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, 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 October 31, 2000
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
----------------------------------------------
Assets September 30, 2000 March 31, 2000
------------------ --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: September 30, 2000 - $23,140,865,
March 31, 2000 - $23,380,865) $ 209,123,759 $ 200,608,759
Companies 5% to 25% owned
(Cost: September 30, 2000 - $23,579,414
March 31, 2000 - $22,579,414) 22,760,505 22,760,506
Companies less than 5% owned
(Cost: September 30, 2000 - $43,586,664
March 31, 2000 - $39,042,158) 90,320,044 100,259,870
------------- -------------
Total investments
(Cost: September 30, 2000- $90,306,943,
March 31, 2000 - $85,002,437) 322,204,308 323,629,135
Cash and cash equivalents 5,211,868 63,986,715
Receivables 330,796 238,594
Other assets 5,054,669 4,731,360
------------- -------------
Totals $ 332,801,641 $ 392,585,804
============= =============
Liabilities and Shareholders' Equity
Notes payable to bank $ 5,000,000 $ 60,000,000
Notes payable to subsidiary 4,500,000 5,000,000
Accrued interest and other liabilities 2,111,779 2,220,753
Income taxes payable 566,540 --
Deferred income taxes 81,197,512 83,489,085
Subordinated debenture 5,000,000 5,000,000
------------- -------------
Total liabilities 98,375,831 155,709,838
------------- -------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,252,416 shares
at September 30, 2000 and March 31, 2000 4,252,416 4,252,416
Additional capital 6,450,747 6,450,747
Undistributed net investment income 4,366,061 4,117,104
Undistributed net realized gain on investments 75,055,521 73,613,301
Unrealized appreciation of investments -
net of deferred income taxes 151,334,367 155,475,700
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $61.45 per share at September 30, 2000,
and $62.09 per share at March 31, 2000, on the
3,815,051 shares outstanding 234,425,810 236,875,966
------------- -------------
Totals $ 332,801,641 $ 392,585,804
============= =============
(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
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Investment income:
Interest $ 159,801 $ 189,176 $ 326,321 $ 520,464
Dividends 1,188,336 720,320 1,476,672 1,123,639
Management and directors' fees 128,600 121,600 267,700 280,676
------------ ------------ ------------ ------------
1,476,737 1,031,096 2,070,693 1,924,779
------------ ------------ ------------ ------------
Operating expenses:
Interest 282,474 107,274 535,020 209,282
Salaries 188,750 166,254 362,000 329,877
Net pension expense (benefit) (134,088) (140,086) (243,084) (217,992)
Other operating expenses 124,304 125,974 319,591 257,222
------------ ------------ ------------ ------------
461,440 259,416 973,527 578,389
------------ ------------ ------------ ------------
Income before income taxes 1,015,297 771,680 1,097,166 1,346,390
Income tax expense 28,706 49,000 85,199 76,300
------------ ------------ ------------ ------------
Net investment income $ 986,591 $ 722,680 $ 1,011,967 $ 1,270,090
============ ============ ============ ============
Proceeds from disposition of investments $ -- $ 2,007,144 $ 7,046,708 $ 14,892,513
Cost of investments sold -- 608,000 4,827,045 5,662,000
------------ ------------ ------------ ------------
Realized gain on investments before
income taxes -- 1,399,144 2,219,663 9,230,513
Income tax expense -- 489,701 777,443 3,230,680
------------ ------------ ------------ ------------
Net realized gain on investments -- 909,443 1,442,220 5,999,833
------------ ------------ ------------ ------------
Decrease in unrealized appreciation
of investments before income taxes (4,121,223) (39,111,361) (6,729,333) (38,744,018)
Decrease in deferred income taxes on
appreciation of investments (1,443,000) (13,689,000) (2,588,000) (13,560,000)
------------ ------------ ------------ ------------
Net decrease in unrealized
appreciation of investments (2,678,223) (25,422,361) (4,141,333) (25,184,018)
------------ ------------ ------------ ------------
Net realized and unrealized loss on
investments $ (2,678,223) $(24,512,918) $ (2,699,113) $(19,184,185)
============ ============ ============ ============
Decrease in net assets from
operations $ (1,691,632) $(23,790,238) $ (1,687,146) $(17,914,095)
============ ============ ============ ============
(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, 2000 March 31, 2000
------------------ --------------
(Unaudited)
Operations
Net investment income $ 1,011,967 $ 1,662,930
Net realized gain on investments 1,442,220 6,019,892
