CAPITAL SOUTHWEST CORP - Annual Report: 2014 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FORM 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, 2014

OR

o

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 or organization)		(I.R.S. Employer 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, $0.25 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 o    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 o 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 o

 

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 be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO  o

 

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 or any amendment to this Form 10-K. x

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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 oAccelerated filer x Non-accelerated filer oSmaller reporting company

Indicate by check  mark  whether  the   registrant  is  a  shell  company  (as defined in Rule 12b-2  of  the  Act).

YES o  NO x.

The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2013 was $462,894,073 based on the last sale price of such stock as quoted by The Nasdaq Stock Market on such date.

The number of shares of common stock outstanding as of May 30, 2014 was 15,413,532.

Proxy Statement for Annual Meeting of Shareholders to be held July 21, 2014 is incorporated by reference in this Annual Report on Form 10-K in response to Part III.

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TABLE OF CONTENTS

PART I		Page
Item 1.	Business	1
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Mine Safety Disclosures	18
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 6.	Selected Financial Data	20
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 8.	Financial Statements and Supplementary Data	31
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	73
Item 9A.	Controls and Procedures	73
Item 9B.	Other Information	74
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	74
Item 11.	Executive Compensation	74
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	74
Item 13.	Certain Relationships and Related Transactions, and Director Independence	75
Item 14.	Principal Accountant Fees and Services	75
PART IV
Item 15.	Exhibits and Financial Statement Schedules	76
Signatures		78

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements regarding the plans and objectives of management for future operations.  Any such forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward looking statements.  Forward-looking statements which involve assumptions and describe our future plans, strategies and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.  These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that the projections included in these forward-looking statements will come to pass.  Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors, including the factors discussed in Item 1A entitled “Risk Factors” in Part I of this Annual Report on Form 10-K and elsewhere in this Annual Report on Form 10-K.  Other factors that could cause actual results to differ materially include changes in the economy, in laws or regulations as well as in conditions in our operating areas.

We have based the forward-looking statements included in this Annual Report on Form 10-K on information available to us on the date of this Annual Report on Form 10-K, and we assume no obligation to update any such forward-looking statements, unless we are required to do so by applicable law.  However, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

PART I

Item 1.

Business

Capital Southwest Corporation (“CSWC”) is a publicly traded investment company whose objective is to achieve capital appreciation through long-term investments in privately held businesses.  Our investment interests are focused on acquisitions and investments in a broad range of industry segments. 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, CSWC 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 registered under the Investment Company Act of 1940, as amended (the "1940 Act").  Prior to March 30, 1988, CSWC was registered as a closed-end, non-diversified investment company under the 1940 Act.  On that date, we elected to be treated as a business development company ("BDC") subject to the provisions of the 1940 Act, as amended by the Small Business Incentive Act of 1980. In order to remain a BDC, we must meet certain specified requirements under the 1940 Act, including investing at least 70% of our assets in eligible portfolio companies and limiting the amount of leverage we incur. We are also a regulated investment company (“RIC”) under Subchapter M of the U.S. Internal Revenue Code of 1986. As such, we are not required to pay corporate-level income tax on our investment income. We intend to maintain our RIC status, which requires that we qualify annually as a RIC by meeting certain specified requirements.   Because CSWC wholly owns CSVC, the portfolios of CSWC and CSVC are referred to collectively as "our," "we" and "us."  Capital Southwest Management Company ("CSMC"), a wholly-owned subsidiary of CSWC, is the management company for CSWC and CSVC.  CSMC generally incurs all normal operating and administrative expenses, including, but not limited to, salaries and related benefits, rent, equipment and other administrative costs required for its day-to-day operations.

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Our portfolio consists of private companies in which we have controlling interests, private companies in which we have minority interests and marketable securities of publicly traded companies.  We make available significant managerial assistance to certain companies in which we invest and believe that providing material assistance to such investee companies is critical to their success.

Our 7 largest holdings had a combined cost of $31,458,537 and a value of $634,615,154, representing 93.6% of the value of our consolidated investment portfolio at March 31, 2014.  The following table illustrates our 7 largest investments at March 31, 2014.  A full description of these investments is set forth under the heading “Consolidated Schedule of Investments” in Item 8.

		CSWC
		Cost				Value
The RectorSeal Corporation		$	52,600			$	275,800,000
Alamo Group Inc.			2,190,937				153,824,529
The Whitmore Manufacturing Company			1,600,000				88,500,000
Encore Wire Corporation			5,200,000				63,590,625
Media Recovery, Inc.			5,415,000				23,900,000
Trax Holdings, Inc.			9,000,000				21,000,000
Deepwater Corrosion Services, Inc.			8,000,000				8,000,000
		$	31,458,537			$	634,615,154

Our investment team has identified the following investment criteria that we believe are important in evaluating prospective portfolio companies:

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Companies with Positive and Sustainable Cash Flow:  We generally seek to invest in established companies with sound historical financial performance, focusing on companies that have historically generated $5-$25 million of EBITDA (earnings before interest, taxes, depreciation and amortization) annually. Acquisition candidates for our existing portfolio companies can be smaller in size.

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Excellent Management:  Management teams with a proven record of achievement, exceptional ability, unyielding determination and unquestionable integrity.  We believe management teams with these attributes are more likely to manage the companies in a manner that protects and enhances value.

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Industry:  We primarily focus on companies having competitive advantages in their respective markets and/or operating in industries with barriers to entry, which may help protect their market position.  Our key sectors are specialty chemicals, industrial products and technologies and energy services and products.

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Investment Size:  Between $10-50 million of equity or debt investments.

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Location: We focus on companies located in the United States. Acquisition candidates for our existing portfolio companies may be located worldwide.

We partner with successful operators to build businesses through:

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Long-term patient capital. Our public ownership structure eliminates the pressure to exit our investments in the five to seven year timeframe typical of most private equity funds.  A significant portion of our active investments have been held continuously for over 20 years.

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Efficient allocation and management of capital. We find that our ability to effectively allocate and manage our capital is essential to achieving our investment objectives. In addition to monitoring the performance of our existing investments, members of our investment and operations team are always available to provide managerial assistance and leverage our extensive network of sources to our portfolio companies. The expertise of our management team in analyzing, valuing, structuring, negotiating and closing transactions provides us with competitive advantages by allowing us to pursue and consummate highly accretive, strategic add-on acquisitions for our portfolio companies.

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Alignment of interests with management. We find that a committed management team whose interests are aligned with ownership provides the highest likelihood of success. When management’s interests are aligned with ours, management is focused on our core objective of producing attractive risk adjusted returns for our shareholders.

 

Our investment strategy involves a "team" approach, whereby our investment team screens potential transactions before they are presented to senior management and ultimately the Board of Directors for approval.  Our investment team generally categorizes the investment process into seven distinctive stages:

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Deal Generation/Origination:  Deal generation and origination is maximized through long-standing and extensive relationships with industry contacts, brokers, commercial and investment bankers, entrepreneurs, service providers such as lawyers and accountants, as well as current and former portfolio companies and investors.

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Screening:  Once it is determined that a potential investment has met our investment criteria, we will screen the investment by performing preliminary due diligence.  It is during this stage that we will take into consideration potential investment structures and price terms, as well as regulatory compliance.  Upon successful screening of the proposed investment, the investment team makes a recommendation to move forward.  We then issue a non-binding term sheet.

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Term Sheet:  The non-binding term sheet will include the key economic terms based upon our analysis performed during the screening process as well as a proposed timeline and our qualitative expectation for the transaction.  Upon execution of the term sheet, we begin our formal due diligence process.

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Due Diligence:  Due diligence is performed under the direction of our Chief Investment Officer, investment team and certain external resources, who together perform due diligence to understand the relationships among the prospective portfolio company’s business plan, operations and financial performance.  Additional procedures may include (i) conducting site visits with management and key personnel; (ii) performing a detailed review of historical and projected financial statements; (iii) interviewing key customers and suppliers; (iv) evaluating company management with a background check; (v) reviewing material contracts; (vi) conducting an in-depth industry, market and strategy analysis; and (vii) obtaining a review by legal, environmental or other consultants.

 

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Document and Close:  Upon completion of a satisfactory due diligence review, our investment team presents its written findings to our Board of Directors for approval.  If the Board of Directors proposes any adjustments to the investment terms or structure, we update our analysis.  Upon Board approval for the investment, we re-confirm our regulatory company compliance, process and finalize all required legal documents and fund the investment.

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Post-Investment:  We continuously monitor the status and progress of our portfolio companies, as well as our investment thesis developed at the time of investment. We offer managerial assistance to our portfolio companies, and provide them access to our investment experience, direct industry expertise and contacts.  The same investment team leader that was involved in the investment process will continue involvement in the portfolio company post-investment.  This approach provides continuity of knowledge and allows the investment team to maintain a strong business relationship with key management of our portfolio companies for post-investment assistance and monitoring.  As part of the monitoring process, members of our investment team will analyze monthly/quarterly/annual financial statements versus the previous periods, review financial projections, meet with management, attend board meetings and review all compliance certificates and covenants.  While we maintain limited involvement in the ordinary course of operations of our portfolio companies, we maintain greater involvement in non-ordinary financings, potential acquisitions and other strategic activities.

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Exit Strategies:  While our approach is primarily focused on providing long-term capital for sustained growth, we assist our portfolio companies in developing and planning exit opportunities, including any sale or merger of our portfolio companies,.  We assist in the structure, timing, execution and transition of the exit strategy.

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We determine our net asset value (“NAV”) per share on a quarterly basis.  The net asset value per share is equal to our total assets 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 accordance with Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) and a valuation process approved by our Board of Directors and in accordance with the 1940 Act. Our valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio.

We undertake a multi-step valuation process each quarter in connection with determining the fair value of our investments.  Our Board of Directors is ultimately responsible for overseeing, reviewing and approving, in good faith, our estimate of the fair value of each individual investment. Our quarterly valuation process begins with the investment team leader responsible for the portfolio investment valuing each portfolio company or investment. Our investment team then reviews and discusses this preliminary valuation, and our Board of Directors assesses the valuations and ultimately approves the fair value of each investment in our portfolio.

