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, 1997 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.
3,787,601 shares of Common Stock, $1 Par Value as of January 31, 1998
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
----------------------------------------------
Assets December 31, 1997 March 31, 1997
----------------- --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: December 31, 1997 - $19,370,874,
March 31, 1997 - $20,552,361) $ 240,059,919 $ 203,399,920
Companies 5% to 25% owned
(Cost: December 31, 1997 - $17,238,589,
March 31, 1997 - $19,979,904) 67,395,579 35,747,002
Companies less than 5% owned
(Cost: December 31, 1997 - $22,751,688,
March 31, 1997 - $19,375,650) 55,727,842 54,144,104
------------- -------------
Total investments
(Cost: December 31, 1997 - $59,361,151,
March 31, 1997 - $59,907,915) 363,183,340 293,291,026
Cash and cash equivalents 24,698,603 14,009,481
Receivables 362,672 279,815
Other assets 3,538,170 3,180,171
------------- -------------
Totals $ 391,782,785 $ 310,760,493
============= =============
Liabilities and Shareholders' Equity
Accrued interest and other liabilities $ 2,025,361 $ 1,735,372
Income taxes payable 6,610,436 3,184,373
Deferred income taxes 106,603,928 81,868,628
Subordinated debenture 5,000,000 5,000,000
------------- -------------
Total liabilities 120,239,725 91,788,373
------------- -------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,224,966 shares
at December 31, 1997 and 4,204,416 shares
at March 31, 1997 4,224,966 4,204,416
Additional capital 5,500,290 4,813,121
Undistributed net investment income 4,396,456 4,804,205
Undistributed net realized gain on investments 66,598,460 60,113,568
Unrealized appreciation of investments -
net of deferred income taxes 197,856,190 152,070,112
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $71.69 per share on the 3,787,601 shares
outstanding at December 31, 1997, and $58.13
per share on the 3,767,051 shares outstanding
at March 31, 1997 271,543,060 218,972,120
------------- -------------
Totals $ 391,782,785 $ 310,760,493
============= =============
(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
1997 1996 1997 1996
------------ ------------ ------------ ------------
Investment income:
Interest $ 565,822 $ 296,204 $ 1,555,491 $ 980,906
Dividends 345,401 393,377 1,443,639 1,998,344
Management and directors' fees 163,600 153,100 433,300 451,300
------------ ------------ ------------ ------------
1,074,823 842,681 3,432,430 3,430,550
------------ ------------ ------------ ------------
Operating expenses:
Interest 103,103 103,103 308,214 533,713
Salaries 578,000 231,757 996,124 620,639
Net pension expense (benefit) (78,378) (87,475) (235,133) (262,427)
Other operating expenses 176,836 122,235 418,274 354,274
------------ ------------ ------------ ------------
779,561 369,620 1,487,479 1,246,199
------------ ------------ ------------ ------------
Income before income taxes 295,262 473,061 1,944,951 2,184,351
Income tax expense 27,525 31,000 84,249 96,825
------------ ------------ ------------ ------------
Net investment income $ 267,737 $ 442,061 $ 1,860,702 $ 2,087,526
============ ============ ============ ============
Proceeds from disposition of
investments $ 227,833 $ 2,273,338 $ 16,669,892 $ 2,273,338
Cost of investments sold 4,085,592 813,333 6,764,823 813,333
------------ ------------ ------------ ------------
Realized gain (loss) on investments
before income taxes (3,857,759) 1,460,005 9,905,069 1,460,005
Income tax expense (benefit) (1,396,813) 568,052 3,420,177 568,052
------------ ------------ ------------ ------------
Net realized gain (loss) on investments (2,460,946) 891,953 6,484,892 891,953
------------ ------------ ------------ ------------
Increase in unrealized appreciation
of investments before income taxes 10,356,201 17,067,558 70,439,078 49,060,139
Increase in deferred income taxes on
appreciation of investments 3,624,000 5,917,000 24,653,000 17,114,000
------------ ------------ ------------ ------------
Net increase in unrealized
appreciation of investments 6,732,201 11,150,558 45,786,078 31,946,139
------------ ------------ ------------ ------------
Net realized and unrealized gain
