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
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For the Quarter Ended June 30, 1999 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, 1999
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
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Assets June 30, 1999 March 31, 1999
------------- --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: June 30, 1999 - $21,890,818,
March 31, 1999 - $22,130,818) $ 231,588,359 $ 231,819,359
Companies 5% to 25% owned
(Cost: June 30, 1999 - $12,941,914,
March 31, 1999 - $18,841,914) 19,696,160 31,596,160
Companies less than 5% owned
(Cost: June 30, 1999 - $33,253,282
March 31, 1999 - $32,607,282) 93,867,326 86,862,983
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Total investments
(Cost: June 30, 1999 - $68,086,014,
March 31, 1999 - $73,580,014) 345,151,845 350,278,502
Cash and cash equivalents 18,849,617 6,050,443
Receivables 377,028 315,707
Other assets 4,273,988 4,141,136
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Totals $ 368,652,478 $ 360,785,788
============= =============
Liabilities and Shareholders' Equity
Accrued interest and other liabilities $ 1,890,403 $ 2,023,625
Income taxes payable 3,013,220 282,741
Deferred income taxes 97,403,757 97,247,457
Subordinated debenture 5,000,000 5,000,000
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Total liabilities 107,307,380 104,553,823
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Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,252,416 shares
at June 30, 1999 and March 31, 1999 4,252,416 4,252,416
Additional capital 6,450,747 6,450,747
Undistributed net investment income 4,527,605 4,743,205
Undistributed net realized gain on investments 72,683,799 67,593,409
Unrealized appreciation of investments -
net of deferred income taxes 180,463,833 180,225,490
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
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Net assets at market or fair value, equivalent
to $68.50 per share at June 30, 1999, and
$67.16 per share at March 31, 1999 on the
3,815,051 shares outstanding 261,345,098 256,231,965
------------- -------------
Totals $ 368,652,478 $ 360,785,788
============= =============
(See Notes to Consolidated Financial Statements)
2
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
-------------------------------------
(Unaudited)
Three Months Ended
June 30
1999 1998
---- ----
Investment income:
Interest $ 331,288 $ 402,847
Dividends 403,319 820,747
Management and directors' fees 159,076 137,350
------------ ------------
893,683 1,360,944
------------ ------------
Operating expenses:
Interest 102,008 102,008
Salaries 163,623 223,819
Net pension expense (benefit) (77,906) (78,378)
Other operating expenses 131,248 245,382
------------ ------------
318,973 492,831
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Income before income taxes 574,710 868,113
Income tax expense 27,300 27,400
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Net investment income $ 547,410 $ 840,713
============ ============
Proceeds from disposition of investments $ 12,885,369 $ 761,837
Cost of investments sold 5,054,000 --
------------ ------------
Realized gain on investments before income taxes 7,831,369 761,837
Income tax expense 2,740,979 266,643
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Net realized gain on investments 5,090,390 495,194
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Increase in unrealized appreciation
of investments before income taxes 367,343 4,616,353
Increase in deferred income
taxes on appreciation of investments 129,000 1,617,000
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Net increase in unrealized appreciation of
investments 238,343 2,999,353
------------ ------------
Net realized and unrealized gain
on investments $ 5,328,733 $ 3,494,547
============ ============
Increase in net assets from operations $ 5,876,143 $ 4,335,260
============ ============
(See Notes to Consolidated Financial Statements)
3
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Net Assets
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Three Months Ended Year Ended
June 30, 1999 March 31, 1999
------------- --------------
(Unaudited)
Operations
Net investment income $ 547,410 $ 1,761,718
Net realized gain on investments 5,090,390 994,949
Net increase (decrease) in unrealized appreciation
of investments 238,343 (41,232,545)
------------- -------------
Increase (decrease) in net assets from operations 5,876,143 (38,475,878)
Distributions from:
Undistributed net investment income (763,010) (2,280,411)
Capital share transactions
Exercise of employee stock options -- 965,438
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Increase (decrease) in net assets 5,113,133 (39,790,851)
Net assets, beginning of period 256,231,965 296,022,816
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Net assets, end of period $ 261,345,098 $ 256,231,965
============= =============
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
June 30
-------
1999 1998
---- ----
Cash flows from operating activities
Increase in net assets from operations $ 5,876,143 $ 4,335,260
Adjustments to reconcile increase in net assets
from operations to net cash provided by
operating activities:
Depreciation and amortization 6,975 5,825
Net pension benefit (77,906) (78,378)
Net realized and unrealized gain
on investments (5,328,733) (3,494,547)
Increase in receivables (61,321) (314,318)
Increase in other assets (24,282) (61,387)