Our Board of Directors is responsible for determining the fair value of portfolio investments on an annual and quarterly basis.  Annually, Duff & Phelps, LLC ("Duff & Phelps") provides third party valuation consulting services to our Board of Directors in response to the limited procedures that our Board of Directors identifies and requests.  For the year ended March 31, 2014, the Board of Directors asked Duff & Phelps to perform limited valuations for The RectorSeal Corporation, The Whitmore Manufacturing Company and Media Recovery, Inc. comprising approximately 57.3% of the total investments at fair value as of March 31, 2014.  Upon completion of the limited valuation assessment, Duff & Phelps concluded that the fair value of those investments, subject to the limited procedures as specified by our Board, appeared reasonable.

We compete for attractive investment opportunities with private equity funds, family offices, and strategic buyers. We believe we are able to be competitive with these entities primarily on the basis of the experience and contacts of our management team and our responsive and efficient investment analysis and decision-making processes.  However, many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do.  Our competitors may have a lower cost of funds and many have access to funding sources that are not available to us.  In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships and build their market shares.  In addition, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC.

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 not be able to take advantage of attractive investment opportunities and may not be able to identify and make investments that satisfy our investment objectives or meet our investment goals.

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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 restrictions relating to transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters.  The 1940 Act requires that a majority of the members of the board of directors of a BDC be persons other than “interested persons,” as defined in the 1940 Act.  In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a majority of our outstanding voting securities.

The 1940 Act defines “a majority of the outstanding voting securities” as the lesser of (i) 67% or more of the voting securities present at a meeting if the holders of more than 50% of our outstanding voting securities are present or represented by proxy or (ii) more than 50% of our voting securities.

The following is a brief description of the 1940 Act provisions applicable to BDCs, which is qualified in its entirety by reference to the full text of the 1940 Act and rules issued thereunder by the SEC.

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Generally, to be eligible to elect BDC status, a company must primarily engage in the business of furnishing capital and making significant managerial assistance available to companies that do not have ready access to conventional financial channels.  Such companies that satisfy certain additional criteria are defined as "eligible portfolio companies."  In general, in order to qualify as a BDC, a company must: (i) be a domestic company; (ii) have registered a class of its securities pursuant to Section 12 of the Securities Exchange Act of 1934; (iii) operate for the purpose of investing in the securities of certain types of eligible portfolio companies, including early stage or emerging companies and businesses suffering or just recovering from financial distress (see following paragraph); (iv) make available significant managerial assistance to such portfolio companies; and (v) file a proper notice of election with the SEC.

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An eligible portfolio company generally is a domestic company that is not an investment company or a company excluded from investment company status pursuant to exclusions for certain types of financial companies (such as brokerage firms, banks, insurance companies and investment banking firms) and that: (i) does not have a class of securities listed on a national securities exchange; (ii) has a class of equity securities listed on a national securities exchange with a market capitalization of less than $250 million; or (iii) is controlled by the BDC itself or together with others and has a representative on the Board of Directors of such company.  The 1940 Act presumes that a person has “control” of a portfolio company where a person owns at least 25% of its outstanding voting securities.

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We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC.  Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our shareholders arising from willful malfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

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We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation and designate a chief compliance officer to be responsible for administering these policies and procedures.

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Qualifying Assets

The 1940 Act provides that we may not make an investment in non-qualifying assets unless at the time at least 70% of the value of our total assets (measured as of the date of our most recently filed financial statements) consists of qualifying assets.  Qualifying assets include: (i) securities of eligible portfolio companies; (ii) securities of certain companies that were eligible portfolio companies at the time we initially acquired their securities and in which we retain a substantial interest; (iii) securities of certain controlled companies; (iv) securities of certain bankrupt, insolvent or distressed companies; (v) securities received in exchange for or distributed in or with respect to any of the foregoing; and (vi) cash items, U.S. government securities and high-quality short-term debt.  The SEC has adopted a rule permitting a BDC to invest its funds in certain money market funds.  The 1940 Act also places restrictions on the nature of the transactions in which, and the persons from whom, securities can be purchased in some instances in order for the securities to be considered qualifying assets.

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 the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance.  However, where we purchase such securities in conjunction with one or more other persons acting together, one of the other 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, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

Idle Funds Investments

For funds that may soon be invested in “qualifying assets,” we hold those assets in cash, cash equivalents, U.S. government securities, short-term investments in secured debt investments, independently rated debt investments and diversified bond funds.  We refer to these investments as idle funds investments.

Senior Securities

We are permitted by the 1940 Act, under specific conditions, to issue multiple classes of debt and a single class of preferred stock if our asset coverage, as defined by the 1940 Act, is at least 200% after the issuance of the debt or the preferred stock (i.e. such senior securities may not be in excess of our net assets).  Under specific conditions, we are also permitted by the 1940 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 per share, exclusive of any distributing commission or discount, without shareholder approval. Shares of our common stock have traded below our NAV per share. While our common stock continues to trade at a price below our NAV per share, there are no assurances that we can issue or sell shares of our common stock if needed to fund our business. In addition, even in certain instances where we could issue or sell shares of our common stock at a price below our NAV per share, such issuance could result in dilution in our NAV per share, which could result in a decline of our stock price.

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Code of Ethics

We adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions.  Personnel subject to the code may invest in securities for their personal investment accounts including securities that may be purchased or held by us, so long as such investments are made 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 not restrict transactions between us and our portfolio companies.

CSVC is licensed by the Small Business Administration ("SBA") to operate as an SBIC under Section 301(c) of the Small Business Investment Act of 1958.

SBICs are designed to stimulate the flow of private equity capital to eligible small businesses.  Under SBIC regulations, an SBIC may make loans to eligible small businesses, invest in equity securities of such businesses and provide them with consulting and advisory services.

Under current SBIC regulations, eligible small businesses generally include businesses that (together with their affiliates) have a tangible net worth not exceeding $18 million and have average annual net income after federal income taxes not exceeding $6 million (average net income to be computed without benefit of any carryover loss) for the two most recent fiscal years. In addition, an SBIC must devote 20% of its investment activity to "smaller" concerns as defined by the SBA.  A smaller concern generally includes businesses that have a tangible net worth not exceeding $6 million and have average annual net income after federal income taxes not exceeding $2 million (average net income to be computed without benefit of any net carryover loss) for the two most recent fiscal years. SBIC regulations also provide alternative size standard criteria to determine eligibility for designation as an eligible small business or smaller concern, which criteria depend on the primary industry in which the business is engaged and are based on such factors as the number of employees and gross revenue.  However, once an SBIC has invested in a company, it may continue to make follow on investments in the company, regardless of the size of the portfolio company at the time of the follow on investment, up to the time of the portfolio company’s initial public offering.

The SBA prohibits an SBIC from providing funds to small businesses for certain purposes, such as relending and investment outside the United States, to businesses engaged in a few prohibited industries, and to certain "passive" (non-operating) companies.  In addition, without prior SBA approval, an SBIC may not invest an amount equal to more than approximately 30% of the SBIC’s regulatory capital in any one portfolio company and its affiliates.

The SBA places certain limitations on the financing terms of investments by SBICs in portfolio companies (such as limiting the permissible interest rate on debt securities held by an SBIC in a portfolio company). Although prior regulations prohibited an SBIC from controlling a small business concern except in limited circumstances, regulations adopted by the SBA in 2002 now allow an SBIC to exercise control over a small business for a period of seven years from the date on which the SBIC initially acquires its control position.  This control period may be extended for an additional period of time with the SBA’s prior written approval.

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The SBA restricts the ability of an SBIC to lend money to any of its officers, directors and employees or to invest in affiliates thereof. The SBA also prohibits, without prior SBA approval, a "change of control" of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10% or more of a class of capital stock of a licensed SBIC. A "change of control" is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise.

An SBIC (or group of SBICs under common control) may generally have outstanding debentures guaranteed by the SBA in amounts up to twice the amount of the privately-raised funds of the SBIC(s). Debentures guaranteed by the SBA have a maturity of 10 years, require semi-annual payments of interest, and do not require any principal payments prior to maturity.  As of March 31, 2014 and 2013, we had no SBA-guaranteed debentures.

SBICs must invest idle funds that are not being used to make loans in investments permitted under SBIC regulations in the following limited types of securities: (i) direct obligations of, or obligations guaranteed as to principal and interest by, the United States government, which mature within 15 months from the date of the investment; (ii) repurchase agreements with federally insured institutions with a maturity of seven days or less (and the securities underlying the repurchase obligations must be direct obligations of or guaranteed by the federal government); (iii) certificates of deposit with a maturity of one year or less, issued by a federally insured institution; (iv) deposit accounts in a federally insured institution that is subject to a withdrawal restriction of one year or less; (v) checking accounts in a federally insured institution; or (vi) a reasonable petty cash fund.

SBICs are periodically examined and audited by the SBA’s staff to determine their compliance with SBIC regulations and are periodically required to file forms with the SBA.

CSWC and CSVC elected to be treated as a regulated investment company (a "RIC"), taxable under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for federal income tax purposes.  In general, a RIC is not taxed on its income or gains to the extent it distributes such income or gains to its shareholders.  In order to qualify as a RIC, we must, in general, (1) annually derive at least 90% of our gross income from dividends, interest and gains from the sale of securities and similar sources (the "Income Source Rule"); (2) quarterly meet certain investment asset diversification requirements; and (3) annually distribute at least 90% of our investment company taxable income as a dividend (the "Income Distribution Rule").  Any taxable investment company income not distributed is subject to corporate level tax.  Any taxable investment company income distributed generally is taxable to shareholders as dividend income.

In addition to the requirement that we must annually distribute at least 90% of our investment company taxable income, we may either distribute or retain our realized net capital gains from investments, but any realized net capital gains not distributed may be subject to corporate level tax. During the twelve months ended March 31, 2014, we did not make any capital gain distributions. Any realized net capital gains distributed generally will be taxable to shareholders as long-term capital gains.

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In lieu of actually distributing our realized net capital gains, we as a RIC may retain all or part of our net capital gains and elect to be deemed to have made a distribution of the retained portion to our shareholders under the "designated undistributed capital gain" rules of the Code.  Although we pay tax at the corporate rate on the amount deemed to have been distributed, our shareholders receive a tax credit equal to their proportionate share of the tax paid and an increase in the tax basis of their shares by the amount per share retained by us.

To the extent that we retain capital gains and have a Deemed Distribution, each shareholder will receive an IRS Form 2439 that will reflect each shareholder's receipt of the income from a Deemed Distribution and a tax credit equal to each shareholder's proportionate share of the tax paid by us.  This tax credit, which is paid at the corporate rate, is often credited at a higher rate than the actual tax due by a shareholder on the income from the Deemed Distribution.  The credit can be used by the shareholder to offset other taxes due in that year or to generate a tax refund to the shareholder.  Tax exempt investors may file for a refund.

