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 December 31, 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 January 31, 1997
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
----------------------------------------------
Assets December 31, 1996 March 31, 1996
----------------- --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: December 31, 1996 - $20,552,361,
March 31, 1996 - $21,480,361) $211,078,840 $191,043,920
Companies 5% to 25% owned
(Cost: December 31, 1996 - $20,937,071,
March 31, 1996 - $18,750,404) 37,959,002 19,633,672
Companies less than 5% owned
(Cost: December 31, 1996 - $21,313,336,
March 31, 1996 - $18,313,335) 61,211,426 46,252,869
----------- -----------
Total investments
(Cost: December 31, 1996 - $62,802,768,
March 31, 1996 - $58,544,100) 310,249,268 256,930,461
Cash and cash equivalents 7,424,267 67,045,185
Receivables 506,035 285,002
Other assets 3,059,790 2,711,802
----------- -----------
Totals $321,239,360 $326,972,450
=========== ===========
Liabilities and Shareholders' Equity
Note payable to bank $ - $ 50,000,000
Accrued interest and other liabilities 1,497,310 1,669,839
Income taxes payable 6,268,782 6,050,730
Deferred income taxes 86,760,128 69,204,128
Subordinated debentures 5,000,000 11,000,000
----------- -----------
Total liabilities 99,526,220 137,924,697
----------- -----------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,204,416 shares
at December 31, 1996 and March 31, 1996 4,204,416 4,204,416
Additional capital 4,813,121 4,813,121
Undistributed net investment income 4,317,669 4,490,374
Undistributed net realized gain on investments 54,199,736 53,307,782
Unrealized appreciation of investments -
net of deferred income taxes 161,211,500 129,265,362
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
----------- -----------
Net assets at market or fair value, equivalent
to $58.86 per share at December 31, 1996, and
$50.18 per share at March 31, 1996 on the
3,767,051 shares outstanding 221,713,140 189,047,753
--------- ----------- -----------
Totals $321,239,360 $326,972,450
=========== ===========
(See Notes to Consolidated Financial Statements)
2
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
-------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
1996 1995 1996 1995
---- ---- ---- ----
Investment income:
Interest $ 296,204 $ 463,764 $ 980,906 $1,498,038
Dividends 393,377 1,502,418 1,998,344 2,794,521
Management and directors' fees 153,100 149,350 451,300 417,650
---------- ---------- ---------- ----------
842,681 2,115,532 3,430,550 4,710,209
---------- ---------- ---------- ----------
Operating expenses:
Interest 103,103 829,393 533,713 1,416,788
Salaries 231,757 221,142 620,639 615,348
Net pension expense (benefit) (87,475) (52,175) (262,427) (156,526)
Other operating expenses 122,235 163,226 354,274 394,516
---------- ---------- ---------- ----------
369,620 1,161,586 1,246,199 2,270,126
---------- ---------- ---------- ----------
Income before income taxes 473,061 953,946 2,184,351 2,440,083
Income tax expense 31,000 20,334 96,825 57,448
---------- ---------- ---------- ----------
Net investment income $ 442,061 $ 933,612 $ 2,087,526 $ 2,382,635
========== ========== ========== ==========
Proceeds from disposition of
investments $ 2,273,338 $20,919,308 $ 2,273,338 $20,919,308
Cost of investments sold 813,333 2,621,266 813,333 2,621,266
---------- ---------- ---------- ----------
Realized gain on investments before
income taxes 1,460,005 18,298,042 1,460,005 18,298,042
Income tax expense 568,052 5,940,235 568,052 5,940,235
---------- ---------- ---------- ----------
Net realized gain on investments 891,953 12,357,807 891,953 12,357,807
---------- ---------- ---------- ----------
Increase (decrease) in unrealized
appreciation of investments before
income taxes and distributions 17,067,558 (3,353,503) 49,060,139 37,634,523
Increase (decrease) in deferred income
taxes on appreciation of investments 5,917,000 (1,174,000) 17,114,000 9,929,000
---------- ---------- ---------- ----------
Net increase (decrease) in unrealized
appreciation of investments
before distributions 11,150,558 (2,179,503) 31,946,139 27,705,523
---------- ---------- ---------- ----------
Net realized and unrealized gain
on investments $12,042,511 $10,178,304 $32,838,092 $40,063,330
