UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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, 2007
OR
[ ] 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: 814-61
CAPITAL SOUTHWEST CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1072796
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
12900 Preston Road, Suite 700, Dallas, Texas 75230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-8242
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $1.00 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X .
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 X .
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 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X 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 of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer ____ Accelerated filer X Non-accelerated filer ____
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes No X .
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 30, 2006 was $332,548,127, based on the last sale
price of such stock as quoted by Nasdaq on such date (officers, directors and 5%
shareholders are considered affiliates for purposes of this calculation).
The number of shares of common stock outstanding as of January 9, 2008 was
3,889,151.
Documents Incorporated by Reference Part of Form 10-K
----------------------------------- -----------------
Proxy Statement for Annual Meeting of Shareholders Part III
to be held July 16, 2007
TABLE OF CONTENTS
Page
EXPLANATORY NOTE...............................................................1
PART I
Item 1. Business.................................................1
Item 1A. Risk Factors.............................................2
Item 1B. Unresolved Staff Comments................................5
Item 2. Properties...............................................6
Item 3. Legal Proceedings........................................6
Item 4. Submission of Matters to a Vote of Security Holders......6
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.....6
Item 6. Selected Financial Data..................................7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................7
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk..................................................7
Item 8. Financial Statements and Supplementary Data..............7
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure...................8
Item 9A. Controls and Procedures..................................8
Item 9B. Other Information.......................................10
PART III
Item 10. Directors, Executive Officers and Corporate Governance..10
Item 11. Executive Compensation..................................11
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters...........11
Item 13. Certain Relationships and Related Transactions, and
Director Independence................................12
Item 14. Principal Accountant Fees and Services..................12
PART IV
Item 15. Exhibits and Financial Statement Schedules..............12
Signatures ...................................................................13
PART I
Explanatory Note Regarding Restatements
Capital Southwest Corporation (the "Company") is filing this amendment to
its Annual Report on Form 10-K for the year ended March 31, 2007, to amend and
restate its consolidated financial statements and per share data and ratios for
each of the fiscal years ended March, 31, 2007, 2006 and 2005 and our selected
per share data and ratios for the years ended March 31, 2004 and 2003. In
addition, we are filing an amendment to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007.
After reviewing the accounting treatment for deferred taxes on unrealized
appreciation of investments, the Company has determined its long-standing policy
of recording deferred taxes on unrealized appreciation of investments was not in
conformity with generally accepted accounting principles and its previously
issued financial statements required restatement. Specifically, a Regulated
Investment Company (RIC) is required to record deferred taxes when it is
probable the RIC will not qualify under Subchapter M of the Internal Revenue
Code for a period longer that one year. Historically, management believed it was
probable the Company would not maintain its qualifying status as a RIC in future
years and recorded a deferred tax liability on the unrealized appreciation of
investments. However, upon further analysis, the Company determined it was only
reasonably possible, but not probable, the Company would not maintain its
qualifying status as a RIC. Thus the deferred tax liability consistently
recorded and disclosed should not have been recognized. Additionally, the
Company historically has accrued income taxes payable on its investment gains as
they have been incurred, as it has been the Company's practice to retain its
investment gains. However, RICs are required to accrue federal income taxes on
investment gains that are retained only on the last day of the tax year. The
Company incorrectly recorded the tax impact of its investment gains in periods
other than the last day of its tax year, December 31. Therefore, the income
taxes payable recorded at times other than the tax year end should not have been
recognized. Furthermore, the Company incorrectly classified its' return of
capital contributions cumulatively as "undistributed net realized gains on
investments." RICs are required to classify return of capital contributions as
"additional capital" in the period in which tax basis amounts become permanent;
and reflect undistributed amounts remaining since its' previous tax year end
adjusted for temporary tax basis differences as "undistributed net realized
gains on investments." The restatement will eliminate the accrual for deferred
taxes on unrealized appreciation of investments, and income taxes payable and
related tax carryforwards on realized gains, increasing the net asset value per
share and net assets from operations for the periods restated; and reclassify
return of capital contributions to "additional capital."
The summary of the effects of this change on our consolidated statements of
financial condition as of March 31, 2007 and 2006, our consolidated statements
of operations, our consolidated statements of cashflow and our consolidated
statements of changes in net assets for the years ended March 31, 2007, 2006,
and 2005 is included in Note 2, "Restatement of Consolidated Financial
Statements," located in the notes to our consolidated financial statements
elsewhere in this annual report amendment.