Although we may retain income and gains subject to the limitations described above (including paying corporate level tax on such amounts), we could be subject to an additional 4% excise tax if we fail to distribute 98% of our aggregate annual taxable income.

The NASDAQ Global Select Market (“NASDAQ”) has adopted corporate governance regulations with which listed companies must comply in order to remain listed.  We believe that we are in compliance with such corporate governance listing standards.  We intend to monitor our compliance with future listing standards and to take all necessary actions to ensure that we remain in compliance.

We are subject to the reporting and disclosure requirements of the Securities Exchange Act of 1934, as amended (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 Act of 2002, which imposes a wide variety of regulatory requirements on publicly-held companies and their insiders.  For example:

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pursuant to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer are required to certify the accuracy of the financial statements contained in our periodic reports;

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pursuant to Item 307 of Regulation S-K, our periodic reports are required to disclose our conclusions about the effectiveness of our disclosure controls and procedures;

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pursuant to Rule 13a-15 of the Exchange Act, our management is required to prepare a report regarding its assessment of our internal control over financial reporting, and our independent registered public accounting firm separately audits our internal control over financial reporting; and

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pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Our principal executive offices are located at 12900 Preston Road, Suite 700, Dallas, Texas 75230.  We maintain a Website at www.capitalsouthwest.com.  You can review the filings we have made with the SEC 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 may also use the site 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 public may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  The SEC also maintains a website that contains the reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

The charters adopted by the committees of our Board of Directors are also available on our website.  Information contained on our Web site is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider that information to be part of this Annual Report on Form 10-K.

As of March 31, 2014, we had fourteen employees, each of whom was employed by our management company, CSMC.  These employees include our corporate officers, investment and portfolio management professionals and administrative staff. All of our employees are located in our Dallas office.

Item 1A.

Risk Factors

Investing in our common stock involves a number of significant risks.  In addition to other information contained in this Annual Report on Form 10-K, investors should consider the following information before making an investment in our common stock.  The risks and uncertainties described below could adversely affect the material risks we face. 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.

RISKS RELATED TO ECONOMIC CONDITIONS

Future adverse market and economic conditions could cause harm to our operating results.

Past recessions have had a significant negative impact on the operating performance and fair value of our portfolio investments. Many of our portfolio companies could be adversely impacted again by any future economic downturn or recession and may be unable to be sold at a price that would allow us to recover our investment, or may be unable to operate during such recession. Such portfolio company performance could have a material adverse effect on our business, financial condition and results of operations.

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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 final responsibility for overseeing, reviewing and approving, in good faith, our estimate of fair value. As a result of recording our investments at fair value, there is and will continue to be subjectivity as to the value of our portfolio investments.

 Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by us, with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, our estimate of fair value.  Typically, there is not a public market for the securities of the privately held companies in which we have invested and generally will continue to invest.  As a result, we value these securities quarterly at fair value based on inputs from management and our investment team, along with the oversight, review and approval of our Board of Directors.

The determination of fair value and consequently, the amount of unrealized gains and losses in our portfolio, are to a certain degree, subjective and dependent on a valuation process approved by our Board of Directors.  Certain factors that may be considered in determining the fair value of our investments include external events, such as private mergers, sales and acquisitions involving comparable companies.  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 a third party would be willing to pay for such securities or the values which would be applicable to unrestricted securities having a public market.  Due to this uncertainty, our fair value determinations may cause our net asset value on a given date to materially understate or overstate the value that we 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 our investments might warrant.  Conversely, investors selling shares during a period in which the net asset value understates the value 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 our portfolio’s total return by generating appreciation from our investments depends on our ability to effectively allocate and manage capital.  Capital allocation depends, in part, upon our investment team’s ability to identify, 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 the investment process and our access to investments offering attractive risk adjusted returns.  In addition, members of our investment 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 to make new investments at attractive relative valuations is also a function of our marketing and management of the investment process. If we fail to invest our capital effectively, our return on equity may be negatively impacted, which could have an adverse effect on the price of the shares of our common stock.

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We operate in a highly competitive market for investment opportunities.

We compete for attractive investment opportunities with private equity funds, family offices, and strategic buyers.  Some of these competitors are substantially larger and have greater financial, technical and marketing resources, and some are subject to different and frequently less stringent regulations.  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.  A significant increase in the number and/or size of our competitors in our target market could force us to accept less attractive investment terms.  Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC.

 

Our success depends on attracting and retaining qualified personnel in a competitive environment.

Sourcing, selection, structuring and closing our investments depends upon the diligence and skill of our management.  Our management’s capabilities may significantly impact our results of operations.  Our success requires that we retain investment and operations personnel in a competitive environment.  Our ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors, including but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities.

The competitive environment for qualified personnel may require us to take certain measures to ensure that we are able to attract and retain experienced personnel.  Such measures may include increasing the attractiveness of our overall compensation packages, altering the structure of our compensation packages through the use of additional forms of compensation or other steps.  The inability to attract and retain experienced personnel could potentially have an adverse effect on our business.

Our business model depends to a significant extent upon strong referral relationships.  Our inability to maintain or develop these relationships, as well as the failure of these relationships to generate investment opportunities, could adversely affect our business.

We expect that members of our management team will maintain their relationships with intermediaries, financial institutions, investment bankers, commercial bankers, financial advisors, attorneys, accountants, consultants and other individuals within our network, and we will rely to a significant extent upon these relationships to provide us with potential investment opportunities.  If our management team fails to maintain its existing relationships or develop new relationships with sources of investment opportunities, we will not be able to effectively allocate capital.  In addition, individuals with whom members of our management team have relationships are not obligated to provide us with investment opportunities, and therefore, there is no assurance that such relationships will generate investment opportunities for us.

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We will be subject to corporate-level income tax if we are unable to qualify as a RIC under Subchapter M of the Code.

To maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source and asset diversification requirements:

·

The annual distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90% 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 forward taxable income in excess of current year distributions into the next year and pay a 4% excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year which generated such taxable income.

·

The source of income requirement will be satisfied if we obtain 90% of our income for each year from distributions, interest, gains from the sale of stock or securities or similar sources.

·

The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year.  To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S Government securities, securities of other RICs, and other acceptable securities.  In addition, no more than 25% of the value of our assets can be invested in the securities, other than U.S Government securities or securities of other RICs, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.”

Failure to meet these requirements may result in us having to dispose of certain unqualified investments quickly in order to prevent the loss of RIC status.  If we fail to maintain RIC tax treatment for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.  In addition, to the extent we had unrealized gains, we would have to establish deferred tax liabilities for taxes, which would reduce our net asset value accordingly.  In addition, our shareholders would lose the tax credit realized when we, as a RIC, decide to retain the net realized capital gain and make deemed distributions of net realized capital gains, and pay taxes on behalf of our shareholders at the end of the tax year.  The loss of this pass-through tax treatment could have a material adverse effect on the total return of an investment in our common stock.

 

We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash received.

We may distribute taxable dividends that are payable in part in our stock as well as stock in any of our other public holdings.  Under an IRS revenue procedure, up to 90% of any such taxable dividend declared on or before December 31, 2013 with respect to taxable years ended on or before December 31, 2013 could be payable in our stock.  Where the IRS revenue procedure is not currently applicable, the IRS has also issued private letter rulings on cash and stock dividends paid by RICs and real estate investment trusts using a 20% cash standard (and, more recently, the 10% cash standard of the above-referenced IRS revenue procedure) if certain requirements are satisfied.  Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distributions is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes.  As a result, a U.S. shareholder may be required to pay tax with respect to such dividends in excess of any cash received.  If a U.S. shareholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale.  Furthermore, with respect to non-U.S. shareholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock.  In addition, if a significant number of our shareholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

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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 BDCs such as us.

Terrorist attacks, act of war or natural disasters may affect any market for our common stock, impact the businesses in which 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 the businesses in which we invest.  Such acts have created, and continue to create, economic and political uncertainties and have contributed to global economic instability.  Future terrorist activities, military or security operations, or natural disasters could further weaken the domestic or global economy.  These events could create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition.  Losses from terrorist attacks and natural disasters are generally 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 key employees.  Therefore, the death, disability, resignation, termination, or significant under-performance of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us.

·

Portfolio companies may have unpredictable operating results, could become parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence and may require substantial 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 available information about their businesses, operations and financial condition. Consequently, we rely on the ability of our management team and investment professionals to obtain adequate information to evaluate the potential returns from making acquisitions for both CSWC and our existing portfolio companies.  If we are unable to uncover all material information about these acquisition targets, we may not make a fully informed investment decision and may lose all or part of our investment.

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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 such companies. To the extent that litigation arises 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 (through our indemnification of such officers and directors) and the diversion of management’s time and resources.

 

As a Regulated Investment Company, we may have certain regulatory restrictions that could preclude us from making additional investments in our portfolio companies.

We may not have the ability to make additional investments in our portfolio companies.  After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment or make follow-on investments.  Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected return on the investment.

Certain of our portfolio companies are leveraged.

Some of our portfolio companies have incurred some indebtedness in relation to their overall capital base.  Such indebtedness often has terms 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.

RISKS RELATING TO 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 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.

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The market price of our common stock may fluctuate significantly.

The market price and marketability of shares of our common stock may from time to time be significantly affected by numerous factors, including:

·

market conditions;

·

our investment results;

·

trading volume of our stock;

·

our investment results;

·

departure of our key personnel;

·

changes in regulatory policies, accounting pronouncements or tax guidelines, particularly with respect to RICs, BDCs or SBICs; and

·

Other influences and events over which we have no control and that may not be directly related to us.

We may not pay any dividends.

While we intend to pay dividends to our shareholders out of assets legally available for distribution, there can be no assurance that we will do so. Any dividends that we do pay may be payable in cash, in our stock, or in stock in any of our holdings or a combination of all three. All dividends will be paid at the discretion of our Board of Directors and will depend upon our financial condition, maintenance of our RIC status, and compliance with applicable BDC compliance.

Our net asset value is heavily concentrated on certain companies.

More than 50% of our portfolio is comprised of The RectorSeal Corporation and The Whitmore Corporation. Changes in key customers, major suppliers and product lines of these companies could adversely impact the operating results of these companies and thus could negatively impact our net asset value and stock price. In addition, more than 30% of our portfolio value derives from Alamo Group Inc. and Encore Wire Corporation. The price fluctuations of these publicly traded holdings could impact our net asset value and stock price.