on investments $ 4,271,255 $ 12,042,511 $ 52,270,970 $ 32,838,092
============ ============ ============ ============
Increase in net assets from operations $ 4,538,992 $ 12,484,572 $ 54,131,672 $ 34,925,618
============ ============ ============ ============
(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, 1997 March 31, 1997
----------------- --------------
(Unaudited)
Operations
Net investment income $ 1,860,702 $ 2,574,062
Net realized gain on investments 6,484,892 6,805,786
Net increase in unrealized appreciation
of investments 45,786,078 22,804,750
------------- -------------
Increase in net assets from operations 54,131,672 32,184,598
Distributions from:
Undistributed net investment income (2,268,451) (2,260,231)
Capital share transactions
Exercise of employee stock options 707,719 --
------------- -------------
Increase in net assets 52,570,940 29,924,367
Net assets, beginning of period 218,972,120 189,047,753
------------- -------------
Net assets, end of period $ 271,543,060 $ 218,972,120
============= =============
(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
---------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
Cash flows from operating activities
Increase in net assets from operations $ 4,538,991 $ 12,484,572 $ 54,131,671 $ 34,925,618
Adjustments to reconcile increase in net
assets from operations to net cash provided
by operating activities:
Depreciation and amortization 5,943 5,710 17,828 21,890
Net pension benefit (78,378) (87,475) (235,133) (262,427)
Net realized and unrealized gain
on investments (4,271,255) (12,042,511) (52,270,970) (32,838,092)
Increase in receivables (29,784) (353,656) (82,857) (221,033)
(Increase) decrease in other assets 15,884 5,165 (6,172) (8,531)
Increase (decrease) in accrued interest
and other liabilities 262,693 (96,948) 161,355 (271,450)
Deferred income taxes 27,500 31,000 82,300 92,000
------------ ------------ ------------ ------------
Net cash provided (used) by operating activities 471,594 (54,143) 1,798,022 1,437,975
------------ ------------ ------------ ------------
Cash flows from investing activities
Proceeds from disposition of investments 227,833 2,273,338 16,669,892 2,273,338
Purchases of securities (6,580,349) (3,000,000) (7,803,426) (6,000,000)
Maturities of securities 585,987 928,000 1,585,366 928,000
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities (5,766,529) 201,338 10,451,832 (2,798,662)
------------ ------------ ------------ ------------
Cash flows from financing activities
Decrease in note payable to bank -- -- -- (50,000,000)
Repayment of subordinated debenture -- -- -- (6,000,000)
Distributions from undistributed net
investment income (1,515,041) (1,506,821) (2,268,451) (2,260,231)
Proceeds from exercise of employee
stock options 548,625 -- 707,719 --
------------ ------------ ------------ ------------
Net cash used by financing activities (966,416) (1,506,821) (1,560,732) (58,260,231)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (6,261,351) (1,359,626) 10,689,122 (59,620,918)
Cash and cash equivalents at beginning
of period 30,959,954 8,783,893 14,009,481 67,045,185
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 24,698,603 $ 7,424,267 $ 24,698,603 $ 7,424,267
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period
for:
Interest $ 200,548 $ 200,548 $ 400,000 $ 691,397
Income taxes $ 2,000 $ -- $ 8,022 $ 9
(See Notes to Consolidated Financial Statements)
5
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, 1997. 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
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
Investment income $ .27 $ .22 $ .90 $ .91
Operating expenses (.18) (.07) (.31) (.19)
Interest expense (.02) (.03) (.08) (.14)
Income taxes -- -- (.02) (.02)
--------- --------- --------- ---------
Net investment income .07 .12 .49 .56
Net realized gain (loss) on investments (.66) .24 1.71 .24
Net increase in unrealized appreciation
of investments 1.74 2.96 12.09 8.48
Distributions from undistributed
net investment income (.40) (.40) (.60) (.60)
Exercise of employee stock options (1) (.07) -- (.13) --
--------- --------- --------- ---------
Net increase in net asset value .68 2.92 13.56 8.68
