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, 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 October 31, 1999
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
----------------------------------------------
Assets September 30, 1999 March 31, 1999
------------------ --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: September 30, 1999 - $22,480,865,
March 31, 1999 - $22,130,818) $202,562,459 $231,819,359
Companies 5% to 25% owned
(Cost: September 30, 1999 - $14,691,914,
March 31, 1999 - $18,841,914) 20,696,161 31,596,160
Companies less than 5% owned
(Cost: September 30, 1999 - $36,645,282,
March 31, 1999 - $32,607,282) 88,513,911 86,862,983
------------ ------------
Total investments
(Cost: September 30, 1999- $73,818,061,
March 31, 1999 - $73,580,014) 311,772,531 350,278,502
Cash and cash equivalents 40,341,281 6,050,443
Receivables 296,327 315,707
Other assets 4,437,201 4,141,136
------------ ------------
Totals $356,847,340 $360,785,788
============ ============
Liabilities and Shareholders' Equity
Note payable to bank $ 25,000,000 $ --
Accrued interest and other liabilities 2,029,140 2,023,625
Income taxes payable 3,499,583 282,741
Deferred income taxes 83,763,757 97,247,457
Subordinated debenture 5,000,000 5,000,000
------------ ------------
Total liabilities 119,292,480 104,553,823
------------ ------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,252,416 shares
at September 30, 1999 and March 31, 1999 4,252,416 4,252,416
Additional capital 6,450,747 6,450,747
Undistributed net investment income 5,250,285 4,743,205
Undistributed net realized gain on investments 73,593,242 67,593,409
Unrealized appreciation of investments -
net of deferred income taxes 155,041,472 180,225,490
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------ ------------
Net assets at market or fair value, equivalent
to $62.27 per share at September 30, 1999,
and $67.16 per share at March 31, 1999, on the
3,815,051 shares outstanding 237,554,860 256,231,965
------------ ------------
Totals $356,847,340 $360,785,788
============ ============
(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
---------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
Investment income:
Interest $ 189,176 $ 321,794 $ 520,464 $ 724,641
Dividends 720,320 373,568 1,123,639 1,194,315
Management and directors' fees 121,600 153,100 280,676 290,450
------------ ------------ ------------ ------------
1,031,096 848,462 1,924,779 2,209,406
------------ ------------ ------------ ------------
Operating expenses:
Interest 107,274 110,193 209,282 212,201
Salaries 166,254 282,600 329,877 506,419
Net pension expense (benefit) (140,086) (77,435) (217,992) (155,813)
Other operating expenses 125,974 120,189 257,222 365,571
------------ ------------ ------------ ------------
259,416 435,547 578,389 928,378
------------ ------------ ------------ ------------
Income before income taxes 771,680 412,915 1,346,390 1,281,028
Income tax expense 49,000 27,100 76,300 54,500
------------ ------------ ------------ ------------
Net investment income $ 722,680 $ 385,815 $ 1,270,090 $ 1,226,528
============ ============ ============ ============
Proceeds from disposition of investments $ 2,007,144 $ -- $ 14,892,513 $ 761,837
Cost of investments sold 608,000 -- 5,662,000 --
------------ ------------ ------------ ------------
Realized gain on investments before
income taxes 1,399,144 -- 9,230,513 761,837
Income tax expense 489,701 -- 3,230,680 266,643
------------ ------------ ------------ ------------
Net realized gain on investments 909,443 -- 5,999,833 495,194
------------ ------------ ------------ ------------
Decrease in unrealized appreciation
of investments before income taxes (39,111,361) (48,549,992) (38,744,018) (43,933,639)
Decrease in deferred income taxes on
appreciation of investments (13,689,000) (16,993,000) (13,560,000) (15,376,000)
------------ ------------ ------------ ------------
Net decrease in unrealized
appreciation of investments (25,422,361) (31,556,992) (25,184,018) (28,557,639)
------------ ------------ ------------ ------------
Net realized and unrealized loss on
investments $(24,512,918) $(31,556,992) $(19,184,185) $(28,062,445)
============ ============ ============ ============
Decrease in net assets from
operations $(23,790,238) $(31,171,177) $(17,914,095) $(26,835,917)
============ ============ ============ ============