RISKS RELATED TO OUR OPERATION AS A BDC

Our ability to enter into transactions with our affiliates is restricted.

 

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Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure by us to comply with these laws 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 to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, 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 stringent requirements than those in which we currently conduct business, we may have to incur significant expenses in order to comply or we might have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business, results of operations or financial condition.

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 12900 Preston Road, Suite 700, Dallas, Texas 75230, where we lease approximately 7,250 square feet of office space pursuant to a lease agreement expiring in September 2014.  Beginning September 2014, we will re-locate to 5400 LBJ Freeway, Suite 1300, Dallas, TX 75240. 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 or otherwise.  Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies.  We have no current pending legal proceedings to which we are a party or to which any of our assets is subject.

Item 4.

Mine Safety Disclosures

Not Applicable.

PART II

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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Quarter Ended		High				Low
March 31, 2014		$	36.63			$	33.23
December 31, 2013			35.00				31.11
September 30, 2013			37.11				32.97
June 30, 2013			35.55				28.37
March 31, 2013		$	32.88			$	24.76
December 31, 2012			29.16				24.28
September 30, 2012			29.63				23.91
June 30, 2012			28.95				20.62

DIVIDENDS

The payment dates and amounts of cash dividends per share on a post-split basis for the past five years are as follows:

Payment Date		Cash Dividend
May 29, 2009		$	0.10
November 30, 2009			0.10
May 28, 2010			0.10
November 30, 2010			0.10
May 31, 2011			0.10
November 30, 2011			0.10
May 31, 2012			0.10
June 8, 2012			4.40
November 30, 2012			0.10
March 28, 2013			0.69
May 31, 2013			0.10
November 29, 2013			0.10

The amounts and timing of cash dividend payments have generally been dictated by requirements of the Internal Revenue Code (“IRC”) regarding the distribution of taxable net investment income (ordinary income) of regulated investment companies.  Instead of distributing realized long-term capital gains to shareholders, the Company has ordinarily elected to retain such gains to fund future investments.

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 indices were provided by NASDAQ.

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Item 6.

Selected Financial Data

The following table provides selected financial data relating to our historical financial condition and results of operations as of and for each of the years ended March 31, 2010 through 2014.  This data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes.

Selected Consolidated Financial Data

(In thousands except per share data)

Financial Position (as of March 31)		2014				2013				2012				2011				2010
Investments at cost		$	98,967			$	88,266			$	88,993			$	98,355			$	100,023
Unrealized appreciation			578,953				485,921				469,553				390,918				377,920
Investments at market or fair value			677,920				574,187				558,546				489,273				477,943
Total assets			778,694				667,672				632,989				543,214				491,175
Net assets			770,388				659,777				628,706				539,233				486,926
Shares outstanding			15,414				15,236				15,020				15,012				14,964
Changes in Net Assets (years ended March 31)
Net investment income		$	4,894			$	1,907			$	2,544			$	1,804			$	2,091
Net realized gain  on investments			14,084				89,558				11,827				63,463				1,640
Net increase in unrealized appreciation before distributions*			93,032				16,367				78,635				12,999				70,624
Increase in net assets from operations before distributions			112,010				107,832				93,006				78,266				74,355
Cash dividends paid			(3,050	)			(80,326	)			(3,003	)			(2,994	)			(2,993	)
Taxes incurred on deemed capital gain distributions			(3,787	)			(1,125	)			(1,249	)			(24,578	)			(814	)
Employee stock options exercised			4,820				3,981				99				745				–
Stock option expense (benefit)			(632	)			515				1,050				957				675
Change in pension plan funded status			1,250				193				(430	)			(88	)			440
Treasury stock			–				–				–				–				–
Increase in net assets		$	110,611			$	31,070			$	89,473			$	52,308			$	71,663
Per share data (as of March 31)
Net assets		$	49.98			$	43.30			$	41.86			$	35.92			$	32.54
Closing market price			34.72				28.75				23.64				22.88				22.72
Cash dividends paid			.20				5.29				.20				.20				.20

*See Note 3 Investments.

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Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.

Statements we make in the following discussion which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are 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 the risks and uncertainties we have referred to under the headings “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” in Part I of this report.

General

On June 17, 2013, Joseph B. Armes joined our Company as President and Chief Executive Officer as well as a director of the Corporation. Mr. Armes has served as president and chief executive officer of JBA Investment Partners, a family investment vehicle, since 2010. From 2005 to 2010, Mr. Armes served as chief operating officer of Hicks Holdings LLC. Mr. Armes earned a BBA in Finance and a MBA from Baylor University, and a JD from Southern Methodist University.

On July 15, 2013, our shareholders approved a four-for-one split. The stock split was payable on August 15, 2013 to shareholders of record at the close of business July 31, 2013. Our common stock began trading at the split-adjusted price on August 16, 2013. All share numbers and per share amounts presented herein reflect the stock split.

On November 20, 2013, Kelly Tacke was appointed as the Company’s Senior Vice President, Chief Financial Officer, Chief Compliance Officer, Secretary and Treasurer, effective November 18, 2013.  Ms. Tacke was with Palm Harbor Homes, Inc., a publicly traded manufacturer and marketer of factory-built homes for 18 years, where she served as Executive Vice President, Chief Financial Officer and Corporate Secretary.  The Company was a long-time investor in Palm Harbor Homes. Ms. Tacke began her career with PricewaterhouseCoopers, where she was a Senior Audit Manager.  She holds a Bachelors of Business Administration degree from the University of Texas at Austin and is a Certified Public Accountant. Ms. Tacke replaced Tracy Morris, who resigned as the Company's Chief Financial Officer, Chief Operating Officer and Secretary, effective November 15, 2013, to pursue other opportunities.

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On January 20, 2014, the Board of Directors of the Company elected Joseph B. Armes as Chairman of the Board and appointed David R. Brooks and William R. Thomas, III to the Board.  The Board increased its size from six to seven members and appointed Messrs. Brooks and Thomas to fill the vacancies created by the resignation of Richard F. Strup in November 2013 and the increase in the size of the Board.

Mr. Brooks has been the Chairman of the Board and Chief Executive Officer of Independent Bank Group, Inc., a publicly-traded bank holding company with approximately $3.0 billion in assets, since its founding in 2002.  Mr. Thomas is a private investor and has served as the President of the Thomas Heritage Foundation, a non-profit grant-making corporation, since 2008.   Mr. Thomas worked for the Company from July 2006 to September 2012, most recently as a Vice President. In addition, Mr. Thomas along with Thomas Heritage Partners, Ltd., is one of the largest shareholders of our Company, representing 4.79% voting power at March 31, 2014. Mr. Thomas currently serves as a director of Encore Wire Corporation.

On March 17, 2014, Bowen S. Diehl joined our Company as Senior Vice President and Chief Investment Officer. Mr. Diehl brings almost 20 years of experience in sourcing, structuring, and managing investments in a variety of industries. Prior to Capital Southwest, Mr. Diehl was a Managing Director at American Capital, Ltd. During his tenure at American Capital, he has closed investments in 15 platform companies and numerous add-on acquisitions, representing over $1.1 billion of invested capital. Mr. Diehl's investments have been in a variety of industries including industrial manufacturing, healthcare, business services, and consumer finance. Prior to American Capital, Mr. Diehl was a Vice President in Investment Banking at Merrill Lynch where he gained experience working with companies in the exploration and production, oilfield services, natural gas pipeline, natural gas gathering and processing, homebuilding and semiconductor sectors. Prior to joining Merrill Lynch, Mr. Diehl was a Vice President in the Global Oil and Gas Group at Chase Securities Inc., in New York, NY and then in Houston, TX, completing numerous transactions in the upstream and midstream oil and gas sectors.

Controlled Affiliates

Three of our controlled affiliates represent 57.3% of our total investment value and consist mainly of The RectorSeal Corporation, along with its subsidiaries Jet-Lube, Inc. and Smoke Guard, Inc., The Whitmore Manufacturing Company, and Media Recovery, Inc.

The RectorSeal Corporation (“RectorSeal”) currently consists of RectorSeal, separately; its wholly-owned subsidiaries Jet-Lube, Inc., and Smoke Guard, Inc.; and its 20% equity interest in The Whitmore Manufacturing Company. RectorSeal manufactures specialty chemical products and control devices for plumbing, HVAC, electrical and industrial applications. Jet-Lube, Inc. manufactures specialty lubricants and other products used in oil field and industrial applications. Smoke Guard, Inc. produces systems for containing smoke from building fires. During the fiscal year ended March 31, 2014, RectorSeal completed the acquisition of Resource Conservation, Inc., a company that manufactures condensate cutoff switches and overflow pans, to expand its development of HVAC products and market penetration. At March, 31, 2014, RectorSeal was valued at $275,800,000, which includes RectorSeal, Jet-Lube Inc., Smoke Guard, Inc. and RectorSeal’s 20% interest in Whitmore Manufacturing Company.  Below are certain key financial data for RectorSeal (including Smoke Guard, Inc. and excluding Jet Lube, Inc.) as well as our valuation at March 31, 2014, 2013 and 2012. Our valuation is based primarily on adjusted EBITDA, which may reflect certain adjustments to the reported EBITDA for non-recurring, unusual or infrequent items or other items to normalize current earnings.

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		For the Fiscal Year Ended March 31,(in thousands)
		2014				2013				2012
Cash & Temporary Investments		$	3,660			$	4,586			$	2,843
Total Assets			133,229				107,475				98,501
Capital Expenditures			2,196				1,219				809
Total Debt			20,600				7,500				6,100
Revenues			109,311				90,339				91,685
Net Income			12,101				8,777				7,255
EBITDA			24,579				19,183				14,581
CSWC Valuation		$	171,500			$	150,100			$	89,900

Jet-Lube, Inc.

Jet-Lube, Inc. is RectorSeal’s largest subsidiary. During the fiscal year ended March 31, 2014, Jet-Lube Inc. completed the acquisition of Design Water Technologies, a chemical company that solves water well contamination problems, to expand its water well division product line. Below are certain key financial data for Jet-Lube, Inc. as well as our valuation at March 31, 2014, 2013 and 2012. Our valuation is based primarily on adjusted EBITDA, which may reflect certain adjustments to the reported EBITDA for non-recurring, unusual or infrequent items or other items to normalize current earnings.

