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, 2002 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. 3,829,051 shares of Common Stock, $1 Par Value as of July 31, 2002PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Financial Condition ---------------------------------------------- Assets June 30, 2002 March 31, 2002 -------------- -------------- (Unaudited) Investments at market or fair value Companies more than 25% owned (Cost: June 30, 2002 - $23,114,865 March 31, 2002 - $23,194,865) $ 228,731,000 $ 243,024,999 Companies 5% to 25% owned (Cost: June 30, 2002 - $27,120,124 March 31, 2002 - $27,167,649) 30,032,003 34,943,003 Companies less than 5% owned (Cost: June 30, 2002 - $29,907,047, March 31, 2002 - $31,831,341) 64,333,787 69,513,064 -------------- -------------- Total investments (Cost: June 30, 2002 - $80,142,036, March 31, 2002 - $82,193,855) 323,096,790 347,481,066 Cash and cash equivalents 66,548,774 1,977,180 Receivables 135,058 1,753,297 Other assets 6,140,438 5,971,361 -------------- -------------- Totals $ 395,921,060 $ 357,182,904 ============== ============== Liabilities and Shareholders' Equity Notes payable to bank $ 73,500,000 $ 6,500,000 Notes payable to portfolio company 2,500,000 2,500,000 Accrued interest and other liabilities 1,887,855 2,018,140 Deferred income taxes 82,679,325 90,673,722 Subordinated debenture -- 5,000,000 -------------- -------------- Total liabilities 160,567,180 106,691,862 -------------- -------------- Shareholders' equity Common stock, $1 par value: authorized, 5,000,000 shares; issued, 4,266,416 shares at June 30, 2002 and March 31, 2002 4,266,416 4,266,416 Additional capital 6,935,497 6,935,497 Undistributed net investment income 3,007,367 3,297,838 Undistributed net realized gain on investments 69,526,146 69,844,380 Unrealized appreciation of investments - net of deferred income taxes 158,651,756 173,180,213 Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302) -------------- -------------- Net assets at market or fair value, equivalent to $61.47 per share at June 30, 2002, and $65.42 per share at March 31, 2002 on the 3,829,051 shares outstanding 235,353,880 250,491,042 -------------- -------------- Totals $ 395,921,060 $ 357,182,904 ============== ============== (See Notes to Consolidated Financial Statements) 2
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Operations ------------------------------------- (Unaudited) Three Months Ended June 30, 2002 2001 ------------ ------------ Investment income: Interest $ 64,675 $ 91,258 Dividends 708,992 705,879 Management and directors' fees 131,350 139,100 ------------ ------------ 905,017 936,237 ------------ ------------ Operating expenses: Salaries 200,750 193,333 Net pension benefit (126,135) (121,542) Other operating expenses 149,907 120,680 ------------ ------------ 224,522 192,471 ------------ ------------ Income before interest expense and income taxes 680,495 743,766 Interest expense 160,956 271,801 ------------ ------------ Income before income taxes 519,539 471,965 Income tax expense 44,200 42,600 ------------ ------------ Net investment income $ 475,339 $ 429,365 ============ ============ Proceeds from disposition of investments $ 1,459,220 $ -- Cost of investments sold 2,012,051 -- ------------ ------------ Realized loss on investments before income taxes (552,831) -- Income tax benefit (234,597) -- ------------ ------------ Net realized loss on investments (318,234) -- ------------ ------------ Increase (decrease) in unrealized appreciation of investments before income taxes (22,332,457) 23,253,060 Increase (decrease) in deferred income taxes on appreciation of investments (7,804,000) 7,943,000 ------------ ------------ Net increase (decrease) in unrealized appreciation of investments (14,528,457) 15,310,060 ------------ ------------ Net realized and unrealized gain (loss) on investments $(14,846,691) $ 15,310,060 ============ ============ Increase (decrease) in net assets from operations $(14,371,352) $ 15,739,425 ============ ============ (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, 2002 March 31, 2002 ------------------ ----------------- (Unaudited) Operations Net investment income $ 475,339 $ 2,041,896 Net realized loss on investments (318,234) (537,934) Net increase (decrease) in unrealized appreciation of investments (14,528,457) 24,174,348 ------------------ ----------------- Increase (decrease) in net assets from operations (14,371,352) 25,678,310 Distributions from: Undistributed net investment income (765,810) (2,294,631) Capital share transactions Exercise of employee stock options -- 498,750 ------------------ ----------------- Increase (decrease) in net assets (15,137,162) 23,882,429 Net assets, beginning of period 250,491,042 226,608,613 ------------------ ----------------- Net assets, end of period $ 235,353,880 $ 250,491,042 ================== ================= (See Notes to Consolidated Financial Statements) 4
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows ------------------------------------- (Unaudited) Three Months Ended June 30, -------- 2002 2001 ------------ ------------ Cash flows from operating activities Increase (decrease) in net assets from operations $(14,371,352) $ 15,739,425 Adjustments to reconcile increase (decrease) in net assets from operations to net cash provided by operating activities: Depreciation and amortization 5,399 5,821 Net pension benefit (126,135) (121,542) Net realized and unrealized (gain) loss on investments 14,846,691 (15,310,060) Decrease in receivables 1,618,239 128,786 Increase in other assets (16,630) (15,104) Decrease in accrued interest and other liabilities (120,175) (139,492) Decrease in accrued pension cost (41,820) (52,487) Deferred income taxes 44,200 42,600 ------------ ------------ Net cash provided by operating activities 1,838,417 277,947 ------------ ------------ Cash flows from investing activities Proceeds from disposition of investments 1,459,220 -- Purchases of securities (40,233) (497,929) Maturities of securities 80,000 150,000 ------------ ------------ Net cash provided by (used in) investing activities 1,498,987 (347,929) ------------ ------------ Cash flows from financing activities Increase in notes payable to bank 67,000,000 61,500,000 Decrease in subordinated debenture (5,000,000) -- Distributions from undistributed net investment income (765,810) (763,010) ------------ ------------ Net cash provided by financing activities 61,234,190 60,736,990 ------------ ------------ Net increase in cash and cash equivalents 64,571,594 60,667,008 Cash and cash equivalents at beginning of period 1,977,180 1,137,767 ------------ ------------ Cash and cash equivalents at end of period $ 66,548,774 $ 61,804,775 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 276,064 $ 353,874 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 fair 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, 2002. Certain information and footnotes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 ------- 2002 2001 --------- --------- Investment income $ .23 $ .24 Operating expenses (.06) (.05) Interest expense (.04) (.07) Income taxes (.01) (.01) --------- --------- Net investment income .12 .11 Distributions from undistributed net investment income (.20) (.20) Net realized loss on investments (.08) -- Net increase (decrease) in unrealized appreciation of investments after deferred taxes (3.79) 4.01 --------- --------- Increase (decrease) in net asset value (3.95) 3.92 Net asset value: Beginning of period 65.42 59.40 --------- --------- End of period $ 61.47 $ 63.32 ========= ========= Increase (decrease) in deferred taxes on unrealized appreciation $ (2.03) $ 2.08 Deferred taxes on unrealized appreciation: Beginning of period 24.05 20.79 --------- --------- End of period $ 22.02 $ 22.87 ========= ========= Shares outstanding at end of period (000s omitted) 3,829 3,815 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net asset value at June 30, 2002 was $235,353,880, equivalent to $61.47 per share after deducting an allowance of $22.02 per share for deferred taxes on net unrealized appreciation. Assuming reinvestment of all dividends, this represents a decrease of 2.1% during the past twelve months and 5.8% during the past three months. June 30, June 30, 2002 2001 ------------ ------------ Net assets $235,353,880 $241,585,028 Shares outstanding 3,829,051 3,815,051 Net assets per share $ 61.47 $ 63.32 Interest income in the three months ended June 30, 2002 decreased from the year-ago period primarily because of a decrease in loans to portfolio companies. During the three months ended June 30, 2002 and 2001, the Company recorded dividend income from the following sources: Three Months Ended June 30 ------- 2002 2001 -------- -------- AT&T Corp. $ 4,997 $ 4,997 Alamo Group Inc. 169,278 169,278 Kimberly-Clark Corporation 23,154 21,610 The RectorSeal Corporation 240,000 240,000 Skylawn Corporation 150,000 150,000 TCI Holdings, Inc. 20,318 20,318 The Whitmore Manufacturing Company 60,000 60,000 Other 41,245 39,676 -------- -------- $708,992 $705,879 ======== ======== Interest expense in the three months ended June 30, 2002 decreased from the year-ago period primarily due to a decrease in interest rates. Other operating expenses in the three months ended June 30, 2002 increased from the year-ago period primarily due to professional fees related to a prior 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 ------- 2002 2001 ------------ ------------ Balco, Inc. $ 2,000,000 $ -- Concert Industries Ltd. (2,186,000) 1,430,000 Encore Wire Corporation (2,725,000) 4,086,000 Liberty Media Corporation (formerly AT&T-Liberty Media Group) (1,788,368) 2,364,168 Mail-Well, Inc. (1,363,000) (1,048,000) Organized Living, Inc. -- (2,500,000) Palm Harbor Homes, Inc. (15,710,000) 15,710,000 PETsMART, Inc. 1,081,042 1,668,262 The RectorSeal Corporation -- 2,500,000 At June 30, 2002, the value of our investment in Palm Harbor Homes, Inc. was reduced due to the increasingly unfavorable outlook for the manufacturing industry and because Palm Harbor reported its first quarterly loss in 13 years for the three months ended June 30, 2002. Conversely, at June 30, 2001, the value of our Palm Harbor investment had been increased in recognition of Palm Harbor's ability to maintain a reduced but acceptable level of earnings despite the difficult condition of the manufactured housing industry. On June 3, 2002, the Company repaid the $5,000,000 subordinated debenture to the Small Business Administration ("SBA") from its cash and cash equivalents. On July 1, 2002, the Company repaid the $65,000,000 note payable to bank from its cash and cash equivalents. The Company has agreed, subject to certain conditions, to invest up to $5,989,346 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 $2,800,000 at June 30, 2002, equivalent to 0.87% 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. 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 3. Quantitative and Qualitative Disclosure About Market Risk (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) Exhibits Exhibit 99.1- Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer of the Corporation. Exhibit 99.2- Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer of the Corporation. (b) 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 9, 2002 By: /s/ William R. Thomas --------------- ---------------------------------- William R. Thomas, President Date: August 9, 2002 By: /s/ Susan K. Hodgson --------------- ---------------------------------- Susan K. Hodgson, Secretary-Treasurer 10
Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Capital Southwest Corporation (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William R. Thomas, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 9, 2002 By: /s/ William R. Thomas -------------- ------------------------------------------ William R. Thomas, Chief Executive Officer
Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Capital Southwest Corporation (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Susan K. Hodgson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 9, 2002 By: /s/ Susan K. Hodgson -------------- ----------------------------------------- Susan K. Hodgson, Chief Financial Officer