 11.2 Distribution 20.8 8.3 20.9 7.3 Consumer Products & Retail 18.3 7.3 18.4 6.4 Energy Services (Upstream) 14.0 5.6 12.7 4.4 Business Services 12.8 5.1 14.0 4.9 Industrial Products 12.3 4.9 44.7 15.6 Software & IT Services 11.8 4.7 12.0 4.2 Environmental Services 10.1 4.0 10.1 3.5 Paper & Forest Products 9.8 3.9 9.8 3.4 Food, Agriculture & Beverage 9.7 3.9 9.9 3.5 Gaming & Leisure 8.5 3.4 8.8 3.1 Telecommunications 8.4 3.4 8.7 3.0 Restaurants 8.4 3.4 8.4 2.9 Consumer Services 5.0 2.0 5.0 1.8 Healthcare Products 4.9 1.9 5.0 1.7 Financial Services 2.7 1.1 2.8 1.0 $250.5 100.0% $286.9 100.0% Percentage of Percentage of Cost Total Portfolio Fair Value Total Portfolio (dollars in millions) March 31, 2016: I-45 SLF, LLC $36.8 24.5% $36.3 20.4%Consumer Products & 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%1I-45 SLF, LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loansin the upper middle market. The portfolio companies in I-45 include multi-sector holdings, which are similar to those in which CSWCinvests directly. See Note 18 for further discussion. 73 11Table of ContentsThe following tables summarize the composition of the investment portfolio by geographic region of the UnitedStates, at cost and fair value (with corresponding percentage of total portfolio investments), as of March 31, 2017 and 2016: Percentage of Percentage of Cost Total Portfolio Fair Value Total Portfolio (dollars in millions) March 31, 2017: I-45 SLF, LLC $60.8 24.3%$63.4 22.1%Southwest 50.0 20.0 82.6 28.8 Northeast 43.4 17.4 43.7 15.2 South 38.2 15.2 38.5 13.4 West 30.2 12.0 30.3 10.6 Midwest 27.9 11.1 28.4 9.9 $250.5 100.0% $286.9 100.0% March 31, 2016: Southwest $55.8 37.2% $80.8 45.3%I-45 SLF, LLC 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%1I-45 SLF, LLC is a joint venture between CSWC and Main Street Capital. This entity primarily invests in syndicated senior secured loansin the upper middle market. The portfolio companies in I-45 are located within the geographic regions listed above. See Note 18 forfurther discussion. 4. FAIR VALUE MEASUREMENTS Investment Valuation Process The valuation process is led by the finance department in conjunction with the investment team. The processincludes a monthly review of each investment by our executive officers and investment teams. Valuations of each portfoliosecurity are prepared quarterly by the finance department using updated financial and other operational informationcollected by the investment teams. Each investment valuation is then subject to review by the executive officers andinvestment teams. In conjunction with the internal valuation process, we have also engaged multiple independentconsulting firms specializing in financial due diligence, valuation, and business advisory services to provide third-partyvaluation reviews of certain investments. The third-party valuation firms provide a range of values for selected investments,which is presented to CSWC’s executive officers and Board of Directors. CSWC also uses a standard internal investment rating system in connection with its investment oversight, portfoliomanagement, and investment valuation procedures for its debt portfolio. This system takes into account both quantitativeand qualitative factors of the portfolio company and the investments held therein. There is no single standard for determining fair value in good faith, as fair value depends upon the specificcircumstances of each individual investment. While management believes our valuation methodologies are appropriate andconsistent with market participants, the recorded fair values of our investments may differ significantly from fair values thatwould have been used had an active market for the securities existed. In addition, changes in the market environment andother events that may occur over the life of the investments may cause the gains or losses ultimately realized on theseinvestments to be different than the valuations currently assigned. The Board of Directors has the ultimate responsibility forreviewing and approving, in good faith, the fair value of CSWC’s investments in accordance with the 1940 Act.74 11Table of ContentsFair Value Hierarchy CSWC has established and documented processes for determining the fair values of portfolio company investmentson a recurring basis in accordance with the 1940 Act and ASC Topic 820. As required by ASC Topic 820, when the inputsused to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement iscategorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, aLevel 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).Therefore, unrealized appreciation and depreciation related to such investments categorized within the Level 3 tables belowmay include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs(Level 3). CSWC conducts reviews of fair value hierarchy classifications on a quarterly basis. We also use judgment andconsider factors specific to the investment in determining the significance of an input to a fair value 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 orliabilities. ·Level 2: Investments whose values are based on quoted prices for similar assets and liabilities in active markets, andinputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of thefinancial instrument. ·Level 3: Investments whose values are based on unobservable inputs that are significant to the overall fair valuemeasurement. As of March 31, 2017 and 2016, 100.0% of the CSWC investment portfolio consisted of debt and equityinstruments of privately held companies for which inputs falling within the categories of Level 1 and Level 2 are generallynot available. Therefore, CSWC determines the fair value its investments (excluding investments for which fair value ismeasured at net asset value) in good faith using Level 3 inputs, pursuant to a valuation policy and process that is establishedby the management of CSWC with the assistance from multiple third-party valuation advisors, which is subsequentlyapproved by our Board of Directors. Investment Valuation Inputs ASC Topic 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid totransfer a liability in an orderly transaction between market participants at the measurement date and excludes transactioncosts. Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in theprincipal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. Theprincipal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and levelof activity for the asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed thatthe reporting entity has access to the market as of the measurement date. The Level 3 inputs to CSWC’s valuation process reflect our best estimate of the assumptions that would be used bymarket participants in pricing the 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 thefollowing unobservable inputs: ·Financial information obtained from each portfolio company, including unaudited statements of operations andbalance sheets for the most recent 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;75 Table of Contents·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 theportfolio company;·Internal occurrences that may have an impact (both positive and negative) on the operating performance of theportfolio 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, the Enterprise Value Waterfall Approach, and the NAV Valuation Method. Market Approach Market Approach is a qualitative and quantitative analysis of the aforementioned unobservable inputs. It is acombination of the Enterprise Value Approach and Income Approach as described in detail below. For debt investmentsrecently originated or where the value has not departed significantly from its cost, we generally rely on our cost basis orrecent transaction price to determine the fair value, unless a material event has occurred since origination. Income Approach In valuing debt securities, CSWC typically uses an Income Approach model, which considers some or all of thefactors listed above. Under the Income Approach, CSWC develops an expectation of the yield that a hypothetical marketparticipant would require when purchasing each debt investment (the “Required Market Yield”). The Required Market Yieldis calculated in a two-step process. First, using quarterly market data from our third-party valuation provider we estimate thecurrent market yield of similar debt securities. Next, based on the factors described above, we modify the current market yieldfor each security to produce a unique Required Market Yield for each of our investments. The resulting Required MarketYield is the significant Level 3 input to the Income Approach model. If, with respect to an investment, the unobservableinputs have not fluctuated significantly from the date the investment was made or have not fluctuated significantly fromCSWC’s expectations on the date the investment was made, and there have been no significant fluctuations in the marketpricing for such investments, we may conclude that the Required Market Yield for that investment is equal to the stated rateon the investment. In instances where CSWC determines that the Required Market Yield is different from the stated rate onthe investment, we discount the contractual cash flows on the debt instrument using the Required Market Yield in order toestimate the fair value of the debt security. In addition, under the Income Approach, CSWC also determines the appropriateness of the use of third-party brokerquotes, if any, as a significant Level 3 input in determining fair value. In determining the appropriateness of the use of third-party broker quotes, CSWC evaluates the level of actual transactions used by the broker to develop the quote, whether thequote was an indicative price or binding offer, the depth and consistency of broker quotes, the source of the broker quotes,and the correlation of changes in broker quotes with underlying performance of the portfolio company and other marketindices. To the extent sufficient observable inputs are available to determine fair value, CSWC may use third-party brokerquotes or other independent pricing to determine the fair value of certain debt investments. Fair value measurements using the Income Approach model can be sensitive to significant changes in one or more ofthe inputs. A significant increase (decrease) in the Required Market Yield for a particular debt security may result76 Table of Contentsin a lower (higher) fair value for that security. A significant increase (decrease) in a third-party broker quote for a particulardebt security may result in a higher (lower) value for that security. Enterprise Value Waterfall Approach In valuing equity securities (including warrants), CSWC estimates fair value using an Enterprise Value Waterfallvaluation model. CSWC estimates the enterprise value of a portfolio company and then allocates the enterprise value to theportfolio company’s securities in order of their relative liquidation preference. In addition, CSWC assumes that anyoutstanding debt or other securities that are senior to CSWC’s equity securities are required to be repaid at par. Additionally,we estimate the fair value of a limited number of our debt securities using the Enterprise Value Waterfall approach. To estimate the enterprise value of the portfolio company, CSWC uses a weighted valuation model based on publiccomparable companies, observable transactions and discounted cash flow analyses. A main input into the valuation model isa measure of the portfolio company’s financial performance, which generally is either earnings before interest, taxes,depreciation and amortization, as adjusted (“Adjusted EBITDA”) or revenues. In addition, 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 theliquidation or collateral value of the portfolio company’s assets in our estimation of its enterprise value. The significant Level 3 inputs to the Enterprise Value Waterfall model are (1) an appropriate multiple derived fromthe comparable public companies and transactions, (2) discount rate assumptions used in the discounted cash flow model and(3) a measure of the portfolio company’s financial performance, which generally is either Adjusted EBITDA or revenues.Inputs can be based on historical operating results, projections of future operating results or a combination thereof. Theoperating results of a portfolio company may be unaudited, projected or pro forma financial information and may requireadjustments for certain non-recurring items. CSWC also may consult with the portfolio company’s senior management toobtain updates on the portfolio company’s performance, including information such as industry trends, new productdevelopment, loss of customers and other operational issues. Fair value measurements using the Enterprise Value Waterfallmodel can be sensitive to significant changes in one or more of the inputs. A significant increase (decrease) in either themultiple, Adjusted EBITDA or revenues for a particular equity security would result in a higher (lower) fair value for thatsecurity. NAV Valuation Method Under the NAV valuation method, for an investment in an investment fund that does not have a readilydeterminable fair value, CSWC measures the fair value of the investment predominately based on the NAV of the investmentfund as of the measurement date. However, in determining the fair value of the investment, we may consider whetheradjustments to the NAV are necessary in certain circumstances, based on the analysis of any restrictions on redemption of ourinvestment as of the measurement date, recent actual sales or redemptions of interests in the investment fund, expected futurecash flows available to equity holders, or other uncertainties surrounding CSWC’s ability to realize the full NAV of itsinterests in the investment fund. The table below presents the Valuation Techniques and Significant Level 3 Inputs (ranges and weighted averages)used in the valuation of CSWC’s debt and equity securities at March 31, 2017 and March 31, 2016. The table is not77 Table of Contentsintended to be all inclusive, but instead captures the significant unobservable inputs relevant to our determination of fairvalue. Fair Value at Significant Valuation 3/31/2017 Unobservable Weighted Type Technique (in millions) Inputs Range Average Equity Investments Enterprise ValueWaterfall Approach $56.0 EBITDA Multiple 4.10x - 9.30x 7.80x Discount Rate 14.1% - 27.8% 17.5% Debt Investments Income Approach 132.8 Discount Rate 7.70% - 12.60% 10.8% Third Party Broker Quote 97.50 - 101.25 Market Approach 34.8 Cost 167.5 Total Level 3 Investments $223.5 Fair Value at Significant Valuation 3/31/2016 Unobservable Weighted Type Technique (in millions) Inputs Range Average Equity Investments Enterprise ValueWaterfall Approach $49.3 EBITDA Multiple 3.5x - 7.60x 6.78x Revenue Multiple 3.70x 3.70x Discount Rate 12.9% - 18.62% 14.0% Debt Investments Income Approach 68.6 Discount Rate 6.00% - 11.5% 9.7% Third Party Broker Quote 86.00 - 99.88 Market Approach 24.2 Cost 92.8 Total Level 3 Investments $142.1 78 Table of ContentsThe following fair value hierarchy tables set forth our investment portfolio by level as of March 31, 2017 and March31, 2016 (in millions): Fair Value Measurements at March 31, 2017 Using Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs Asset Category Total (Level 1) (Level 2) (Level 3) 1 lien loans $107.8 $− $− $107.8 2 lien loans 47.2 − − 47.2 Subordinated debt 12.5 − − 12.5 Preferred equity, common equity &warrants 56.0 − − 56.0 Investments measured at net assetvalue 63.4 − − − Total Investments $286.9 $− $− $223.5 Fair Value Measurements at March 31, 2016 Using Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs Asset Category Total (Level 1) (Level 2) (Level 3) 1st lien loans $39.5 $− $− $39.5 2nd lien loans 38.2 − − 38.2 Subordinated debt 15.1 − − 15.1 Preferred equity, common equity & warrants 49.3 − − 49.3 Investments measured at net asset value 36.3 − − − Total Investments $178.4 $− $− $142.1 1Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not beencategorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair valuehierarchy to the amounts presented in Consolidated Statements of Assets and Liabilities. Changes in Fair Value Levels We monitor the availability of observable market data to assess the appropriate classification of financial instrumentswithin the fair value hierarchy. Changes in economic conditions or model based valuation techniques may require the transferof financial instruments from one fair value to another. We recognize transfer of financial instruments between levels at theend of each quarterly reporting period. During the years ended March 31, 2017 and 2016, we had no transfers between levels. 79 stnd11Table of ContentsThe following table provides a summary of changes in the fair value of investments measured using Level 3 inputsduring the years ended March 31, 2017 and 2016 (in millions): Conversion of Realized & Security from Fair Value Unrealized Purchases of Debt Fair Value at 3/31/2016 Gains (Losses) Investments Repayments Divestitures to Equity 3/31/20171st lien loans $39.5 $2.3 102.2 (36.2) - $- $107.82nd lien loans 38.2 1.3 17.2 (7.0) (2.5) - 47.2Subordinated debt 15.1 0.1 - - - (2.7) 12.5Preferred equity, common equity &warrants 49.3 8.9 3.1 - (8.0) 2.7 56.0Total Investments $142.1 $12.6 $122.5 $(43.2) $(10.5) $− $223.5 Realized & Unrealized Fair Value Unrealized Depreciation due to Purchases of Fair Value at 3/31/2015 Gains (Losses) Share Distribution Investments Repayments Divestitures 3/31/20161st lien loans $− $0.2 $− $39.3 $− $− $39.52nd lien loans 6.9 (0.7) − 32.0 − − 38.2Subordinated debt 2.9 1.1 − 12.4 − (1) 15.1Preferred equity, common equity &warrants 517.3 14.8 (458.3) 2.0 − (26.5) 49.3Total Investments $527.1 $15.4 $(458.3) $85.7 $− $(27.8) $142.11Includes purchases of new investments, as well as discount accretion on existing investments.2Includes the cost basis of The Rectorseal Corporation, Whitmore Manufacturing Company, Balco, Inc. and CapStar Holdings Company,which were spun off to CSW Industrials, Inc. at September 30, 2015. The total net unrealized gains (excluding reversals) included in earnings that related to assets still held at the reportdate for the years ended March 31, 2017 and 2016 were $12.5 million and $7.6 million, respectively. 