The following information has been updated to give the effect to the
restatement. In accordance with Rule 12b-15, under the Security Exchange Act of
1934, as amended, the complete text of each amended item is set forth in this
report, even though much of the disclosure in the restated items has not
changed. The disclosure in this annual report amendment supersedes and replaces
corresponding disclosures in our annual report on Form 10-K for the year ended
March 31, 2007.
Item 1. Business
We were organized as a Texas corporation on April 19, 1961. Until September
1969, we operated as a licensee under the Small Business Investment Act of 1958.
At that time, we transferred to our wholly-owned subsidiary, Capital Southwest
Venture Corporation ("CSVC"), certain assets and our license as a small business
investment company ("SBIC"). CSVC is a closed-end, non-diversified investment
company of the management type registered under the Investment Company Act of
1940 (the "1940 Act"). Prior to March 30, 1988, we were registered as a
closed-end, non-diversified investment company under the 1940 Act. On that date,
we elected to become a business development company subject to the provisions of
the 1940 Act, as amended by the Small Business Incentive Act of 1980. Because we
wholly own CSVC, the portfolios of both entities are referred to collectively as
"our", "we" and "us".
1
We are a venture capital investment company whose objective is to achieve
capital appreciation through long-term investments in businesses believed to
have favorable growth potential. Our investment interests are focused on
expansion financings, management buyouts, recapitalizations, industry
consolidations and early-stage financings in a broad range of industry segments.
Our portfolio is a composite of companies in which we have major interests as
well as a number of developing companies and marketable securities of
established publicly-owned companies. We make available significant managerial
assistance to the companies in which we invest and believe that providing
material assistance to such investee companies is critical to their business
development activities.
The 12 largest investments we own had a combined cost of $38,566,269 and a
value of $638,196,845, representing 93.7% of the value of our consolidated
investment portfolio at March 31, 2007. For a narrative description of the 12
largest investments, see "Twelve Largest Investments - March 31, 2007" in
Exhibit 13.1 of this Form 10-K/A which is herein incorporated by reference.
Certain of the information presented on the 12 largest investments has been
obtained from the respective companies and, in certain cases, from public
filings of such companies. The financial information presented on each of the
respective companies is from such companies' audited financial statements.
We compete for attractive investment opportunities with venture capital
partnerships and corporations, venture capital affiliates of industrial and
financial companies, SBICs and wealthy individuals.
The number of persons employed by us at March 31, 2007 was seven.
Our internet website address is www.capitalsouthwest.com. You can review
the filings we have made with the U.S. Securities and Exchange Commission, free
of charge by linking directly from our website to NASDAQ, a database that links
to EDGAR, the Electronic Data Gathering, Analysis, and Retrieval System of the
SEC. You should be able to access our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. The charters adopted by the committees of our board of
directors are also available on our website.
Item 1A. Risk Factors
You should carefully consider the risks described below and all other
information contained in this restated annual report on Form 10-K/A, including
our consolidated financial statements and the related notes thereto. The risks
and uncertainties described below are not the only ones facing us. Additional
risks and uncertainties not presently known to us, or not presently deemed
material by us, may also impair our operations and performance. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially adversely affected. If that happens, the trading
price of our common stock could decline, and you may lose all or part of your
investment.
There is uncertainty regarding the value of our investments in restricted
securities.
Our net asset value is based on the values assigned to the various
investments in our portfolio, determined in good faith by our board of
directors. Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, our fair value
determinations may differ materially from the values which would be applicable
to unrestricted securities having a public market.
We have identified a material weakness in our internal control over financial
reporting ("ICFR"), which could adversely affect our ability to report our
financial condition and results of operations accurately or on a timely basis.
As a result, current and potential stockholders could lose confidence in our
financial reporting, which could harm our business and the trading price of our
stock.
2
As required by Section 404 of the Sarbanes-Oxley Act of 2002, our
management has conducted an evaluation of the effectiveness of our internal
control over financial reporting as of March 31, 2007. We have identified
material weakness in our internal controls over financial reporting,
specifically related to accounting for taxes and have concluded that as of March
31, 2007, we did not maintain effective control over financial reporting.
A material weakness is a control deficiency, or a combination of
deficiencies, that result in more than a remote likelihood that a material
misstatement of our annual or interim financial statements will not be prevented
or detected. We determined as of November 19, 2007 we did not maintain effective
controls related to accounting for taxes. Management believes they will be
effective in remediation of the material weakness indentified in Management's
Report on Internal Control over Financial Reporting within the current fiscal
year.
