SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------
For the Quarter Ended September 30, 1996 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 (I.R.S. Employer
Incorporation or Organization) Identification Number)
12900 Preston Road, Suite 700, Dallas, Texas 75230
(Address of principal executive offices including zip code)
(972) 233-8242
(Registrant's telephone number including area code)
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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
3,767,051 shares of Common Stock, $1 Par Value as of October 31, 1996
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
Assets September 30, 1996 March 31, 1996
------------------ --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: September 30, 1996 - $21,480,361,
March 31, 1996 - $21,480,361) $208,425,840 $191,043,920
Companies 5% to 25% owned
(Cost: September 30, 1996 - $21,750,404,
March 31, 1996 - $18,750,404) 28,787,002 19,633,672
Companies less than 5% owned
(Cost: September 30, 1996 - $18,313,335,
March 31, 1996 - $18,313,335) 54,710,201 46,252,869
------------- -------------
Total investments
(Cost: September 30, 1996 - $61,544,100,
March 31, 1996 - $58,544,100) 291,923,043 256,930,461
Cash and cash equivalents 8,783,893 67,045,185
Receivables 152,379 285,002
Other assets 2,950,216 2,711,802
-------------- --------------
Totals $303,809,531 $326,972,450
============ ============
Liabilities and Shareholders' Equity
Note payable to bank $ - $50,000,000
Accrued interest and other liabilities 1,561,284 1,669,839
Income taxes payable 6,050,730 6,050,730
Deferred income taxes 80,462,128 69,204,128
Subordinated debentures 5,000,000 11,000,000
------------- --------------
Total liabilities 93,074,142 137,924,697
------------ --------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,204,416 shares
at September 30, 1996 and March 31, 1996 4,204,416 4,204,416
Additional capital 4,813,121 4,813,121
Undistributed net investment income 5,382,429 4,490,374
Undistributed net realized gain on investments 53,307,782 53,307,782
Unrealized appreciation of investments -
net of deferred income taxes 150,060,943 129,265,362
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
-------------- --------------
Net assets at market or fair value,
equivalent to $55.94 per share at
September 30, 1996, and $50.18 per share at
March 31, 1996 on the 3,767,051 shares outstanding
Totals 210,735,389 189,047,753
------------- -------------
$303,809,531 $326,972,450
============ ============
(See Notes to Consolidated Financial Statements)
2
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
Investment income:
Interest $ 314,755 $ 507,221 $ 684,702 $1,034,274
Dividends 802,483 646,449 1,604,967 1,292,103
Management and directors' fees 141,100 127,750 298,200 268,300
----------- ----------- ---------- -----------
1,258,338 1,281,420 2,587,869 2,594,677
---------- ---------- ---------- ----------
Operating expenses:
Interest 194,997 350,686 430,610 587,395
Salaries 198,611 214,607 388,882 394,206
Net pension expense (benefit) (122,777) (43,993) (174,952) (104,351)
Other operating expenses 110,915 110,630 232,039 231,290
----------- ----------- ----------- -----------
381,746 631,930 876,579 1,108,540
----------- ----------- ----------- ----------
Income before income taxes 876,592 649,490 1,711,290 1,486,137
Income tax expense 47,825 16,114 65,825 37,114
----------- ----------- ------------ ------------
Net investment income $ 828,767 $ 633,376 $1,645,465 $1,449,023
=========== ========== ========== ==========
Increase in unrealized appreciation
of investments before income taxes
and distributions $19,238,921 $36,968,158 $31,992,581 $40,988,026
Increase in deferred income taxes on
appreciation of investments 6,734,000 9,696,000 11,197,000 11,103,000
------------- ------------ ------------ ------------
Net increase in unrealized
appreciation of investments
before distributions 12,504,921 27,272,158 20,795,581 29,885,026
------------ ----------- ------------ ------------
Net realized and unrealized gain
on investments $12,504,921 $27,272,158 $20,795,581 $29,885,026
=========== =========== =========== ===========
Increase in net assets from operations
