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 June 30, 2001 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.
3,815,051 shares of Common Stock, $1 Par Value as of July 31, 2001
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
----------------------------------------------
Assets June 30, 2001 March 31, 2001
------------- --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: June 30, 2001 - $23,194,865,
March 31, 2001 - $23,140,865) $ 223,542,759 $ 205,273,759
Companies 5% to 25% owned
(Cost: June 30, 2001 - $17,642,756,
March 31, 2001 - $17,642,756) 21,209,004 19,623,004
Companies less than 5% owned
(Cost: June 30, 2001 - $47,111,954,
March 31, 2001 - $46,818,025) 94,766,735 91,020,746
------------- -------------
Total investments
(Cost: June 30, 2001 - $87,949,575,
March 31, 2001 - $87,601,646) 339,518,498 315,917,509
Cash and cash equivalents 61,804,775 1,137,767
Receivables 135,591 264,377
Other assets 5,517,078 5,348,315
------------- -------------
Totals $ 406,975,942 $ 322,667,968
============= =============
Liabilities and Shareholders' Equity
Notes payable to bank $ 66,500,000 $ 5,000,000
Notes payable to portfolio companies 6,000,000 6,000,000
Accrued interest and other liabilities 1,981,011 2,135,052
Deferred income taxes 85,909,903 77,924,303
Subordinated debenture 5,000,000 5,000,000
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Total liabilities 165,390,914 96,059,355
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Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,252,416 shares
at June 30, 2001 and March 31, 2001 4,252,416 4,252,416
Additional capital 6,450,747 6,450,747
Undistributed net investment income 3,216,928 3,550,573
Undistributed net realized gain on investments 70,382,314 70,382,314
Unrealized appreciation of investments -
net of deferred income taxes 164,315,925 149,005,865
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $63.32 per share at June 30, 2001, and
$59.40 per share at March 31, 2001 on the
3,815,051 shares outstanding 241,585,028 226,608,613
------------- -------------
Totals $ 406,975,942 $ 322,667,968
============= =============
(See Notes to Consolidated Financial Statements)
2
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
-------------------------------------
(Unaudited)
Three Months Ended
June 30,
2001 2000
---- ----
Investment income:
Interest $ 91,258 $ 166,520
Dividends 705,879 288,336
Management and directors' fees 139,100 139,100
------------ ------------
936,237 593,956
------------ ------------
Operating expenses:
Interest 271,801 252,546
Salaries 193,333 173,250
Net pension benefit (121,542) (108,996)
Other operating expenses 120,680 195,287
------------ ------------
464,272 512,087
------------ ------------
Income before income taxes 471,965 81,869
Income tax expense 42,600 56,493
------------ ------------
Net investment income $ 429,365 $ 25,376
============ ============
Proceeds from disposition of investments $ -- $ 7,046,708
Cost of investments sold -- 4,827,045
------------ ------------
Realized gain on investments before income taxes -- 2,219,663
Income tax expense -- 777,443
------------ ------------
Net realized gain on investments -- 1,442,220
------------ ------------
Increase (decrease) in unrealized appreciation
of investments before income taxes 23,253,060 (2,608,110)
Increase (decrease) in deferred income
taxes on appreciation of investments 7,943,000 (1,145,000)
------------ ------------
Net increase (decrease) in unrealized
appreciation of investments 15,310,060 (1,463,110)
------------ ------------
Net realized and unrealized gain (loss)
on investments $ 15,310,060 $ (20,890)
============ ============
Increase in net assets from operations $ 15,739,425 $ 4,486
============ ============
(See Notes to Consolidated Financial Statements)
3
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Net Assets
------------------------------------------------
Three Months Ended Year Ended
June 30, 2001 March 31, 2001
------------- --------------
(Unaudited)
Operations
Net investment income $ 429,365 $ 1,722,500
Net realized loss on investments -- (3,230,987)
Net increase (decrease) in unrealized appreciation
of investments 15,310,060 (6,469,835)
------------- -------------
Increase (decrease) in net assets from operations 15,739,425 (7,978,322)
Distributions from:
Undistributed net investment income (763,010) (2,289,031)
------------- -------------
Increase (decrease) in net assets 14,976,415 (10,267,353)
Net assets, beginning of period 226,608,613 236,875,966
------------- -------------
Net assets, end of period $ 241,585,028 $ 226,608,613
============= =============
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Three Months Ended
June 30,
2001 2000
---- ----
Cash flows from operating activities
Increase in net assets from operations $ 15,739,425 $ 4,486
Adjustments to reconcile increase in net assets
from operations to net cash provided by (used in)
operating activities:
Depreciation and amortization 5,821 7,221
Net pension benefit (121,542) (108,996)
Net realized and unrealized (gain) loss
on investments (15,310,060) 20,890
Decrease in receivables 128,786 108,940
Increase in other assets (15,104) (29,703)
Decrease in accrued interest
and other liabilities (139,492) (185,137)
Decrease in accrued pension cost (52,487) (52,487)
Deferred income taxes 42,600 56,493
------------ ------------
Net cash provided by (used in) operating activities 277,947 (178,293)
------------ ------------
Cash flows from investing activities
Proceeds from disposition of investments -- 7,046,708
Purchases of securities (497,929) (10,109,051)
Maturities of securities 150,000 240,000
------------ ------------
Net cash used in investing activities (347,929) (2,822,343)
------------ ------------
Cash flows from financing activities
Increase (decrease) in notes payable to bank 61,500,000 (60,000,000)
Increase in notes payable to portfolio companies -- 4,500,000
Distributions from undistributed net investment income (763,010) (763,010)
------------ ------------
Net cash provided by (used in) financing activities 60,736,990 (56,263,010)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 60,667,008 (59,263,646)
Cash and cash equivalents at beginning
of period 1,137,767 63,986,715
------------ ------------
Cash and cash equivalents at end of period $ 61,804,775 $ 4,723,069
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 353,874 $ 361,104
Income taxes $ 0 $ 0
(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 accounting principles generally accepted in the United
States of America 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 accounting principles generally accepted in the United States of
America 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, 2001. 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
June 30
-------
2001 2000
---- ----
Investment income $ .24 $ .15
Operating expenses (.05) (.07)
Interest expense (.07) (.07)
Income taxes (.01) (.01)
-------- --------
Net investment income .11 -
Net realized gain on investments - .38
Net increase (decrease) in unrealized appreciation
of investments 4.01 (.38)
Distributions from undistributed
net investment income (.20) (.20)
-------- --------
Net increase (decrease) in net asset value 3.92 (.20)
Net asset value:
Beginning of period 59.40 62.09
-------- --------
End of period $ 63.32 $ 61.89
======== ========
Shares outstanding at end of period
(000s omitted) 3,815 3,815
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net asset value at June 30, 2001 was $241,585,028, equivalent to $63.32
per share after deducting an allowance of $22.87 per share for deferred taxes on
net unrealized appreciation. Assuming reinvestment of all dividends, this
represents an increase of 3.4% during the past twelve months and 6.9% during the
past three months.
June 30, June 30,
2001 2000
---- ----
Net assets $241,585,028 $236,117,442
Shares outstanding 3,815,051 3,815,051
Net assets per share $63.32 $61.89
Interest income in the three months ended June 30, 2001 decreased from
the year-ago period primarily because of a decrease in average idle funds
invested. During the three months ended June 30, 2001 and 2000, the Company
recorded dividend income from the following sources:
Three Months Ended
June 30
-------
2001 2000
---- ----
AT&T Corp. $ 4,997 $ 29,314
Alamo Group Inc. 169,278 169,278
Kimberly-Clark Corporation 21,610 20,839
The RectorSeal Corporation 240,000 -
Skylawn Corporation 150,000 -
TCI Holdings, Inc. 20,318 20,318
The Whitmore Manufacturing Company 60,000 -
Other 39,676 48,587
---------- ----------
$ 705,879 $ 288,336
========== ==========
Interest expense in the three months ended June 30, 2001 increased from
the year-ago period due to increased borrowings from the bank. Other operating
expenses in the three months ended June 30, 2001 decreased from the year-ago
period primarily due to legal fees incurred in the prior year related to
documentation of the exchange of an investment.
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 changes in deferred
taxes and excluding the effect of gains or losses realized during the periods)
by portfolio company:
Three Months Ended
June 30
-------
2001 2000
---- ----
AT&T Corp. 93,271 (3,306,142)
AT&T-Liberty Media Group 2,364,168 (3,577,582)
Alamo Group Inc. - 1,410,000
Concert Industries Ltd. 1,430,000 -
Encore Wire Corporation 4,086,000 (2,725,000)
Mail-Well, Inc. (1,048,000) -
Media Recovery, Inc. - 5,000,000
Mylan Laboratories, Inc. 292,492 (1,202,681)
Organized Living, Inc. (2,500,000) -
Palm Harbor Homes, Inc. 15,710,000 -
PETsMART, Inc. 1,668,262 204,444
The RectorSeal Corporation 2,500,000 3,500,000
Skylawn Corporation - 3,000,000
During the quarter ended June 30, 2001, the Company made new
investments of $26,000 and additional investments of $471,929 in existing
portfolio companies.
On July 2, 2001, the Company repaid the $60,000,000 note payable to
bank from its cash and cash equivalents.
The Company has agreed, subject to certain conditions, to invest up to
$3,686,874 in six portfolio companies.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is subject to financial market risks, including changes in
marketable equity security prices. The Company does not use derivative financial
instruments to mitigate any of these risks. The return on the Company's
investments is not affected by foreign currency fluctuations.
The Company's investment in portfolio securities consists of fixed rate
debt securities which totaled $5,497,971 at June 30, 2001, equivalent to 1.62%
of the value of the Company's total investments. Since these debt securities
usually have relatively high fixed rates of interest, minor changes in market
yields of publicly-traded debt securities have little or no effect on the values
of debt securities in the Company's portfolio and no effect on interest income.
On the other hand, significant changes in the market yields of publicly-traded
debt securities may have a material effect on the values of debt securities in
our portfolio. The Company's investments in debt securities are generally held
to maturity and their fair values are determined on the basis of the terms of
the debt security and the financial condition of the issuer.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
A portion of the Company's investment portfolio consists of debt and
equity securities of private companies. The Company anticipates little or no
effect on the values of these investments from modest changes in public market
equity valuations. Should significant changes in market valuations of comparable
publicly-owned companies occur, there may be a corresponding effect on
valuations of private companies, which would affect the value and the amount and
timing of proceeds eventually realized from these investments. A portion of the
Company's investment portfolio also consists of restricted common stocks and
warrants to purchase common stocks of publicly-owned companies. The fair values
of these restricted securities are influenced by the nature of applicable resale
restrictions, the underlying earnings and financial condition of the issuer, and
the market valuations of comparable publicly-owned companies. A portion of the
Company's investment portfolio also consists of unrestricted, freely marketable
common stocks of publicly-owned companies. These freely marketable investments
are directly exposed to equity price risks, in that a change in an issuer's
public market equity price would result in an identical change in the fair value
of the Company's investment in such security.
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
9
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: August 10, 2001 By: /s/ William R. Thomas
---------------------------- ---------------------------------------
William R. Thomas, President
Date: August 10, 2001 By: /s/ Susan K. Hodgson
---------------------------- ---------------------------------------
Susan K. Hodgson, Secretary-Treasurer
10