A material weakness in our internal control over financial reporting could
adversely impact our ability to provide timely and accurate financial
information. If we are unsuccessful in implementing or following our remediation
plan, or fail to update our internal control over financial reporting as our
business evolves, we may be unable to report financial information timely and
accurately or to maintain effective disclosure controls and procedures. Any such
failure in the future could also adversely affect the results of periodic
management evaluations and annual auditor attestation reports regarding
disclosure controls and effectiveness of our internal control over financial
reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the
rules promulgated thereunder. If we are unable to report financial information
in a timely and accurate manner or to maintain effective disclosure controls and
procedures, we could be subject to, among other things, regulatory or
enforcement actions by the SEC and NASDAQ, including a delisting from the NASDAQ
Stock Market.
We are subject to additional risks in light of the restatement of our prior
period consolidated financial statements.
As described in Note 2, "Restatement of Consolidated Financial Statements"
of the notes to our consolidated financial statements, we have restated our
consolidated financial statements for the year ended March 31, 2007 and all
years represented in our Form 10-K for the year ended March 31, 2007. The
restatement of our consolidated financial statements could expose us to legal
actions. The defense of any such actions could cause the diversion of
management's attention and resources, and we could be required to pay damages to
settle such actions if any such actions are not resolved in our favor. Even if
resolved in our favor, such actions could cause us to incur significant legal
and other expenses. Moreover, we may be the subject of negative publicity
focusing on the restatement and negative reactions from shareholders and others
with whom we do business.
The lack of liquidity of our restricted securities may adversely affect our
business.
Our portfolio contains many securities which are subject to restrictions on
sale because they were acquired from issuers in "private placement" transactions
or because we are deemed to be an affiliate of the issuer. Unless an exemption
from the registration requirements of the Securities Act of 1933 is available,
we will not be able to sell these securities publicly without the expense and
time required to register the securities under applicable federal and state
securities laws. In addition, contractual or practical limitations may restrict
our ability to liquidate our securities in portfolio companies, because we may
own a relatively large percentage of the issuer's outstanding securities. Sales
may also be limited by unfavorable market conditions. The illiquidity of our
investments may preclude or delay the disposition of such securities, which may
make it difficult for us to obtain cash equal to the value at which we record
our investments.
There is limited publicly available information regarding the companies in which
we invest.
Many of the securities in our portfolio are issued by privately held
companies. There is generally little or no publicly available information about
such companies, and we must rely on the diligence of our management to obtain
the information necessary for our decision to invest. There can be no assurance
3
that such diligence efforts will uncover all material information necessary to
make fully informed investment decisions.
Certain of our portfolio companies are highly leveraged.
Many of our portfolio companies have incurred substantial indebtedness in
relation to their overall capital base. Such indebtedness often has a term that
will require the balance of the loan to be refinanced when it matures. If
portfolio companies cannot generate adequate cash flow to meet the principal and
interest payments on their indebtedness, the value of our investments could be
reduced or eliminated through foreclosure on the portfolio company's assets or
by the portfolio company's reorganization or bankruptcy.
Fluctuations may occur in our quarterly results.
Our quarterly operating results may fluctuate materially due to a number of
factors including, among others, variations in and the timing of the recognition
of realized and unrealized gains or losses, the degree to which we encounter
competition in our portfolio companies' markets, the ability to find and close
suitable investments, and general economic conditions. As a result of these
factors, results for any period should not be relied upon as being indicative of
performance in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We may not continue to qualify for pass-through tax treatment.
We may not qualify for conduit tax treatment as a Regulated Investment
Company ("RIC") if we are unable to comply with the requirements of Subchapter M
of the Internal Revenue Code. If we fail to satisfy such requirements and cease
to qualify for conduit tax treatment, we will be subject to federal taxes on our
net investment income. To the extent we had unrealized gains, we would have to
establish reserves for taxes, which would reduce our net asset value
accordingly. In addition, if we, as a RIC, were to decide to make a deemed
distribution of net realized capital gains and retain the net realized capital
gain, we would have to establish appropriate reserves for taxes, at the end of
the tax year, that we would have to pay on behalf of our shareholders. The loss
of this pass-through tax treatment could have a material adverse effect on the
total return, if any, obtainable from an investment in our common stock.