		For the Fiscal Year Ended March 31, (in thousands)
		2014				2013				2012
Cash & Temporary Investments		$	20,949			$	21,177			$	20,351
Total Assets			53,682				50,395				47,495
Capital Expenditures			2,162				1,451				938
Total Debt			−				−				−
Revenues			51,060				48,048				45,867
Net Income			6,344				5,146				4,742
EBITDA			9,592				7,438				7,050
CSWC Valuation		$	82,200			$	68,700			$	59,600

The Whitmore Manufacturing Company (“Whitmore”) manufactures high performance, specialty lubricants for heavy equipment used in surface mining, railroads and other industries, lubrication equipment specifically for rail applications and lubrication-centric reliability solutions for a wide variety of industries.  Whitmore also produces water-based coatings for the automotive and primary metals industries.  During the fiscal year ended March 31, 2014, Whitmore completed the acquisition of Fluid Defense, a manufacturer of lubricant storage, filtration and handling products, to expand its presence in the reliability market. Below are certain key financial data for Whitmore as well as our valuation at March 31, 2014, 2013 and 2012. Our valuation is based primarily on adjusted EBITDA, which may reflect certain adjustments to the reported EBITDA for non-recurring, unusual or infrequent items or other items to normalize current earnings. In addition, our valuation for Whitmore also includes the fair market value of non-operating real estate assets held for investment purposes.

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		For the Fiscal Year Ended March 31, (in thousands)
		2014				2013				2012
Cash & Temporary Investments		$	2,661			$	7,102			$	2,498
Total Assets			84,163				69,665				42,928
Capital Expenditures			10,334				12,681				2,561
Total Debt			24,497				15,848				−
Revenues			57,784				48,481				43,620
Net Income			6,132				7,273				6,281
EBITDA			13,000				11,814				10,181
Total CSWC Valuation			110,600				100,600				84,000
RectorSeal’s 20% Interest			22,100				20,100				16,800
CSWC’s 80% Interest		$	88,500			$	80,500			$	67,200

Media Recovery, Inc. (MRI) is the holding company of DataSpan, ShockWatch and Damage Prevention Company (“DPC”). DataSpan provides datacenter supplies and services to corporate customers through a direct sales force. ShockWatch manufactures and distributes devices used to prevent damage and manage inventory in transit. DPC manufactures dunnage products used to secure loads during long-haul transport. The assets of DPC were sold in November 2013. In addition, MRI also acquired Shocklog, a company that manufactures impact and environmental recording devices on December 31, 2013. Below are certain key financial data for MRI for the fiscal years ended September 30, 2013, 2012 and 2011 and our valuation at March 31, 2014, 2013 and 2012. Our valuation is based primarily on adjusted EBITDA, which may reflect certain adjustments to the reported EBITDA of for non-recurring, unusual or infrequent items or other items to normalize current earnings.

		For the Fiscal Year Ended September 30, (in thousands)
		2013				2012				2011
Cash		$	5			$	185			$	361
Total Assets			43,284				46,624				44,584
Capital Expenditures			538				726				593
Total Debt			−				2,556				−
Revenues			92,926				104,632				111,254
Net Income			1,405				842				614
EBITDA			3,248				3,062				5,253
CSWC Valuation*		$	23,900			$	11,900			$	18,700

*Reflects our valuation at March 31, 2014, 2013 and 2012.

Results of Operations

The composite measure of our financial performance in the Consolidated Statements of Operations is captioned “Increase in net assets from operations” and consists of three elements.  The first is “Net investment income,” 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 on investments,” which is the difference between the proceeds received from the disposition of portfolio securities and their stated cost, net of applicable income tax expense based on our tax year.  The third element is the “Net increase in unrealized appreciation of investments,” which is the net change in the market or fair value of our investment portfolio, compared with stated cost.  It should be noted that the “Net realized gain on investments” and “Net increase in unrealized appreciation of investments” are directly related in that when an appreciated portfolio security is sold to realize a gain, a corresponding decrease in net unrealized appreciation occurs by transferring the gain associated with the transaction from being “unrealized” to being “realized.”  Conversely, when a loss is realized on a depreciated portfolio security, an increase in net unrealized appreciation occurs.

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Net Investment Income

For the year ended March 31, 2014, total investment income was $12,606,546, a $1,771,285, or 16.3%, increase over total investment income of $10,835,261 for the year ended March 31, 2013.  This increase was primarily attributable to a $3,312,075, or 40.9%, increase in dividend income from The Rectorseal Corporation, Whitmore Manufacturing Company and Wellogix, Inc. and offset by a $1,496,562 or 74.6%, decrease in interest income (due to a reserve against Cinatra Clean Technologies Inc.’s interest income). For the year ended March 31, 2013, total investment income was $10,835,261, a $1,501,025, or 16.08%, increase over total investment income of $9,334,236  for the year ended March 31, 2012.  This increase was primarily attributable to a $1,372,250, or 20.4%, increase in dividend income and a $79,047, or 4.1%, increase in interest income.

Our principal objective is to achieve capital appreciation. Therefore, a significant portion of the investment portfolio is structured to maximize the potential return from equity participation and, therefore, provides minimal current yield in the form of interest or dividends.  We also earn interest income 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 fluctuations in short-term interest rates.  During the three years ended March 31, 2014, we had interest income from temporary cash investments of $66,949 in 2014, $71,136 in 2013 and $52,477 in 2012.

We also receive management fees primarily from our controlled affiliated investments which aggregated $559,800 in 2014, $591,300 in 2013 and $564,050 in 2012. As compared to the fiscal year ended March 31, 2013, management fees for the year ended March 31, 2014 decreased by $31,500 or 5.3% as Trax Holdings, Inc. management fees ceased pursuant to the terms of its Series B financing.  As compared to the fiscal year ended March 31, 2012, management fees for the year ended March 31, 2013 increased by $27,250, or 4.8%, primarily due to management fees received from TitanLiner, Inc.

 During the three years ended March 31 2014, the Company recorded dividend income from the following sources:

		Year Ended March 31,
		2014				2013				2012
Alamo Group, Inc.		$	793,192			$	708,075			$	679,632
Capital South Partners Fund III			–				198,647				79,459
CapStar Holdings Corporation			350,000				–				–
Capitala Finance Corporation			101,619				–				–
Encore Wire Corporation			131,250				160,485				326,940
The RectorSeal Corporation			6,920,000				5,555,372				4,442,512
TCI Holdings, Inc.			78,110				81,270				81,270
Wellogix. Inc.			1,650,596				–				–
The Whitmore Manufacturing Company			1,380,000				1,388,842				1,110,628
		$	11,404,767			$	8,092,691			$	6,720,441

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Due to the nature of our business, the majority of our operating expenses are related to employees’ and directors’ compensation, office expenses, legal, professional and accounting fees and pension expense.  Total operating expenses increased by $113,206, or 1.36% during the year ended March 31, 2014 as compared to the year ended March 31, 2013. The increase in 2014 is due to an increase of approximately $1 million in compensation expense associated with certain staffing changes incurred during the year as well as a slight increase in employee compensation and an increase of approximately $200,000 in pension expense. This increase was offset by a decrease in stock option expense of $1.1 million caused by stock option forfeitures during the year.  Total operating expenses increased by $1,666,280 or 24.97%, during the year ended March 31, 2013 as compared to the year ended March 31, 2012. The increase in 2013 is due primarily to compensation, accrued phantom stock liabilities, increase in advertising and promotion fees, other professional fees, rent increase and insurance expenses.

Net Realized Gain on Investments

During the fiscal year ended March 31, 2014, we had realized gains of $12,604,987 from the sale of Hologic, Inc.’s common stock, $677,250 from the redemption of TCI Holdings Inc.’s preferred stock, and $746,850 from the sale of PalletOne. Our total realized gain on investments for fiscal year 2014 was $14,084,087 as compared to a gain of $12,257,100(net of capital gain distribution) during fiscal 2013 and a gain of $11,826,876 during fiscal 2012.

During the fiscal year ended March 31, 2013, we sold 2,774,250 shares of common stock in Encore Wire Corporation, which generated a capital gain of $66,037,485. We also sold 50,000 shares of common stock of Hologic, Inc., which resulted in a capital gain of $850,548. In addition, we sold our ownership in Extreme International, Inc. for cash proceeds of $10,926,000 and a realized gain of $7,600,125. We also sold our ownership in Heelys, Inc., which generated cash proceeds of $20,963,948 and a capital gain of $20,861,458. These gains were offset by a $4,926,289 realized loss from the sale of VIA Holdings, Inc., a $760,742 realized loss related to liquidation of Sterling Group Partners, L.P., and a $150,594 realized loss related to liquidation of StarTech Seed Fund I, L.P.

During the fiscal year ended March 31, 2012, we sold Phi Health, Inc. on June 29, 2011 for $38,959, resulting in a realized loss of $5,910,655. On September 9, 2011, All Components was sold for $18,000,000, resulting in a realized gain of $17,850,000. We also sold all of our shares of common stock of Texas Capital Bancshares, Inc. in November 2011, resulting in a realized gain of $9,866,335. On December 5, 2011, Palm Harbor Homes Inc. filed Chapter 11 bankruptcy in state of Delaware; therefore, we subsequently wrote off our investment in this portfolio company of $10,931,955.

Management does not attempt to maintain a consistent level of realized gains from year to year, but instead focuses on maximizing total investment portfolio appreciation.  This strategy often results in the long-term holding of portfolio securities in pursuit of increased values and increased unrealized appreciation, but may at opportune times, result in realizing gains or losses through the disposition of certain portfolio investments.

Net Increase/(Decrease) in Unrealized Appreciation of Investments

For the fiscal year ended March 31, 2014, we had an increase in unrealized appreciation of investments of $93,032,228. Our increase in unrealized appreciation of investments in fiscal year 2013 was $16,367,413.

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As explained in the first paragraph of “Results of Operations”, the realization of gains or losses results in a corresponding decrease or increase in unrealized appreciation of investments. Set forth in the following table are the significant increases and decreases in unrealized appreciation.

		Years Ended March 31
		2014				2013				2012
Alamo Group, Inc.		$	45,546,429			$	23,139,162			$	22,872,338
Encore Wire Corporation			17,640,000				(74,907,585	)*			39,723,210
Hologic, Inc.			(12,963,375	)*			(453,896	)			(405,005	)
Media Recovery			12,000,000				(6,800,000	)			600,000
The Whitmore Manufacturing Company			8,000,000				13,300,000				11,600,000
The RectorSeal Corporation			36,900,000				72,600,000				21,600,000

*These investments were sold during each respective year.