Net asset value:
Beginning of period 71.01 55.94 58.13 50.18
--------- --------- --------- ---------
End of period $ 71.69 $ 58.86 $ 71.69 $ 58.86
========= ========= ========= =========
Shares outstanding at end of period
(000s omitted) 3,788 3,767 3,788 3,767
(1) Net decrease is due to the exercise of employee stock options at
prices less than beginning of period net asset value.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Interest income in the nine months ended December 31, 1997 increased from
the year-ago period primarily because of interest payments by a new portfolio
company and an increase in average idle funds invested. During the nine months
ended December 31, 1997 and 1996, the Company recorded dividend income from the
following sources:
Nine Months Ended
December 31
-----------
1997 1996
---- ----
Alamo Group Inc. $ 798,000 $ 798,000
The RectorSeal Corporation 261,200 640,895
Skylawn Corporation 150,000 300,000
Cherokee Communications, Inc. - 108,000
Westmarc Communications, Inc. 60,953 60,953
The Whitmore Manufacturing Company 60,000 -
Texas Shredder, Inc. 28,125 28,125
Other 85,361 62,371
----------- ----------
$ 1,443,639 $1,998,344
=========== ==========
Interest expense in the nine months ended December 31, 1997 decreased from
the year-ago period due to the repayment of a subordinated debenture on
September 1, 1996. Salaries in the nine months ended December 31, 1997 increased
from the year-ago period mainly due to the accrual in December 1997 of annual
bonuses, which in the prior fiscal year were accrued in March 1997. Other
operating expenses in the nine months ended December 31, 1997 increased from the
year-ago period primarily because of additional environmental remediation
expenses related to a previous investment and legal expenses in connection with
a claim against the Company's pension plan.
During the nine months ended December 31, 1997, the Company reported a
realized gain before income taxes of $9,905,069. 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.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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
----------- -----------
1997 1996 1997 1996
---- ---- ---- ----
Alamo Group Inc. $ -- $ 5,359,000 $ 8,308,000 $ (1,609,000)
All Components, Inc. -- 1,000,000 950,000 1,000,000
American Homestar Corporation 657,176 (500,704) 3,786,589 1,051,481
Amfibe, Inc. -- -- 2,400,000 600,000
Encore Wire Corporation -- 1,539,000 17,279,000 6,865,000
Kimberly-Clark Corporation 130,708 68,911 911,705 (505,351)
Mail-Well, Inc. 5,726,000 3,123,000 14,020,000 4,956,000
Mylan Laboratories, Inc. (192,429) (64,143) 777,734 (561,251)
Palm Harbor Homes, Inc. -- -- 28,656,000 21,918,000
PETsMART, Inc. (1,921,771) (2,535,101) (8,382,194) 2,371,549
The RectorSeal Corporation -- -- -- 2,000,000
Skylawn Corporation -- (3,000,000) -- (3,000,000)
Tele-Communications-LM Group 459,844 (5,625) 1,105,312 106,875
Tele-Communications-TCI Group 851,713 (337,500) 1,054,659 (990,000)
Tele-Communications-TCI Ventures 503,408 -- 1,853,991 --
Texas Petrochemical Holdings, Inc. -- -- (900,000) --
Texas Shredder, Inc. -- -- 1,125,000 250,000
The Whitmore Manufacturing Co. -- 1,200,000 -- 1,200,000
During the quarter ended December 31, 1997, the Company made new
investments of $5,225,000 and additional investments of $1,155,349 in existing
portfolio companies.
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.
8
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
Date: February 10, 1998 By: /s/ William R. Thomas
-----------------------------
William R. Thomas, President
Date: February 10, 1998 By: /s/ Tim Simth
-----------------------------
Tim Simth, Vice President and Secretary-Treasurer
9
6
0000017313
Capital Southwest Corporation
1
US DOLLARS
9-MOS
MAR-31-1997
APR-01-1997
DEC-31-1997
1
59,361,151
363,183,340
362,672
3,538,170
24,698,603
391,782,785
0
5,000,000
115,239,725
120,239,725
0
2,691,954
3,787,601
3,767,051
4,396,456
0
66,598,460
0
197,856,190
271,543,060
1,443,639
1,555,491
433,300
1,487,479
1,860,702
6,484,892
45,786,078
54,131,672
0
2,268,451
0
0
20,550
0
0
52,570,940
4,804,205
60,113,568
0
0
0
308,214
1,487,479
0
58.13
.49
13.80
(.60)
0
0
71.69
0
0
0