========== ========== ========== ==========
Increase in net assets from operations
before distributions $12,484,572 $11,111,916 $34,925,618 $42,445,965
========== ========== ========== ==========
(See Notes to Consolidated Financial Statements)
3
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Net Assets
------------------------------------------------
Nine Months Ended Year Ended
December 31, 1996 March 31, 1996
----------------- --------------
(Unaudited)
Operations
Net investment income $ 2,087,526 $ 2,854,917
Net realized gain on investments 891,953 11,174,025
Net increase in unrealized appreciation
of investments before distributions 31,946,139 38,745,668
----------- -----------
Increase in net assets from operations
before distributions 34,925,618 52,774,610
Distributions from:
Undistributed net investment income (2,260,231) (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 32,665,387 41,677,849
Net assets, beginning of period 189,047,753 147,369,904
----------- -----------
Net assets, end of period $221,713,140 $189,047,753
=========== ===========
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Cash flows from operating activities
Increase in net assets from operations before
distributions $ 12,484,572 $ 11,111,916 $ 34,925,618 $ 42,445,965
Adjustments to reconcile increase in net
assets from operations before distributions
to net cash provided by operating activities:
Depreciation and amortization 5,710 8,147 21,890 23,361
Net pension benefit (87,475) (52,175) (262,427) (156,526)
Net realized and unrealized gain
on investments (12,042,511) (10,178,304) (32,838,092) (40,063,330)
Increase in receivables (353,656) (429,008) (221,033) (519,638)
(Increase) decrease in other assets 5,165 57,832 (8,531) 40,282
Increase (decrease) in accrued interest
and other liabilities (96,948) 602,499 (271,450) 546,326
Deferred income taxes 31,000 18,000 92,000 55,000
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities (54,143) 1,138,907 1,437,975 2,371,440
----------- ----------- ----------- -----------
Cash flows from investing activities
Proceeds from disposition of investments 2,273,338 964,708 2,273,338 964,708
Purchases of securities (3,000,000) (1,101,684) (6,000,000) (11,978,816)
Maturities of securities 928,000 4,941,155 928,000 5,051,824
----------- ----------- ----------- -----------
Net cash provided (used) by investing activities 201,338 4,804,179 (2,798,662) (5,962,284)
----------- ----------- ----------- -----------
Cash flows from financing activities
Increase (decrease) in notes payable to bank - (25,075,000) (50,000,000) 54,425,000
Increase in note payable to Skylawn Corp. - - - 2,500,000
Repayment of subordinated debenture - - (6,000,000) -
Distributions from undistributed net
investment income (1,506,821) (1,506,821) (2,260,231) (2,253,831)
Distributions from undistributed net realized
gain on investments - - - (15,842)
Proceeds from exercise of employee
stock options - - - 574,750
----------- ----------- ----------- -----------
Net cash provided (used) by financing activities (1,506,821) (26,581,821) (58,260,231) 55,230,077
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,359,626) (20,638,735) (59,620,918) 51,639,233
Cash and cash equivalents at beginning
of period 8,783,893 80,650,944 67,045,185 8,372,976
----------- ----------- ----------- ----------
Cash and cash equivalents at end of period $ 7,424,267 $ 60,012,209 $ 7,424,267 $ 60,012,209
=========== =========== =========== ===========
(Continued)
(See Notes to Consolidated Financial Statements)
5
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Continued
- ---------
Three Months Ended Nine Months Ended
December 31 December 31
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $200,548 $233,360 $691,397 $787,117
Income taxes $ - $ 9 $ 9 $ 123
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
--------------------------------
December 31, 1996
-----------------
(Unaudited)
Assets
Investments at market or fair value
Companies more than 25% owned (Cost - $3,367,737) $48,257,782
Companies 5% to 25% owned (Cost - $3,001,483) 12,048,001
Companies less than 5% owned (Cost - $12,260,983) 33,346,522
----------
Total investments (Cost - $18,630,203) 93,652,305
Cash and cash equivalents 3,594,240
Interest and dividends receivable 132,123