5. CREDIT FACILITY In September of 2016, CSWC entered into a credit facility (the “Credit Facility”) to provide additional liquidity tosupport its investment and operational activities. The Credit Facility includes total commitments of $100.0 million from adiversified group of five lenders and is scheduled to mature August 30, 2020. The Credit Facility also contains an accordionfeature that allows CSWC to increase the total commitments under the facility up to $150.0 million from new and existinglenders on the same terms and conditions as the existing commitments. Borrowings under the Credit Facility bear interest on a per annum basis at a rate equal to the applicable LIBOR rate(1.13% as of March 31, 2017) plus 3.25% with no LIBOR floor. For the first six months following the close of the CreditFacility, CSWC paid unused commitment fees of 0.50% per annum on the unused lender commitments under the CreditFacility. Subsequent to that period, the unused commitment fee is 0.50% to 1.50% based on utilization. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (1) certainreporting requirements, (2) maintaining RIC and BDC status, (3) maintaining a minimum consolidated net worth, (4)maintaining a regulatory asset coverage of not less than 200.0%, and (5) maintaining a consolidated interest coverage ratioof at least 2.5 to 1.0. The Credit Facility also contains customary events of default, including, without limitation, nonpayment,misrepresentation of representations and warranties in a material respect, breach of covenant, bankruptcy, and change ofcontrol, with customary cure and notice provisions. If the Company defaults on its obligations under the Credit Facility, thelenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests. The Credit Facility is secured by (1) substantially all of the present and future property and assets of the Companyand the guarantors and (2) 100% of the equity interests in the Company’s wholly-owned subsidiaries. As of March 31, 80 112Table of Contents2017, all of the Company’s assets were pledged as collateral for the Credit Facility. At March 31, 2017, CSWC had $25.0 million in borrowings outstanding under the Credit Facility. CSWCrecognized interest expense related to the Credit Facility, including unused commitment fees and amortization of deferredloan costs of $1 million for the year ended March 31, 2017. The weighted average interest rate on the Credit Facility was4.3% as of March 31, 2017. As of March 31, 2017, CSWC was in compliance with all financial covenants under the CreditFacility. 6. INCOME TAXES We have elected to be treated as a RIC under Subchapter M of the IRC and have a tax year end of December 31. Inorder to qualify as a RIC, we must annually distribute at least 90% of our investment company taxable income, as defined bythe IRC, to our shareholders in a timely manner. Investment company income generally includes net short-term capital gainsbut excludes net long-term capital gains. A RIC is not subject to federal income tax on the portion of its ordinary incomeand long-term capital gains that is distributed to its shareholders, including “deemed distributions” as discussed below. Aspart of maintaining RIC status, undistributed taxable income, which is subject to a 4% non-deductible U.S. federal excisetax, pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, providedsuch dividends are declared on or prior to the later of (1) the filing of the U.S federal income tax return for the applicablefiscal year or (2) the fifteenth day of the ninth month following the close of the year in which such taxable income wasgenerated. For the tax years ended December 31, 2016, 2015 and 2014, CSWC qualified to be taxed as a RIC. We intend tomeet the applicable qualifications to be taxed as a RIC in future periods. However, the company’s ability to meet certainportfolio diversification requirements of RICs in future years may not be controllable by the company. We have distributed or intend to distribute sufficient dividends to eliminate taxable income for our completed taxyears. If we fail to satisfy the 90.0% distribution requirement or otherwise fail to qualify as a RIC in any tax year, we wouldbe subject to tax in that year on all of our taxable income, regardless of whether we made any distributions to ourshareholders. During the quarter ended March 31, 2017, CSWC declared regular dividends in the amount of $3.0 million, or$0.19 per share and declared special dividends in the amount of $4.2 million, or $0.26 per share. During the tax year endedDecember 31, 2016, we declared total dividends of $6.0 million or $0.38 per share. We declared quarterly dividends of $0.04per share in March 2016, $0.06 per share in June 2016, $0.11 per share in September 2016, and $0.17 per share in December2016. For the tax year ended December 31, 2015, we declared total dividends of $1.5 million, or $0.10 per share, in May2015. For the tax year ended December 31, 2014, we declared total dividends of $3.1 million, or $0.10 per share in May of2014 and $0.10 per share in November 2014. Book and tax basis differences relating to stockholder dividends and distributions and other permanent book andtax differences are typically reclassified among the CSWC’s capital accounts. In addition, the character of income and gainsto be distributed is determined in accordance with income tax regulations that may differ from GAAP; accordingly for thefiscal years ended March 31, 2017 and 2016, CSWC reclassified for book purposes amounts arising from permanent book/taxdifferences related to the tax treatment of return of capital and/or deemed distributions, tax treatment of investments upondisposition, and non-deductible expenses, as follows (amounts in thousands): Year ended Year ended March 31, 2017 March 31, 2016 Additional capital $ (2,518) $(16,877) Accumulated net investment (income) loss $ (889) $15,395 Accumulated net realized gains $ 3,407 $1,482 The determination of the tax attributes of CSWC’s distributions is made after tax year end, based upon its taxableincome for the full tax year and distributions paid for the full tax year. Therefore, the determination of tax attributes made onan interim basis for fiscal year end may not be representative of the actual tax attributes determined at tax year end. For tax purposes, the 2016 dividends totaled $0.38 per share and were comprised of (1) ordinary income totalingapproximately $0.065 per share, (2) long term capital gains totaling approximately $0.28 per share, and (3) qualified81 Table of Contentsdividend income totaling approximately $0.035 per share. In addition, 19.75% of total distributions are considered aninterest-related dividend and 97.78% of total distributions represent the portion of CSWC’s dividends received by non-U.S.residents and foreign corporation shareholders that are generally exempt from US withholding tax. Of the qualified dividendsof $0.5 million, 34.65% are eligible for the dividends received deduction. For tax purposes, the 2015 dividends werecomprised entirely of long term capital gains. Ordinary dividend distributions from a RIC do not qualify for the 20.0% maximum tax rate (plus a 3.8% Medicaresurtax, if applicable) on dividend income from domestic corporations and qualified foreign corporations, except to the extentthat the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreigncorporations. The tax attributes for distributions will generally include both ordinary income and capital gains, but may alsoinclude qualified dividends or return of capital. The tax character of distributions paid for the tax years ended December 31,2016 and 2015 was as follows (amounts in thousands): Twelve Months Ended December31, 2016 2015Ordinary income $1,551 $ —Distributions of long term capital gains 4,367 1,544Distributions on tax basis $5,918 $1,5441Includes only those distributions which reduce estimated taxable income. As of March 31, 2017, CSWC estimates that it has undistributed taxable income of approximately $7.8 million, or$0.49 per share, that will be carried forward toward distributions to be paid in future periods. We intend to meet theapplicable qualifications to be taxed as a RIC in future periods. The following reconciles net increase in assets resulting from operations to estimated RIC taxable income for theyears ended March 31, 2017, 2016 and 2015: Years ended March 31, 2017 2016 2015Reconciliation of RIC Taxable Income Net increase (decrease) in net assets resulting from operations $23,474 $(5,400) $53,442Net change in unrealized (appreciation) depreciation on investments (7,690) (16,089) 108,377Disallowed net operating loss — 3,630 3,944Income/gain recognized for tax on pass-through entities 986 2,334 (446)Gain (loss) recognized for tax on dispositions 1,248 (2,165) 373Net operating loss (income) - management company 1,323 6,188 9Non-deductible tax expense 588 — —Other book tax differences 223 563 (1,062)Estimated taxable income (loss) before deductions for distributions 20,152 (10,939) 164,637Distributions: Ordinary 932 — 3,083Capital gains 4,367 1,544 —Deemed distributions — 8,423 155,343Distributions payable 7,072 619 —Estimated RIC undistributed taxable income (loss) 7,781 (21,525) 6,2111The calculation of taxable income for each period is an estimate and will not be finally determined until the Company files its tax returneach year. Final taxable income may be different than this estimate.2Includes only those distributions which reduce estimated taxable income. 82 1122Table of ContentsAs of March 31, 2017, 2016 and 2015, the components of estimated RIC accumulated earnings on a tax basis wereas follows (amounts in thousands): Years ended March 31,Components of Accumulated Earnings on a Tax Basis 2017 2016 2015Undistributed ordinary income - tax basis $11,890 $ — $ —Capital loss carryforward — (10,939) —Undistributed net realized gain 3,085 — 8,922Unrealized appreciation (depreciation) on investments 36,481 30,740 470,886Other temporary differences (122) 243 (2,710)Distributions payable (7,072) (619) —Components of distributable earnings at year-end 44,262 19,425 477,0981The calculation of taxable income for each period is an estimate and will not be finally determined until the Company files its tax returneach year. Final taxable income may be different than this estimate.2Includes only those distributions which reduce estimated taxable income. As of March 31, 2017, the cost of investments for U.S. federal income tax purposes was $250.1 million, with suchinvestments having a gross unrealized appreciation of $40.1 million and gross unrealized depreciation of $3.4 million. A RIC may elect to retain its long-term capital gains by designating them as a “deemed distribution” to itsshareholders and paying a federal tax rate of 35% on the long-term capital gains for the benefit of itsshareholders. Shareholders then report their share of the retained capital gains on their income tax returns as if it had beenreceived 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. For the tax year ended December 31, 2016, we intend to distribute all long-term capital gains and therefore had nodeemed distributions to our shareholders or federal taxes incurred related to such items. During our tax year ended December31, 2015, we had net long-term capital gains of $8.4 million for tax purposes, which we elected to retain and treat as deemeddistributions to our shareholders. For the tax year ended December 31, 2015, we incurred federal taxes on behalf of ourshareholders in the amount of $2.9 million. During the tax year ended December 31, 2014, we had net long-term capitalgains of $155.3 million for tax purposes, which we elected to retain and treat as deemed distributions to ourshareholders. For the tax year ended December 31, 2014, we incurred federal taxes on behalf of our shareholders in theamount of $54.4 million. The following table sets forth a summary of our net realized gains for book purposes on transactions by category(amounts in thousands): For the Tax Year endedDecember 31, Net Realized Gains on Transactions In Investment Securities of 2016 2015 Control investments $28 $231 Affiliate investments 3,986 (1,457) Non-control/Non-affiliate investments (201) 12,758 Net realized gain on investments $3,813 $11,532 Capital gain distribution (4,367) (1,544) Taxes incurred on deemed capital gain distribution - 2,948 Net realized gains on investments(for book purposes; after tax) $(554) $7,040 Net realized gains on investments (for tax purposes; after tax) $3,680 $5,475 CSMC, a wholly-owned subsidiary of CSWC, is not a RIC and is required to pay taxes at the current corporaterate. For tax purposes, CSMC has elected to be treated as a taxable entity, and therefore is not consolidated for tax purposesand is taxed at normal corporate tax rates based on its taxable income and, as a result of its activities, may generate incometax expense or benefit. The taxable income, or loss, of CSMC may differ from its book income, or loss, due to temporarybook and tax timing differences and permanent differences. This income tax expense, or benefit, if any,83 12Table of Contentsand the related tax assets and liabilities, are reflected in our consolidated financial statements. CSMC records individualincentive award and bonus accruals on a quarterly basis. Deferred taxes related to the changes in the qualified definedpension plan, restoration plan, individual cash incentive award and bonus accruals are also recorded on a quarterly basis. Avaluation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of thedeferred tax asset will not be realized. Establishing a valuation allowance of a deferred tax asset requires management tomake estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecastedcash flows from CSMC’s operations. As of March 31, 2017, CSMC had a deferred tax asset of approximately $3.4 million, adeferred tax liability of $0.1 million, our valuation allowance was $1.3 million and our net deferred tax asset was $2.0million. As of March 31, 2017, we believe that it is more likely than not that we will be able to utilize $2.0 million of ourdeferred tax assets. We will continue to assess our ability to realize our existing deferred tax assets. As of March 31, 2016,CSMC had a deferred tax asset of $2.3 million. Based on our assessment of our unrecognized tax benefits, management believes that all benefits, net of thevaluation allowance, will be realized and they do not contain any uncertain tax positions. Additionally, the increase invaluation allowance of $0.5 million was a result of adjusting the net realizable deferred tax asset to an amount managementbelieves will be realized. Our analysis of the net realizable deferred tax assets is based on projections of future taxableincome. The following table sets forth the significant components of the deferred tax assets and liabilities as of March 31,2017 and 2016 (amounts in thousands): Years ended 2017 2016 Deferred tax asset: Net operating loss carryforwards $1,571 $1,381 Compensation 1,110 874 Pension liability 722 750 Other 76 203 Total deferred tax asset 3,479 3,208 Less valuation allowance (1,325) (866) Total net deferred tax asset 2,154 2,342 Deferred tax liabilities: Other (137) — Total deferred tax liabilities (137) — Total net deferred tax assets $2,017 $2,342 The above referenced Net Operating Loss was generated in 2015 and expires in 2035. In addition, we have a wholly-owned taxable subsidiary, or the Taxable Subsidiary, which holds a portion of one ormore of our portfolio investments that are listed on the Consolidated Schedule of Investments. The Taxable Subsidiary isconsolidated for financial reporting purposes in accordance with U.S. GAAP, so that our consolidated financial statementsreflect our investments in the portfolio companies owned by the Taxable Subsidiary. The purpose of the Taxable Subsidiaryis to permit us to hold certain interests in portfolio companies that are organized as limited liability companies, or LLCs (orother forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90.0% of our gross income forfederal income tax purposes must consist of qualifying investment income. Absent the Taxable Subsidiary, a proportionateamount of any gross income of a partnership or LLC (or other pass-through entity) portfolio investment would flow throughdirectly to us. To the extent that our income did not consist of investment income, it could jeopardize our ability to qualifyas 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 taxedto the Taxable Subsidiary and does not flow through to us, thereby helping us preserve our RIC status and resultant taxadvantages. The Taxable Subsidiary is not consolidated for U.S. federal income tax purposes and may generate income taxexpense as a result of their ownership of the portfolio companies. This income tax expense, or benefit, and the related taxassets and liabilities, if any, are reflected in our Statement of Operations. 84 Table of ContentsThe income tax expense, or benefit, and the related tax assets and liabilities generated by CSMC and the TaxableSubsidiary, if any, are reflected in CSWC’s consolidated financial statements. For the year ended March 31, 2017, werecognized a total net income tax provision of $1.8 million, principally consisting of a provision for deferred U.S. federalincome taxes relating to CSMC of $1.0 million, a $0.6 million accrual for excise tax on our estimated undistributed taxableincome and $0.2 million relating to the Taxable Subsidiary. We also recognized a deferred tax provision of $0.3 million,which is primarily the result of the unrealized appreciation related to the portfolio investment held in the Taxable Subsidiary.For the year ended March 31, 2016, we recognized a net income tax benefit of $1.3 million, of which the entire amountconsisted of a benefit for current U.S. federal income taxes. Although we believe our tax returns are correct, the finaldetermination of tax examinations could be different from what was reported on the returns. In our opinion, we have madeadequate tax provisions for years subject to examination. Generally, we are currently open to audit under the statute oflimitations by the Internal Revenue Service as well as state taxing authorities for the years ended December 31, 2013 through2015. The following table sets forth the significant components of the income tax expense as of March 31, 2017, 2016 and2015 (amounts in thousands): Years ended March 31, Components of Income Tax Expense 2017 2016 2015 Statutory federal income tax $(175) $(2,593) $98 162(m) limitation 625 545 14 Excise tax 588 - - Valuation allowance 459 866 - Tax related to Taxable Subsidiary 173 - - Prior year deferred tax true-up 67 (125) 213 Other 42 29 (55) Total income tax expense $1,779 $(1,278) $270 7. ACCUMULATED NET REALIZED GAINS (LOSSES) ON INVESTMENTSThe Company may retain some or all of its realized net long-term capital gains in excess of realized net short-termcapital losses and may designate the retained net capital gain as a “deemed distribution.” For the tax year ended December31, 2016, the Company did not elect to designate retained net capital gains as deemed distributions. For the tax year endedDecember 31, 2015, we elected to retain a portion of our long-term capital gains, incur the applicable taxes of $2.9 millionand designate the after-tax gain as “deemed distributions” to the shareholders. “Deemed distributions” are generallyreclassified from accumulated net realized gains into additional capital after our tax year ends each December 31. 