A description of the investments listed above and other material components of the investment portfolio are included elsewhere in this report under the caption “Consolidated Schedule of Investments – March 31, 2014 and 2013” in Item 8 “Financial Statements and Supplemental Data.”

During the fiscal year ended March 31, 2014, we recognized a $93,032,228 increase in net change in unrealized appreciation of investments.  The increases in unrealized appreciation are attributable to Alamo Group, Inc. and Encore Wire Corporation, which increased by $45,546,429 and $17,640,000, respectively, due to increases in their stock price, while The Rectorseal Corporation increased by $36,900,000; The Whitmore Manufacturing Company increased by $8,000,000; and Media Recovery, Inc. increased by $12,000,000 due to increases in each entity’s respective earnings, several add-on acquisitions and increases in valuation multiples based on market changes. Offsetting these increases were Cinatra Clean Technologies, Inc., TitanLiner Inc., and iMemories, Inc., which decreased by $4,060,293, $4,430,999, and $4,084,477, respectively, due to each entity’s under performance in their respective markets. In addition, CapitalSouth Partners Fund III, L.P. decreased by $2,833,201; during the fiscal year ended March 31, 2014 due to a distribution of 108,105 shares of Capitala Finance Corporation (CPTA) valued at $2,083,183 at March 31, 2014, which represented 71% of our interest in Capital South Partners Fund III, L.P.

During the fiscal year ended March 31, 2013, we recognized significant increases and decreases in several of our large investments.  The largest increases in unrealized appreciation were attributable to The Rectorseal Corporation, which increased by $72,600,000 due to multiple acquisitions during the year and improved earnings; Alamo Group, Inc., a publicly traded company, which increased $23,139,162 due to an increase in the stock price; Whitmore Manufacturing Company, which increased by $13,300,000 due to an acquisition in May 2012, facility expansion in Rockwall and increased value in its real estate investment; Trax Holdings, which increased by $8,800,000 due to its recent series B equity financing. Offsetting these decreases were Encore Wire Corporation, which decreased $74,907,585 primarily due to our recent sale of CSVC’s interest in Encore Wire Corporation; Heelys, Inc. decreased $20,395,592 due to the sale of all shares of its common stock; Media Recovery, Inc. decreased $6,800,000; and Cinatra Clean Technologies, Inc. decreased $5,590,390 due to decreases in the entities’ respective earnings during FY 2013. Excluding the sales of all shares of common stock of Heelys, Inc. and partial sale of 2,774,250 shares of Encore Wire Corporation, net unrealized appreciation of investments for the year ended March 31, 2013 increased by $118,613,715.

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The largest increases in unrealized appreciation for the fiscal year ended March 31, 2012 are attributable to Encore Wire Corporation, which increased $39,723,210 and Alamo Group, which increased $22,872,338. In March 2012, Form S-3 registration statements of Alamo Group, Inc. (NYSE: ALG), Encore Wire Corporation (NASDAQ: WIRE), and Heelys Inc. (NASDAQ: HLYS) were filed with the Securities and Exchange Commission (“SEC”). As a result of these registrations, restrictions of the common stock of these companies imposed by Rule 144 of the Securities Exchange Act of 1933 were lifted, and discounts on these common stocks were subsequently removed. As a result, Encore Wire Corporation, Alamo Group Inc. and Heelys Inc. common stock were transferred from Level 3 to Level 1 under the fair value hierarchy of ASC 820. On March 13, 2012, Encore’s registration statement became effective. As a result, Encore’s fair value is equivalent to the company’s closing bid price of $29.72 per share on March 31, 2012.  Alamo’s registration statement became effective March 28, 2012. As a result, Alamo’s fair value is equivalent to the company’s closing bid price of $30.06 per share on March 31, 2012. In addition, unrealized appreciation in RectorSeal Corporation and Whitmore Manufacturing Company increased $21,600,000 and $11,600,000, respectively, due to improved earnings; Heelys, Inc. increased $1,304,723 due to recent Form S-3 registration statement filed with the SEC. On April 17, 2012, Heelys’ registration statement became effective. As a result, Heelys’ fair value is equivalent to the company’s closing bid price of $2.20 per share.

Portfolio Investments

During fiscal years ended March 31, 2014, March 31, 2013 and March 31, 2012, we invested a total of $12,607,024, $9,780,849 and $13,377,408, respectively.

Financial Liquidity and Capital Resources

At March 31, 2014, we had cash and cash equivalents of approximately $88.2 million.

With the exception of two capital gain distributions made in the form of cash dividend during fiscal year ended March 31, 2013 and a capital gain distribution made in the form of a distribution of the stock of a portfolio company in the fiscal year ended March 31, 1996, we have historically elected to retain all gains realized during our more than 50 years of operation.  Retention of future gains is viewed as an important source of funds to sustain our investment activity. At March 31, 2014, approximately $220 million of our investment portfolio is represented by unrestricted publicly traded securities and represents a source of liquidity.

Funds for operating or investment purposes may be transferred in the form of dividends or management fees from The Rectorseal Corporation and The Whitmore Manufacturing Company, controlled affiliates of the Company, to the extent of their available cash reserves and borrowing capacities.

Management believes that our cash and cash equivalents and funds available from other sources described above are adequate to meet our expected cash requirements. The disposition of investments from time to time may also be a source of funds for future investment activities.

Contractual Obligations

As shown below, we had the following contractual obligations as of March 31, 2014.  For information on our capital commitments, see Note 9 of the Notes to Consolidated Financial Statements.

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		Payments Due By Period (In thousands)
Contractual Obligations		Total				1 Year				2-3 Years				More Than 3 Years
Operating lease obligations		$	1,792			$	85			$	449			$	1,258

Critical Accounting Policies

Valuation of Investments

In accordance with the Investment Company Act of 1940, investments in unrestricted securities (freely marketable securities having readily available market quotations) are valued at market, and investments in restricted securities (securities subject to one or more resale restrictions) are valued at fair value determined in good faith by our Board of Directors.  Under our valuation policy, unrestricted securities are valued at the closing sale price for NYSE listed securities and at the lower of the closing bid price or the last sale price for NASDAQ securities on the valuation date.

Among the factors considered by our Board of Directors in determining the fair value of restricted securities are the financial condition and operating results of the issuer, the long-term potential of the business of the issuer, the market for and recent sales prices of the issuer’s securities, the values of similar securities issued by companies in similar businesses, the proportion of the issuer’s securities owned by us. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities.

Impact of Inflation

We do not believe that our business is materially affected by inflation, other than the impact which inflation may have on the securities markets, the valuations of business enterprises and the relationship of such valuations to underlying earnings.

Portfolio Changes during the Year Ended March 31, 2014

New Investment and Additions to Previous Investments

New Investment		Purchase Amount
Deepwater Corrosion Services, Inc.		$	8,000,000

Additions to Previous Investments		Purchase Amount
Ballast Point Ventures II, L.P.		$	675,000
BankCap Partners Fund I, L.P.			102,724
Capital South Partners			500,000
Cinatra Clean Technologies, Inc.			2,889,300	*
iMemories, Inc.			440,000
		$	12,607,024

 

*During the fiscal year ended March 31, 2014, the $5,279,112 investment in debt securities of  Cinatra Clean Technologies, Inc. and $1,579,056 accrued interest were converted into Convertible Preferred Stock.

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Dispositions

		Proceeds				Cost				Realized gain/(loss)
Hologic, Inc.		$	12,807,516			$	202,529			$	12,604,987
PalletOne, Inc.			2,450,000				1,703,150				746,850
TCI Holdings, Inc.			677,250				−				677,250
Diamond State Ventures			55,000				−				55,000
		$	15,989,766			$	1,905,679			$	14,084,087
Cash distributions from net realized gain											−
Undistributed realized gain before income taxes										$	14,084,087

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.  All of these factors may have an adverse effect on the value of our investments and on our net asset value.

A portion of our investment portfolio consists of debt and equity securities of private companies.  We anticipate little to no impact on the values of these investments from modest changes in public market equity valuations.  Should significant changes in market valuations of comparable publicly traded 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 significant portion of our investment portfolio also consists of unrestricted, freely marketable common stocks of publicly traded companies.  These freely marketable investments, which are valued at the public market price, are directly exposed to equity market price risks.   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.

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Item 8.

Financial Statements and Supplementary Data

Index to Financial Statements

	Page
Reports of Independent Registered Public Accounting Firm	32
Consolidated Statements of Assets and Liabilities as of March 31, 2014 and 2013	34
Consolidated Statements of Operations for Years Ended March 31, 2014, 2013 and 2012	35
Consolidated Statements of Changes in Net Assets for Years Ended March 31, 2014, 2013 and 2012	36
Consolidated Statements of Cash Flows for Years Ended March 31, 2014, 2013 and 2012	37
Consolidated Schedules of Investments as of March 31, 2014 and 2013	38
Notes to Consolidated Financial Statements	49

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Capital Southwest Corporation

We have audited the accompanying consolidated statements of assets and liabilities of Capital Southwest Corporation (a Texas Corporation) and subsidiaries (the “Company”), including the consolidated schedules of investments, as of March 31, 2014 and 2013, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended March 31, 2014 and the selected per share data and ratios for each of the five years in the period ended March 31, 2014. Our audits of the basic consolidated financial statements included the Schedule of Investments In and Advances to Affiliates listed in the index appearing under Item 15(2). These financial statements, per share data and ratios and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements, per share data and ratios, and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included verification by confirmation of securities as of March 31, 2014 and 2013, by correspondence with the portfolio companies and custodians, or by other appropriate auditing procedures where replies were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements and the selected per share data and ratios referred to above present fairly, in all material respects, the financial position of Capital Southwest Corporation and subsidiaries as of March 31, 2014 and 2013, and the results of their operations, changes in their net assets, and their cash flows for each of the three years in the period ended March 31, 2014, and the selected per share data and ratios for each of the five years in the period ended March 31, 2014, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2014, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 3, 2014 expressed an unqualified opinion thereon.

/s/ Grant Thornton LLP

Dallas, Texas

June 3, 2014

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Capital Southwest Corporation

We have audited the internal control over financial reporting of Capital Southwest Corporation (a Texas Corporation) and subsidiaries (the “Company”) as of March 31, 2014, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because 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 of March 31, 2014, based on criteria established in the 1992 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 financial statements of the Company as of and for the year ended March 31, 2014, and our report dated June 3, 2014 expressed an unqualified opinion on those financial statements.