Other assets 49,432
----------
Total $97,428,100
==========
Liabilities and Shareholder's Equity
Accrued interest and other liabilities $ 81,401
Deferred income taxes 26,185,000
Subordinated debenture 5,000,000
----------
Total liabilities 31,266,401
----------
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 16,011,904
Undistributed net investment income 642,163
Accumulated net realized loss on investments (329,470)
Unrealized appreciation of investments - net of deferred
income taxes 48,837,102
----------
Shareholder's equity 66,161,699
----------
Total $97,428,100
==========
(See Notes to Consolidated Financial Statements)
7
CAPITAL SOUTHWEST VENTURE CORPORATION
(wholly-owned subsidiary of Capital Southwest Corporation)
Statement of Operations
-----------------------
Nine Months Ended December 31, 1996
-----------------------------------
(Unaudited)
Investment income:
Interest $ 750,787
Dividends 941,372
-----------
1,692,159
-----------
Operating expenses:
Interest 533,713
Management fee 107,844
Miscellaneous 10,917
-----------
652,474
-----------
Net investment income $ 1,039,685
===========
Proceeds from disposition of investments $ 2,273,338
Cost of investments sold 813,333
-----------
Realized gain on investments before income taxes 1,460,005
Income tax expense 350,000
-----------
Net realized gain on investments 1,110,005
-----------
Net increase in unrealized appreciation of investments before distribution
(net of increase in deferred income taxes of $4,719,000) $ 8,927,766
-----------
Net realized and unrealized gain on investments $ 10,037,771
-----------
Increase in shareholder's equity from operations before distribution $ 11,077,456
===========
Statements of Changes in Shareholder's Equity
---------------------------------------------
Nine Months Ended Year Ended
December 31, 1996 March 31, 1996
----------------- --------------
(Unaudited)
Net investment income $ 1,039,685 $ 1,508,704
Net realized gain (loss) on investments 1,110,005 (552,240)
Net increase in unrealized appreciation
of investments before distribution 8,927,766 12,662,525
---------- -----------
Increase in shareholder's equity from
operations before distribution 11,077,456 13,618,989
Capital contribution by Capital Southwest Corporation 404,955 2,500,000
Distributions to Capital Southwest Corporation from:
Undistributed net investment income (1,129,184) (1,089,251)
Accumulated net realized loss on investments (623,008) (137,765)
Unrealized appreciation of investments - (9,279,873)
---------- -----------
Increase in shareholder's equity 9,730,219 5,612,100
Shareholder's equity, beginning of period 56,431,480 50,819,380
---------- -----------
Shareholder's equity, end of period $66,161,699 $ 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
-----------------------
Nine Months Ended December 31, 1996
-----------------------------------
(Unaudited)
Cash flows from operating activities
Increase in shareholder's equity from operations before distribution $ 11,077,456
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 (10,037,771)
Increase in interest and dividends receivable (28,841)
Decrease in other assets 12,317
Decrease in accrued interest and other liabilities (258,817)
-----------
Net cash provided by operating activities 764,344
-----------
Cash flows from investing activities
Proceeds from disposition of investments 2,273,338
Purchase of securities (3,000,000)
Maturities of securities 928,000
-----------
Net cash provided by investing activities 201,338
-----------
Cash flows from financing activities
Repayment of subordinated debenture (6,000,000)
Capital contribution by Capital Southwest Corporation 404,955
Distributions from undistributed net investment income (1,129,184)
Distributions from accumulated net realized loss on investments (623,008)
-----------
(7,347,237)
-----------
Net increase in cash and cash equivalents (6,381,555)
Cash and cash equivalents at beginning of period 9,975,795
-----------
Cash and cash equivalents at end of period $ 3,594,240
===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 665,753
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 Nine Months Ended
December 31 December 31
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Investment income $ .22 $ .56 $ .91 $ 1.25
Operating expenses (.07) (.09) (.19) (.23)