Historically, we have distributed net investment income semi-annually. Our
current intention is to continue these distributions of ordinary income to our
shareholders. Also, historically, we have retained net realized capital gains,
paid the resulting tax at the corporate level and retained the after-tax gains
to supplement our equity capital and support continuing additions to our
portfolio. Our shareholders then report such capital gains on their tax returns,
receive credit for the tax we paid and are deemed to have reinvested the amount
of the retained after-tax gain. We cannot assure you that we will achieve
investment results or maintain a RIC tax status that will allow any specified
level of cash distributions or our shareholders' current tax treatment of
realized and retained capital gains.
Our financial condition and results of operations will depend on our ability to
effectively manage any future growth.
Sustaining growth depends on our ability to identify, evaluate, finance,
and invest in companies that meet our investment criteria. Accomplishing such
results on a cost-effective basis is a function of our marketing capabilities
and skillful management of the investment process. Failure to achieve future
growth could have a material adverse effect on our business, financial
condition, and results of operations.
We are dependent upon management for our future success.
Selection, structuring and closing our investments depends upon the
diligence and skill of our management, which is responsible for identifying,
evaluating, negotiating, monitoring and disposing of our investments. Our
management's capabilities may significantly impact our results of operations. If
4
we lose any member of our management team and he/she cannot be promptly replaced
with an equally capable team member, our results of operations could be
significantly impacted.
We operate in a highly competitive market for investment opportunities.
We compete with a number of private equity funds, other investment entities
and individuals for investment opportunities. Some of these competitors are
substantially larger and have greater financial resources, and some are subject
to different and frequently less stringent regulation. As a result of this
competition, we may not be able to take advantage of attractive investment
opportunities from time to time and there can be no assurance that we will be
able to identify and make investments that satisfy our objectives.
Changes in laws or regulations governing our operations or our failure to comply
with those laws or regulations may adversely affect our business.
We and our portfolio companies are subject to regulation by laws at the
local, state and federal level. These laws and regulations, as well as their
interpretation, may be changed from time to time. Accordingly, any changes in
these laws and regulations or failure to comply with them could have a material
adverse effect on our business. Certain of these laws and regulations pertain
specifically to business development companies such as ours.
Failure to deploy new capital may reduce our return on equity.
If we fail to invest our capital effectively, our return on equity may be
decreased, which could reduce the price of the shares of our common stock.
Investment in shares of our common stock should not be considered a complete
investment program.
Our stock is intended for investors seeking long-term capital appreciation.
Our investments in portfolio securities generally require many years to reach
maturity, and such investments generally are illiquid. An investment in our
shares should not be considered a complete investment program. Each prospective
purchaser should take into account his or her investment objectives as well as
his or her other investments when considering the purchase of our shares.
Our common stock often trades at a discount from net asset value.
Our common stock is listed on The Nasdaq Global Market ("NASDAQ").
Shareholders desiring liquidity may sell their shares on NASDAQ at current
market value, which has often been below net asset value. Shares of closed-end
investment companies frequently trade at discounts from net asset value, which
is a risk separate and distinct from the risk that a fund's performance will
cause its net asset value to decrease.
The market price of our common stock may fluctuate significantly.
The market price and marketability of shares of our common stock may from
time to time be significantly affected by numerous factors, including our
investment results, market conditions, and other influences and events over
which we have no control and that may not be directly related to us.
Item 1B. Unresolved Staff Comments
We have no unresolved staff comments to report pursuant to Item 1B.
5
Item 2. Properties
We maintain our offices at 12900 Preston Road, Suite 700, Dallas, Texas,
75230, where we rent approximately 4,232 square feet of office space pursuant to
a lease agreement expiring in February 2008. On December 7, 2007, we renewed our
lease and extended our commitment through February 2013. We believe that our
offices are adequate to meet our current and expected future needs.
Item 3. Legal Proceedings
We have no material pending legal proceedings to which we are a party or to
which any of our property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter
ended March 31, 2007.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Information set forth under the captions "Shareholder Information -
Shareholders, Market Prices and Dividends" in Exhibit 13.1 of this Form 10-K/A
is herein incorporated by reference.
Performance Graph
The following graph compares our cumulative total shareholder return
during the last five years (based on the market price of our common stock
and assuming reinvestment of all dividends and tax credits on retained
long-term capital gains) with the Total Return Index for NASDAQ (U.S.
Companies) and with the Total Return Index for Nasdaq Financial Stocks,
both of which indices have been prepared by the Center for Research in
Security Prices at the University of Chicago.