8. SPIN-OFF COMPENSATION PLAN On August 28, 2014, our Board of Directors adopted a compensation plan (the “Spin-off Compensation Plan”)consisting of grants of nonqualified stock options, restricted stock and cash incentive awards to certain officers of theCompany at the time. The plan was intended to align the compensation of the Company’s key officers with the Company’sstrategic objective of increasing the market value of the Company’s shares through a transformative transaction for thebenefit of the Company’s shareholders. Under the plan, Joseph B. Armes, former CEO of the Company, Kelly Tacke, formerCFO of the Company, and Bowen S. Diehl, former CIO and current CEO of the company, were eligible to receive an amountequal to six percent of the aggregate appreciation in the Company’s share price from August 28, 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 consisted of nonqualified options awarded to purchase 259,000 shares of common stock at an exercise price of$36.60 per share. The second plan component consisted of awards of 127,000 shares of restricted stock, which have votingrights but do not have cash dividend rights. See Note 9 for further discussion on the first two components of the Spin-offCompensation Plan. The final plan component consisted of cash incentive payments awarded to each participant in anamount equal to the excess of each awardee’s allocable portion of the total payment amount over the aggregate value as ofthe Trigger Event Date of the awardee’s restricted common stock and nonqualified option awards under the plan.85 Table of Contents On September 8, 2015, the Board designated the Share Distribution as a transformative transaction for purposes ofthe Spin-off Compensation Plan and amended the award agreements granted under the plan to provide for accelerated vestingof the awards held by a participant in the event of a termination of that participant’s service effected by the participant forgood reason, by the employer without cause, or as a result of the disability or death of the participant. On September 30,2015, we completed the Share Distribution. Effective immediately with the Share Distribution, both Joseph B. Armes and Kelly Tacke became employees ofCSWI and Bowen Diehl, our President and Chief Executive Officer, continued to be an employee of our Company. TheCompany entered into the Employee Matters Agreement with CSWI. Under the Employee Matters Agreement, we retainedthe cash incentive awards granted under the Spin-off Compensation Plan, and all liabilities with respect to the cash incentiveawards remained liabilities of CSWC. The equity based awards vesting terms are as follows: (1) 1/3 on December 29, 2015;(2) 1/3 on December 29, 2016; and (3) 1/3 on December 29, 2017, subject to accelerated vesting as described above. The total value accretion was six percent of the aggregate appreciation in the Company’s share price from $36.16 tothe combined volume-weighted average prices of both CSWC and CSWI stock as of December 29, 2015. The cashcomponent of the Spin-off Compensation Plan was the difference between the total value accretion and the aggregate valueof the awardee’s restricted common stock and non-qualified option awards under the plan. The total cash liabilities for threeparticipants under the plan totaled $6.1 million, of which $4.8 million was fully vested as of December 29, 2016, and waspaid as of March 31, 2017. The remaining payment will be fully vested on December 29, 2017, subject to accelerated vestingas described above. During the twelve months ended March 31, 2017, we recognized the cash component of spin-off compensationexpense of $0.7 million, which represented the cash component of spin-off compensation for our current employee. Duringthe twelve months ended March 31, 2017, we also recorded $1.9 million directly to additional capital for the cashcomponent of spin-off compensation related to the two employees who transferred to CSWI, of which $1.3 million was paidto Kelly Tacke upon her separation from CSWI. During the twelve months ended March 31, 2016, we recognized the cashcomponent of spin-off compensation expense of $1.3 million, which represented the cash component of spin-offcompensation for our current employee and two transferred employees to CSWI prior to the Share Distribution. During thetwelve months ended March 31, 2016, we also recorded $1.3 million directly to additional capital for the cash component ofthe spin-off compensation related to the two transferred employees to CSWI. 9. EMPLOYEE STOCK BASED COMPENSATION PLANS Stock Options On July 20, 2009, shareholders approved our 2009 Stock Incentive Plan (the “2009 Plan”), which provides for thegranting of stock options to employees and officers and authorizes the issuance of common stock upon exercise of stockoptions for up to 560,000 shares. All options are granted at or above market price, generally expire up to 10 years from thedate of grant and are generally exercisable on or after the first anniversary of the date of grant in five annual installments. On August 28, 2014, our Board of Directors amended the 2009 Plan, as permitted pursuant to Section 18 of the 2009Plan (the “First Amendment to the 2009 Plan”). The First Amendment to the 2009 Plan provides that an award agreementmay allow an award to remain outstanding after a spin-off or change in control of one or more wholly-owned subsidiaries ofthe Company. In addition, on August 28, 2014, options to purchase 259,000 shares at $36.60 per share were granted underthe 2009 Plan, as amended. On September 8, 2015, the Board designated the Share Distribution as a transformativetransaction for purposes of the 2009 Plan and amended the award agreements granted under the 2009 Plan to provide foraccelerated vesting of the awards held by a participant in the event of a termination of that participant’s service effected bythe executive for good reason, by the employer without cause, or as a result of the disability or death of the participant. Athird of these options were vested on each of December 29, 2015 and December 29, 2016, respectively, and the rest of theoptions will vest on December 29, 2017, subject to accelerated vesting as described above. 86 Table of ContentsAt March 31, 2017, there are options to acquire 206,364 shares of common stock outstanding. The CompensationCommittee does not intend to grant additional options under the 2009 Stock Incentive Plan or request shareholders’approval of additional stock options to be added under the 2009 Stock Incentive Plan. We previously granted stock options under our 1999 Stock Option Plan (the “1999 Plan”), as approved byshareholders on July 19, 1999. The 1999 Plan expired on April 19, 2009. Options previously granted under our 1999 Planand outstanding on July 20, 2009 continue in effect and are governed by the provisions of the 1999 Plan. All optionsgranted under the 1999 Plan were granted at market price on the date of grant, generally expire up to 10 years from the dateof grant and are generally exercisable on or after the first anniversary of the date of grant in five to ten annual installments. AtMarch 31, 2017 and 2016, there are no options to acquire shares of common stock outstanding under the 1999 Plan. At September 30, 2015, in connection with the Share Distribution, we entered into the Employee MattersAgreement, which provided that each option to acquire CSWC common stock that was outstanding immediately prior toSeptember 30, 2015, would be converted into both an option to acquire post-Share Distribution CSWC common stock andan option to acquire CSWI common stock and would be subject to substantially the same terms and conditions (includingwith respect to vesting and expiration) after the September 30, 2015. Certain adjustments, using volumetric weighted-average prices for the 10-day period immediately prior to and immediately following the distribution, were made to theexercise price and number of shares of CSWC subject to such awards, with the intention of preserving the economic value ofthe awards immediately prior to the distribution for all CSWC employees. We compared the fair market value of our stockoptions on the day of the Share Distribution with the combined fair value of our stock options and CSWI stock options theday after the completion of the Share Distribution. The distribution-related adjustments did not have a material impact oncompensation expense for the years ended March 31, 2017 and 2016. 87 Table of ContentsThe following table summarizes activity in the 2009 Plan and the 1999 Plan as of March 31, 2017, includingadjustments in connection with the Share Distribution: Weighted Average Exercise Number of Shares Price 2009 Plan 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* Granted – – Exercised (131,252) 11.48 Canceled/Forfeited (24,897) 10.56 Balance at March 31, 2017 206,364 $11.17 1999 Plan 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)* NA Balance at March 31, 2016 − – Granted – – Exercised – – Canceled/Forfeited – – Balance at March 31, 2017 − $– Combined Balance at March 31, 2017 206,364 $11.17* Aggregate Weighted Average Intrinsic March 31, 2017 Remaining Contractual Term Value Outstanding 6.5 years $1,195,129 Exercisable 6.0 years $753,371 *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 immediately prior to and immediately following the distribution with the intention of preserving theeconomic value of the awards immediately prior to the distribution for all Capital Southwest employees. We recognize compensation cost using the straight-line method for all share-based payments. The fair value of stockoptions is determined on the date of grant using the Black-Scholes pricing model and is expensed over the requisite serviceperiod of the related stock options. Accordingly, for the years ended March 31, 2017, 2016 and 2015, we recognized88 Table of Contentsstock option compensation expense of $0.2 million, $0.4 million, and $0.5 million, respectively, related to the stock optionsheld by our employees and officers. As of March 31, 2017, the total remaining unrecognized compensation expense related to non-vested stock optionswas $0.2 million, which will be amortized over the weighted-average vesting period of approximately 1.4 years. During theyear ended March 31, 2017, we recognized stock-based compensation expense for awards that are held by our employees. At March 31, 2017, the range of exercise prices was $7.55 to $11.53 and the weighted-average remaining contractuallife of outstanding options was 6.5 years. The total number of shares of common stock exercisable under both the 2009 Planand the 1999 Plan at March 31, 2017 was 125,141 shares with a weighted-average exercise price of $11.12. During the yearended March 31, 2017, no options were granted and 131,252 options were exercised with an average exercise price of$11.48. At March 31, 2016, the range of exercise prices was $7.55 to $11.53 and the weighted-average remaining contractuallife of outstanding options was 7.8 years. The total number of options exercisable under both the 2009 Plan and the 1999Plan at March 31, 2016, was 139,759 shares with a weighted-average exercise price of $10.86. During the year ended March31, 2016, no options were granted and 23,974 options were exercised with an average exercise price of $19.38. At March 31, 2017, 2016 and 2015, the number of options exercisable was 125,141, 139,759 and 49,000,respectively, and the weighted average price of those options was $11.12, $10.86 and $27.04, respectively. Stock Awards Pursuant to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (“2010 Plan”), our Board ofDirectors originally reserved 188,000 shares of restricted stock for issuance to certain of our employees. At our annualshareholder meeting in August 2015, our shareholders approved an increase of an additional 450,000 shares to our 2010Plan. A restricted stock award is an award of shares of our common stock, which generally have full voting and dividendrights but are restricted with regard to sale or transfer. Restricted stock awards are independent of stock grants and aregenerally subject to forfeiture if employment terminates prior to these restrictions lapsing. Unless otherwise specified in theaward agreement, these shares vest in equal annual installments over a four to five-year period from the grant date and areexpensed over the vesting period starting on the grant date. On August 28, 2014, our Board of Directors amended the 2010 Plan, as permitted pursuant to Section 14 of the 2010Plan (the “First Amendment to the 2010 Plan”). The First Amendment to the 2010 Plan provides that an award agreementmay allow an award to remain outstanding after a spin-off or change in control of one or more wholly-owned subsidiaries ofthe Company. In addition, on August 28, 2014, the Board of Directors granted 127,000 shares of restricted stock under theSpin-Off Compensation Plan. On September 30, 2015, we completed the Share Distribution. Each holder of an outstanding Capital SouthwestRestricted Stock Award immediately prior to the Share Distribution received, as of the effective date of the ShareDistribution, a CSWI Restricted Stock Award for the number of CSWI Shares the holder would have received if theoutstanding Capital Southwest Restricted Stock Award comprised fully vested Capital Southwest Shares as of the effectivedate. The vesting terms for restricted stock awards previously granted under the Spin-off Compensation Plan are asfollows: (1) one-third on December 29, 2015; (2) one-third on December 29, 2016; and (3) one-third on December 29, 2017,subject to accelerated vesting as described above. 89 Table of ContentsThe following table summarizes the restricted stock available for issuance for the year ended March 31, 2017: Restricted stock available for issuance as of March 31, 2016 344,540 Additional restricted stock approved under the plan − Restricted stock granted during the year ended March 31, 2017 (161,918) Restricted stock forfeited during the year ended March 31, 2017 7,880 Restricted stock available for issuance as of March 31, 2017 190,502 We expense the cost of the restricted stock awards, which is determined to equal the fair value of the restricted stockaward at the date of grant, on a straight-line basis over the requisite service period. For these purposes, the fair value of therestricted stock award is determined based upon the closing price of our common stock on the date of the grant. Due to theShare Distribution, the Company evaluated (1) the value of the CSWC stock awards prior to the Share Distribution and (2)the combined value of CSWC and CSWI stock awards following the Share Distribution and recorded additional incrementalstock based compensation expenses. For the fiscal years ended March 31, 2017, 2016, and 2015 we recognized total share based compensation expenseof $1.0 million, $0.7 million and $0.5, respectively, related to the restricted stock issued to our employees and officers. As of March 31, 2017, the total remaining unrecognized compensation expense related to non-vested restrictedstock awards was $3.6 million, which will be amortized over the weighted-average vesting period of approximately 3.1 years.Subsequent to the Share Distribution, the compensation expense related to non-vested awards held by employees who arenow employed by CSWI is recorded by CSWI. The following table summarizes the restricted stock outstanding as of March 31, 2017: Weighted Average Weighted Average Fair Value Per Remaining Vesting Restricted Stock Awards Number of Shares Share at grant date Term (in Years) 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 Granted 161,918 14.46 3.6 Vested (93,202) 15.87 − Forfeited (7,880) 22.44 − Unvested at March 31, 2017 294,043 $14.99 3.1 Individual Incentive Awards On January 16, 2012, our Board of Directors approved the issuance of 104,000 individual cash incentive awardswith a baseline for measuring increases in net asset value per share of $36.74 (Net Asset Value at December 31, 2011) toprovide deferred compensation to certain key employees. On January 22, 2013, the Board of Directors granted 16,200individual cash incentive awards with a baseline net asset value per share of $41.34 (Net Asset Value at December 31, 2012)to officers of the Company. On July 15, 2013, the Board of Directors granted 24,000 shares of individual cash incentiveawards with a baseline 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 granted 38,000 individual cash incentive awards with a baseline net asset value pershare of $50.25 (Net Asset Value at December 31, 2013) to several key employees of the Company in January 2014 andMarch 2014. Under the individual cash incentive award agreements, awards vest on the fifth anniversary of the award date.Upon exercise of an individual cash incentive award, the Company pays the recipient a cash payment in an amount equal tothe net asset value per share minus the baseline net asset value per share, adjusted for capital gain dividends declared. 