 

/s/ Grant Thornton LLP

Dallas, Texas

June 3, 2014

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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(In thousands except per share data)

		March 31				March 31
		2014				2013
Assets
Investments at market or fair value
Companies more than 25% owned (Cost: March 31, 2014 - $13,711, March 31, 2013 - $13,711)		$	400,824			$	344,790
Companies 5% to 25% owned (Cost: March 31, 2014 - $13,891, March 31, 2013 - $15,594)			218,480				157,394
Companies less than 5% owned (Cost: March 31, 2014 - $71,365, March 31, 2013 - $58,961)			58,616				72,003
Total investments (Cost: March 31, 2014 - $98,967, March 31, 2013 - $88,266)			677,920				574,187
Cash and cash equivalents			88,163				81,767
Receivables
Dividends and interest			782				2,465
Affiliates			422				291
Income tax receivable			167				-
Net pension assets			10,962				8,762
Other assets			278				200
Total assets		$	778,694			$	667,672
Liabilities
Other liabilities		$	3,263			$	3,102
Accrued restoration plan liability			3,103				2,650
Deferred income taxes			1,940				2,143
Total liabilities			8,306				7,895
Net Assets
Common stock, $0.25 par value: authorized, 25,000,000  shares; issued, 17,753,044 shares at March 31, 2014 and 17,576,776 shares at March 31, 2013			4,438				4,394
Additional capital			195,767				183,668
Accumulated net investment income (loss)			1,138				(706	)
Accumulated net realized gain			14,029				10,437
Unrealized appreciation of investments			578,953				485,921
Treasury stock - at cost, 2,339,512 shares			(23,937	)			(23,937	)
Total net assets			770,388				659,777
Total liabilities and net assets		$	778,694			$	667,672
Net asset value per share (15,413,532 shares outstanding at March 31, 2014 and 15,237,264 shares outstanding at March 31, 2013)		$	49.98			$	43.30

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

		Years Ended March 31,
		2014				2013				2012
Investment income:
Interest		$	577			$	2,078			$	1,980
Dividends			11,405				8,093				6,720
Management fees and other income			625				664				634
			12,607				10,835				9,334
Operating expenses:
Salaries			6,121				5,113				3,653
Stock option (benefit) expense			(632	)			515				1,050
Net pension expense (benefit)			176				(34	)			(300	)
Professional fees			990				1,133				990
Other operating expenses			1,797				1,611				1,279
			8,452				8,338				6,672
Income before income taxes			4,155				2,497				2,662
Income tax (benefit) expense			(739	)			590				118
Net investment income		$	4,894			$	1,907			$	2,544
Proceeds from disposition of investments			15,990				99,542				32,454
Cost of investments sold			1,906				9,984				20,627
Realized gain on investments before income tax			14,084				89,558				11,827
Net increase in unrealized appreciation of investments			93,032				16,367				78,635
Net realized and unrealized gain on investments		$	107,116			$	105,925			$	90,462
Increase in net assets from operations		$	112,010			$	107,832			$	93,006

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(In thousands)

		Years Ended March 31
		2014				2013				2012
Operations:
Net investment income		$	4,894			$	1,907			$	2,544
Net realized gain on investments			14,084				89,558				11,827
Net increase in unrealized appreciation of investments			93,032				16,367				78,635
Increase in net assets from operations			112,010				107,832				93,006
Distributions from:
Undistributed net investment income			(3,050	)			(3,025	)			(3,003	)
Net realized gains			-				(77,301	)			-
Taxes incurred in deemed capital gain distributions			(3,787	)			(1,125	)			(1,249	)
Capital share transactions:
Change in pension plan funded status			1,250				194				(430	)
Exercise of employee stock options			4,820				3,981				99
Stock option and restricted awards(benefit)expense			(632	)			515				1,050
Increase in net assets			110,611				31,071				89,473
Net assets, beginning of period			659,777				628,706				539,233
Net assets, end of period		$	770,388			$	659,777			$	628,706

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

		Years Ended March 31
		2014				2013				2012
Cash flows from operating activities
Increase in net assets from operations		$	112,010			$	107,832			$	93,006
Adjustments to reconcile increase in net assets from operations to net cash provided by operating activities:
Net proceeds from disposition of investments			15,990				99,535				32,454
Return of capital on investment			-				767				-
Proceeds from repayment of loans			-				-				2,111
Purchases of securities			(12,607	)			(10,018	)			(13,377	)
Depreciation and amortization			23				30				25
Net pension expense (benefit)			176				(34	)			(300	)
Realized gains on investments before income tax			(14,084	)			(89,558	)			(11,827	)
Taxes incurred on deemed capital gain distribution			(3,787	)			(1,125	)			(1,249	)
Net increase in unrealized appreciation of investments			(93,032	)			(16,367	)			(78,635	)
Stock option and restricted awards (benefit)expense			(632	)			515				1,050
Decrease (increase)  in dividend and interest receivable			1,683				(724	)			(1,218	)
(Increase) decrease in receivables from affiliates			(131	)			(70	)			120
Increase in tax receivable			(167	)			-				-
(Increase) decrease in other assets			(100	)			6				(81	)
(Decrease) increase in other liabilities			(513	)			2,520				344
Decrease in deferred income taxes			(203	)			(92	)			(123	)
Net cash provided by operating activities			4,626				93,217				22,300
Cash flows from financing activities
Distributions from undistributed net investment income			(3,050	)			(3,025	)			(3,003	)
Dividends paid from capital gains			-				(77,301	)			-
Proceeds from exercise of employee stock options			4,820				3,981				99
Net cash provided by (used in) financing activities			1,770				(76,345	)			(2,904	)
Net increase in cash and cash equivalents			6,396				16,872				19,396
Cash and cash equivalents at beginning of period			81,767				64,895				45,499
Cash and cash equivalents at end of period		$	88,163			$	81,767			$	64,895
Supplemental disclosure of cash flow information:
Income taxes paid		$	350			$	590			$	–

 

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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2014

Company			Equity (a)		Investment (b)		Cost				Value (c)
*†ALAMO GROUP INC. Seguin, Texas Tractor-mounted mowing and mobile excavation equipment for governmental, industrial and agricultural markets; street-sweeping and snow removal equipment for municipalities.			22.0	%	‡2,831,300 shares of common stock (acquired 4-1-73 thru 5-09-13)		$	2,190,937			$	153,824,529
ATLANTIC CAPITAL BANCSHARES, INC Atlanta, Georgia Holding company of Atlantic Capital Bank, a full service commercial bank.			1.9	%	300,000 shares of common stock (acquired 4-10-07)			3,000,000				3,817,000
¥BALCO, INC. Wichita, Kansas Specialty architectural products used in the construction and remodeling of commercial and institutional buildings.			95.7	%	445,000 shares of common stock and 60,920 shares Class B non-voting common stock (acquired 10-25-83 and 5-30-02)			624,920				4,500,000
*BOXX TECHNOLOGIES, INC. Austin, Texas Workstations for computer graphic imaging and design.			14.9	%	3,125,354 shares of Series B Convertible Preferred Stock, convertible into 3,125,354 shares of common stock at $0.50 per share (acquired 8-20-99 thru 8-8-01)			1,500,000				1,040,000
¥ CAPSTAR HOLDINGS CORPORATION Dallas, Texas Acquires holds and manages real estate for potential development and sale.			100	%	500 shares of common stock (acquired 6-10-10) and 1,000,000 shares of preferred stock (acquired 12-17-12)			4,703,619				7,514,000
CINATRA CLEAN TECHNOLOGIES, INC. Houston, Texas Cleans above ground oil storage tanks with a patented, automated system.			76.2	%	12% subordinated secured promissory note, due 5-9-16 (acquired 5-19-10 thru 10-20-10)			779,278				1
					12% subordinated secured promissory note, due 5-9-17 (acquired 5-9-11 thru 10-26-11)			2,285,700				1
					12% subordinated secured promissory note, due 3-31-17 (acquired 9-9-11 and 10-26-11)			1,523,800				1
					10% subordinated secured promissory note, due 5-9-17 (acquired 7-14-08 thru 4-28-10)			921,588				1
					12% subordinated secured promissory note, due 10-31-17 (acquired 10-19-12)			499,997				1
					12% subordinated secured promissory note, due 9-30-14 (acquired 7-25-13)			1,157,850				1
					12% subordinated secured promissory note, due 9-30-14 (acquired 2-19-14)			152,394				1
					9,891,578 shares of Series A Convertible Preferred Stock, convertible into 9,891,578 shares of common stock at $1.00 per share (acquired 7-14-08 thru 3-15-14)			9,891,578				1
					Warrants to purchase 1,436,499 shares of common stock at $1.00 per share, expiring 10-31-2027 (acquired 5-9-11 thru 10-19-12)			–				–
								17,212,185				8

 

†Publicly-owned company   ¥ Control investment   * Affiliated investment ‡Unrestricted securities as defined in Note (a)

 

Company			Equity (a)		Investment (b)			Cost				Value (c)
DEEPWATER CORROSION SERVICES, INC. Houston, Texas Full-service corrosion control   company providing the oil and gas industry with expertise in cathodic protection and asset integrity management.			31.3	%	127,004 shares of Series A convertible preferred stock, convertible into 127,004 shares of common stock at $1.00 per shares (acquired 4-9-13)			8,000,000				8,000,000
¥DISCOVERY ALLIANCE, LLC Dallas, Texas Provides services related to intellectual property protection and development.			90	%	90.0% limited liability company interest (acquired  9-12-08 thru 10-15-12)			1,315,000				400,000
*†ENCORE WIRE CORPORATION McKinney, Texas Electric wire and cable for residential, commercial and industrial construction use.			6.2	%	‡1,312,500 shares of common stock (acquired 9-10-92 thru 10-15-98)			5,200,000				63,590,625
iMEMORIES, INC. Scottsdale, Arizona Enables online video and photo sharing and DVD creation for home movies and photos recorded in analog and digital formats.			23.3	%	17,391,304 shares of Series B Convertible Preferred Stock, convertible into 19,891,304 shares of common stock at $0.23 per share (acquired 7-10-09)			4,000,000				2
					4,684,967 shares of Series C Convertible Preferred Stock, convertible into 4,684,967 shares of common stock at $0.23 per share (acquired 7-20-11)			1,078,479				994,000
					Warrants to purchase 8,396,000  shares of common stock at $0.12 per share, expiring 7-31-14 (acquired 9-13-10 thru 3-15-13)			–				–
					10% convertible notes, $308,000 principal due 7-31-14 (acquired  9-7-12)			308,000				308,000
					10% convertible notes, $880,000 principal due 7-31-14 (acquired  from 3-15-13 to 9-26-13)			880,000				880,000
								6,266,479				2,182,002
INSTAWARES HOLDING COMPANY, LLC Atlanta, Georgia Provides services and distributes equipment and supplies to the restaurant industry via its five subsidiary companies.			4.3	%	3,846,154 Class D Convertible Preferred Stock (acquired 5-20-11)			5,000,000				3,354,000
KBI BIOPHARMA, INC. Durham, North Carolina Provides fully-integrated, outsourced drug development and bio-manufacturing services.			17.1	%	10,204,082 shares of Series B-2 Convertible Preferred Stock, convertible into 10,204,802 shares of common stock at $0.49 per share (acquired 9-08-09)			5,000,000				7,000,000
					Warrants to purchase 94,510 shares of Series B preferred stock at $ 0.70 per share, acquired 1-26-12			-				-
								5,000,000				7,000,000