Comparison of Five Year Cumulative Total Returns
[GRAPH OMITTED]
Nasdaq Total Return (U.S.) Nasdaq Financial Stocks Capital Southwest Corporation
2002 100.000 100.000 100.000
2003 73.397 92.777 70.744
2004 108.335 133.387 112.003
2005 109.059 138.745 118.299
2006 128.607 162.999 143.785
2007 133.404 170.643 241.089
6
Item 6. Selected Financial Data
See Exhibit 13.1 "Selected Consolidated Financial Data" of this Form
10-K/A.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
See Exhibit 13.1 "Selected Consolidated Financial Data" of this Form
10-K/A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in marketable
equity security prices. We do not use derivative financial instruments to
mitigate any of these risks.
Our investment performance is a function of our portfolio companies'
profitability, which may be affected by economic cycles, competitive forces,
foreign currency fluctuations and production costs including labor rates, raw
material prices and certain basic commodity prices. Most of the companies in our
investment portfolio do not hedge their exposure to raw material and commodity
price fluctuations. However, the portfolio company with the greatest exposure to
foreign currency fluctuations generally hedges its exposure. All of these
factors may have an adverse effect on the value of our investments and on our
net asset value.
Our investment in portfolio securities includes fixed-rate debt securities
which totaled $6,109,238 at March 31, 2007, equivalent to 0.9% of the value of
our total investments. Generally, these debt securities are below investment
grade and have relatively high fixed rates of interest, therefore; minor changes
in market yields of publicly-traded debt securities have little or no effect on
the values of debt securities in our portfolio and no effect on interest income.
Our investments in debt securities are generally held to maturity and their fair
values are determined on the basis of the terms of the debt security and the
financial condition of the issuer.
A portion of our investment portfolio consists of debt and equity
securities of private companies. We anticipate little or no effect on the values
of these investments from modest changes in public market equity valuations.
Should significant changes in market valuations of comparable publicly-owned
companies occur, there may be a corresponding effect on valuations of private
companies, which would affect the value and the amount and timing of proceeds
eventually realized from these investments. A portion of our investment
portfolio also consists of restricted common stocks of publicly-owned companies.
The fair values of these restricted securities are influenced by the nature of
applicable resale restrictions, the underlying earnings and financial condition
of the issuers of such restricted securities and the market valuations of
comparable publicly-owned companies. A portion of our investment portfolio also
consists of unrestricted, freely marketable common stocks of publicly-owned
companies. These freely marketable investments, which are valued at the public
market price, are directly exposed to equity price risks, in that a change in an
issuer's public market equity price would result in an identical change in the
value of our investment in such security.
Item 8. Financial Statements and Supplementary Data
See Item 15 of this Form 10-K/A - "Exhibits and Financial Statement
Schedules".
7
Selected Quarterly Financial Data (Unaudited)
The following presents a summary of the unaudited quarterly consolidated
financial information for the years ended March 31, 2007 and 2006.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
as restated as restated as restated as restated as restated
(In thousands, except per share amounts)
2007
----
Net investment income $ 492 $ 1,170 $ 1,617 $ 954 $ 4,233
Net realized gain (loss) on investments 397 9,219 19,531 (14,181) 14,966
Net increase (decrease) in unrealized
appreciation of investments (5,218) (2,931) 132,210 23,621 147,682
Net increase (decrease) in net assets
from operations (4,329) 7,458 153,358 10,394 166,881
Net increase (decrease) in net assets
from operations per share (1.12) 1.92 39.46 2.66 42.94
2006
----
Net investment income $ 574 $ 666 $ 893 $ 256 $ 2,389
Net realized gain on investments 5,261 5,915 6,317 (2,042) 15,451
Net increase in unrealized
appreciation of investments 4,142 26,824 15,009 78,380 124,355
Net increase in net assets
from operations 9,977 33,405 22,219 76,594 142,195
Net increase in net assets
from operations per share 2.59 8.66 5.76 19.83 36.84
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
(i) Disclosure Controls and Procedures.
An evaluation was performed under the supervision and with the
participation of our management, including the President and Controller, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act
of 1934). Based on that evaluation, the President and Controller concluded that
our disclosure controls and procedures as of March 31, 2007 were not effective
due to a material weakness in the Company's internal control over financial
reporting disclosed in "Item 9A. Controls and Procedures" of the Company's
Annual Report on Form 10-K/A, for the fiscal year ended March 31, 2007.
(ii) Internal Control Over Financial Reporting.
(a) Management's annual report on internal control over financial reporting.
Management is responsible for establishing and maintaining adequate
controls over financial reporting, as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Securities and Exchange Act of 1934. The Company's
internal control over financial reporting ("ICFR")is designed to provide
8
reasonable assurance regarding the reliability of financial reporting and
preparation of the financial statements for external purposes in accordance with
accounting principles generally accepted in the United States.
Because of its inherent limitations, internal controls over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to risk that controls
may become inadequate because of changes in conditions, or that the degree of
compliance with policies and procedures may deteriorate.
The Company has reassessed the effectiveness of its internal control over
financial reporting as of November 19, 2007. The Company has been subject to
Section 404 (Management's Assessment of Internal Controls) of the Sarbanes-Oxley
Act of 2002 since March 31, 2005. For purposes of Management's internal control
evaluation, the following from the the Securities and Exchange Commission
Federal Register SEC 17 CFR Part 241 ("SEC") and Public Company Accounting
Oversight Board ("PCAOB") Auditing Standard No. 5 were considered.
Deficiency in internal control over financial reporting exists when the
design or operation of a control does not allow management or employees, in the
normal course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. Significant deficiency is a deficiency, or a
combination of deficiencies, in internal control over financial reporting that
are less severe than a material weakness, yet important enough to merit
attention by those responsible for oversight of a company's financial reporting.
Material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our management,
including our President and Controller, we conducted an evaluation of the
effectiveness of our internal control over financial reporting in connection
with preparation of the Amended Annual Report on Form 10-K/A for the year ended
March 31, 2007. As a result of this assessment, a material weakness was
identified.
The following material weakness was the basis for our conclusion at March
31, 2007:
o We did not maintain an adequate process to assess and determine the
probability of the Company maintaining its qualifying status as a RIC
subject to subchapter M of the IRC over the next twelve months at any
given quarter end.
According to SEC and PCAOB Auditing Standard No. 5, one of the indicators
of a material weakness in internal control is a restatement of previously issued
financial statements to reflect the correction of a material misstatement.
Management has concluded that ICFR as of March 31, 2007 was not effective as it
relates to the Company's accounting for taxes.
Impact on the Company's Financial Reporting and ICFR
Management has identified a material weakness related to its accounting for
taxes, and has determined that a restatement of its previously issued financial
statements is required. Management believes, however, the material weakness
identified does not have a pervasive impact on ICFR and the restatement is not
an indication that other significant control deficiencies or material weaknesses
exist.
Remediation
Management will add a formal evaluation to consider whether it is probable
the Company will not qualify as a RIC subject to Subchapter M of the IRC over
the next 12 months at any given quarter end. The considerations will primarily
include review of current investments and assessing the probability that a
non-qualifying event will occur to a degree the Company would not be able to
cure within prescribed timeframes. Additionally, the Company will review its
investment gains quarterly and calculate the tax impact on those gains it will
retain, however, they will only record the tax liability at the last day of the
tax year. Management will also determine, based on materiality, any footnote
disclosure that will be required during the interim periods. Furthermore,
Management will review and assess temporary and permanent differences for
reclassification to "additional capital" at each tax year end. When
9
considered necessary by Management, an independent attorney or accountant with
requisite knowledge of investment company taxation will be consulted in order to
provide necessary guidance.
As a result, the Company will amend and restate its previously filed Annual
Report on Form 10-K for the fiscal year ended March 31, 2007 and its Form 10-Q
for the quarter ended June 30, 2007. Concurrent with this assessment, Management
concludes the Company's ICFR related to accounting for taxes was ineffective and
a material weakness exists. Management believes the actions taken to remediate
the internal control deficiencies, as more fully described above, are adequate
to address future considerations of RIC status and related financial statement
presentations and disclosures.
There were no other changes in the Company's internal control over
financial reporting that have materially affected or are reasonably likely to
materially affect our ICFR during the year ended March 31, 2007.
(b) Attestation report of the registered public accounting firm
Grant Thornton, LLP, the independent registered public accounting firm that
audited the consolidated financial statements of the Company included in the
Amended Annual Report on Form 10-K/A has issued an audit report on the
effectiveness of the Company's internal control over financial reporting as of
March 31, 2007. The report, dated January 9, 2008, which expressed an opinion
that the Company had not maintained effective internal control over financial
reporting as of March 31, 2007 is based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and is set forth in our Exhibit 13.1.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The section of our 2007 Proxy Statement captioned "Nominees for Director"
under "Proposal 1. Election of Directors" identifies members of our board of
directors and nominees, and is incorporated in this Item 10 by reference.
The names and ages of our executive officers as of January 8, 2008,
together with certain biographical information, are as follows:
William M. Ashbaugh, age 52, has served as Senior Vice President since 2005
and Vice President since 2001. He previously served as Managing
Director in the corporate finance departments of Hoak Breedlove
Wesneski & Co. from 1998 to 2001, Principal Financial Securities from
1997 to 1998 and Southwest Securities from 1995 to 1997.
Gary L. Martin, age 61, was named President and Chief Executive Officer in
July 2007, has been a director since July 1988 and has served as Vice
President since 1984. He previously served as Vice President from 1978
to 1980. Since 1980, Mr. Martin has served as President of The
Whitmore Manufacturing Company, a wholly-owned portfolio company.
Jeffrey G. Peterson, age 34, was named Secretary in August 2007 and has
served as Vice President and Treasurer since 2005 and was an
Investment Associate since 2001. He previously held positions with the
investment banking division of Scott & Stringfellow, Inc. and the
corporate lending division of Bank One.
William R. Thomas, age 79, has served as Chairman of the Board of Directors
since 1982. In July 2007, he retired from his role as President, which
he held since 1980. In addition, he has been a director since 1972 and
was previously Senior Vice President from 1969 to 1980.
10
The sections of our 2007 Proxy Statement captioned "Meetings and Committees
of the Board of Directors under "Proposal 1. Election of Directors" and "Report
of the Audit Committee" identifies members of our audit committee of our board
of directors and our audit committee financial expert, and are incorporated in
this Item 10 by reference.
The section of our 2007 Proxy Statement captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" is incorporated in this Item 10 by reference.
Code of Ethics
We have adopted a code of ethics that applies to all our directors,
officers and employees. We have made the Code of Conduct and Ethics available on
our website at www.capitalsouthwest.com.
Item 11. Executive Compensation
The information in the section of our 2007 Proxy Statement captioned
"Compensation Discussion and Analysis" is incorporated in this Item 11 by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information in the sections of our 2007 Proxy Statement captioned
"Stock Ownership of Certain Beneficial Owners" are incorporated in this Item 12
by reference.
The table below sets forth certain information as of March 31, 2007
regarding the shares of our common stock available for grant or granted under
stock option plans that (i) were approved by our shareholders, and (ii) were not
approved by our shareholders.
Equity Compensation Plan Information
Number of Securities
Number of Securities Remaining Available For
To Be Issued Upon Weighted-Average Exercise Future Issuance Under Equity
Exercise of Price Of Outstanding Compensation Plans
Outstanding Options, Options, (excluding securities reflected
Plan Category Warrants And Rights Warrants And Rights in column (a)
------------- ------------------- ------------------- -------------
(a) (b) (c)
--- --- ---
Equity 52,500 $86.184 58,500
compensation plans
approved by security
holders(1)
Equity - - -
compensation plans
not approved by
security holders ______ ______ ______
Total 52,500 $86.184 58,500
------
(1) Includes the 1999 Stock Option Plan. For a description of this plan, please
refer to Footnote 5 contained in our consolidated financial statements.
11
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information in the sections of our 2007 Proxy Statement captioned
"Meetings and Committees of the Board of Directors" - "Committee Member
Independence" and "Certain Relationships and Related Party Transactions" are
incorporated in this Item 13 by reference.
Item 14. Principal Accountant Fees and Services
The information in the sections of our 2007 Proxy Statement captioned
"Proposal 2: Ratification of Appointment of Independent Registered Accounting
Firm" and "Audit and Other Fees" are incorporated in this Item 14 by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) The following information included in Exhibit 13.1 is herein
incorporated by reference:
(A) Portfolio of Investments - March 31, 2007
Consolidated Statements of Financial Condition - March 31, 2007
and 2006
Consolidated Statements of Operations - Years Ended March 31,
2007, 2006 and 2005
Consolidated Statements of Changes in Net Assets - Years Ended
March 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows - Years Ended March 31,
2007, 2006 and 2005
(B) Notes to Consolidated Financial Statements
(C) Notes to Portfolio of Investments
(D) Selected Per Share Data and Ratios
(E) Management's Report on Internal Control over Financial Reporting
(F) Reports of Independent Registered Public Accounting Firm
(G) Portfolio Changes During the Year
(a)(2) All schedules are omitted because they are not applicable or not
required, or the information is otherwise supplied.