90 Table of ContentsIn connection with the Share Distribution, we entered into the Employee Matters Agreement with CSWI. Under theEmployee Matters Agreement, the individual cash incentive award agreements were amended to provide that the value ofeach individual cash incentive award is determined based upon the net asset value of CSWC as of June 30, 2015. Theremaining terms of each individual incentive award agreement, including the vesting and payment terms, will remainunchanged. After the effective date of the Share Distribution, CSWC retains all liabilities associated with all individual cashincentive awards granted by CSWC. There are currently 48,000 individual cash incentive awards outstanding as of March 31, 2017 and the liability forindividual cash incentive awards was $0.3 million at March 31, 2017. During the twelve months ended March 31, 2016,payments in the amount of $0.3 million were paid to vested employees. The estimated liability for individual cash incentiveawards was $0.6 million at March 31, 2016. At March 31, 2015, our estimated liability for individual cash incentive awardswas $0.7 million. During the twelve months ended March 31, 2015, a payment in the amount of $0.2 million was paid out toa vested employee. There were no individual cash incentive awards granted during the twelve months ended March 31, 2017. Weighted Average Weighted Remaining Number of Average Grant Vesting Term Individual Cash Incentive Awards Shares Price Per Share (in Years) Unvested at March 31, 2016 74,000 $45.60 2.3 Granted − − − Vested (14,000) 36.74 − Forfeited or expired (12,000) 50.25 − Unvested at March 31, 2017 48,000 $47.03 1.6 10. OTHER EMPLOYEE COMPENSATION We established a 401(k) plan (“401K Plan”) effective October 1, 2015. All full-time employees are eligible toparticipate in the 401K Plan. The 401K Plan permits employees to defer a portion of their total annual compensation up tothe Internal Revenue Service annual maximum based on age and eligibility. During the year ended March 31, 2017, wemade contributions to the 401K Plan of up to 4.5% of the Internal Revenue Service’s annual maximum eligiblecompensation, all of which is fully vested immediately. During the year ended March 31, 2017, we made matchingcontributions of approximately $119.0 thousand. During the year ended March 31, 2016, we made matching contributionsof approximately $49.0 thousand. 11. RETIREMENT PLANS Until the Share Distribution, CSWC sponsored a qualified defined benefit pension plan which covers its employeesand employees of certain of its controlled affiliates. The following information about the plan represents amounts andinformation related to CSWC’s participation in the plan and is presented as though CSWC sponsored a single-employerplan. Benefits were based on years of service and an average of the highest five consecutive years of compensation duringthe last 10 years of employment. The funding policy of the plan was to contribute annual amounts that are currentlydeductible for tax reporting purposes. No contribution was made to the plan during the three years ended March 31, 2017.The qualified defined benefit pension plan is closed to any employees hired or rehired on or after January 1, 2015. Inconnection with the Share Distribution, we entered into an Employee Matters Agreement with CSWI on September 8, 2015.The Employee Matters Agreement was amended and restated on September 14, 2015. Under the Employee MattersAgreement, Capital Southwest Corporation and Capital Southwest Management Corporation withdrew as participatingemployers in the Plan and CSWI became the Sponsoring Employer of the Qualified Retirement Plan and assumed all theliabilities, assets, and future funding obligations for providing benefits for the covered Participants under the QualifiedRetirement Plan. Additionally, CSWC sponsors an unfunded Retirement Restoration Plan, which is a nonqualified plan that providesfor the payment, upon retirement, of the difference between the maximum annual payment permissible under the91 Table of Contentsqualified retirement plan pursuant to federal limitations and the amount which would otherwise have been payable under thequalified plan. Effective September 30, 2015, the benefits accrued under the Restoration Plan on behalf of CSWI employees,including employees who transferred from the Company to CSWI, were transferred to a non-qualified deferred compensationplan established by CSWI. The Company retained all liabilities associated with benefits accrued under the Restoration Planon behalf of individuals who remain employees of the Company or Capital Southwest Management Corporation followingSeptember 30, 2015 or who terminated employment prior to September 30, 2015 with vested benefits under the RestorationPlan. Unvested accrued benefits under the Restoration Plan were forfeited as of September 30, 2015. The following tables set forth the qualified plan’s net pension benefit, benefit obligation, fair value of plan assets,and amounts recognized in our Consolidated Statements of Operations at March 31, 2017, 2016 and 2015, as well asamounts recognized in our Consolidated Statements of Assets and Liabilities at March 31, 2017 and 2016 in thousands): Years ended March 31, 2017 2016 2015 Net pension benefit Service cost-benefits earned during the year $- $190 $199 Interest cost on projected benefit obligation - 173 348 Expected return on assets - (579) (1,043) Net amortization - 5 25 Immediate recognition of benefit cost due to Plan Freeze at 9/30/2016 - (72) - Net pension benefit from qualified plan $- $(283) $(471) Years ended March 31, 2017 2016 2015 Change in benefit obligation Benefit obligation at beginning of year $- $8,329 $7,149 Service cost - 190 199 Interest cost - 173 348 Actuarial (gain) loss - (508) 931 Benefits paid - (172) (298) Curtailment recognition - (409) - Transferred to CSWI at 9/30/2016 - (7,603) - Benefit obligation at end of year $- $- $8,329 Years ended March 31, 2017 2016 2015 Change in plan assets Fair value of plan assets at beginning of year $- $18,623 $18,112 Actual return on plan assets - (315) 809 Benefits paid - (172) (298) Transferred to CSWI at 9/30/2016 - (18,136) - Fair value of plan assets at end of year $- $- $18,623 Following the Share Distribution, all plan assets were transferred to CSWI. As such, CSWC did not record anyprepaid pension cost or accumulated benefit obligation in connection with the qualified defined benefit pension plan for theyears ended March 31, 2017 and 2016. 92 Table of ContentsThe following tables set forth the retirement restoration plan’s net pension benefit and benefit obligation amounts atMarch 31, 2017, 2016 and 2015, as well as amounts recognized in our consolidated statements of assets and liabilities atMarch 31, 2017 and 2016: Years ended March 31, 2017 2016 2015 Net pension cost Service cost-benefits earned during the year $- $82 $18 Interest cost on projected benefit obligation 125 138 143 Net amortization 47 45 31 Immediate recognition of benefit cost due to Plan Freeze at 9/30/2015 - (82) - Net pension cost from restoration plan $172 $183 $192 Years ended March 31, 2017 2016 2015 Change in benefit obligation Benefit obligation at beginning of year $3,061 $3,119 $3,103 Service cost - 82 18 Interest cost 125 138 143 Actuarial loss 41 428 105 Benefits paid (207) (200) (250) Curtailment recognition - (329) – Other adjustments - (177) – Benefit obligation at end of year $3,020 $3,061 $3,119 Years ended March 31, 2017 2016 Amounts recognized in our Consolidated Statements of Assets and Liabilities Projected benefit obligation $(3,020) $(3,061) Portion recognized as a component of equity 850 856 Accrued pension cost included in pension liabilities $(2,170) $(2,205) The following assumptions were used in estimating the actuarial present value of the projected benefit obligations: Years ended March 31, 2017 2016 2015 Discount rate 4.00% 4.25% 4.25%Rate of compensation increases N/A 5.00% 5.00% The following assumptions were used in estimating the net periodic (income)/expense: Years ended March 31, 2017 2016 2015 Discount rate 4.00% 4.25% 5.00%Expected return on plan assets N/A N/A 7.00%Rate of compensation increases N/A N/A 5.00% Following are the expected benefit payments for the next five years and in the aggregate for the years 2023-2027(amounts in thousands): (In thousands) 2018 2019 2020 2021 2022 2023-2027 Restoration Plan $214 $214 $213 $223 $232 $1,096 93 Table of Contents12. COMMITMENTS AND CONTINGENCIES On September 9, 2015, we entered into an agreement to co-manage I-45 SLF LLC (the “Joint Venture” or “I-45SLF”) with Main Street Capital Corporation (“Main Street”). Both companies have equal voting rights on the JointVenture’s Board of Managers. We have committed to provide $68 million of equity to the Joint Venture, with Main Streetproviding $17 million. The Joint Venture invests primarily in syndicated senior secured loans in the upper middle market.To date we have contributed $60.8 million and currently have commitments outstanding of $7.2 million as of March 31,2017. We lease office space under an operating lease which requires annual base rentals of approximately $250 thousand.For the three years ended March 31, 2017, total rental expense was $233 thousand in 2017, $186 thousand in 2016, and$207 thousand in 2015, and the rent commitments for the next five years as of March 31, 2017 are as follows (amounts inthousands): Year ending March 31, Rent Commitment 2018 239 2019 248 2020 258 2021 267 2022 226 Thereafter — Total $1,238 We may, from time to time, be involved in litigation arising out of our operations in the normal course of business orotherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of ourportfolio companies. We have no currently pending material legal proceedings to which we are part or to which any of ourassets is subject. 13. SOURCES OF INCOME (AMOUNTS IN THOUSANDS) Realized Gain(Loss) on Investments Investment Income before IncomeTaxes Year ended Other March 31, 2017 Interest Dividends Income Non-control/Non-affiliate investments $11,759 $- $622 $3,992 Affiliate investments 561 162 - 3,876 Control investments 160 9,682 362 28 Other sources, including temporary investments 166 - - - $12,646 $9,844 $984 $7,896 Realized Gain(Loss) onInvestments Investment Income before IncomeTaxes Year ended Other March 31, 2016 Interest Dividends Income Non-control/Non-affiliate investments $4,409 $− $130 $(9,575) Affiliate investments 135 − − (1,458) Control investments − 3,489 530 231 Other sources, including temporary investments 386 − 81 − $4,930 $3,489 $741 $(10,802) 94 Table of Contents Realized Gain(Loss) onInvestments Investment Income before IncomeTaxes Year ended Other March 31, 2015 Interest Dividends Income Non-control/Non-affiliate investments $288 $67 $75 $8,226 Affiliate investments − 581 − 157,213 Control investments − 8,295 485 (1,175) Other sources, including temporary investments 122 − 35 − $410 $8,943 $595 $164,264 14. SELECTED QUARTERLY FINANCIAL DATA The following presents a summary of the unaudited quarterly consolidated financial information for the years endedMarch 31, 2017 and 2016 (in thousands except per share amounts): First Second Third Fourth 2017 Quarter Quarter Quarter Quarter Total Net investment income (loss) $371 $1,365 $2,873 $3,279 $7,888 Net realized gain (loss) on investments 199 3,527 72 4,098 7,896 Net increase (decrease) in unrealized appreciation on investments 2,127 2,026 4,940 (1,403) 7,690 Net increase (decrease) in net assets from operations 2,697 6,918 7,885 5,974 23,474 Net investment (loss) income per share 0.02 0.09 0.18 0.21 0.50 Net increase (decrease) in net assets from operations per share 0.17 0.44 0.50 0.37 1.48 First Second Third Fourth 2016 Quarter Quarter Quarter Quarter 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 unrealized appreciation on investments 4,245 3,783 7,060 1,001 16,089 Net increase (decrease) in net assets from operations 2,164 (8,948) (1,130) 2,514 (5,400) Net investment (loss) income per share (0.18) (0.60) — 0.10 (0.68) Net increase (decrease) in net assets from operations per share 0.14 (0.58) (0.07) 0.16 (0.35) 15. RELATED PARTY TRANSACTIONS As a BDC, we are obligated under the 1940 Act to make available to certain of our portfolio companies significantmanagerial assistance. “Making available significant managerial assistance” refers to any arrangement whereby we providesignificant guidance and counsel concerning the management, operations, or business objectives and policies of a portfoliocompany. We are also deemed to be providing managerial assistance to all portfolio companies that we control, either byourselves 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, 2017 and 2016, we receivedmanagement and other fees from certain of our portfolio companies totaling $0.4 million and $0.7 million, respectively,which were recognized as fees and other income on the Consolidated Statements of Operations. 16. SUBSEQUENT EVENTS On April 3, 2017, CSWC paid regular dividends declared on February 28, 2017 in the amount of $3.0 million, or$0.19 per share, and special dividends declared in the amount of $4.2 million, or $0.26 per share. On May 10, 2017, CSWC announced that the Chairman of the Board, Joseph B. Armes has informed the Company’sBoard of Directors (the “Board”) of his decision not to stand for re-election at the Annual Meeting of Shareholders in August2017. The Company reported this along with the plan for replacing Mr. Armes in connection with the Company’s upcomingannual meeting on August 3, 2017 in an 8-K filed with the SEC on that day.95 Table of Contents On May 31, 2017, we announced our Board of Directors had declared a $0.21 dividend per share for the quarterended for June 30, 2017. The record date for the dividend is June 15, 2017. The payment date for the dividend is July 3,2017. 17. SELECTED PER SHARE DATA AND RATIOS The following presents a summary of the selected per share data for the years ended March 31, 2013 through 2017(in thousands except per share amounts): Years Ended March 31, Per Share Data: 2017 2016 2015 2014 2013 Investment income $1.48 $0.58 $0.64 $0.82 $0.71 Operating expenses (0.87) (1.34) (0.78) (0.55) (0.55) Income taxes (0.11) 0.08 (0.02) 0.05 (0.04) Net investment income (loss) 0.50 (0.68) (0.16) 0.32 0.12 Dividends to shareholders (0.79) (0.14) (0.20) (0.20) (5.27) Net realized gain (loss) 0.50 (0.88) 7.06 0.66 5.81 Net increase (decrease) in unrealized appreciation oninvestments 0.49 1.02 (6.96) 6.04 1.08 Distribution from additional capital for spin-off — (1.67) — — — Spin-off Compensation Plan distribution, net of tax (0.08) (0.08) — — — Decrease in unrealized appreciation due to distributions toCSWI - (29.15) — — — Exercise of employee stock options (0.09) 0.03 (0.04) (0.18) (0.24) Forfeiture/ (Issuance) of restricted stock (0.15) (0.49) (0.40) — (0.10) Share based compensation expense 0.08 0.08 0.07 (0.04) 0.03 Net change in pension plan funded status - — (0.05) 0.08 0.01 Increase (decrease) in net asset value 0.46 (31.96) (0.68) 6.68 1.44 Net asset value Beginning of period 17.34 49.30 49.98 43.30 41.86 End of period $17.80 $17.34 $49.30 $49.98 $43.30 Ratios and Supplemental Data Ratio of operating expenses, excluding interest expense, toaverage net assets 4.59% 4.48% 1.59% 1.18% 1.36%Ratio of net investment income to average net assets 2.83% (2.27)% (0.32)% 0.68% 0.31%Portfolio turnover 17.3% 4.2% 0.93% 1.76% 2.22%Total investment return 27.9% (20.7)% 8.4% 16.9% 27.0%Total return based on change in NAV 7.2% (2.2)% (1.0)% 15.9% 16.0% Weighted-average fully diluted shares outstanding 15,877 15,724 15,531 15,298 15,207 Common shares outstanding at end of period 16,011 15,726 15,565 15,414 15,236 1Based on weighted average of common shares outstanding for the period.2Net decrease is due to the exercise of employee stock options at prices less than beginning of period net asset value.3Reflects impact of the different share amounts as a result of issuance or forfeiture of restricted stock during the period.4Total 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 thelast day of each period reported on the table and assumes reinvestment of dividends at prices obtained by CSWC’s dividend reinvestmentplan during the period. The return does not reflect any sales load that may be paid by an investor.5Total return based on change in net asset value was calculated using the sum of ending net asset value plus dividends to shareholders andother non-operating changes during the period, as divided by the beginning net asset value.6Amounts for fiscal 2015, 2014 and 2013 are based on average net assets prior to the Share Distribution. 96 111123645Table of Contents18. SIGNIFICANT SUBSIDIARIES Media Recovery Inc. Media Recovery, Inc. (MRI), through its subsidiary ShockWatch, provides solutions that currently enable over3,000 customers and some 200 partners in 62 countries to detect mishandling that causes product damage and spoilageduring transport and storage. The ShockWatch product portfolio includes impact, tilt, temperature, vibration, and humiditydetection 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-closingservices to DataSpan Holdings under a transition services agreement (“TSA”) through June 27, 2015. Our valuation is basedprimarily on adjusted EBITDA. At March 31, 2017, our investment in Media Recovery, Inc. exceeded the 10.0% and 20.0% thresholds in at leastone of the tests under Rule 3-09 and Rule 4-08(g) of Regulation S-X. Accordingly, we will amend our Form 10-K to includethe financial statements of Media Recovery, Inc. once they are available. At March 31, 2016, our investment in MediaRecovery, Inc. exceeded the 10% and 20% thresholds in at least one of the tests under Rule 3-09 and Rule 4-08(g).Accordingly, we amended our Form 10-K to include the financial statements of Media Recovery, Inc. in December 2016,within 90 days of Media Recovery, Inc.’s fiscal year end. Below is certain selected key financial data from its Balance Sheetat March 31, 2017 and 2016 and the twelve months ended March 31, 2017 and 2016 Income Statement (amounts inthousands). March 31, 2017 March 31, 2016Current Assets $9,935 $11,242Non-Current Assets 23,173 23,644Current Liabilities 2,083 1,997Non-Current Liabilities $2,396 $2,240 Years Ended March 31 2017 2016Revenue $19,571 $20,765Income from continuing operations 1,100 591Net income 1,100 472 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-45SLF began investing in syndicated senior secured loans in the upper middle market during the quarter ended December 31,2015. The initial equity capital commitment to I-45 SLF totaled $85.0 million, consisting of $68.0 million from us and $17.0million from Main Street. Approximately $76.0 million was funded as of March 31, 2017, relating to these commitments, ofwhich $60.8 million was from CSWC. We own 80.0% of I-45 SLF and have a profits interest of 75.6%, while Main Streetowns 20.0% and has a profits interest of 24.4%. I-45 SLF’s Board of Managers make all investment and operationaldecisions for the fund, and consist of equal representation from CSWC and Main Street. As of March 31, 2017 and 2016, I-45 SLF had total assets of $216.2 million and $102.9 million. I-45 SLF hadapproximately $200.2 million and $99.2 million of credit investments at fair value as of March 31, 2017 and 2016,respectively. The portfolio companies in I-45 SLF are in industries similar to those in which we may invest directly. As ofMarch 31, 2017 and 2016, approximately $11.8 million and $8.0 million, respectively, were unsettled trades. For the yearsended March 31, 2017 and 2016, I-45 SLF declared total dividends of $9.1 million and $1.7 million, respectively. Additionally, I-45 SLF closed on a $75.0 million 5-year senior secured credit facility led by Deutsche Bank AG(“Deutsche Bank facility”) in November 2015. This facility includes an accordion feature which will allow I-45 to achieveleverage of up to 2x debt-to-equity. Borrowings under the facility are secured by all of the assets of I-45 SLF and bearinterest at a rate equal to LIBOR plus 2.5% per annum. During the year ended March 31, 2017, I-45 increased debtcommitments outstanding by an additional $90.0 million by adding three additional lenders to the syndicate, bringing totaldebt commitments to $165.0 million. There is $122.0 million drawn on the facility as of March 31, 2017. 