(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, 1999 March 31, 1999
------------------ --------------
(Unaudited)
Operations
Net investment income $ 1,270,090 $ 1,761,718
Net realized gain on investments 5,999,833 994,949
Net decrease in unrealized
appreciation of investments (25,184,018) (41,232,545)
------------- -------------
Decrease in net assets from operations (17,914,095) (38,475,878)
Distributions from:
Undistributed net investment income (763,010) (2,280,411)
Capital share transactions
Exercise of employee stock options -- 965,438
------------- -------------
Decrease in net assets (18,677,105) (39,790,851)
Net assets, beginning of period 256,231,965 296,022,816
------------- -------------
Net assets, end of period $ 237,554,860 $ 256,231,965
============= =============
(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
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Cash flows from operating activities
Decrease in net assets from operations $ (23,790,238) $ (31,171,177) $ (17,914,095) $ (26,835,917)
Adjustments to reconcile decrease
in net assets from operations to net cash
provided by operating activities:
Depreciation and amortization 7,184 6,530 14,159 12,355
Net pension benefit (140,086) (77,435) (217,992) (155,813)
Net realized and unrealized loss
on investments 24,512,918 31,556,992 19,184,185 28,062,445
(Increase) decrease in receivables 80,701 233,106 19,380 (81,212)
(Increase) decrease in other assets 2,777 (1,056) (21,505) (62,443)
Increase (decrease) in accrued interest
and other liabilities 102,311 110,272 (79,050) (142,971)
Deferred income taxes 49,000 27,100 76,300 54,500
------------- ------------- ------------- -------------
Net cash provided by operating activities 824,567 684,332 1,061,382 850,944
------------- ------------- ------------- -------------
Cash flows from investing activities
Proceeds from disposition of investments 2,007,144 -- 14,892,513 761,837
Purchases of securities (6,340,047) (4,849,523) (6,740,047) (11,272,272)
Maturities of securities -- -- 840,000 451,539
------------- ------------- ------------- -------------
Net cash provided (used) by investing
activities (4,332,903) (4,849,523) 8,992,466 (10,058,896)
------------- ------------- ------------- -------------
Cash flows from financing activities
Increase (decrease) in note payable to bank 25,000,000 40,000,000 25,000,000 (60,000,000)
Distributions from undistributed net
investment income -- -- (763,010) (757,590)
Proceeds from exercise of employee
stock options -- 181,688 -- 181,688
------------- ------------- ------------- -------------
Net cash provided (used) by financing activities 25,000,000 40,181,688 24,236,990 (60,575,902)
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents 21,491,664 36,016,497 34,290,838 (69,783,854)
Cash and cash equivalents at beginning
of period 18,849,617 11,247,569 6,050,443 117,047,920
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 40,341,281 $ 47,264,066 $ 40,341,281 $ 47,264,066
============= ============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ -- $ 199,452 $ 217,288
Income taxes $ 6,490 $ -- $ 16,990 $ 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 Six Months Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Investment income $ .27 $ .22 $ .50 $ .58
Operating expenses (.04) (.08) (.09) (.18)
Interest expense (.03) (.03) (.06) (.06)
Income taxes (.01) (.01) (.02) (.02)
--------- --------- --------- ---------
Net investment income .19 .10 .33 .32
Net realized gain on investment .24 -- 1.58 .13
Net decrease in unrealized
appreciation of investments (6.66) (8.32) (6.60) (7.53)
Distributions from undistributed
net investment income -- -- (.20) (.20)
Exercise of employee stock options (1) -- (.05) -- (.05)
--------- --------- --------- ---------
Net decrease in net asset value (6.23) (8.27) (4.89) (7.33)
Net asset value:
Beginning of period 68.50 79.09 67.16 78.15
--------- --------- --------- ---------
End of period $ 62.27 $ 70.82 $ 62.27 $ 70.82
========= ========= ========= =========
Shares outstanding at end of period
(000s omitted) 3,815 3,793 3,815 3,793
(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
Net asset value at September 30, 1999 was $237,554,860, equivalent to
$62.27 per share after deducting an allowance of $21.73 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
11.4% during the past twelve months and a decrease of 7.0% during the past six
months.