Decrease in accrued interest
and other liabilities (181,361) (253,243)
Deferred income taxes 27,300 27,400
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Net cash provided by operating activities 236,815 166,612
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Cash flows from investing activities
Proceeds from disposition of investments 12,885,369 761,837
Purchases of securities (400,000) (6,422,749)
Maturities of securities 840,000 451,539
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Net cash provided (used) by investing activities 13,325,369 (5,209,373)
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Cash flows from financing activities
Decrease in note payable to bank -- (100,000,000)
Distributions from undistributed net investment income (763,010) (757,590)
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Net cash used by financing activities (763,010) (100,757,590)
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Net increase (decrease) in cash and cash
equivalents 12,799,174 (105,800,351)
Cash and cash equivalents at beginning
of period 6,050,443 117,047,920
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Cash and cash equivalents at end of period $ 18,849,617 $ 11,247,569
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 199,452 $ 217,288
Income taxes $ 10,500 $ 8,500
(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, 1999. 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
-------
1999 1998
---- ----
Investment income $ .23 $ .36
Operating expenses (.05) (.10)
Interest expense (.03) (.03)
Income taxes (.01) (.01)
------- -------
Net investment income .14 .22
Net realized gain on investments 1.34 .13
Net increase in unrealized appreciation
of investments .06 .79
Distributions from undistributed
net investment income (.20) (.20)
------- -------
Net increase in net asset value 1.34 .94
Net asset value:
Beginning of period 67.16 78.15
------- -------
End of period $68.50 $79.09
====== ======
Shares outstanding at end of period
(000s omitted) 3,815 3,788
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net asset value at June 30, 1999 was $261,345,098, equivalent to $68.50
per share after deducting an allowance of $25.32 per share for deferred taxes on
net unrealized appreciation. Assuming reinvestment of all dividends and tax
credits on retained long term capital gains, this represents a decrease of 12.7%
during the past twelve months and an increase of 2.3% during the past three
months.
June 30, June 30,
1999 1998
---- ----
Net assets $261,345,098 $299,600,486
Shares outstanding 3,815,051 3,787,951
Net assets per share $68.50 $79.09
Interest income in the three months ended June 30, 1999 decreased from
the year-ago period primarily because of a decrease in average idle funds
invested. During the three months ended June 30, 1999 and 1998, the Company
recorded dividend income from the following sources:
Three Months Ended
June 30
-------
1999 1998
---- ----
Alamo Group Inc. $292,600 $292,600
Kimberly-Clark Corporation 20,067 19,295
The RectorSeal Corporation -- 240,000
Skylawn Corporation -- 150,000
The Whitmore Manufacturing Company -- 60,000
AT&T 29,314 --
TCI Holdings, Inc./Westmarc
Communications, Inc. 20,318 20,318
Other 41,020 38,534
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$403,319 $820,747
========== ==========
Salaries in the three months ended June 30, 1999 decreased from the
year-ago period primarily due to a reduction in staff. Other operating expenses
in the three months ended June 30, 1999 decreased from the year-ago period
primarily due to payment of a finders fee related to an investment.
During the three months ended June 30, 1999, the Company reported a
realized gain before income taxes of $7,831,369. 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
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
-------
1999 1998
---- ----
AT&T/Tele-Communications - TCI Group 346,993 837,399
AT&T-Liberty Media Group/Tele-Communications
LM & TCI Ventures Goup 3,541,206 774,859
American Homestar Corporation (375,530) 985,765
Balco, Inc. -- 1,904,680
Dyntec, Inc. (3,749,998) --
Encore Wire Corporation -- (2,104,000)
Kimberly-Clark Corporation 699,444 (328,015)
Mail-Well, Inc. 2,097,000 2,082,000
Mylan Laboratories, Inc. (120,268) 930,074
PETsMART, Inc. 1,431,106 (470,221)
During the quarter ended June 30, 1999, the Company made a new
investment of $100,000 and an additional investment of $300,000 in an existing
portfolio company.
The Company has agreed, subject to certain conditions, to invest up to
$6,000,000 in six 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 on the Company's
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: August 5, 1999 By: /s/ William R. Thomas
-------------------- -------------------------------------------------
William R. Thomas, President
Date: August 5, 1999 By: /s/ Tim Smith
-------------------- -------------------------------------------------
Tim Smith, Vice President and Secretary-Treasurer
9
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.6 0000017313 Capital Southwest Corporation 1 US Dollars 3-MOS MAR-31-1999 APR-01-1999 JUN-30-1999 1 68,086,014 345,151,845 377,028 4,273,988 18,849,617 368,652,478 0 5,000,000 102,307,380 107,307,380 0 3,669,861 3,815,051 3,815,051 4,527,605 0 72,683,799 0 180,463,833 261,345,098 403,319 331,288 159,076 318,973 547,410 5,090,390 238,343 5,876,143 0 763,010 0 0 0 0 0 5,113,133 4,743,205 67,593,409 0 0 0 102,008 318,973 0 67.16 .14 1.40 (.20) 0 0 68.50 0 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0