before distributions $13,333,688 $27,905,534 $22,441,046 $31,334,049
=========== =========== =========== ===========
(See Notes to Consolidated Financial Statements)
3
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Net Assets
Six Months Ended Year Ended
September 30, 1996 March 31, 1996
------------------ --------------
(Unaudited)
Operations
Net investment income $ 1,645,465 $ 2,854,917
Net realized gain on investments - 11,174,025
Net increase in unrealized appreciation
of investments before distributions 20,795,581 38,745,668
----------- ------------
Increase in net assets from operations
before distributions 22,441,046 52,774,610
Distributions from:
Undistributed net investment income (753,410) (2,253,831)
Undistributed net realized gain on investments - (153,376)
Unrealized appreciation of investments - (9,264,304)
Capital share transactions
Exercise of employee stock options - 574,750
------------ ------------
Increase in net assets 21,687,636 41,677,849
Net assets, beginning of period 189,047,753 147,369,904
------------ ------------
Net assets, end of period $210,735,389 $189,047,753
============ ============
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
Cash flows from operating activities
Increase in net assets from operations before
distributions $ 13,333,688 $27,905,534 $22,441,046 $31,334,049
Adjustments to reconcile increase in net
assets from operations before distributions
to net cash provided by operating activities:
Depreciation and amortization 5,709 7,606 16,180 15,214
Net pension benefit (122,777) (43,993) (174,952) (104,351)
Net realized and unrealized gain
on investments (12,504,921) (27,272,158) (20,795,581) (29,885,026)
(Increase) decrease in receivables 212,808 (78,381) 132,623 (90,630)
(Increase) decrease in other assets 19,619 14,695 (13,696) (17,550)
Decrease in accrued interest and
other liabilities (106,307) (7,396) (174,502) (56,173)
Deferred income taxes 43,000 16,000 61,000 37,000
------------- ------------- ------------- --------------
Net cash provided by operating activities 880,819 541,907 1,492,118 1,232,533
------------- ------------- ------------- --------------
Cash flows from investing activities
Purchases of securities - (10,877,132) (3,000,000) (10,877,132)
Maturities of securities - - - 110,669
------------- ------------- ------------- --------------
Net cash used by investing activities - (10,877,132) (3,000,000) (10,766,463)
------------- ------------- ------------- --------------
Cash flows from financing activities
Increase (decrease) in notes payable to bank - 79,500,000 (50,000,000) 79,500,000
Increase in note payable to Skylawn Corp. - 2,500,000 - 2,500,000
Repayment of subordinated debenture (6,000,000) - (6,000,000) -
Distributions from undistributed net
investment income - - (753,410) (747,010)
Distributions from undistributed net realized
gain on investments - (15,842) - (15,842)
Proceeds from exercise of employee
stock options - 574,750 - 574,750
------------- ------------ ------------- -------------
Net cash provided (used) by financing activities (6,000,000) 82,558,908 (56,753,410) 81,811,898
------------- ------------ ------------- -------------
Net increase (decrease) in cash and cash
equivalents (5,119,181) 72,223,683 (58,261,292) 72,277,968
Cash and cash equivalents at beginning
of period 13,903,074 8,427,261 67,045,185 8,372,976
------------ ------------ ------------- -------------
Cash and cash equivalents at end of period $ 8,783,893 $80,650,944 $ 8,783,893 $80,650,944
============ =========== ============= =============
(Continued)
(See Notes to Consolidated Financial Statements)
5
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Continued
Three Months Ended Six Months Ended
September 30 September 30
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 264,658 $ 354,305 $ 490,849 $ 553,757
Income taxes $ 9 $ 114 $ 9 $ 114
Supplemental disclosure of financing activities:
On July 31, 1995, Capital Southwest Corporation distributed to its shareholders
940,184 shares of common stock of Palm Harbor Homes, Inc., which had a fair
market value of $10.00 per share, or $9,401,838, as adjusted for a 5-for-4 stock
split on August 2, 1996.