Interest expense (.03) (.22) (.14) (.38)
Income taxes - - (.02) (.01)
----- ----- ----- ------
Net investment income .12 .25 .56 .63
Net realized gain on investments .24 3.28 .24 3.28
Net increase (decrease) in unrealized
appreciation of investments before
distributions 2.96 (.58) 8.48 7.36
Distributions from undistributed
net investment income (.40) (.40) (.60) (.60)
Distributions from undistributed net
realized gain on investments - - - (.04)
Distributions from unrealized appreciation
of investments - - - (2.46)
Exercise of employee stock options (1) - - - (.19)
----- ----- ----- ------
Net increase in net asset value 2.92 2.55 8.68 7.98
Net asset value:
Beginning of period 55.94 44.89 50.18 39.46
----- ----- ----- ------
End of period $58.86 $47.44 $58.86 $47.44
===== ===== ===== =====
Shares outstanding at end of period
(000s omitted) 3,767 3,767 3,767 3,767
(1) 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 nine months ended December 31, 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 nine months ended December 31, 1996 and 1995, the Company recorded
dividend income from the following sources:
Nine Months Ended
December 31
-----------------
1996 1995
---- ----
Alamo Group Inc. $ 798,000 $ 798,000
The RectorSeal Corporation 640,895 1,229,019
Skylawn Corporation 300,000 150,000
Cherokee Communications, Inc. 108,000 108,000
Westmarc Communications, Inc. 60,953 60,953
Humac Company - 208,200
Texas Shredder, Inc. 28,125 168,750
Other 62,371 71,599
--------- ---------
$1,998,344 $2,794,521
========= =========
Interest expense in the nine months ended December 31, 1996 decreased from
the year-ago period due to the repayment of bank debt and a subordinated
debenture and due to the accrual of interest in the prior year on the deferred
tax related to the installment sale of MESC Holdings, Inc.
During the nine months ended December 31, 1996, the Company reported a
realized gain before income taxes of $1,460,005. It should be noted that a
realized gain before income taxes and a decrease in unrealized appreciation
before income taxes are directly related in that when an appreciated portfolio
security is sold to realize a gain, a corresponding decrease in 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 unrealized appreciation
occurs.
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 Nine Months Ended
December 31 December 31
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Alamo Group Inc. $ 5,359,000 $ - $(1,609,000) $ 3,920,000
All Components, Inc. 1,000,000 - 1,000,000 -
American Homestar Corporation (500,704) 1,266,255 1,051,481 2,524,368
Cherokee Communications, Inc. 5,752,958 1,000,000 5,752,938 1,000,000
Data Race, Inc. 5,259,721 223,900 5,764,886 (1,585,400)
Encore Wire Corporation 1,539,000 (2,789,000) 6,865,000 (6,356,000)
LiL'Things, Inc. - (318,284) (1,835,670) (318,284)
Mail-Well, Inc. 3,123,000 (607,000) 4,956,000 3,062,990
PTS Holdings, Inc. - - 3,000,000 -
Palm Harbor Homes, Inc. - 14,461,000 21,918,000 31,751,777
PETsMART, Inc. (2,535,101) (899,000) 2,371,549 5,434,755
The RectorSeal Corporation - 1,000,000 2,000,000 1,000,000
Skylawn Corporation (3,000,000) - (3,000,000) -
The Whitmore Manufacturing Co. 1,200,000 (800,000) 1,200,000 (800,000)
11
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 December 31, 1996, the Company made a new
investment of $3,000,000.
PART II. OTHER INFORMATION
--------------------------
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
February 10, 1997 /s/William R. Thomas
Date:_________________ By:_________________________________________________
William R. Thomas, President
February 10, 1997 /s/Tim Smith
Date:_________________ By:_________________________________________________
Tim Smith, Vice President and Secretary-Treasurer
13
EXHIBIT INDEX
-------------
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6
0000017313
1
US DOLLARS
9-MOS
MAR-31-1996
APR-01-1996
DEC-31-1996
1
62,802,768
310,249,268
506,035
3,059,790
7,424,267
321,239,360
0
5,000,000
94,526,220
99,526,220
0
1,984,235
3,767,051
3,767,051
4,317,669
0
54,199,736
0
161,211,500
221,713,140
1,998,344
980,906
451,300
1,246,199
2,087,526
891,953
31,946,139
34,925,618
0
2,260,231
0
0
0
0
0
32,665,387
4,490,374
53,307,782
0
0
0
533,713
1,246,199
0
50.18
.56
8.72
(.60)
0
0
58.86
0
0
0
