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, 2000 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, 2000
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
----------------------------------------------
Assets June 30, 2000 March 31, 2000
------------- -------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: June 30, 2000 - $23,140,865,
March 31, 2000 - $23,380,865) $ 208,276,759 $ 200,608,759
Companies 5% to 25% owned
(Cost: June 30, 2000 - $23,329,414,
March 31, 2000 - $22,579,414) 20,785,505 22,760,506
Companies less than 5% owned
(Cost: June 30, 2000 - $43,574,164,
March 31, 2000 - $39,042,158) 97,000,767 100,259,870
------------- -------------
Total investments
(Cost: June 30, 2000 - $90,044,443,
March 31, 2000 - $85,002,437) 326,063,031 323,629,135
Cash and cash equivalents 4,723,069 63,986,715
Receivables 129,654 238,594
Other assets 4,898,205 4,731,360
------------- -------------
Totals $ 335,813,959 $ 392,585,804
============= =============
Liabilities and Shareholders' Equity
Note payable to bank $ -- $ 60,000,000
Notes payable to subsidiaries 9,500,000 5,000,000
Accrued interest and other liabilities 2,018,171 2,220,753
Income taxes payable 566,540 --
Deferred income taxes 82,611,806 83,489,085
Subordinated debenture 5,000,000 5,000,000
------------- -------------
Total liabilities 99,696,517 155,709,838
------------- -------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,252,416 shares
at June 30, 2000 and March 31, 2000 4,252,416 4,252,416
Additional capital 6,450,747 6,450,747
Undistributed net investment income 3,379,470 4,117,104
Undistributed net realized gain on investments 75,055,521 73,613,301
Unrealized appreciation of investments -
net of deferred income taxes 154,012,590 155,475,700
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $61.89 per share at June 30, 2000, and
$62.09 per share at March 31, 2000 on the
3,815,051 shares outstanding 236,117,442 236,875,966
------------- -------------
Totals $ 335,813,959 $ 392,585,804
============= =============
(See Notes to Consolidated Financial Statements)
2
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
-------------------------------------
(Unaudited)
Three Months Ended
June 30,
2000 1999
------------ ------------
Investment income:
Interest $ 166,520 $ 331,288
Dividends 288,336 403,319
Management and directors' fees 139,100 159,076
------------ ------------
593,956 893,683
------------ ------------
Operating expenses:
Interest 252,546 102,008
Salaries 173,250 163,623
Net pension expense (benefit) (108,996) (77,906)
Other operating expenses 195,287 131,248
------------ ------------
512,087 318,973
------------ ------------
Income before income taxes 81,869 574,710
Income tax expense 56,493 27,300
------------ ------------
Net investment income $ 25,376 $ 547,410
============ ============
Proceeds from disposition of investments $ 7,046,708 $ 12,885,369
Cost of investments sold 4,827,045 5,054,000
------------ ------------
Realized gain on investments before income taxes 2,219,663 7,831,369
Income tax expense 777,443 2,740,979
------------ ------------
Net realized gain on investments 1,442,220 5,090,390
------------ ------------
Increase (decrease) in unrealized appreciation
of investments before income taxes (2,608,110) 367,343
Increase (decrease) in deferred income
taxes on appreciation of investments (1,145,000) 129,000
------------ ------------
Net increase (decrease) in unrealized
appreciation of investments (1,463,110) 238,343
------------ ------------
Net realized and unrealized gain (loss)
on investments $ (20,890) $ 5,328,733
============ ============
Increase in net assets from operations $ 4,486 $ 5,876,143
============ ============
(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, 2000 March 31, 2000
------------- -------------
(Unaudited)
Operations
Net investment income $ 25,376 $ 1,662,930
Net realized gain on investments 1,442,220 6,019,892
Net decrease in unrealized appreciation
of investments (1,463,110) (24,749,790)
------------- -------------
Increase (decrease) in net assets from operations 4,486 (17,066,968)
Distributions from:
Undistributed net investment income (763,010) (2,289,031)
------------- -------------
Decrease in net assets (758,524) (19,355,999)
Net assets, beginning of period 236,875,966 256,231,965
------------- -------------
Net assets, end of period $ 236,117,442 $ 236,875,966
============= =============
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Three Months Ended
June 30,
--------
2000 1999
------------ ------------
Cash flows from operating activities
Increase in net assets from operations $ 4,486 $ 5,876,143
Adjustments to reconcile increase in net assets
from operations to net cash provided (used) by
operating activities:
Depreciation and amortization 7,221 6,975
Net pension benefit (108,996) (77,906)
Net realized and unrealized (gain) loss
on investments 20,890 (5,328,733)
(Increase) decrease in receivables 108,940 (61,321)
Increase in other assets (29,703) (24,282)
Decrease in accrued interest
and other liabilities (185,137) (181,361)
Decrease in accrued pension cost (52,487) --
Deferred income taxes 56,493 27,300
------------ ------------
Net cash provided (used) by operating activities (178,293) 236,815