(a)(3) See the Exhibit Index.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
/s/ Gary L. Martin
By:___________________________
Gary L. Martin, President
Date: January 9, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Gary L. Martin
_____________________ President January 9, 2008
Gary L. Martin (chief executive officer)
/s/ William R. Thomas
______________________ Chairman of the Board January 9, 2008
William R. Thomas
/s/ Donald W. Burton
_____________________ Director January 9, 2008
Donald W. Burton
/s/ Graeme W. Henderson
_____________________ Director January 9, 2008
Graeme W. Henderson
/s/ Gary L. Martin
_____________________ Director January 9, 2008
Gary L. Martin
/s/ Samuel B. Ligon
_____________________ Director January 9, 2008
Samuel B. Ligon
/s/ John H. Wilson
______________________ Director January 9, 2008
John H. Wilson
/s/ Tracy L. Morris
_____________________ Controller January 9, 2008
Tracy L. Morris (chief financial/accounting officer)
13
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated
herein by reference to a prior filing, in accordance with Rule 12b-32 under the
Securities Exchange Act of 1934. Asterisk denotes exhibits filed with this
report. Double asterick denotes exhibits furnished with this report.
Exhibit No. Description
----------- -----------
3.1(a) Articles of Incorporation and Articles of Amendment to
Articles of Incorporation, dated June 25, 1969 (filed as
Exhibit 1(a) and 1(b) to Amendment No. 3 to Form N-2 for the
fiscal year ended March 31, 1979).
3.1(b) Articles of Amendment to Articles of Incorporation, dated
July 20, 1987 (filed as an exhibit to Form N-SAR for the six
month period ended September 30, 1987).
3.2 By-Laws of the Company, as amended.
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 The RectorSeal Corporation and Jet-Lube, Inc. Employee Stock
Ownership Plan as revised and restated effective April 1,
2007.
10.2 Retirement Plan for Employees of Capital Southwest
Corporation and Its Affiliates as amended and restated
effective April 1, 2006.
10.3 Capital Southwest Corporation and Its Affiliates Restoration
of Retirement Income Plan for certain highly-compensated
superseded plan participants effective April 1, 1993 (filed
as Exhibit 10.4 to Form 10-K for the fiscal year ended March
31, 1995).
10.4 Amendment One to Capital Southwest Corporation and Its
Affiliates Restoration of Retirement Income Plan for certain
highly-compensated superceded plan participants effective
April 1, 1993 (filed as Exhibit 10.6 to Form 10-K for the
fiscal year ended March 31, 1998).
10.5 Capital Southwest Corporation Retirement Income Restoration
Plan as amended and restated effective April 1, 1989 (filed
as Exhibit 10.5 to Form 10-K for the fiscal year ended March
31, 1995).
10.6 Form of Indemnification Agreement which has been established
with all directors and executive officers of the Company
(filed as Exhibit 10.9 to Form 8-K dated February 10, 1994).
10.7 Capital Southwest Corporation 1999 Stock Option Plan (filed
as Exhibit 10.10 to Form 10-K for the fiscal year ended
March 31, 2000).
10.8 Severance Pay Agreement with William M. Ashbaugh (filed as
Exhibit 10.1 to Form 8-K dated July 18, 2005).
10.9 Severance Pay Agreement with Susan K. Hodgson (filed as
Exhibit 10.3 to Form 8-K dated July 18, 2005).
10.10 Severance Pay Agreement with Jeffrey G. Peterson (filed as
Exhibit 10.4 to Form 8-K dated July 18, 2005).
14
13.1 * Selected Consolidated Financial Data.
21.1 List of subsidiaries of the Company.
23.1 * Consent of Independent Registered Public Accounting Firm -
Grant Thornton LLP.
31.1 * Certification of President required by Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), filed herewith.
31.2 * Certification of Controller required by Rule 13a-14(a) or
Rule 15d-14(a) of the Exchange Act, filed herewith.
32.1 ** Certification of President required by Rule 13a-14(b) or
Rule 15d-14(b) of the Exchange Act and Section 1350 of
Chapter 63 of Title 18 of the United States Code, furnished
herewith.
32.2 ** Certification of Controller required by Rule 13a-14(b) or
Rule 15d-14(b) of the Exchange Act and Section 1350 of
Chapter 63 of Title 18 of the United States Code, furnished
herewith.