September 30, September 30,
1999 1998
---- ----
Net assets $237,554,860 $268,610,997
Shares outstanding 3,815,051 3,793,051
Net assets per share $62.27 $70.82
Interest income in the six months ended September 30, 1999 decreased
from the year-ago period primarily because of the suspension of interest
accruals related to one of our portfolio companies. During the six months ended
September 30, 1999 and 1998, the Company recorded dividend income from the
following sources:
Six Months Ended
September 30
------------
1999 1998
---- ----
AT&T $ 58,628 $ --
Alamo Group Inc. 452,200 585,200
Dennis Tool Company 24,999 --
Kimberly-Clark Corporation 40,134 38,590
The RectorSeal Corporation 240,000 240,000
Skylawn Corporation 150,000 150,000
TCI Holdings, Inc/Westmarc
Communications, Inc. 40,635 40,635
Texas Shredder, Inc. 20,230 20,230
The Whitmore Manufacturing Company 60,000 60,000
Other 36,813 59,660
--------- ----------
$1,123,639 $1,194,315
========== ==========
Salaries in the six months ended September 30, 1999 decreased from the
year-ago period primarily due to reductions in staff. Other operating expenses
in the six months ended September 30, 1999 decreased from the year-ago period
primarily due to the payment in the prior period of a finders fee related to an
investment.
During the six months ended September 30, 1999, the Company reported a
realized gain before income taxes of $9,230,513. 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 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
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
AT&T/Tele-Communications- $(1,640,579) $ 85,887 $ (1,293,586) $ 923,286
TCI Group
AT&T-Liberty Media Group/Tele- 190,522 (499,792) 3,731,728 275,067
Communications LM&TCI
Ventures Group
Alamo Group Inc. 1,834,053 (10,640,000) 1,834,053 (10,640,000)
All Components, Inc. 1,975,000 1,225,000 1,975,000 1,225,000
American Homestar Corporation (2,159,294) (1,830,706) (2,534,824) (844,941)
Amfibe, Inc. (600,000) -- (600,000) --
Balco, Inc. -- -- -- 1,904,680
Dennis Tool Company -- (828,177) -- (828,177)
Dyntec, Inc. -- -- (3,749,998) --
Encore Wire Corporation -- (13,884,000) -- (15,988,000)
Kimberly-Clark Corporation (328,015) (414,843) 371,429 (742,858)
Mail-Well, Inc. -- (14,575,000) 2,097,000 (12,493,000)
Mylan Laboratories, Inc. (1,042,324) (96,215) (1,162,592) 833,859
Palm Harbor Homes, Inc. (31,421,000) (4,713,000) (31,421,000) (4,713,000)
PETsMART, Inc. (4,231,985) (2,003,548) (2,800,879) (2,473,769)
Texas Petrochemical Holdings, Inc. (749,999) -- (749,999) --
The Whitmore Manufacturing Company -- 1,200,000 -- 1,200,000
During the quarter ended September 30, 1999, the Company made new
investments of $2,000,000 and additional investments of $4,340,047 in existing
portfolio companies.
On October 1, 1999, the Company repaid the $25,000,000 note payable to
bank from its cash and cash equivalents.
The Company has agreed, subject to certain conditions, to invest up to
$3,800,000 in seven 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.
8
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 totalled $11,955,970 at September 30, 1999, equivalent to
3.8% 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.
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 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on July 19, 1999, 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 3,380,865 11,002 423,184
Gary L. Martin 3,380,865 11,002 423,184
James M. Nolan 3,380,865 11,002 423,184
William R. Thomas 3,380,865 11,002 423,184
John H. Wilson 3,380,865 11,002 423,184
b. The 1999 Stock Option Plan of the Corporation was
authorized and approved. 3,328,857 35,644 450,550
c. KPMG LLP was approved as the Company's
auditors for the 2000 fiscal year. 3,380,181 7,534 427,336
9
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.
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 5, 1999 By: /s/ William R. Thomas
----------------------------------------
William R. Thomas
President
Date: November 5, 1999 By: /s/ Tim Smith
----------------------------------------
Tim Smith
Vice President & Secretary-Treasurer
10
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. [TYPE]6 0000017313 Capital Southwest Corporation 1 US Dollars 6-MOS MAR-31-1999 APR-01-1999 SEP-30-1999 1 73,818,061 311,772,531 296,327 4,437,201 40,341,281 356,847,340 0 5,000,000 114,292,480 119,292,480 0 3,669,861 3,815,051 3,815,051 5,250,285 0 73,593,242 0 155,041,472 237,554,860 1,123,639 520,464 280,676 578,389 1,270,090 5,999,833 (25,184,018) (17,914,095) 0 763,010 0 0 0 0 0 (18,677,105) 4,743,205 67,593,409 0 0 0 209,282 578,389 0 67.16 .33 (5.02) (.20) 0 0 62.27 0 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0