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 quarterly period ended September 30, 1998 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.
3,793,051 shares of Common Stock, $1 Par Value as of October 31, 1998
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
----------------------------------------------
Assets September 30, 1998 March 31, 1998
------------------ --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: September 30, 1998 - $22,130,819,
March 31, 1998 - $19,370,874) $ 254,857,600 $ 266,370,919
Companies 5% to 25% owned
(Cost: September 30, 1998 - $17,141,914,
March 31, 1998 - $14,984,195) 29,213,914 43,044,195
Companies less than 5% owned
(Cost: September 30, 1998 - $32,702,421,
March 31, 1998 - $26,799,352) 84,102,034 91,871,340
------------- -------------
Total investments
(Cost: September 30, 1998- $71,975,154,
March 31, 1998 - $61,154,421) 368,173,548 401,286,454
Cash and cash equivalents 47,264,066 117,047,920
Receivables 414,085 332,873
Other assets 3,937,487 3,656,308
------------- -------------
Totals $ 419,789,186 $ 522,323,555
============= =============
Liabilities and Shareholders' Equity
Note payable to bank $ 40,000,000 $ 100,000,000
Accrued interest and other liabilities 1,893,689 1,961,382
Income taxes payable 266,643 --
Deferred income taxes 104,017,857 119,339,357
Subordinated debenture 5,000,000 5,000,000
------------- -------------
Total liabilities 151,178,189 226,300,739
------------- -------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,230,416 shares
at September 30, 1998 and 4,225,316 shares
at March 31, 1998 4,230,416 4,225,316
Additional capital 5,688,997 5,512,409
Undistributed net investment income 5,730,836 5,261,898
Undistributed net realized gain on investments 67,093,654 66,598,460
Unrealized appreciation of investments -
net of deferred income taxes 192,900,396 221,458,035
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $70.82 per share on the 3,793,051 shares
outstanding at September 30, 1998, and
$78.15 per share on the 3,787,951 shares
outstanding at March 31, 1998 268,610,997 296,022,816
------------- -------------
Totals $ 419,789,186 $ 522,323,555
============= =============
(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
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
Investment income:
Interest $ 321,794 $ 589,637 $ 724,641 $ 989,669
Dividends 373,568 324,381 1,194,315 1,098,238
Management and directors' fees 153,100 138,600 290,450 269,700
------------ ------------ ------------ ------------
848,462 1,052,618 2,209,406 2,357,607
------------ ------------ ------------ ------------
Operating expenses:
Interest 110,193 103,103 212,201 205,111
Salaries 282,600 208,500 506,419 418,124
Net pension expense (benefit) (77,435) (69,279) (155,813) (156,755)
Other operating expenses 120,189 118,214 365,571 241,438
------------ ------------ ------------ ------------
435,547 360,538 928,378 707,918
------------ ------------ ------------ ------------
Income before income taxes 412,915 692,080 1,281,028 1,649,689
Income tax expense 27,100 26,124 54,500 56,724
------------ ------------ ------------ ------------
Net investment income $ 385,815 $ 665,956 $ 1,226,528 $ 1,592,965
============ ============ ============ ============
Proceeds from disposition of investments $ -- $ 1,267,880 $ 761,837 $ 16,442,059
Cost of investments sold -- 199,115 -- 2,679,231
------------ ------------ ------------ ------------
Realized gain on investments before
income taxes -- 1,068,765 761,837 13,762,828
Income tax expense -- 374,068 266,643 4,816,990
------------ ------------ ------------ ------------
Net realized gain on investments -- 694,697 495,194 8,945,838
------------ ------------ ------------ ------------
Increase (decrease) in unrealized
appreciation of investments before
income taxes (48,549,992) 34,680,421 (43,933,639) 60,082,877
Increase (decrease) in deferred income
taxes on appreciation of investments (16,993,000) 12,138,000 (15,376,000) 21,029,000
------------ ------------ ------------ ------------
Net increase (decrease) in unrealized
appreciation of investments (31,556,992) 22,542,421 (28,557,639) 39,053,877
------------ ------------ ------------ ------------
Net realized and unrealized gain
(loss) on investments $(31,556,992) $ 23,237,118 $(28,062,445) $ 47,999,715
============ ============ ============ ============
Increase (decrease) in net assets from
operations $(31,171,177) $ 23,903,074 $(26,835,917) $ 49,592,680
============ ============ ============ ============
(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, 1998 March 31, 1998
------------------ --------------
(Unaudited)
Operations
Net investment income $ 1,226,528 $ 2,726,144
Net realized gain on investments 495,194 6,484,892
Net increase (decrease) in unrealized
appreciation of investments (28,557,639) 69,387,923
------------- -------------
Increase (decrease) in net assets from operations (26,835,917) 78,598,959