 

 †Publicly-owned company   ¥ Control investment   * Affiliated investment ‡Unrestricted securities as defined in Note (a)

---

 

Company			Equity (a)		Investment (b)			Cost				Value (c)
¥MEDIA RECOVERY, INC. Dallas, Texas Distributor of computer datacenter and office automation supplies and accessories; manufactures and distributes devices used to monitor and manage intransit inventory and dunnage products for protecting shipments.			97.9	%	800,000 shares of Series A Convertible Preferred Stock, convertible into 800,000 shares of common stock at $1.00 per share (acquired 11-4-97)			800,000				4,000,000
					4,000,002 shares of common stock (acquired 11-4-97)			4,615,000				19,900,000
								5,415,000				23,900,000
¥THE RECTORSEAL CORPORATION Houston, Texas Specialty chemicals, tools and products for plumbing, HVAC, electrical, construction, industrial, and oil field; smoke containment systems for building fires; also owns 20% of The Whitmore Manufacturing Company.			100.0	%	27,907 shares of common stock (acquired 1-5-73 and 3-31-73)			52,600				275,800,000
TITANLINER, INC. Midland, Texas Manufactures, installs and rents spill containment system for oilfield applications.			31.2	%	217,038 shares of Series A Convertible Preferred Stock convertible into 217,038 shares of Series A Preferred Stock at $14.76 per share (acquired 6-29-12)			3,203,000				1
					7%  senior subordinated secured promissory note, due 6-30-17 (acquired 6-29-12)			2,747,000				1,519,000
					Warrants to purchase 122,239 shares of Series A Preferred Stock at $ 0.01 per share, expiring 12-31-22			-				-
								5,950,000				1,519,001
TRAX HOLDINGS, INC. Scottsdale, Arizona Provides a comprehensive set of solutions to improve the  validation, accounting and payment of transportation-related invoices.			28.4	%	475,430 shares of Series B convertible Preferred Stock convertible into 475,430 shares of  common stock at $8.41 per share(acquired 12-5-12)			4,000,000				7,700,000
					1,061,279 shares of Series A Convertible Preferred Stock, convertible into 1,061,279 shares of common stock at $4.71 per share (acquired 12-8-08 and 2-17-09)			5,000,000				13,300,000
								9,000,000				21,000,000
*WELLOGIX, INC. Houston, Texas Formerly a developer and supporter of business process software used by the oil and gas industry.			19.0	%	4,788,371 shares of Series A-1 Convertible Participating Preferred Stock, convertible into 4,788,371 shares of common stock at $1.04 per share (acquired 8-19-05 thru 6-15-08)			5,000,000				25,000

 

†Publicly-owned company   ¥ Control investment   * Affiliated investment ‡Unrestricted securities as defined in Note (a)

---

 

Company			Equity (a)		Investment (b)			Cost				Value (c)
¥THE WHITMORE MANUFACTURING COMPANY Rockwall, Texas Specialized surface mining, railroad and industrial lubricants; coatings for automobiles and primary metals; fluid contamination control devices.			80.0	%	80 shares of common stock (acquired 8-31-79)			1,600,000				88,500,000
MISCELLANEOUS			–		Ballast Point Ventures II, L.P. 2.2% limited partnership interest (acquired 8-4-08 thru 2-15-13)			2,334,790				3,167,000
			–		BankCap Partners Fund I, L.P. 5.5% limited partnership interest (acquired 7-14-06 thru 11-16-12)			6,000,000				5,385,000
			–		†Capitala Finance Corporation 108,105 shares of common stock (acquired 9-25-13)			1,363,799				2,083,183
			–		CapitalSouth Partners Fund III, L.P. 1.9% limited partnership interest (acquired 1-22-08 and 11-16-11)			467,457				237,000
			–		Diamond State Ventures, L.P. 1.4% limited partnership interest (acquired 10-12-99 thru 8-26-05)			-				16,000
			–		First Capital Group of Texas III, L.P. 3.0% limited partnership interest (acquired 12-26-00 thru 8-12-05)			778,895				117,000
			100	%	¥Humac Company 1,041,000 shares of common stock (acquired 1-31-75 and 12-31-75)			–				210,000
			–		†North American Energy Partners, Inc. 77,194 shares of common stock (acquired 8-20-12)			236,986				555,797
			–		STARTech Seed Fund II 3.2% limited partnership interest (acquired 4-28-00 thru 2-23-05)			754,327				183,000
TOTAL INVESTMENTS							$	98,966,994			$	677,920,145

†Publicly-owned company   ¥ Control investment   * Affiliated investment ‡Unrestricted securities as defined in Note (a)

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2013

Company			Equity (a)		Investment (b)			Cost				Value (c)
*†ALAMO GROUP INC. Seguin, Texas Tractor-mounted mowing and mobile excavation equipment for governmental, industrial and agricultural markets; street-sweeping equipment for municipalities.			22.0	%	‡2,832,300 shares of common stock (acquired 4-1-73 thru 5-09-11)		$	2,190,937			$	108,278,100
ATLANTIC CAPITAL BANCSHARES, INC Atlanta, Georgia Holding company of Atlantic Capital Bank, a full service commercial bank.			1.9	%	300,000 shares of common stock (acquired 4-10-07)			3,000,000				2,950,000
¥BALCO, INC. Wichita, Kansas Specialty architectural products used in the construction and remodeling of commercial and institutional buildings.			95.7	%	445,000 shares of common stock and 60,920 shares Class B non-voting common stock (acquired 10-25-83 and 5-30-02)			624,920				4,500,000
*BOXX TECHNOLOGIES, INC. Austin, Texas Workstations for computer graphic imaging and design.			14.9	%	3,125,354 shares of Series B Convertible Preferred Stock, convertible into 3,125,354 shares of common stock at $0.50 per share (acquired 8-20-99 thru 8-8-01)			1,500,000				1,240,000
CINATRA CLEAN TECHNOLOGIES, INC. Houston, Texas Cleans above ground oil storage tanks with a patented, automated system.			73.4	%	12% subordinated secured promissory note, due 5-9-16 (acquired 5-19-10 thru 10-20-10)			779,278				81,000
					12% subordinated secured promissory note, due 5-9-17 (acquired 5-9-11 thru 10-26-11)			2,285,700				237,000
					12% subordinated secured promissory note, due 3-31-17 (acquired 9-9-11 and 10-26-11)			1,523,800				158,000
					10% subordinated secured promissory note, due 5-9-17 (acquired 7-14-08 thru 4-28-10)			6,200,700				643,000
					12% subordinated secured promissory note, due 10-31-17 (acquired 10-19-12)			499,997				52,000
					3,033,410 shares Series A Convertible Preferred Stock, convertible into 3,033,410 shares common stock at $1.00 per share (acquired 7-14-08 thru 11-18-10)			3,033,410				1
					Warrants to purchase 1,436,499 shares of common stock at $1.00 per share, expiring 10-31-2027 (acquired 5-9-11 thru 10-19-12)			–				–
								14,322,885				1,171,001

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Company			Equity (a)		Investment (b)			Cost				Value (c)
*†ENCORE WIRE CORPORATION McKinney, Texas Electric wire and cable for residential, commercial and industrial construction use.			6.2	%	‡1,312,500 shares of common stock (acquired 9-10-92 thru 10-15-98)			5,200,000				45,950,625
†HOLOGIC, INC. Bedford, Massachusetts Medical instruments including bone densitometers, mammography devices and digital radiography systems.		< 1		%	‡582,820 shares of common stock (acquired 8-27-99)			202,529				13,165,904
iMEMORIES, INC. Scottsdale, Arizona Enables online video and photo sharing and DVD creation for home movies recorded in analog and new digital format.			23	%	17,391,304 shares of Series B Convertible Preferred Stock, convertible into 19,891,304 shares of common stock at $0.23 per share (acquired 7-10-09)			4,000,000				4,000,000
					4,684,967 shares of Series C Convertible Preferred Stock, convertible into 4,684,967 shares of common stock at $0.23 per share (acquired 7-20-11)			1,078,479				1,078,479
					Warrants to purchase 2,500,000  shares of common stock at $0.12 per share, expiring 1-21-21(acquired 9-13-10 thru 1-21-11)			–				–
					10% convertible notes, $308,000 principal due 7-31-14 (acquired  9-7-12)			308,000				308,000
					10% convertible notes, $400,000 principal due 7-31-14 (acquired  3-15-13			440,000				440,000
								5,826,479				5,826,479
INSTAWARES HOLDING COMPANY, LLC Atlanta, Georgia Provides services to the    restaurant industry via its five subsidiary companies.			4.5	%	3,846,154 shares of Class D Convertible Preferred Stock (acquired 5-20-11)			5,000,000				5,975,000
KBI BIOPHARMA, INC. Durham, North Carolina Provides fully-integrated, outsourced drug development and bio-manufacturing services.			17.1	%	10,204,082 shares of Series B-2 Convertible Preferred Stock, convertible into 10,204,802 shares of common stock at $0.49 per share (acquired 9-08-09)			5,000,000				5,200,000
					Warrants to purchase 94,510 shares of Series B Preferred stock at $ 0.70 per share, acquired 1-26-12			-				-
								5,000,000				5,200,000