(See Notes to Consolidated Financial Statements)
6
CAPITAL SOUTHWEST VENTURE CORPORATION
(wholly-owned subsidiary of Capital Southwest Corporation)
Statement of Financial Condition
September 30, 1996
(Unaudited)
Assets
Investments at market or fair value
Companies more than 25% owned (Cost - $4,295,737) $43,840,782
Companies 5% to 25% owned (Cost - $3,814,816) 9,539,001
Companies less than 5% owned (Cost - $9,260,982) 27,905,072
------------
Total investments (Cost - $17,371,535) 81,284,855
Cash and cash equivalents 4,502,670
Interest and dividends receivable 55,521
Other assets 53,603
------------
Total $85,896,649
===========
Liabilities and Shareholder's Equity
Accrued interest and other liabilities $ 170,003
Deferred income taxes 22,004,000
Subordinated debenture 5,000,000
------------
Total liabilities 27,174,003
Shareholder's equity
Common stock, $1 par value: authorized 5,000,000 shares;
issued and outstanding, 1,000,000 shares 1,000,000
Additional capital 15,606,949
Undistributed net investment income 1,372,844
Accumulated net realized loss on investments (816,467)
Unrealized appreciation of investments - net of deferred
income taxes 41,559,320
----------
Shareholder's equity 58,722,646
----------
Total $85,896,649
============
(See Notes to Consolidated Financial Statements)
7
CAPITAL SOUTHWEST VENTURE CORPORATION
(wholly-owned subsidiary of Capital Southwest Corporation)
Statement of Operations
Six Months Ended September 30, 1996
(Unaudited)
Investment income:
Interest $ 516,695
Dividends 627,582
-----------
1,144,277
-----------
Operating expenses:
Interest 430,610
Management fee 64,856
Miscellaneous 7,629
-----------
503,095
-----------
Net investment income $ 641,182
===========
Net increase in unrealized appreciation of investments before distribution
(net of increase in deferred income taxes of $888,000) $1,649,984
-----------
Net realized and unrealized gain on investments $1,649,984
===========
Increase in shareholder's equity from operations before distribution $2,291,166
===========
Statements of Changes in Shareholder's Equity
Six Months Ended Year Ended
September 30, 1996 March 31, 1996
------------------ --------------
(Unaudited)
Net investment income $ 641,182 $ 1,508,704
Net realized loss on investments - (552,240)
Net increase in unrealized appreciation
of investments before distribution 1,649,984 12,662,525
------------ ------------
Increase in shareholder's equity from
operations before distribution 2,291,166 13,618,989
Capital contribution by Capital Southwest Corporation - 2,500,000
Distributions to Capital Southwest Corporation from:
Undistributed net investment income - (1,089,251)
Accumulated net realized loss on investments - (137,765)
Unrealized appreciation of investments - (9,279,873)
------------ ------------
Increase in shareholder's equity 2,291,166 5,612,100
Shareholder's equity, beginning of period 56,431,480 50,819,380
------------ ------------
Shareholder's equity, end of period $58,722,646 $56,431,480
============ ============
(See Notes to Consolidated Financial Statements)
8
CAPITAL SOUTHWEST VENTURE CORPORATION
(wholly-owned subsidiary of Capital Southwest Corporation)
Statement of Cash Flows
Six Months Ended September 30, 1996
(Unaudited)
Cash flows from operating activities
Increase in shareholder's equity from operations before distribution $2,291,166
Adjustments to reconcile increase in shareholder's equity from
operations before distribution to net cash provided by operating activities:
Net realized and unrealized gain on investments (1,649,984)
Decrease in interest and dividends receivable 47,761
Decrease in other assets 8,147
Decrease in accrued interest and other liabilities (170,215)
-----------
Net cash provided by operating activities 526,875
-----------
Cash flows from investing activities -
Cash flows from financing activities
Repayment of subordinated debenture (6,000,000)
----------
Net increase in cash and cash equivalents (5,473,125)
Cash and cash equivalents at beginning of period 9,975,795
-----------
Cash and cash equivalents at end of period $4,502,670
===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 465,205
Income taxes $ -
(See Notes to Consolidated Financial Statements)
9
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements, which include the
accounts of Capital Southwest Corporation and its wholly-owned small business
investment company subsidiary (the "Company"), have been prepared on the value
basis in accordance with generally accepted accounting principles for investment
companies. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The financial statements included herein have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 6 of Regulation S-X. The financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended March 31, 1996. Certain information and footnotes
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes that the disclosures are adequate for a fair presentation. The
information reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods.
2. Summary of Per Share Information
Three Months Ended Six Months Ended
September 30 September 30
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
Investment income $ .33 $ .34 $ .69 $ .69
Operating expenses (.05) (.08) (.12) (.14)
Interest expense (.05) (.09) (.11) (.16)
Income taxes (.01) - (.02) (.01)
------ -------- ------- -------
Net investment income .22 .17 .44 .38
Distributions from undistributed
net investment income - - (.20) (.20)
Distributions from undistributed net
realized gain on investments - (.04) - (.04)
Net increase in unrealized appreciation of
investments before distributions 3.32 7.24 5.52 7.94
Distributions from unrealized appreciation
of investments - (2.46) - (2.46)
Exercise of employee stock options - (.19) - (.19)
--------- -------- --------- --------
Net increase in net asset value 3.54 4.72 5.76 5.43
Net asset value:
Beginning of period 52.40 40.17 50.18 39.46
------- ------- ------- -------
End of period $55.94 $44.89 $55.94 $44.89
====== ====== ====== ======
Shares outstanding at end of period
(000s omitted) 3,767 3,767 3,767 3,767
Net decrease is due to the exercise of employee stock options at prices
less than beginning of period net asset value.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Interest income in the six months ended September 30, 1996 decreased from
the year-ago period primarily because of the repayment of debentures by
portfolio companies offset somewhat by an increase in invested idle funds.