Distributions from:
Undistributed net investment income (757,590) (2,268,451)
Capital share transactions
Exercise of employee stock options 181,688 720,188
------------- -------------
Increase (decrease) in net assets (27,411,819) 77,050,696
Net assets, beginning of period 296,022,816 218,972,120
------------- -------------
Net assets, end of period $ 268,610,997 $ 296,022,816
============= =============
(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
----------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Cash flows from operating activities
Increase (decrease) in net assets from
operations $ (31,171,177) $ 23,903,074 $ (26,835,917) $ 49,592,680
Adjustments to reconcile increase (decrease)
in net assets from operations to net cash
provided by operating activities:
Depreciation and amortization 6,530 5,942 12,355 11,885
Net pension benefit (77,435) (69,279) (155,813) (156,755)
Net realized and unrealized (gain) loss
on investments 31,556,992 (23,237,118) 28,062,445 (47,999,715)
(Increase) decrease in receivables 233,106 (91,951) (81,212) (53,073)
(Increase) decrease in other assets (1,056) 8,774 (62,443) (22,056)
Increase (decrease) in accrued interest
and other liabilities 110,272 96,666 (142,971) (101,338)
Deferred income taxes 27,100 24,200 54,500 54,800
------------- ------------- ------------- -------------
Net cash provided by operating activities 684,332 640,308 850,944 1,326,428
------------- ------------- ------------- -------------
Cash flows from investing activities
Proceeds from disposition of investments -- 14,075,989 761,837 16,442,059
Purchases of securities (4,849,523) (800,000) (11,272,272) (1,223,077)
Maturities of securities -- 999,379 451,539 999,379
------------- ------------- ------------- -------------
Net cash provided (used) by investing
activities (4,849,523) 14,275,368 (10,058,896) 16,218,361
------------- ------------- ------------- -------------
Cash flows from financing activities
Increase (decrease) in note payable to bank 40,000,000 -- (60,000,000) --
Distributions from undistributed net
investment income -- -- (757,590) (753,410)
Proceeds from exercise of employee
stock options 181,688 159,094 181,688 159,094
------------- ------------- ------------- -------------
Net cash provided (used) by financing activities 40,181,688 159,094 (60,575,902) (594,316)
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents 36,016,497 15,074,770 (69,783,854) 16,950,473
Cash and cash equivalents at beginning
of period 11,247,569 15,885,184 117,047,920 14,009,481
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 47,264,066 $ 30,959,954 $ 47,264,066 $ 30,959,954
============= ============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ -- $ 217,288 $ 199,452
Income taxes $ -- $ 6,022 $ 8,500 $ 6,022
(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, 1998. 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 September 30
--------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
Investment income $ .22 $ .28 $ .58 $ .63
Operating expenses (.08) (.07) (.18) (.13)
Interest expense (.03) (.03) (.06) (.06)
Income taxes (.01) (.01) (.02) (.02)
--------- --------- --------- ---------
Net investment income .10 .17 .32 .42
Net realized gain on investments -- .18 .13 2.37
Net increase (decrease) in unrealized
appreciation of investments (8.32) 5.97 (7.53) 10.35
Distributions from undistributed
net investment income -- -- (.20) (.20)
Exercise of employee stock options (1) (.05) (.06) (.05) (.06)
--------- --------- --------- ---------
Net increase (decrease) in net asset value (8.27) 6.26 (7.33) 12.88
Net asset value:
Beginning of period 79.09 64.75 78.15 58.13
--------- --------- --------- ---------
End of period $ 70.82 $ 71.01 $ 70.82 $ 71.01
========= ========= ========= =========
Shares outstanding at end of period
(000s omitted) 3,793 3,774 3,793 3,774
(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 six months ended September 30, 1998 decreased
from the year-ago period primarily because of a decrease in average idle funds
invested. During the six months ended September 30, 1998 and 1997, the Company
recorded dividend income from the following sources:
Six Months Ended
September 30
--------------------------
1998 1997
---- ----
Alamo Group Inc. $ 585,200 $ 532,000
Kimberly-Clark Corporation 38,590 --
The RectorSeal Corporation 240,000 240,000
Skylawn Corporation 150,000 150,000
Westmarc Communications, Inc. 40,635 40,635
The Whitmore Manufacturing Company 60,000 60,000
Other 79,890 75,603
---------- ----------
$1,194,315 $1,098,238
========== ==========
Salaries in the six months ended September 30, 1998 increased from the
year-ago period due to an addition to the Company's professional staff and a
special bonus payment. Other operating expenses in the six months ended
September 30, 1998 increased from the year-ago period primarily due to the
payment of a finders fee related to an investment.
During the six months ended September 30, 1998, the Company reported a
realized gain before income taxes of $761,837. It should be noted that a
realized gain before income taxes occurs when an appreciated portfolio security
is sold to realize a gain and 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 Six Months Ended
September 30 September 30
----------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
Alamo Group Inc. $(10,640,000) $4,021,000 $(10,640,000) $8,308,000
All Components, Inc. 1,225,000 950,000 1,225,000 950,000
American Homestar Corporation (1,830,706) 1,064,001 (844,941) 3,129,413
Amfibe, Inc. -- 2,400,000 -- 2,400,000
Balco, Inc. -- -- 1,904,680 --
Dennis Tool Company (828,177) -- (828,177) --
Encore Wire Corporation (13,884,000) 11,220,000 (15,988,000) 17,279,000
Kimberly-Clark Corporation (414,843) (367,528) (742,858) 780,997
Mail-Well, Inc. (14,575,000) - (12,493,000) 8,294,000
Mylan Laboratories, Inc. (96,215) 986,198 833,859 970,163
Palm Harbor Homes, Inc. (4,713,000) 14,328,000 (4,713,000) 28,656,000
PETsMART, Inc. (2,003,548) (858,664) (2,473,769) (6,460,423)
Tele-Communications - TCI Group 85,887 (325,804) 923,286 202,946
Tele-Communications - LM Group (221,485) 383,906 234,140 645,468
Tele-Communications - TCI Ventures (278,307) 1,350,583 40,927 1,350,583
Texas Petrochemical Holdings, Inc. -- (900,000) -- (900,000)
Texas Shredder, Inc. -- 1,125,000 -- 1,125,000
The Whitmore Manufacturing Company 1,200,000 -- 1,200,000 --
7
During the quarter ended September 30, 1998, the Company made
additional investments totaling $4,849,523 in existing portfolio companies.
On October 1, 1998, the Company repaid the $40,000,000 note payable to
bank from its cash and cash equivalents.
The Company has agreed, subject to certain conditions, to invest up to
$3,000,000 in three portfolio companies.
Many computer software systems in use today cannot properly process
date-related information from and after January 1, 2000. Should any of the
computer systems employed by our major portfolio companies fail to process this
type of information properly, it could have a negative impact to our
shareholders. The Company has reviewed its computer system and determined that
it will be Year 2000 compliant. In addition, the Company has inquired of its
major service providers as well as its major portfolio companies to determine if
they will be prepared for the Year 2000. All have indicated they are taking the
necessary steps to be Year 2000 compliant. It is anticipated that the Company
will incur no material expenses related to the Year 2000 issues.
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 20, 1998, 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 3,295,037 2,852 490,062
Gary L. Martin 3,295,726 2,164 490,061
James M. Nolan 3,295,726 2,164 490,061
William R. Thomas 3,295,726 2,164 490,061
John H. Wilson 3,295,726 2,164 490,061
b. KPMG Peat Marwick LLP was approved as the
Company's auditors for the 1999 fiscal year. 3,273,774 20,780 493,397
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: November 12, 1998 By: /s/ William R. Thomas
------------------------------------
William R. Thomas
President
Date: November 12, 1998 By: /s/ Tim Smith
------------------------------------
Tim Smith
Vice President & Secretary-Treasurer
9
6
0000017313
Capital Southwest Corporation
1
US DOLLARS
6-MOS
MAR-31-1998
APR-01-1998
SEP-30-1998
1
71,975,154
368,173,548
414,085
3,937,487
47,264,066
419,789,186
0
5,000,000
146,178,189
151,178,189
0
2,886,111
3,793,051
3,787,951
5,730,836
0
67,093,654
0
192,000,396
268,610,997
1,194,315
724,641
290,450
928,378
1,226,528
495,194
(28,557,639)
(26,835,917)
0
757,590
0
0
5,100
0
0
(27,411,819)
5,261,898
66,598,460
0
0
0
212,201
928,378
0
78.15
.32
(7.40)
(.20)
0
0
70.82
0
0
0