97 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 March31, 2017 and 2016: I-45 SLF LLC Loan Portfolio as of March 31, 2017 Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair Value Ahead, LLC Business services First Lien 11/2/2020 L+ 6.50% $4,687,500 $4,585,980 4,640,625 American Scaffold Holdings Aerospace & defense First Lien 3/31/2022 L+6.50%(Floor1.00%) 2,925,000 2,887,177 2,910,375 American Teleconferencing Telecommunications First Lien 12/8/2021 L+6.50% (Floor1.00%) 5,711,302 5,243,687 5,700,451 SecondLien 6/6/2022 L+9.50% (Floor1.00%) 1,708,571 1,643,620 1,674,400 Ansira Partners Business services First Lien 12/31/2022 L+6.50%(Floor1.00%) 4,500,000 3,884,092 3,893,523 Array Technologies Technology products& components First Lien 6/22/2021 L+7.25%(Floor1.00%) 4,625,000 4,542,126 4,613,437 ATX Networks Corp. Technology products& components First Lien 6/12/2021 L+6.00% (Floor1.00%) 4,924,812 4,877,593 4,875,564 Beaver-Visitec International Healthcare products First Lien 8/21/2023 L+5.00%(Floor1.00%) 4,975,000 4,928,997 4,975,000 California Pizza Kitchen Food, agriculture &beverage First Lien 8/23/2022 L+6.00%(Floor1.00%) 6,969,987 6,925,133 6,971,381 CMN.com (Higher Education) Consumer services First Lien 10/15/2021 L+6.00%(Floor1.00%) 6,912,500 6,785,531 6,785,531 Contextmedia Media, marketing &entertainment First Lien 12/31/2021 L+6.50% (Floor1.00%) 1,975,000 1,787,489 1,975,000 Digital River Software & ITservices First Lien 2/12/2021 L+6.50% (Floor1.00%) 7,015,452 6,988,236 7,050,529 Digital Room Paper & forestproducts SecondLien 5/28/2023 L+10.00%(Floor1.00%) 4,000,000 3,924,128 3,924,128 Highline Aftermarket Automobile First Lien 3/17/2024 L+4.25% (Floor1.00%) 3,000,000 2,985,000 3,033,900 Hunter Defense Technologies Aerospace & defense First Lien 8/5/2019 L+6.00%(Floor1.00%) 2,703,947 2,697,208 2,514,671 ICSH, Inc. Containers &packaging First Lien 12/31/2018 L+5.75% (Floor1.00%) 6,698,007 6,670,865 6,685,051 iEnergizer Business services First Lien 5/1/2019 L+6.00%(Floor1.25%) 6,567,046 6,217,720 6,542,748 IG Investments Holdings Business services First Lien 10/31/2021 L+5.00%(Floor1.00%) 2,480,470 2,469,439 2,507,856 Imagine! Print Solutions Media, marketing &entertainment First Lien 3/30/2022 L+6.00% (Floor1.00%) 3,565,489 3,526,760 3,610,057 98 1,32Table of Contents Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair Value InfoGroup Inc. Software & IT services First Lien 5/28/2018 L+5.50%(Floor1.50%) 5,913,550 5,813,451 5,907,637 First Lien L+5.00%(Floor1.50%) 3,000,000 2,970,000 2,970,000 Integro Parent Inc. Business services First Lien 11/2/2022 L+5.75% (Floor1.00%) 4,938,924 4,790,756 4,963,618 iPayment, Inc. Financial services First Lien 5/8/2017 L+5.25% (Floor1.50%) 6,964,029 6,947,920 6,929,209 LTI Holdings, Inc. Industrial products First Lien 4/17/2022 L+4.25% (Floor1.00%) 1,974,874 1,780,886 1,974,874 Mood Media Corporation Business services First Lien 5/1/2019 L+6.00% (Floor1.00%) 4,503,289 4,427,043 4,483,024 MWI Holdings Industrial products First Lien 6/29/2020 L+5.50%(Floor1.00%) 4,962,500 4,921,442 5,006,170 New Media Holdings II LLC Media, marketing &entertainment First Lien 6/4/2020 L+6.25% (Floor1.00%) 6,901,894 6,886,200 6,867,385 Northstar Travel Media, marketing &entertainment First Lien 6/7/2022 L+6.25% (Floor1.00%) 4,090,625 4,036,655 4,070,172 PetValu Consumer products &retail First Lien 7/5/2022 L+5.50%(Floor1.00%) 4,975,000 4,931,261 4,987,438 Pike Corp. Utilities SecondLien 8/30/2024 L+8.00% (Floor1.00%) 1,000,000 990,000 1,017,500 Polycom Telecommunications First Lien 9/27/2023 L+6.50% (Floor1.00%) 6,445,833 6,445,833 6,547,678 Prepaid Legal Services, Inc. Consumer services First Lien 7/1/2019 L+5.25% (Floor1.25%) 4,474,279 4,470,626 4,507,836 SecondLien 7/1/2020 L+9.00% (Floor1.25%) 405,000 395,663 407,349 PT Network Healthcare products First Lien 11/30/2021 L+6.50%(Floor1.00%) 4,990,972 3,883,735 3,883,735 Redbox Automated Retail Gaming & leisure First Lien 9/27/2021 L+7.50%(Floor1.00%) 6,125,000 5,958,692 6,132,963 Safe Guard Automobile First Lien 3/31/2024 L+5.00% (Floor1.00%) 3,250,000 3,152,500 3,225,625 Sigma Electric Industrial products First Lien 8/31/2021 L+7.50%(Floor1.00%) 5,000,000 4,886,637 4,886,637 SRP Companies Consumer services First Lien 9/8/2023 L+6.50% (Floor1.00%) 5,152,273 5,106,492 5,132,212 TaxACT Financial services First Lien 12/31/2022 L+6.00% (Floor1.00%) 1,269,915 1,238,463 1,269,915 99 1,32Table of Contents Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair Value Terra Millennium Industrial products First Lien 11/23/2022 L+6.25% (Floor1.00%) 6,956,250 6,889,423 6,956,250 Time Manufacturing Capital Equipment First Lien 2/10/2022 L+5.00% (Floor1.00%) 3,000,000 2,985,343 2,985,343 Turning Point Brands Retail First Lien 12/31/2021 L+6.00% (Floor1.00%) 5,000,000 4,950,846 4,950,846 Tweddle Group Media, marketing &entertainment First Lien 10/24/2022 L+6.00%(Floor1.00%) 2,506,731 2,459,763 2,525,531 US Joiner (IMECO and RAACI) Transportation &logistics First Lien 4/16/2020 L+6.00% (Floor1.00%) 4,791,601 4,737,062 4,767,643 VIP Cinema Hotel, gaming &leisure First Lien 3/31/2023 L+6.00% (Floor1.00%) 5,000,000 4,975,275 5,059,500 Water Pik, Inc. Consumer products& retail First Lien 7/8/2020 L+4.75% (Floor1.00%) 1,137,090 1,135,097 1,139,478 SecondLien 1/8/2021 L+8.75% (Floor1.00%) 1,789,474 1,756,683 1,802,895 Total Investments $197,494,528 $200,242,690 1Represents the interest rate as of March 31, 2017. 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 isdetermined by the Board of Managers of the Joint Venture. It is not included in the Company’s Board of Directors’ valuation process describedelsewhere herein.3The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) orPrime (“Prime”) which reset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime andthe current contractual interest rate in effect at March 31, 2017. Certain investments are subject to a LIBOR or Prime interest rate floor. 100 1,32Table of ContentsI-45 SLF LLC Loan Portfolio as of March 31, 2016 Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair ValueAhead, LLC Business services First Lien 11/2/2020 L+ 6.50% $4,937,500 $4,800,794 $4,814,063ATX Networks Corp. Technology products& components First Lien 6/12/2021 L+6.00% (Floor1.00%) 4,974,937 4,915,874 4,925,188BDF Acquisition Corp. Consumer products &retail SecondLien 2/12/2022 L+8.00% (Floor1.00%) 3,000,000 2,859,650 2,895,000Compuware Corporation Software & ITservices First Lien 12/15/2019 L+5.25% (Floor1.00%) 2,922,078 2,854,681 2,829,857CRGT Aerospace & defense First Lien 12/19/2020 L+6.50% (Floor1.00%) 3,923,567 3,918,804 3,913,758Digital River Software & ITservices First Lien 2/12/2021 L+6.50% (Floor1.00%) 5,415,452 5,383,375 5,408,683Hunter Defense Technologies Aerospace & Defense First Lien 8/5/2019 L+5.50% (Floor1.00%) 2,960,526 2,950,002 2,442,434ICSH, Inc. Containers &packaging First Lien 12/31/2018 L+5.75% (Floor1.00%) 4,974,243 4,953,875 4,941,503Imagine! Print Solutions Media, marketing &entertainment First Lien 3/30/2022 L+6.00% (Floor1.00%) 3,000,000 2,947,500 3,011,250Integro Parent Inc. Business services First Lien 11/2/2022 L+5.75% (Floor1.00%) 4,988,287 4,821,625 4,813,697iPayment, Inc. Financial services First Lien 5/8/2017 L+5.25% (Floor1.00%) 5,000,000 4,904,057 4,778,150Jet Support Services, Inc. Aerospace & defense First Lien 8/31/2021 L+6.50% (Floor1.00%) 4,875,000 4,768,698 4,631,250Kendra Scott Consumer products &retail First Lien 7/17/2020 L+6.00% (Floor1.00%) 4,899,684 4,892,037 4,887,434LTI Holdings, Inc. Industrial products First Lien 4/17/2022 L+4.25% (Floor1.00%) 1,994,975 1,760,565 1,890,239MediMedia USA Healthcare services First Lien 11/20/2018 L+6.75% (Floor1.25%) 5,000,000 4,876,157 4,887,500Milk Specialties Food, agriculture &beverage First Lien 11/9/2018 L+7.00% (Floor1.25%) 3,686,288 3,681,983 3,693,200Mood Media Corporation Business services First Lien 5/1/2019 L+6.00% (Floor1.00%) 4,549,714 4,435,393 4,260,375New Media Holdings II LLC Media, marketing &entertainment First Lien 6/4/2020 L+6.25% (Floor1.00%) 4,962,311 4,951,057 4,853,785Prepaid Legal Services, Inc. Consumer services First Lien 7/1/2019 L+5.25% (Floor1.25%) 4,824,760 4,819,070 4,812,698 SecondLien 7/1/2020 L+9.00% (Floor1.25%) 405,000 392,850 400,950101 1,32Table of Contents Current Investment Maturity Interest Portfolio Company Industry Type Date Rate Principal Cost Fair Value Stardust Finance Holdings, Inc. Buildings &infrastructureproducts First Lien 3/13/2022 L+5.50% (Floor1.00%) 4,974,874 4,928,459 4,937,563TaxACT Financial services First Lien 12/31/2022 L+6.00% (Floor1.00%) 4,500,000 4,369,102 4,432,500US Joiner (IMECO and RAACI) Transportation &logistics First Lien 4/16/2020 L+6.00% (Floor1.00%) 2,992,366 2,940,000 2,947,481Vivid Seats Media, marketing &entertainment First Lien 3/1/2022 L+6.00% (Floor1.00%) 5,000,000 4,653,688 4,737,500Water Pik, Inc. Consumer products& retail First Lien 7/8/2020 L+4.75% (Floor1.00%) 1,191,287 1,188,560 1,179,868 SecondLien 1/8/2021 L+8.75% (Floor1.00%) 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 isdetermined by the Board of Managers of the Joint Venture. It is not included in the Company’s Board of Directors’ valuation process describedelsewhere herein.3The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) orPrime (“Prime”) which reset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR or Prime andthe current contractual interest rate in effect at March 31, 2016. Certain investments are subject to a LIBOR or Prime interest rate floor. 102 1,32Table of ContentsAt March 31, 2017, our investment in I-45 SLF, LLC exceeded the 10.0% and 20.0% thresholds in at least one ofthe tests under Rule 3-09 and Rule 4-08(g) of Regulation S-X. Accordingly, we have included as an exhibit to our Form 10-Kthe financial statements of I-45 SLF, LLC. Below is certain summarized financial information for I-45 SLF, LLC as of March31, 2017 and 2016 and for the years ended March 31, 2017 and 2016 (amounts in thousands): March 31, 2017 March 31, 2016 Selected Balance Sheet Information: Investments, at fair value (cost $197,495 and $99,836) $200,243 $99,214 Cash and cash equivalents 12,093 2,181 Due from broker 1,732 - Deferred financing costs 1,659 1,060 Interest receivable 474 436 Total assets $216,201 $102,891 Senior credit facility payable $122,000 $48,000 Payable for unsettled transactions 11,795 8,040 Other liabilities 2,988 1,494 Total liabilities $136,783 $57,534 Members’ equity 79,418 45,357 Total liabilities and net assets $216,201 $102,891 Year Ended Year Ended March 31, 2017 March 31, 2016 Selected Statement of Operations Information: Total revenues $12,542 $2,401 Total expenses 4,400 689 Net investment income 8,142 1,712 Net unrealized appreciation (depreciation) 3,370 (621) Net realized gains 1,653 42 Net increase in members’ equity resulting from operations $13,165 $1,133 103 Table of ContentsSCHEDULE 12-14 Schedule of Investments in and Advances to Affiliates(In thousands) Amount of Interest, Fees or Dividends Fair Value Gross Gross Fair Value at Portfolio Company/ Credited in at March31, Additions Reductions March 31, Type of Investment (1) Income (2) 2016 (3) (4) 2017 Control Investments I-45 SLF LLC 80% LLC equity interest $6,883 $36,337 $27,058 $ — $63,395 Media Recovery, Inc. 800,000 shares Series A Convertible Preferred Stock,convertible into 800,000 shares common stock 460 4,757 833 5,590 4,000,002 shares common stock 2,653 27,445 4,804 32,249 TitanLiner 1,189,609 shares Series B convertible preferred stock 44 — 2,777 — 2,777 702,475 shares Series A convertible preferred stock — 3,352 — (3,352) — Total Control Investments $10,040 $71,891 $35,472 $(3,352) $104,011 Amount of Interest, Fees or Dividends Fair Value Gross Gross Fair Value Portfolio Company / Credited in at March31, Additions Reductions atMarch 31, Type of Investment (1) Income (2) 2016 (3) (4) 2017 Affiliate Investments Chandler Signs, LP Senior secured debt 561 4,413 65 — 4,478 1,500,000 units of Class A-1 common stock 163 2,529 132 — 2,661 kSEP Holdings, Inc. 861,591 shares of common stock — 3,676 — (3,676) — Total Affiliate Investments $724 $10,618 $197 $(3,676) $7,139 Total Control & Affiliate Investments $10,764 $82,509 $35,669 $(7,028) $111,150 This schedule should be read in conjunction with our Consolidated Financial Statements, including the ConsolidatedSchedules of Investments and Notes to Consolidated 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 investmentwas included in the Control or Affiliate categories, respectively. (3)Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-oninvestments and accrued PIK interest, and the exchange of one or more existing securities for one or more newsecurities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealizeddepreciation as well as movement of an existing portfolio company into this category and out of a different category. (4)Gross reductions include in decreases in the cost basis of investments resulting from principal repayments or sales andexchanges of one or more existing securities for one or more new securities. Gross reductions also include net increasesin unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfoliocompany out of this category and into a different category. 104 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Capital Southwest Corporation (the “Company”) maintains disclosure controls and procedures, as defined in Rules13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed toprovide reasonable assurance that information required to be disclosed in the Company’s filings and submissions under theExchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of theSecurities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to theCompany’s management, including the Chief Executive Officer and Chief Financial Officer of the Company, as appropriate,to allow timely discussions regarding the required disclosure. We completed an evaluation under the supervision and with participation of the Company’s management, includingthe Chief Executive Officer and Chief Financial Officer of the Company, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures as of March 31, 2017. Based upon this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer of the Company have concluded that as of March 31, 2017, our disclosure controls andprocedures were effective to provide the reasonable assurance described above. The Company notes that the design of anysystem of controls is based in part upon certain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving the stated goals under all potential future conditions. Management’s Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation ofmanagement, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation ofthe effectiveness of the Company’s internal control over financial reporting based on the criteria established in the 2013Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Based on the Company’s evaluation under the framework in the 2013 Internal Control — IntegratedFramework, management concluded that the Company’s internal control over financial reporting was effective as of March31, 2017. Grant Thornton, LLP, the Company’s independent registered public accounting firm, has audited the effectivenessof the Company’s internal control over financial reporting as of March 31, 2017, as stated in its report which is included inItem 15 of Part III of this Annual Report. Changes in Internal Control over Financial Reporting There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13(a)-15(f) of the Exchange Act) during the three months ended March 31, 2017 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting. Limitations on Controls Because of its inherent limitations, management does not expect that our disclosure controls and our internalcontrols over financial reporting will prevent or detect all misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequate because of changes in conditions or that thedegree of compliance with policies and procedures may deteriorate. Any control system, no matter how well designed andoperated, is based upon certain assumptions and can only provide reasonable, not absolute, assurance that its objectives willbe met. Further, no evaluation of controls can provide absolute assurance that misstatements due to errors or fraud will notoccur or that all control issues and instances of fraud, if any within the Company, have been detected. 105 Table of Contents Item 9B. Other Information None. 106 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item 10 will be contained in the definitive proxy statement relating to our 2017annual meeting of shareholders under the headings of “Election of Directors,” “Corporate Governance,” “Executive Officers”and “Section 16(a) Beneficial Ownership Reporting Compliance” to be filed with the Securities and Exchange Commissionon or before July 29, 2017, 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, officersand employees. We have made the Code of Conduct and of Ethics available on our website athttp://www.capitalsouthwest.com/governance. Shareholders may request a free copy of the Code of Conduct and Code ofEthics from: Michael Sarner, Corporate Secretary and Chief Compliance Officer, at our principal executive office. Item 11. Executive Compensation The information required by this Item 11 will be contained in the definitive proxy statement relating to our 2017annual meeting of shareholders under the headings of “Compensation of Executive Officers,” “Director Compensation,”“Compensation Discussion and Analysis” and “Compensation Committee Report” to be filed with the Securities andExchange Commission on or before July 29, 2017, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters The information in the sections of our 2017 Proxy Statement captioned “Stock Ownership of Certain BeneficialOwners” is incorporated in this Item 12 by reference. The table below sets forth certain information as of March 31, 2017 regarding the shares of our common stockavailable for grant or granted under stock option plans that (1) were approved by our shareholders, and (2) were not approvedby our shareholders. Number of Number of Securities Securities to be Weighted- Remaining Issued Upon Average Exercise Available for Exercise of Price of Future Issuance Outstanding Outstanding Under Equity Options, Warrants Options, Warrants Compensation Plan Category and Rights and Rights Plans Equity compensation plans approved byshareholders (1) 206,364 $11.17 194,502 Equity compensation plans not approved byshareholders (2) − − − Total 206,364 $11.17 194,502 1)Includes the 1999 Stock Option Plan, 2009 Stock Incentive Plan and 2010 Restricted Stock Award Plan. For adescription of all plans, please refer to Footnotes 8 and 9 contained in our consolidated financial statements. 2)We have no equity compensation plans that were not approved by shareholders. Other information required by this Item 12 will be contained in the definitive proxy statement relating to our 2017 annualmeeting of shareholders under the heading of “Security Ownership of Certain Beneficial Owners and Management” to befiled with the Securities and Exchange Commission on or before July 29, 2017, and is incorporated herein by reference. 107 Table of Contents Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item 13 will be contained in the definitive proxy statement relating to our 2017annual meeting of shareholders under the headings of “Certain Relationships and Related Transactions” and “CorporateGovernance” to be filed with the Securities and Exchange Commission on or before July 29, 2017, and is incorporated hereinby reference. Item 14. Principal Accountant Fees and Services The information required by this Item 14 will be contained in the definitive proxy statement relating to our 2017annual meeting of shareholders under the heading of “Ratification and Appointment of Independent Registered PublicAccounting Firm for the Year Ended March 31, 2017” to be filed with the Securities and Exchange Commission on or beforeJuly 29, 2017, and is incorporated herein by reference. 108 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules The following documents are filed or incorporated by reference as part of this Annual Report: 1. Consolidated Financial Statements PageReports of Independent Registered Public Accounting Firm 54Consolidated Statements of Assets and Liabilities as of March 31, 2017 and 2016 56Consolidated Statements of Operations for Years Ended March 31, 2017, 2016 and 2015 57Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2017, 2016and 2015 58Consolidated Statements of Cash Flows for Years Ended March 31, 2017, 2016 and 2015 59Consolidated Schedules of Investments as of March 31, 2017 and 2016 60Notes to Consolidated Financial Statements 66 2. Schedule of Investments in and Advances To AffiliatesReports of Independent Registered Public Accounting Firm 3. Exhibits A 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 ExhibitIndex, which immediately precedes such exhibits, and is incorporated herein by reference. 109 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITAL SOUTHWEST CORPORATION By:/s/ Bowen S. Diehl Bowen S. DiehlPresident and Chief Executive Officer Date: June 1, 2017 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of Capital Southwest Corporation and its Subsidiariesundersigned directors hereby constitutes and 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 all capacities, with full power to act alone, to sign any and allamendments to this Report, and to file each such amendment to the Report, with all exhibits thereto, and any and all otherdocuments in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done inand about the premises as fully to all intents and purposes as it or he might or could do in person, hereby ratifying andconfirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. Pursuant to the requirement of the Securities and Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on the dates indicated: SignatureTitleDate /s/ Joseph B. ArmesChairman of the BoardJune 1, 2017Joseph B. Armes /s/ David R. BrooksDirectorJune 1, 2017David R. Brooks /s/ Jack D. FurstDirectorJune 1, 2017Jack D. Furst /s/ T. Duane MorganDirectorJune 1, 2017T. Duane Morgan /s/ William Thomas IIIDirectorJune 1, 2017William Thomas III /s/ John H. WilsonDirectorJune 1, 2017John H. Wilson /s/ Bowen S. DiehlPresident and Chief Executive OfficerJune 1, 2017Bowen S. Diehl /s/ Michael SarnerChief Financial OfficerJune 1, 2017Michael Sarner(Chief Financial/Accounting Officer) 110 Table of Contents EXHIBIT INDEX The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with theSEC. Asterisk denotes exhibits filed with this report. Double asterisk denotes exhibits furnished with this report. Exhibit No. Description 2.1 Distribution Agreement, dated September 8, 2015, between the Company and CSW Industrials, Inc. (filed asExhibit 2.1 to Form 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 asExhibit 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 forthe six month period ended September 30, 1987). 3.2 By-Laws of the Company, as amended (filed as Exhibit 3.2 to Form 10-K for the fiscal year ended March 31,2007). 4.1 Specimen of Common Stock certificate (filed as Exhibit 4.1 to Form 10-K for the fiscal year ended March 31,2002). 10.1 Capital Southwest Corporation and Its Affiliates Restoration of Retirement Income Plan as amended and restatedeffective January 1, 2008 (filed as Exhibit 10.3 to form 10-K for the fiscal year ended March 31, 2009). 10.2 Form of Indemnification Agreement which has been established with all directors and executive officers of theCompany (filed as Exhibit 10.9 to Form 8-K dated February 10, 1994). 10.3 Capital Southwest Corporation 1999 Stock Option Plan (filed as Exhibit 10.10 to Form 10-K for the fiscal yearended March 31, 2000). 10.4 Severance Pay Agreement with William M. Ashbaugh (filed as Exhibit 10.1 to Form 8-K dated July 18, 2005). 10.5 Retirement Plan for Employees of Capital Southwest Corporation and its Affiliates as amended and restatedeffective April 1, 2011 (filed as Exhibit 10.15 to Form 10-K for the fiscal year ended March 31, 2012) 10.6 Amendment One to Retirement Plan for employees of Capital Southwest Corporation and its affiliates as amendedand restated effective April 1, 2011(filed as Exhibit 10.16 to Form 10-K for the fiscal year ended March 31, 2013) 10.7 Amendment Four to Retirement Plan for employees of Capital Southwest Corporation and its Affiliates asamended and restated effective April 1, 2011 (filed as Exhibit 10.1 to Form 8-K dated August 6, 2015). 10.8 Joseph B. Armes Revised Offer Letter (filed as Exhibit 99.2 to Form 8-K dated May 17, 2013). 10.9 Capital Southwest Corporation 2009 Stock Incentive Plan (filed as Exhibit 10.1 to Form 10-Q for the quarterlyperiod ended June 30, 2011) 10.10 Capital Southwest Corporation 2010 Restricted Stock Award Plan (filed as Exhibit 10.1 to Form 10-Q for thequarterly period ended June 30, 2011) 10.11 First Amendment to the Capital Southwest Corporation 2009 Stock Incentive Plan (filed as Exhibit 10.1 to Form10-Q for the quarterly period ended September 30, 2014) 10.12 Second Amendment to the Capital Southwest Corporation 2009 Stock Incentive Plan (filed as Exhibit 10.1 toForm 8-K dated August 12, 2015). 111 Table of Contents Exhibit No. Description 10.13 First Amendment to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (filed as Exhibit 10.1 toForm 10-Q for the quarterly period ended September 30, 2014) 10.14 Second Amendment to the Capital Southwest Corporation 2010 Restricted Stock Award Plan (filed as Exhibit10.2 to Form 8-K dated August 12, 2015). 10.15 Form of Restricted Stock Award Agreement under the 2010 Restricted Stock Award Plan, as amended (filed asExhibit 10.1 to Form 10-Q for the quarterly period ended September 30, 2014) 10.16 Form of Non-Qualified Stock Option Agreement under the 2009 Stock Incentive Plan, as amended (filed asExhibit 10.1 to Form 10-Q for the quarterly period ended September 30, 2014) 10.17 Form of Cash Incentive Award Agreement (filed as Exhibit 10.1 to Form 10-Q for the quarterly period endedSeptember 30, 2014) 10.18 Tax Matters Agreement, dated September 8, 2015, between the Company and CSW Industrials, Inc. (filed asExhibit 10.1 to Form 8-K dated September 14, 2015). 10.19 Amended and Restated Employee Matters Agreement, dated September 4, 2015, between the Company and CSWIndustrials, Inc. (filed as Exhibit 10.2 to Form 8-K dated September 14, 2015). 10.20 Form of Amended and Restated Non-Qualified Stock Option Agreement under the 2009 Stock Incentive Plan(CSWC Employee Form) (filed as Exhibit 10.3 to Form 10-Q for the quarterly period ended September 30, 2015). 10.21 Form of Amended and Restated Non-Qualified Stock Option Agreement under the 2009 Stock Incentive Plan(CSWI Employee Form) (filed as Exhibit 10.4 to Form 10-Q for the quarterly period ended September 30, 2015). 10.22 Form of Amended and Restated Incentive Stock Option Agreement under the 2009 Stock Incentive Plan (CSWCEmployee Form) (filed as Exhibit 10.5 to Form 10-Q for the quarterly period ended September 30, 2015). 10.23 Form of Amended and Restated Incentive Stock Option Agreement under the 2009 Stock Incentive Plan (CSWIEmployee Form) (filed as Exhibit 10.6 to Form 10-Q for the quarterly period ended September 30, 2015). 10.24 Form of Amended and Restated Non-Qualified Stock Option Agreement (Executive Compensation Plan – CSWCEmployee Form) (filed as Exhibit 10.7 to Form 10-Q for the quarterly period ended September 30, 2015). 10.25 Form of Amended and Restated Non-Qualified Stock Option Agreement (Executive Compensation Plan – CSWIEmployee Form) (filed as Exhibit 10.8 to Form 10-Q for the quarterly period ended September 30, 2015). 10.26 Form of Restricted Stock Agreement under the 2010 Restricted Stock Award Plan (CSWC Employee Form) (filedas Exhibit 10.9 to Form 10-Q for the quarterly period ended September 30, 2015). 10.27 Form of Amended and Restated Restricted Stock Agreement under the 2010 Restricted Stock Award Plan (CSWIEmployee Form) (filed as Exhibit 10.10 to Form 10-Q for the quarterly period ended September 30, 2015). 10.28 Form of Amended and Restated Restricted Stock Award (Executive Compensation Plan – CSWC EmployeeForm) (filed as Exhibit 10.11 to Form 10-Q for the quarterly period ended September 30, 2015). 10.29 Form of Amended and Restated Restricted Stock Award (Executive Compensation Plan – CSWI Employee Form)(filed as Exhibit 10.12 to Form 10-Q for the quarterly period ended September 30, 2015). 112 Table of Contents Exhibit No. Description 10.30 Form of Amended and Restated Cash Incentive Award Agreement (Executive Compensation Plan) (filed asExhibit 10.13 to Form 10-Q for the quarterly period ended September 30, 2015). 10.31 I-45 SLF LLC Agreement dated September 9, 2015 (filed as Exhibit 10.14 to Form 10-Q for the quarterly periodended September 30, 2015). 10.32 Guarantee, Pledge and Security Agreement dated as of August 30, 2016 (filed as Exhibit 10.1 to Form 8-K filedSeptember 1, 2016) 10.33 Credit Agreement dated as of August 30, 2016 among Capital Southwest Corporation, the Lenders party thereto,ING Capital LLC, as administrative agent, and Texas Capital Bank, N.A., as documentation agent (filed as Exhibit10.1 to Form 8-K filed September 1, 2016). 21.1 * List of subsidiaries of the Company, filed herewith. 23.1 * Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP, filed herewith. 23.2 * Consent of Independent Auditor – RSM US LLP, filed herewith. 31.1 * Certification of Chairman of the Board and President required by Rule 13a-14(a) or Rule 15d-14(a) of theSecurities Exchange Act 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, filedherewith. 32.1 ** Certification of Chairman of the Board and President required by Rule 13a-14(b) or Rule 15d-14(b) of theExchange Act and Section 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 andSection 1350 of Chapter 63 of Title 18 of the United States Code, furnished herewith. 99.1 * Audited Consolidated Financial Statements of I-45 SLF LLC as of March 31, 2017 and 2016 and for the periodsthen ended, filed herewith. 99.2 Audited Consolidated Financial Statements of Media Recovery, Inc. as of September 30, 2017 and 2016 and forthe years ended September 30, 2017, 2016 and 2015.1Media Recovery, Inc. has a 2017 fiscal year to be ended September 30, 2017. These financial statements will be filed by amendmentwithin 90 days of September 30, 2017. 1131Exhibit 21.1 CAPITAL SOUTHWEST CORPORATIONList of Subsidiaries Name of Subsidiary State of Incorporation Media Recovery, Inc. NevadaCapital Southwest Management Corporation NevadaCapital Southwest Equity Investments, Inc. Delaware  Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We have issued our reports dated June 1, 2017, with respect to the consolidated financial statements, schedules, and internalcontrol over financial reporting included in the Annual Report of Capital Southwest Corporation on Form 10-K for the yearended March 31, 2017. We consent to the incorporation by reference of said reports in the Registration Statements of CapitalSouthwest Corporation on Forms S-8 (File No. 333-207296, effective October 5, 2015; File No. 333-177433, effectiveOctober 21, 2011; File No. 333-177432, effective October 21, 2011; File No. 333-118681, effective August 31, 2004). /s/ GRANT THORNTON LLP Dallas, TexasJune 1, 2017  Exhibit 23.2 Consent of Independent Auditor We consent to the inclusion as an exhibit to the Annual Report on the Form 10-K of Capital Southwest Corporation of ourreport dated May 12, 2017, relating to the financial statements of I-45 SLF LLC for the year ended March 31, 2017. /s/ RSM US LLP Chicago, IllinoisJune 1, 2017 Exhibit 31.1 CERTIFICATIONS 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 materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading 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 presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this reportis being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) thathas materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. Date: June 1, 2017By:/s/ Bowen S. Diehl Bowen S. DiehlPresident and Chief Executive Officer Exhibit 31.2 CERTIFICATIONS 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 materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading 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 presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting tobe designed under our supervision, to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered bythis report based on such evaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) thathas materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize andreport financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. Date: June 1, 2017By:/s/ Michael S. Sarner Michael S. SarnerChief Financial Officer Exhibit 32.1 Certification of the President Pursuant 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, 2017, filed with the Securities and Exchange Commission on June 1,2017 (“accompanied report”) fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934; and 2.The information contained in the accompanied report fairly presents, in all material respects, the consolidatedfinancial condition and results of operations of Capital Southwest Corporation. Date: June 1, 2017By:/s/ Bowen S. Diehl Bowen S. DiehlPresident and Chief Executive Officer Exhibit 32.2 Certification of the Chief Financial Officer Pursuant 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, 2017, filed with the Securities and Exchange Commission on June 1,2017 (“accompanied report”) fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934; and 2.The information contained in the accompanied report fairly presents, in all material respects, the consolidatedfinancial condition and results of operations of Capital Southwest Corporation. Date: June 1, 2017By:/s/ Michael S. Sarner Michael S. SarnerChief Financial Officer Exhibit 99.1 I-45 SLF LLC Consolidated Financial StatementsandIndependent Auditor’s Report As of March 31, 2017 and 2016 and for the year ended March 31, 2017 and for the period fromSeptember 3, 2015 (the date of incorporation) to March 31, 2016 Table of Contents Independent Auditor’s Report1 Consolidated Statements of Assets, Liabilities and Members’ Equity2 Consolidated Schedules of Investments3 Consolidated Statements of Operations6 Consolidated Statements of Changes in Members’ Equity7 Consolidated Statements of Cash Flows8 Notes to Consolidated Financial Statements9 Independent Auditor's Report Board of ManagersI-45 SLF LLC Report on the Financial StatementsWe have audited the accompanying consolidated financial statements of I-45 SLF LLC and its subsidiary, which comprise the consolidatedstatements of assets, liabilities and members’ equity, including the consolidated schedules of investments, as of March 31, 2017 and 2016, therelated consolidated statements of operations, changes in members' equity and cash flows for the year ended March 31, 2017, and for the periodfrom September 3, 2015 (date of incorporation) to March 31, 2016, and the related notes to the consolidated financial statements (collectively,the financial statements). Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principlesgenerally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant tothe preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance withauditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. Theprocedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’spreparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. Anaudit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates madeby management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of I-45 SLF LLC and itssubsidiary as of March 31, 2017 and 2016, and the results of their operations and their cash flows for the year ended March 31, 2017, and for theperiod from September 3, 2015 (date of incorporation) to March 31, 2016, in accordance with accounting principles generally accepted in theUnited States of America. /s/ RSM LLP Chicago, IllinoisMay 12, 2017 I-45 SLF LLCConsolidated Statements of Assets, Liabilitiesand Members’ Equity March 31, 2017 2016 Assets Investments, at fair value (cost $197,494,528 and $99,835,813, respectively) $200,242,690 $99,214,303 Cash and cash equivalents 12,092,653 2,180,769 Due from broker 1,732,500 –– Deferred financing costs (net of accumulated amortization of $439,982 and $65,323, respectively) 1,659,042 1,059,677 Interest receivable 474,331 436,392 $216,201,216 $102,891,141 Liabilities and Members' Equity Liabilities Credit facility $122,000,000 $48,000,000 Payable for securities purchased 11,795,000 8,040,191 Distributions payable 2,830,442 1,425,474 Interest payable 60,192 29,205 Accrued expenses and other liabilities 97,882 39,040 Total liabilities 136,783,516 57,533,910 Members' equity 79,417,700 45,357,231 $216,201,216 $102,891,141 See accompanying notes to consolidated financial statements 2 I-45 SLF LLCConsolidated Schedule of Investments March 31, 2017 Description Maturity Date CurrentInterestRate PrincipalAmount Cost Fair Value Percentage ofMembers'Equity Corporate Bank Loans United States Aerospace & Defense American Scaffold Holdings 3/31/2022 L+6.50% $2,925,000 $2,887,177 $2,910,375 Hunter Defense Technologies 8/5/2019 L+6.00% 2,703,947 2,697,208 2,514,671 Automobile Highline Aftermarket 3/17/2024 L+4.25% 3,000,000 2,985,000 3,033,900 Safe Guard 3/31/2024 L+5.00% 3,250,000 3,152,500 3,225,625 Business Services Ahead, LLC 11/2/2020 L+6.50% 4,687,500 4,585,981 4,640,625 Ansira Partners 12/31/2022 L+6.50% 4,500,000 3,884,092 3,893,523 iEnergizer 5/1/2019 L+6.00% 6,567,046 6,217,720 6,542,748 IG Investments Holdings 10/31/2021 L+5.00% 2,480,570 2,469,439 2,507,856 Integro Parent Inc. 11/2/2022 L+5.75% 4,938,924 4,790,756 4,963,618 Mood Media Corporation 5/1/2019 L+6.00% 4,503,289 4,427,043 4,483,024 Capital Equipment Time Manufacturing 2/10/2022 L+5.00% 3,000,000 2,985,343 2,985,343 Consumer Products & Retail PetValu 7/5/2022 L+5.50% 4,975,000 4,931,261 4,987,438 Water Pik, Inc. - 1st lien 7/8/2020 L+4.75% 1,137,090 1,135,097 1,139,478 Water Pik, Inc. - 2nd lien 1/8/2021 L+8.75% 1,789,474 1,756,683 1,802,895 Consumer Services CMN.com (Higher Education) 10/15/2021 L+6.00% 6,912,500 6,785,531 6,785,531 Prepaid Legal Services, Inc. - 2nd Lien 7/1/2020 L+9.00% 405,000 395,663 407,349 Prepaid Legal Services, Inc. - 1st Lien 7/1/2019 L+5.25% 4,474,279 4,470,626 4,507,836 SRP Companies 9/8/2023 L+6.50% 5,975,275 5,106,492 5,132,212 Containers & Packaging ICSH, Inc. 12/31/2018 L+5.75% 6,698,007 6,670,865 6,685,051 Financial Services iPayment, Inc. 5/8/2017 L+5.25% 6,964,029 6,947,920 6,929,209 TaxACT 12/31/2022 L+6.00% 1,269,915 1,238,463 1,269,915 Food, Agriculture & Beverage California Pizza Kitchen 8/23/2022 L+6.00% 6,969,987 6,925,133 6,971,381 Gaming & leisure Redbox Automated Retail 9/27/2021 L+7.50% 6,125,000 5,958,692 6,132,963 Healthcare Services Beaver-Visitec International 8/21/2023 L+5.00% 4,975,000 4,928,997 4,975,000 PT Network 11/30/2021 L+6.50% 4,990,972 3,883,735 3,883,735 Hotel, gaming & leisure VIP Cinema 3/31/2023 L+6.00% 5,000,000 4,975,275 5,059,500 Industrial products LTI Holdings, Inc. 4/17/2022 L+4.25% 1,974,874 1,780,886 1,974,874 MWI Holdings 6/29/2020 L+5.50% 4,962,500 4,921,442 5,006,170 Sigma Electric 8/31/2021 L+7.50% 5,000,000 4,886,637 4,886,637 Terra Millennium 11/23/2022 L+6.25% 6,956,250 6,889,423 6,956,250 Media, Marketing & Entertainment Contextmedia 12/31/2021 L+6.50% 1,975,000 1,787,489 1,975,000 Imagine! Print Solutions 3/30/2022 L+6.00% 3,565,489 3,526,760 3,610,057 New Media Holdings II LLC 6/4/2020 L+6.25% 6,901,894 6,886,200 6,867,385 Northstar Travel 6/7/2022 L+6.25% 4,090,625 4,036,655 4,070,172 Tweddle Group 10/24/2022 L+6.00% 2,506,731 2,459,763 2,525,531 Paper & forest products Digital Room 5/28/2023 L+10.00% 4,000,000 3,924,128 3,924,128 Retail Turning Point Brands 12/31/2021 L+6.00% 5,000,000 4,950,846 4,950,846 Software & IT Services Digital River 2/12/2021 L+6.50% 7,015,452 6,988,236 7,050,529 InfoGroup Inc. - 1st Lien 5/28/2018 L+5.50% 3,000,000 2,970,000 2,970,000 InfoGroup Inc. - 1st Lien 5/28/2018 L+5.00% 5,913,550 5,813,451 5,907,637 Technology Products & Components Array Technologies 6/22/2021 L+7.25% 4,625,000 4,542,126 4,613,438 ATX Networks Corp. 6/12/2021 L+6.00% 4,924,812 4,877,594 4,875,564 See accompanying notes to consolidated financial statements3 (1)I-45 SLF LLCConsolidated Schedule of InvestmentsMarch 31, 2017 (Continued) Description Maturity Date CurrentInterestRate PrincipalAmount Cost Fair Value Percentage ofMembers'Equity Telecommunications American Teleconferencing - 1st Lien 12/8/2021 L+6.50% $5,711,302 $5,243,685 $5,700,450 7.18%American Teleconferencing - 2nd Lien 6/6/2022 L+9.50% 1,708,571 1,643,620 1,674,400 2.11%Polycom 9/27/2023 L+6.50% 6,445,833 6,445,833 6,547,678 8.24%Transportation & Logistics US Joiner 4/16/2020 L+6.00% 4,791,601 4,737,062 4,767,643 6.00%Utilities Pike Corp. 8/30/2024 L+8.00% 1,000,000 990,000 1,017,500 1.28%Total Investments - (cost $197,494,528) $197,494,528 $200,242,690 252.13%(1)The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”)which reset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR and the currentcontractual interest rate in effect at March 31, 2017. Certain investments are subject to a LIBOR interest rate floor. See accompanying notes to consolidated financial statements 4 (1)I-45 SLF LLCConsolidated Schedule of InvestmentsMarch 31, 2017 Description Maturity Date CurrentInterestRate PrincipalAmount Cost Fair Value Percentage ofMembers'Equity Corporate Bank Loans United States Aerospace & Defense CRGT 12/19/2020 L+6.50% $3,923,567 $3,918,804 $3,913,758 Hunter Defense Technologies 8/5/2019 L+5.50% 2,960,526 2,950,002 2,442,434 Jet Support Services, Inc. 8/31/2021 L+6.50% 4,875,000 4,768,698 4,631,250 Building & Infrastructure Products Stardust Finance Holdings, Inc. 3/13/2022 L+5.50% 4,974,874 4,928,459 4,937,563 Specialty Chemicals LTI Holdings, Inc. 4/17/2022 L+4.25% 1,994,975 1,760,565 1,890,239 Software & IT Services Compuware Corporation 12/15/2019 L+5.25% 2,922,078 2,854,681 2,829,857 Digital River, Inc. 2/12/2021 L+6.50% 5,415,452 5,383,375 5,408,683 Containers & Packaging ICSH, Inc. 12/31/2018 L+5.75% 4,974,243 4,953,875 4,941,503 Media, Marketing & Entertainment Imagine! Print Solutions, Inc. 3/30/2022 L+6.00% 3,000,000 2,947,500 3,011,250 Mood Media Corporation 5/1/2019 L+6.00% 4,549,714 4,435,393 4,260,375 New Media Holdings II LLC 6/4/2020 L+6.25% 4,962,311 4,951,057 4,853,785 Vivid Seats 3/1/2022 L+6.00% 5,000,000 4,653,688 4,737,500 Food, Agriculture & Beverage Milk Specialties 11/9/2018 L+7.00% 3,686,288 3,681,983 3,693,200 Consumer Products & Retail BDF Acquisition Corp. 2/12/2022 L+8.00% 3,000,000 2,859,650 2,895,000 Kendra Scott 7/17/2020 L+6.00% 4,899,684 4,892,037 4,887,434 Water Pik, Inc. - 1st lien 7/9/2020 L+4.75% 1,191,287 1,188,560 1,179,868 Water Pik, Inc. - 2nd lien 1/9/2021 L+8.75% 1,912,281 1,867,957 1,888,377 Business Services Ahead, LLC 11/2/2020 L+6.50% 4,937,500 4,800,794 4,814,063 Integro Parent Inc. 11/2/2022 L+5.75% 4,988,287 4,821,625 4,813,697 Healthcare Services MediMedia USA 11/20/2018 L+6.75% 5,000,000 4,876,157 4,887,500 Financial Services iPayment, Inc. 5/8/2017 L+5.25% 5,000,000 4,904,057 4,778,150 TaxACT, Inc. 12/31/2022 L+6.00% 4,500,000 4,369,102 4,432,500 Consumer Services Prepaid Legal Services, Inc. - 1st lien 7/1/2019 L+5.25% 4,824,760 4,819,070 4,812,698 Prepaid Legal Services, Inc. - 2ndlien 7/1/2020 L+9.00% 405,000 392,850 400,950 Transportation & Logistics US Joiner 4/16/2020 L+6.00% 2,992,366 2,940,000 2,947,481 Technology Products &Components ATX Networks Corp. 6/12/2021 L+6.00% 4,974,937 4,915,874 4,925,188 Total Investments - (cost $99,835,813) $99,835,813 $99,214,303 210.11 %(1)The majority of investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”)which reset daily, monthly, quarterly, or semiannually. For each the Company has provided the spread over LIBOR and the currentcontractual interest rate in effect at March 31, 2016. Certain investments are subject to a LIBOR interest rate floor. See accompanying notes to consolidated financial statements 5 (1)I-45 SLF LLCConsolidated Statements of OperationsFor the year ended March 31, 2017 and for the period from September 3, 2015 (date ofincorporation) to March 31, 2016 Year endedMarch 31, 2017 Period fromSeptember 3, 2015(date ofincorporation) toMarch 31, 2016 Investment income Interest income $12,541,556 $2,400,871 Total investment income 12,541,556 2,400,871 Expenses Interest expense 3,164,136 309,949 Unused facility fee 185,897 95,264 Organizational expense — 80,853 Administrative agent fee 318,150 69,792 Amortization of facility fee 374,659 65,323 Administrative fee 120,543 35,106 Professional fees and other 236,372 32,295 Total expenses 4,399,757 688,582 Net investment income 8,141,799 1,712,289 Realized and unrealized gain on investments Net realized gain on investments 1,653,143 41,926 Net change in unrealized appreciation (depreciation) on investments 3,369,673 (621,510) Net gain (loss) on investments 5,022,816 (579,584) Net increase in members' equity resulting from operations $13,164,615 $1,132,705 See accompanying notes to consolidated financial statements 6 I-45 SLF LLCConsolidated Statements of Changes in Members’ EquityFor the year ended March 31, 2017 and for the period from September 3, 2015 (date ofincorporation) to March 31, 2016 Year endedMarch 31,2017 Period fromSeptember 3,2015 (date ofincorporation) toMarch 31, 2016 Members' equity beginning balance $45,357,231 $–– Contributions 30,000,000 46,000,000 Distributions (9,104,146) (1,775,474) 66,253,085 44,224,526 Net increase in members' equity resulting from operations: Net investment income 8,141,799 1,712,289 Net realized gain on investments 1,653,143 41,926 Net change in unrealized appreciation (depreciation) on investments 3,369,673 (621,510) Net increase in members' equity resulting from operations 13,164,615 1,132,705 Members' equity ending balance $79,417,700 $45,357,231 See accompanying notes to consolidated financial statements 7 I-45 SLF LLCConsolidated Statements of Cash FlowsFor the year ended March 31, 2017 and for the period from September 3, 2015 (date ofincorporation) to March 31, 2016 Year endedMarch 31,2017 Period fromSeptember 3,2015 (date ofincorporation) toMarch 31, 2016 Cash flows from operating activities Net increase in members' equity resulting from operations $13,164,615 $1,132,705 Adjustments to reconcile net increase in members' equity resulting from operations to net cash used in operating activities: Net realized gain on investments (1,653,143) (41,926) Net change in unrealized (appreciation) depreciation on investments (3,369,673) 621,510 Amortization of premiums and discounts on investments (1,084,012) (84,867) Amortization of deferred financing costs 374,659 65,323 Purchases of investments (161,951,431) (101,973,261) Proceeds from sales / paydowns of investments 67,029,872 2,264,241 Changes in operating assets and liabilities: Due from broker (1,732,500) - Interest receivable (37,939) (436,392) Payable for securities purchase 3,754,809 8,040,191 Interest payable 30,987 29,205 Accrued expenses and other liabilities 58,842 39,040 Net cash used in operating activities (85,414,914) (90,344,231) Cash flows from financing activities Proceeds from credit facility contracts 74,000,000 48,000,000 Deferred financing costs paid (974,024) (1,125,000) Capital contributions 30,000,000 46,000,000 Distributions (7,699,178) (350,000) Net cash provided by financing activities 95,326,798 92,525,000 Net change in cash and cash equivalents 9,911,884 2,180,769 Cash and cash equivalents, beginning of period 2,180,769 — Cash and cash equivalents, end of period $12,092,653 $2,180,769 Supplemental disclosure of cash flow information Cash paid during the period for interest $3,133,149 $280,744 Supplemental disclosure of noncash financing activities Distributions payable $2,830,442 $1,425,474 See accompanying notes to consolidated financial statements 8 I-45 SLF LLCNotes to Consolidated Financial Statements 1. ORGANIZATION AND BASIS OF PRESENTATION ORGANIZATION I-45 SLF LLC (the “Company”) was organized as a Delaware limited liability company on September 3, 2015 by the filing of a certificateof formation (the “Certificate”) with the Office of the Secretary of State of the State of Delaware under and pursuant to the Delaware LimitedLiability Company Act (the “Act”). The Company is a joint venture between Main Street Capital Corporation and Capital SouthwestCorporation. Capital Southwest Corporation owns 80.0% of the Company and has a profits interest of 75.6%, while Main Street CapitalCorporation owns 20.0% and has a profits interest of 24.4%. The initial equity capital commitment to I-45 SLF totaled $85 million, consistingof $68 million from Capital Southwest Corporation and $17 million from Main Street Capital Corporation, of which, $76 million, or 89.4%, intotal was funded as of March 31, 2017 and $46 million, or 54.1% was funded as of March 31, 2016. On September 18, 2015, the Company’s wholly-owned and consolidated subsidiary, I-45 SPV LLC (the “SPV”) was organized as aDelaware limited liability company by the filing of a certificate of formation with the Office of the Secretary of State of the State of Delaware.The Company is the sole equity member of the SPV. All intercompany balances and transactions have been eliminated in consolidation. The registered agent and office of the Company required by the Act to be maintained in the State of Delaware is The Corporation TrustCompany, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The principal office of the Company shall be located at suchplace within or without the State of Delaware, and the Company shall maintain such records, as the Members shall determine from time to time. BASIS OF PRESENTATION The accounting and reporting policies of the Company conform with U.S. generally accepted accounting principles (“U.S. GAAP”) asdetailed in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). The Company is an investmentcompany and follows the accounting and reporting guidance in FASB Topic 946 – Financial Services – Investment Companies (“ASC Topic946”). Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts anddisclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as moreinformation becomes known, which could impact the amounts reported and disclosed herein. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS Investment transactions are accounted for on a trade-date basis. Premiums and discounts are amortized over the lives of the respectivedebt securities using the effective interest method. Investments that are held by the Company are stated at fair value in accordance with ASCTopic 820 – Fair Value Measurements and Disclosures (“ASC Topic 820”). Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment and thecost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the year net of recoveries and realized gains or losses from in-kind redemptions. Net change in unrealized appreciation ordepreciation reflects the net change in the fair value of the investment portfolio and the reclassification of any prior period unrealizedappreciation or depreciation on exited investments and financial instruments to realized gains or losses. CASH AND CASH EQUIVALENTS Cash and cash equivalents, which consist of cash and highly liquid investments with an original maturity of three months or less at thedate of purchase, are carried at cost, which approximates fair value. In the normal course of business, the Company maintains its cash and cash equivalents balances in financial institutions, which at timesmay exceed federally insured limits. The Company is subject to credit risk to the extent9 I-45 SLF LLCNotes to Consolidated Financial Statements any financial institution with which it conducts business is unable to fulfill contractual obligations on its behalf. Management monitors thefinancial condition of such financial institutions and does not anticipate any losses from these counterparties. DEFERRED FINANCING COSTS Deferred financing costs include commitment fees and other costs related to the Company’s credit facility (the “Credit Facility”, asdiscussed further in Note 4). These costs have been capitalized and are amortized into interest expense over the term of the individualinstrument. INTEREST AND DIVIDEND INCOME Interest income is recorded as earned on the accrual basis and includes amortization of premiums or accretion of discounts. Dividendincome is recorded on the ex-dividend date. In accordance with the Company’s valuation policy, accrued interest and dividend receivables areevaluated periodically for collectability. When the Company does not expect the debtor to be able to service all of its debt or other obligations,the Company will generally establish a reserve against interest income receivable, thereby placing the loan or debt security on non-accrualstatus, and cease to recognize interest income on that loan or debt security until the borrower has demonstrated the ability and intent to paycontractual amounts due. If a loan or debt security’s status significantly improves regarding the ability to service debt or other obligations, itwill be restored to accrual basis. As of March 31, 2017 and 2016, the Company did not have any investments on non-accrual status. EXPENSES Unless otherwise voluntarily or contractually assumed by the Board of Managers or another party, the Company bears all expensesincurred in its business including, but not limited to, the following: all costs and expenses related to investment transactions and positions