During the six months ended September 30, 1996 and 1995, the Company recorded
dividend income from the following sources:
Six Months Ended
September 30
1996 1995
The RectorSeal Corporation $ 600,001 $ 600,001
Alamo Group Inc. 532,000 532,000
Skylawn Corporation 300,000 -
Cherokee Communications, Inc. 72,000 72,000
Westmarc Communications, Inc. 40,635 40,635
Other 60,331 47,467
---------- ----------
$1,604,967 $1,292,103
========== ==========
Interest expense in the six months ended September 30, 1996 decreased from
the year-ago period due to the repayment of bank debt and a subordinated
debenture.
Set forth in the following table are the significant increases and
decreases in unrealized appreciation (before the related change in deferred
taxes and excluding the effect of gains or losses realized during the periods)
by portfolio company:
Three Months Ended Six Months Ended
September 30 September 30
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
Alamo Group Inc. $ (2,143,000) $ 1,609,000 $ (6,968,000) $ 3,920,000
American Homestar Corporation (500,705) 970,025 1,552,185 1,258,113
Amfibe, Inc. - - 600,000 -
Data Race, Inc. 830,000 (2,621,300) 830,000 (1,809,300)
Dennis Tool Company - - - (800,000)
Encore Wire Corporation 5,171,000 (455,400) 5,326,000 (3,567,000)
LiL' Things, Inc. (917,540) - (1,835,670) -
Mail-Well, Inc. 1,824,000 3,669,990 1,833,000 3,669,990
PTS Holdings, Inc. - - 3,000,000 -
Palm Harbor Homes, Inc. 12,568,000 17,290,777 21,918,000 17,290,777
PETsMART, Inc. 1,308,440 4,168,906 4,906,650 6,622,950
The RectorSeal Corporation 2,000,000 - 2,000,000 -
Tecnol Medical Products, Inc. (826,938) (505,351) (574,262) 45,941
Tele-Communications, Inc.-TCI Group (562,500) 135,000 (652,500) 573,750
On July 31, 1995, Capital Southwest Corporation distributed 940,184 shares
(adjusted for the 8/96 stock split) of common stock of Palm Harbor Homes, Inc.
on the basis of 1.25 shares for each five shares of Capital Southwest common
stock of record on July 17, 1995. Cash payments were made in lieu of Palm Harbor
common stock to record holders of fewer than 50 shares of Capital Southwest
common stock and in lieu of fractional shares. The fair market value of Palm
Harbor common stock on the July 31, 1995 distribution date was determined to be
$10.00 per share (adjusted for the 8/96 stock split).
During the quarter ended September 30, 1996, the Company made no new
investments.
11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on July 15, 1996, with the
following results of elections and approval:
Votes Cast
----------------------------------------------------
Against/ Abstentions/
For Withheld Non-Votes
----------------------------------------------------
a. The following Directors were elected to serve until
the next Annual Meeting of Stockholders:
Graeme W. Henderson 3,052,135 9,064 705,852
Gary L. Martin 3,052,135 9,064 705,852
James M. Nolan 3,052,135 9,064 705,852
William R. Thomas 3,052,126 9,073 705,852
John H. Wilson 3,051,335 9,864 705,852
b. KPMG Peat Marwick LLP was approved as the
Company's auditors for the 1997 fiscal year. 2,982,552 6,598 777,901
c. Amendment of the fundamental investment policies
of Capital Southwest Corporation was approved. 2,498,471 57,046 1,211,534
d. Amendment of the fundamental investment policies of
Capital Southwest Venture Corporation was approved. 2,495,155 60,498 1,211,398
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
November 12, 1996 /s/William R. Thomas
Date:____________________ By:_______________________________________
William R. Thomas, President
November 12, 1996 /s/Tim Smith
Date:____________________ By:_______________________________________
Tim Smith, Vice President and Secretary-Treasurer
13
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule