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, 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.
3,807,051 shares of Common Stock, $1 Par Value as of January 31, 1999
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
----------------------------------------------
Assets December 31, 1998 March 31, 1998
----------------- --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: December 31, 1998 - $22,130,819,
March 31, 1998 - $19,370,874) $ 256,394,359 $ 266,370,919
Companies 5% to 25% owned
(Cost: December 31, 1998 - $18,841,914,
March 31, 1998 - $14,984,195) 29,071,160 43,044,195
Companies less than 5% owned
(Cost: December 31, 1998 - $32,607,281,
March 31, 1998 - $26,799,352) 87,900,818 91,871,340
------------- -------------
Total investments
(Cost: December 31, 1998 - $73,580,014,
March 31, 1998 - $61,154,421) 373,366,337 401,286,454
Cash and cash equivalents 5,023,387 117,047,920
Receivables 283,987 332,873
Other assets 4,019,378 3,656,308
------------- -------------
Totals $ 382,693,089 $ 522,323,555
============= =============
Liabilities and Shareholders' Equity
Note payable to bank $ -- $ 100,000,000
Accrued interest and other liabilities 2,061,703 1,961,382
Income taxes payable 288,980 --
Deferred income taxes 105,301,157 119,339,357
Subordinated debenture 5,000,000 5,000,000
------------- -------------
Total liabilities 112,651,840 226,300,739
------------- -------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,244,416 shares
at December 31, 1998 and 4,225,316 shares
at March 31, 1998 4,244,416 4,225,316
Additional capital 6,173,747 5,512,409
Undistributed net investment income 4,330,410 5,261,898
Undistributed net realized gain on investments 67,093,654 66,598,460
Unrealized appreciation of investments -
net of deferred income taxes 195,232,324 221,458,035
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $70.93 per share on the 3,807,051 shares
outstanding at December 31, 1998, and $78.15
per share on the 3,787,951 shares outstanding
at March 31, 1998 270,041,249 296,022,816
------------- -------------
Totals $ 382,693,089 $ 522,323,555
============= =============
(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
1998 1997 1998 1997
---- ---- ---- ----
Investment income:
Interest $ 266,174 $ 565,822 $ 990,815 $ 1,555,491
Dividends 385,072 345,401 1,579,387 1,443,639
Management and directors' fees 124,850 163,600 415,300 433,300
------------ ------------ ------------ ------------
776,096 1,074,823 2,985,502 3,432,430
------------ ------------ ------------ ------------
Operating expenses
Interest 103,104 103,103 315,305 308,214
Salaries 406,783 578,000 913,202 996,124
Net pension expense (benefit) (77,906) (78,378) (233,719) (235,133)
Other operating expenses 194,420 176,836 559,991 418,274
------------ ------------ ------------ ------------
626,401 779,561 1,554,779 1,487,479
------------ ------------ ------------ ------------
Income before income taxes 149,695 295,262 1,430,723 1,944,951
Income tax expense 27,300 27,525 81,800 84,249
------------ ------------ ------------ ------------
Net investment income $ 122,395 $ 267,737 $ 1,348,923 $ 1,860,702
============ ============ ============ ============
Proceeds from disposition of
investments $ -- $ 227,833 $ 761,837 $ 16,669,892
Cost of investments sold -- 4,085,592 -- 6,764,823
------------ ------------ ------------ ------------
Realized gain (loss) on investments
before income taxes -- (3,857,759) 761,837 9,905,069
Income tax expense (benefit) -- (1,396,813) 266,643 3,420,177
------------ ------------ ------------ ------------
Net realized gain (loss) on investments -- (2,460,946) 495,194 6,484,892
------------ ------------ ------------ ------------
Increase (decrease) in unrealized appreciation
of investments before income taxes 3,587,928 10,356,201 (40,345,711) 70,439,078
Increase (decrease) in deferred income taxes
on appreciation of investments 1,256,000 3,624,000 (14,120,000) 24,653,000
------------ ------------ ------------ ------------
Net increase (decrease) in unrealized
appreciation of investments 2,331,928 6,732,201 (26,225,711) 45,786,078
------------ ------------ ------------ ------------
Net realized and unrealized gain (loss)
on investments $ 2,331,928 $ 4,271,255 $(25,730,517) $ 52,270,970
============ ============ ============ ============
Increase (decrease) in net assets from
operations $ 2,454,323 $ 4,538,992 $(24,381,594) $ 54,131,672
============ ============ ============ ============
(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, 1998 March 31, 1998
----------------- --------------
(Unaudited)
Operations
Net investment income $ 1,348,923 $ 2,726,144
Net realized gain on investments 495,194 6,484,892
Net increase (decrease) in unrealized
appreciation of investments (26,225,711) 69,387,923
------------- -------------
Increase (decrease) in net assets from
operations (24,381,594) 78,598,959
Distributions from:
Undistributed net investment income (2,280,411) (2,268,451)
Capital share transactions
Exercise of employee stock options 680,438 720,188
------------- -------------
Increase (decrease) in net assets (25,981,567) 77,050,696
Net assets, beginning of period 296,022,816 218,972,120
------------- -------------
Net assets, end of period $ 270,041,249 $ 296,022,816
============= =============
(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
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
Cash flows from operating activities
Increase (decrease) in net assets from operations $ 2,454,323 $ 4,538,992 $ (24,381,594) $ 54,131,672
Adjustments to reconcile increase (decrease) in
net assets from operations to net cash provided
by operating activities:
Depreciation and amortization 6,178 5,942 18,533 17,827
Net pension benefit (77,906) (78,378) (233,719) (235,133)
Net realized and unrealized (gain) loss on
investments (2,331,929) (4,271,255) 25,730,516 (52,270,970)
(Increase) decrease in receivables 130,098 (29,784) 48,886 (82,857)
(Increase) decrease in other assets 27,475 15,884 (34,968) (6,172)
Increase (decrease) in accrued interest
and other liabilities 152,713 262,693 9,742 161,355
Deferred income taxes 27,300 27,500 81,800 82,300
------------- ------------- ------------- -------------
Net cash provided by operating activities 388,252 471,594 1,239,196 1,798,022
------------- ------------- ------------- -------------
Cash flows from investing activities
Proceeds from disposition of investments -- 227,833 761,837 16,669,892
Purchases of securities (1,897,860) (6,580,349) (13,170,132) (7,803,426)
Maturities of securities 293,000 585,987 744,539 1,585,366
------------- ------------- ------------- -------------
Net cash provided (used) by investing activities (1,604,860) (5,766,529) (11,663,756) 10,451,832
------------- ------------- ------------- -------------
Cash flows from financing activities
Decrease in note payable to bank (40,000,000) -- (100,000,000) --
Distributions from undistributed net
investment income (1,522,821) (1,515,041) (2,280,411) (2,268,451)
Proceeds from exercise of employee
stock options 498,750 548,625 680,438 707,719
------------- ------------- ------------- -------------
Net cash used by financing activities (41,024,071) (966,416) (101,599,973) (1,560,732)
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents (42,240,679) (6,261,351) (112,024,533) 10,689,122
Cash and cash equivalents at beginning
of period 47,264,066 30,959,954 117,047,920 14,009,481
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 5,023,387 $ 24,698,603 $ 5,023,387 $ 24,698,603
============= ============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 207,638 $ 200,548 $ 424,926 $ 400,000
Income taxes $ 5,000 $ 2,000 $ 13,500 $ 8,022
(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 Nine Months Ended
December 31 December 31
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
Investment income $ .20 $ .27 $ .78 $ .90
Operating expenses (.15) (.18) (.33) (.31)
Interest expense (.02) (.02) (.08) (.08)
Income taxes -- -- (.02) (.02)
--------- --------- --------- ---------
Net investment income .03 .07 .35 .49
Net realized gain (loss) on investments -- (.66) .13 1.71
Net increase (decrease) in unrealized
appreciation of investments .61 1.74 (6.89) 12.09
Distributions from undistributed
net investment income (.40) (.40) (.60) (.60)
Exercise of employee stock options (1) (.13) (.07) (.21) (.13)
--------- --------- --------- ---------
Net increase (decrease) in net asset value .11 .68 (7.22) 13.56
Net asset value:
Beginning of period 70.82 71.01 78.15 58.13
--------- --------- --------- ---------
End of period $ 70.93 $ 71.69 $ 70.93 $ 71.69
========= ========= ========= =========
Shares outstanding at end of period
(000s omitted) 3,807 3,788 3,807 3,788
(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, 1998 decreased
from the year-ago period primarily because of a decrease in average idle funds
invested. During the nine months ended December 31, 1998 and 1997, the Company
recorded dividend income from the following sources:
Nine Months Ended
December 31
-----------
1998 1997
---- ----
Alamo Group Inc. $ 877,800 $ 798,000
The RectorSeal Corporation 240,000 261,200
Skylawn Corporation 150,000 150,000
Westmarc Communications, Inc. 60,953 60,953
The Whitmore Manufacturing Company 60,000 60,000
Kimberly-Clark Corporation 57,885 -
Texas Shredder, Inc. 30,345 28,125
Other 102,404 85,361
---------- ----------
$1,579,387 $1,443,639
========== ==========
Salaries in the nine months ended December 31, 1998 decreased from
the year-ago period mainly due to a reduction in staff. Other operating expenses
in the nine months ended December 31, 1998 increased from the year-ago period
primarily due to the payment of a finders fee related to an investment.
During the nine months ended December 31, 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.
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
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
Alamo Group Inc. $ -- $ -- $(10,640,000) $ 8,308,000
All Components, Inc. -- -- 1,225,000 950,000
American Homestar Corporation (4,975,766) 657,176 (5,820,707) 3,786,589
Amfibe, Inc. (2,400,000) -- (2,400,000) 2,400,000
Balco, Inc. 1,517,760 -- 3,422,440 --
Dennis Tool Company (800,000) -- (2,799,944) --
Encore Wire Corporation (300,000) -- (16,288,000) 17,279,000
Intelligent Reasoning Systems, Inc. (1,542,754) -- (1,542,754) --
Kimberly-Clark Corporation 1,080,520 130,708 337,662 911,705
Mail-Well, Inc. 2,085,140 5,726,000 (10,407,860) 14,020,000
Mylan Laboratories, Inc. 256,572 (192,429) 1,090,431 777,734
Palm Harbor Homes, Inc. -- -- (4,713,000) 28,656,000
PETsMART, Inc. 2,514,659 (1,921,771) 40,890 (8,382,194)
Tele-Communications-LM Group 955,547 459,844 1,189,687 1,105,312
Tele-Communications-TCI Group 1,853,727 851,713 2,777,013 1,054,659
Tele-Communications-TCI Ventures 744,881 503,408 785,808 1,853,991
Texas Shredder, Inc. -- -- -- 1,125,000
The Whitmore Manufacturing Co. 800,000 -- 2,000,000 --
During the quarter ended December 31, 1998, the Company made additional
investments of $1,897,860 in existing portfolio companies.
The Company has agreed, subject to certain conditions, to invest up to
$2,900,000 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 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 5, 1999 By: /s/ William R. Thomas
---------------------------
William R. Thomas, President
Date: February 5, 1999 By: /s/ Tim Smith
---------------------------
Tim Smith, Vice President
& Secretary-Treasurer
9
6
0000017313
Capital Southwest Corporation
1
US DOLLARS
3-MOS
MAR-31-1998
APR-01-1998
DEC-31-1998
1
73,580,014
373,366,337
283,987
4,019,378
5,023,387
382,693,089
0
5,000,000
107,651,840
112,651,840
0
3,384,861
3,807,951
3,787,951
4,330,410
0
67,093,654
0
195,232,324
270,041,249
1,579,387
990,815
415,300
1,554,779
1,348,923
495,194
(26,225,711)
(24,381,594)
0
2,280,411
0
0
14,000
0
0
(24,381,594)
5,261,898
66,598,460
0
0
0
315,305
1,554,779
0
78.15
.35
(6.76)
(.60)
0
0
70.93
0
0
0