------------ ------------
Cash flows from investing activities
Proceeds from disposition of investments 7,046,708 12,885,369
Purchases of securities (10,109,051) (400,000)
Maturities of securities 240,000 840,000
------------ ------------
Net cash provided (used) by investing activities (2,822,343) 13,325,369
------------ ------------
Cash flows from financing activities
Decrease in note payable to bank (60,000,000) --
Increase in notes payable to subsidiaries 4,500,000 --
Distributions from undistributed net investment income (763,010) (763,010)
------------ ------------
Net cash used by financing activities (56,263,010) (763,010)
------------ ------------
Net increase (decrease) in cash and cash
equivalents (59,263,646) 12,799,174
Cash and cash equivalents at beginning
of period 63,986,715 6,050,443
------------ ------------
Cash and cash equivalents at end of period $ 4,723,069 $ 18,849,617
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 361,104 $ 199,452
Income taxes $ 0 $ 10,500
(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, 2000. 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
-------
2000 1999
-------- --------
Investment income $ .15 $ .23
Operating expenses (.07) (.05)
Interest expense (.07) (.03)
Income taxes (.01) (.01)
-------- --------
Net investment income - .14
Net realized gain on investments .38 1.34
Net increase (decrease) in unrealized appreciation
of investments (.38) .06
Distributions from undistributed
net investment income (.20) (.20)
-------- --------
Net increase (decrease) in net asset value (.20) 1.34
Net asset value:
Beginning of period 62.09 67.16
-------- --------
End of period $61.89 $68.50
======== ========
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, 2000 was $236,117,442, equivalent to $61.89
per share after deducting an allowance of $21.50 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 9.3%
during the past twelve months and basically no change during the past three
months.
June 30, June 30,
2000 1999
---- ----
Net assets $236,117,442 $261,345,098
Shares outstanding 3,815,051 3,815,051
Net assets per share $61.89 $68.50
Interest income in the three months ended June 30, 2000 decreased from
the year-ago period primarily because of the suspension of interest accruals
related to one of our portfolio companies. During the three months ended June
30, 2000 and 1999, the Company recorded dividend income from the following
sources:
Three Months Ended
June 30
-------
2000 1999
--------- ---------
AT&T $ 29,314 $ 29,314
Alamo Group Inc. 169,278 292,600
Kimberly-Clark Corporation 20,839 20,067
TCI Holdings, Inc./Westmarc
Communications, Inc. 20,318 20,318
Other 48,587 41,020
--------- ---------
$ 288,336 $ 403,319
========= =========
Interest expense in the three months ended June 30, 2000 increased from
the year-ago period due to borrowings from subsidiaries. Other operating
expenses in the three months ended June 30, 2000 increased from the year-ago
period primarily due to legal fees incurred related to documentation of the
exchange of an investment.
During the three months ended June 30, 2000, the Company reported a
realized gain before income taxes of $2,219,663 including a gain of $5,973,990
on our investment in Amfibe, Inc. and a loss of $4,329,835 on our investment in
Dyntec, Inc. 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 changes in deferred
taxes and excluding the effect of gains or losses realized during the periods)
by portfolio company:
Three Months Ended
June 30
-------
2000 1999
--------- ---------
AT&T (3,306,142) 346,993
AT&T-Liberty Media Group (3,577,582) 3,541,206
Alamo Group Inc. 1,410,000 -
Dyntec, Inc. - (3,749,998)
Encore Wire Corporation (2,725,000) -
iChoose, Inc. (1,100,000) -
Mail-Well, Inc. - 2,097,000
Media Recovery, Inc. 5,000,000 -
Mylan Laboratories, Inc. (1,202,681) (120,268)
PETsMART, Inc. 204,444 1,431,106
The RectorSeal Corporation 3,500,000 -
Skylawn Corporation 3,000,000 -
During the quarter ended June 30, 2000, the Company made new
investments of $8,600,006 and additional investments of $1,509,045 in existing
portfolio companies.
On April 3, 2000, 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
$3,828,125 in four 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 totalled $11,641,971 at June 30, 2000, equivalent to 3.57%
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) 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.
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 11, 2000 By: /s/ William R. Thomas
--------------------------- -----------------------------
William R. Thomas, President
Date: August 11, 2000 By: /s/ Tim Smith
--------------------------- -----------------------------
Tim Smith, Vice President and
Secretary-Treasurer
10
6 0000017313 Capital Southwest Corporation 1 US Dollars 3-MOS Mar-31-2000 Apr-01-2000 Jun-30-2000 1 90,044,443 326,063,031 129,654 4,898,205 4,723,069 335,813,959 0 5,000,000 94,696,517 99,696,517 0 3,669,861 3,815,051 3,815,051 3,379,470 0 75,055,521 0 154,012,590 236,117,442 288,336 166,520 139,100 512,087 25,376 1,442,220 (1,463,110) 4,486 0 763,010 0 0 0 0 0 (758,524) 4,117,104 73,613,301 0 0 0 252,546 512,087 0 62.09 .00 .00 (.20) 0 0 61.89 0