forthe Company, legal fees, accounting, auditing and tax preparation fees, recordkeeping and custodial fees, costs of computing the Company’snet asset value, research expenses, costs of insurance, registration expenses, offering costs, all costs with respect to communications withmembers, and other types of expenses as may be approved from time to time. INCOME TAXES The Company is organized and operates as a limited liability company and is not subject to income taxes as a separate entity. Such taxesare the responsibility of the individual members. Accordingly, no provision for income taxes has been made in the Company’s financialstatements. Investments in foreign securities may result in foreign taxes being withheld by the issuer of such securities. For the current open tax year and for all major jurisdictions, management of the Company has evaluated the tax positions taken orexpected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions will “more-likely-than-not” besustained by the Company upon challenge by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-notthreshold and that would result in a tax benefit or expense to the Company would be recorded as a tax benefit or expense in the current year. Forthe year ended March 31, 2017 and the period from September 3, 2015 (date of incorporation) to March 31, 2016, the Company determined thatit did not have any uncertain tax positions. Generally, the Company is subject to income tax examinations by major taxing authorities duringthe three years prior to the periods covered by these financial statements. RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS In April 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-03, Interest-Imputation of Interest (Subtopic 835-30),Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized liability bepresented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. It is effectivefor annual reporting periods beginning after December 15, 2015. Subsequently, in August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-CreditArrangements. ASU 2015-15 allows debt issuance costs for lines of credit to be presented as an asset and subsequently amortized ratably overthe term of the line-of-credit arrangement, regardless of whether there are outstanding borrowings on the line-of-credit10 I-45 SLF LLCNotes to Consolidated Financial Statements arrangement. The Company adopted this guidance during the period ended March 31, 2017 and there was no impact to its consolidatedfinancial statements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenuerecognition requirements under ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics ofthe ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services tocustomers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Underthe new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify theperformance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations inthe contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhancecomparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requiresimproved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. In May 2016, the FASB issued ASUNo. 2016-12, Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients. This ASU clarifiedguidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters. The FASB decidedto defer the effective date of the new revenue standard for public entities under U.S. GAAP for one year. The new guidance will be effective forthe annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. Early adoption wouldbe permitted for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact the adoption ofthis new accounting standard will have on its consolidated financial statements, but the impact of the adoption is not expected to be material. 3. FAIR VALUE MEASUREMENTS ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) inan orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’sinvestments is determined as of the close of business at the end of each reporting period (“Valuation Date”) in conformity with the guidance onfair value measurements and disclosures under U.S. GAAP. The inputs used to determine the fair value of the Company’s investments are summarized in the three broad levels listed below: ·Level 1- unadjusted quoted prices in active markets for identical investments·Level 2- investments with other significant observable inputs (including quoted prices for similar securities, interest rates,prepayments speeds, credit risk, etc.)·Level 3- investments with significant unobservable inputs (including the Company’s own assumptions in determining the fair valueof investments) The Company establishes valuation processes and procedures to ensure the valuation methodologies for investments categorized withinLevel 3 of the fair value hierarchy are fair, consistent, and verifiable. The Company designates the Board of Managers to oversee the entirevaluation process of Level 3 investments. The Board of Managers is responsible for developing the Company’s valuation processes andprocedures, conducting periodic reviews of the valuation policies, and evaluating the overall fairness and consistent application of thevaluation policies. Additionally, the Board of Managers is generally responsible for reviewing and approving the valuation determinations andany information provided by U.S. Bancorp Fund Services, LLC (the “Administrator”), as well as determining the levels of the fair valuehierarchy in which the investments fall. The Board of Managers meets on a quarterly basis, or more frequently as needed, to determine the valuations of Level 3investments. Valuations determined by the Board of Managers are required to be supported by market data, third-party pricing sources,industry accepted pricing models, counterparty prices, or other methods the Board of Managers deems to be appropriate, including the use ofinternal proprietary pricing models. The Company, along with the Board of Managers, periodically reviews the valuations of Level 3investments, and if necessary, recalibrates its valuation procedures. 11 I-45 SLF LLCNotes to Consolidated Financial Statements Investments currently held by the Company are generally valued as follows: Securities that are listed on a recognized exchange are valued at their last available public sales price. Securities that are listed on morethan one national securities exchange are valued at the last quoted sales price on the primary exchange on which the security is listed.If a security was not traded on the primary exchange on the valuation date, such security is valued at the last quoted sales price on thenext most active market, if the Board of Managers determines the price to be representative of fair value. Investments that are notlisted on an exchange but are traded over-the-counter are generally valued using independent pricing services. These pricing servicesmay use the broker quotes or models that consider such factors as issue type, coupon rate, maturity, rating, prepayment speed, yield, orprices of comparable quality, when pricing securities. In the case of investments not priced by independent pricing services, the Board of Managers will endeavor to obtain market makerquotes. For both long and short positions, the average of all “bid” and “asked” quotations is generally used. The fair value determination of the Company’s investments consists of a combination of observable inputs in non-active markets andunobservable inputs. The observable inputs are not always sufficient to determine the fair value of these investments. As a result, allinvestments currently held by the Company are categorized as Level 3 under ASC 820. The significant unobservable input utilized in thevaluation process is broker quotes. The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s investments thatare categorized within Level 3 of the fair value hierarchy as of March 31, 2017 and 2016: Type of Investment Fair Value atMarch 31, 2017 ValuationTechnique UnobservableInput Range Corporate bank loans $161,497,019 Income Approach Broker Quotes 93 - 101.75 8,359,451 Income Approach Discount Rate 6.06% - 10.5% 30,386,220 Market Approach Cost Type of Investment Fair Value atMarch 31, 2016 ValuationTechnique UnobservableInput Range Corporate bank loans $99,214,303 Income Approach Broker Quotes 83 - 100 The Board of Managers will evaluate the valuation hierarchy and make changes when necessary. The Company discloses transfersbetween levels based on valuations at the end of the reporting period. The inputs or methodology used for valuing investments are notnecessarily an indication of the risk associated with investing in those investments. The following is a summary categorization, as of March 31, 2017, of the Company’s investments based on the level of inputs utilized indetermining the value of such investments: LEVEL 1 LEVEL 2 LEVEL 3 Total Investments (at fair value) Corporate bank loans $— $— $200,242,690 $200,242,690 Total investments — — 200,242,690 200,242,690 Cash equivalents - money market fund 8,861,173 — — 8,861,173 $8,861,173 $— $200,242,690 $209,103,863 12 I-45 SLF LLCNotes to Consolidated Financial Statements The following is a summary categorization, as of March 31, 2016, of the Company’s investments based on the level of inputs utilized indetermining the value of such investments: LEVEL 1 LEVEL 2 LEVEL 3 Total Investments (at fair value) Corporate bank loans $— $— $99,214,303 $99,214,303 Total investments — — 99,214,303 99,214,303 Cash equivalents - money market fund 1,876,414 — — 1,876,414 $1,876,414 $— $99,214,303 $101,090,717 The following table represents additional information about Level 3 assets measured at fair value. Both observable and unobservableinputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, theunrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both observableand unobservable inputs. Changes in Level 3 assets measured at fair value for the year ended March 31, 2017 and the period from September 3,2015 (date of incorporation) to March 31, 2016 were as follows: LEVEL 3 Beginning BalanceMarch 31, 2016 Purchases Settlements Change inUnrealizedAppreciation Realized Gains(Losses) Ending BalanceMarch 31, 2017 Investments (at fair value) Corporate bank loans $99,214,303 $162,546,451 $(66,540,880) $3,369,673 $1,653,143 $200,242,690 Total $99,214,303 $162,546,451 $(66,540,880) $3,369,673 $1,653,143 $200,242,690 LEVEL 3 Beginning BalanceSeptember 3, 2015 Purchases Settlements Change inUnrealizedAppreciation Realized Gains(Losses) Ending BalanceMarch 31, 2016 Investments (at fair value) Corporate bank loans $— $102,054,707 $(2,260,820) $(621,510) $41,926 $99,214,303 Total $— $102,054,707 $(2,260,820) $(621,510) $41,926 $99,214,303 (a)Includes purchases of new investments, as well as discount accretion on investments.(b)The change in unrealized appreciation is reflected in the net change in unrealized appreciation on investments in the ConsolidatedStatements of Operations. This amount is equivalent to the change in unrealized appreciation for investments still held at March 31, 2017and 2016.(c)Realized gains (losses) are included in the net realized gain on investments in the Consolidated Statements of Operations. 4. CREDIT FACILITY The Company closed on a $75.0 million 5-year senior secured credit facility with Deutsche Bank AG (“Credit Facility”) in the periodended March 31, 2016. This facility included an accordion feature which allows the Company to achieve leverage of up to 2x debt-to-equity.During 2017, the Company increased credit facility commitments outstanding by an additional $90.0 million by adding three additionallenders to the syndicate, bringing total debt commitments to $165.0 million. The Company maintains the Credit Facility to provide additionalliquidity to support its investment and operational activities. Borrowings under the Credit Facility bear interest on a per annum basis at a rate equal to the applicable LIBOR rate (1.15% as of March31, 2017 and 0.63% as of March 31, 2016) plus 2.50%. The Company pays an Admin Fee of 0.25% per annum and unused fees of 0.50% perannum on the unused lender commitments under the Credit Facility. The Credit Facility is secured by a first lien on the assets of13 (a)(b)(c)(a)(b)(c)I-45 SLF LLCNotes to Consolidated Financial Statements the Company. The Credit Facility contains certain affirmative and negative covenants, including but not limited to maintenance of a borrowingbase. The Credit Facility is provided on a revolving basis through its final maturity date in November 2020. At March 31, 2017, the Company had $122 million in borrowings outstanding under the Credit Facility. The Company recognizedinterest expense related to the Credit Facility, including unused commitment fees and amortization of deferred loan costs, of approximately$3.4 million for the year ended March 31, 2017. At March 31, 2016, the Company had $48 million in borrowings outstanding under the Credit Facility. The Company recognized interestexpense related to the Credit Facility, including unused commitment fees and amortization of deferred loan costs, of approximately $470,000for the period ended March 31, 2016. 5. ALLOCATION OF PROFITS AND LOSSES For each fiscal year, profits or net losses of the Company are allocated among and credited to or debited against the capital accounts of themembers as of the last day of each fiscal year in accordance the Limited Liability Company Agreement (the “LLC Agreement”). Net profits ornet losses are allocated after giving effect for any initial or additional applications for interests or any repurchases of interests. Net investmentincome, realized gains and losses, and unrealized gains or losses are allocated to the members pro rata in accordance with their profitpercentages, as defined in the LLC Agreement. Net profits or net losses are measured as the net change in the value of the members’ equity inthe Company, including any change in unrealized appreciation or depreciation of investments and income, net of expenses, and realized gainsor losses during a fiscal year. Each quarter a cash distribution may be made to the members, which is generally equivalent to estimated taxable income less non-cashrevenue (such as original issue discount amortization or PIK interest). The estimated taxable income distributions are generally made up oftaxable net investment income (excluding non-cash revenue) and realized gains and losses. Estimated taxable income and distributions madeto the members therefore may be materially different than GAAP net investment income. The distribution policy is subject to change by theBoard of Managers based on business and market conditions at any time. 6. DUE FROM BROKERS The Company conducts business with brokers for its investment activities. The clearing and depository operations for the investmentactivities are performed pursuant to agreements with the brokers. The Company is subject to credit risk to the extent any broker with whom theCompany conducts business is unable to deliver cash balances or securities, or clear security transactions on the Company’s behalf. TheCompany monitors the financial condition of the brokers with which the Company conducts business and believes the likelihood of loss underthe aforementioned circumstances is remote. At March 31, 2017 and 2016, the balance in due from brokers is cash of approximately $1.7million and $0, respectively. 7. ADMINISTRATION AGREEMENT In consideration for administrative, accounting, and recordkeeping services, the Company pays the Administrator a pro rata portion of amonthly administration fee. This fee is calculated based on the quarter end invested assets. For the year ended March 31, 2017, the Companyhad incurred $120,543 in administration fees to US Bancorp Fund Services, LLC, of which $35,101 were payable at the end of the year. For theperiod ended March 31, 2016, the Company had incurred $35,106 in administration fees to US Bancorp Fund Services, LLC, of which $19,068were payable at the end of the period. The Administrator is affiliated with a broker, US Bank, through which the Company transacts operations. At March 31, 2017, cash andcash equivalents in the amount of $12,092,653 are held with US Bank. At March 31, 2016, cash and cash equivalents in the amount of$2,322,946 are held by US Bank. 14 I-45 SLF LLCNotes to Consolidated Financial Statements 8. COMMITMENTS AND CONTINGENCIES The Company entered into various trades during the periods ended March 31, 2017 and 2016. As of March 31, 2017, there wereoutstanding trades in the amount of $11,795,000 that remained unsettled. As of March 31, 2016, there were outstanding trades in the amount of$8,040,191 that remained unsettled. This is shown as payable for securities purchased on the Consolidated Statements of Assets, Liabilities andMembers’ Equity. The Company may, from time to time, be involved in litigation arising out of its operations in the normal course of business orotherwise. Furthermore, third parties may try to seek to impose liability on the Company in connection with the activities of its portfoliocompanies. The Company has no currently pending material legal proceedings to which it is are party or to which any of its assets is subject. 9. FINANCIAL HIGHLIGHTS Financial highlights are as follows: Year endedMarch 31, 2017 Period fromSeptember 3, 2015(date ofincorporation) toMarch 31, 2016 Net investment income to average members' equity 12.17 % 14.79 %Expenses to average members' equity (6.58)% (5.55)%Internal Rate of Return, end of year 15.13 % (1.32)%(1)Ratios are calculated by dividing the indicated amount by average members' equity measured at the end of each quarter during the period.(2)The internal rate of return since inception ("IRR") of the members is computed based on the actual dates of cash inflows, outflows, and theending net assets at the end of the year of the members' equity account as of the measurement date. Financial highlights are calculated for the members’ class taken as a whole. An individual member’s return and ratios may vary. Financialhighlights disclosed may not be indicative of future performance of the fund. 10. SUBSEQUENT EVENTS Management has evaluated the need for additional disclosures and/or adjustments resulting from subsequent events through May 12,2017, the date the consolidated financial statements were available to be issued. 15(1) (1)(2)

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