Net decrease in unrealized
appreciation of investments (4,141,333) (24,749,790)
------------- -------------
Decrease in net assets from operations (1,687,146) (17,066,968)
Distributions from:
Undistributed net investment income (763,010) (2,289,031)
------------- -------------
Decrease in net assets (2,450,156) (19,355,999)
Net assets, beginning of period 236,875,966 256,231,965
------------- -------------
Net assets, end of period $ 234,425,810 $ 236,875,966
============= =============
(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
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Cash flows from operating activities
Decrease in net assets from operations $ (1,691,632) $(23,790,238) $ (1,687,146) $(17,914,095)
Adjustments to reconcile decrease
in net assets from operations to net cash
provided by operating activities:
Depreciation and amortization 7,242 7,184 14,463 14,159
Net pension benefit (134,088) (140,086) (243,084) (217,992)
Net realized and unrealized loss
on investments 2,678,223 24,512,918 2,699,113 19,184,185
(Increase) decrease in receivables (201,142) 80,701 (92,202) 19,380
(Increase) decrease in other assets 10,891 2,777 (18,812) (21,505)
Increase (decrease) in accrued interest
and other liabilities 105,586 102,311 (79,551) (79,050)
Decrease in accrued pension cost (52,487) -- (104,974) --
Deferred income taxes 28,706 49,000 85,199 76,300
------------ ------------ ------------ ------------
Net cash provided by operating activities 751,299 824,567 573,006 1,061,382
------------ ------------ ------------ ------------
Cash flows from investing activities
Proceeds from disposition of investments -- 2,007,144 7,046,708 14,892,513
Purchases of securities (262,500) (6,340,047) (10,371,551) (6,740,047)
Maturities of securities -- -- 240,000 840,000
------------ ------------ ------------ ------------
Net cash provided (used) by investing
activities (262,500) (4,332,903) (3,084,843) 8,992,466
------------ ------------ ------------ ------------
Cash flows from financing activities
Increase (decrease) in notes payable to bank 5,000,000 25,000,000 (55,000,000) 25,000,000
Increase (decrease) in notes payable to
subsidiaries (5,000,000) -- (500,000) --
Distributions from undistributed net
investment income -- -- (763,010) (763,010)
------------ ------------ ------------ ------------
Net cash provided (used) by financing activities -- 25,000,000 (56,263,010) 24,236,990
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 488,799 21,491,664 (58,774,847) 34,290,838
Cash and cash equivalents at beginning
of period 4,723,069 18,849,617 63,986,715 6,050,443
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 5,211,868 $ 40,341,281 $ 5,211,868 $ 40,341,281
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 177,220 $ -- $ 538,324 $ 199,452
Income taxes $ -- $ 6,490 $ -- $ 16,990
(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 Six Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
Investment income $ .39 $ .27 $ .54 $ .50
Operating expenses (.05) (.04) (.12) (.09)
Interest expense (.07) (.03) (.14) (.06)
Income taxes (.01) (.01) (.02) (.02)
------- ------- ------- -------
Net investment income .26 .19 .26 .33
Net realized gain on investments - .24 .38 1.58
Net decrease in unrealized
appreciation of investments (.70) (6.66) (1.08) (6.60)
Distributions from undistributed
net investment income - - (.20) (.20)
------- ------- ------- -------
Net decrease in net asset value (.44) (6.23) (.64) (4.89)
Net asset value:
Beginning of period 61.89 68.50 62.09 67.16
------- ------- ------- -------
End of period $ 61.45 $ 62.27 $ 61.45 $ 62.27
======= ======= ======= =======
Shares outstanding at end of period
(000s omitted) 3,815 3,815 3,815 3,815
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net asset value at September 30, 2000 was $234,425,810 equivalent to
$61.45 per share after deducting an allowance of $21.12 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 an increase of
1.4% during the past twelve months.
September 30, September 30,
2000 1999
---- ----
Net assets $234,425,810 $237,554,860
Shares outstanding 3,815,051 3,815,051
Net assets per share $61.45 $62.27
Interest income in the six months ended September 30, 2000 decreased
from the year-ago period primarily because of a decrease in average idle funds
invested. During the six months ended September 30, 2000 and 1999, the Company
recorded dividend income from the following sources:
Six Months Ended
September 30
------------
2000 1999
---- ----
AT&T $ 58,628 $ 58,628
Alamo Group Inc. 338,556 452,200
Dennis Tool Company 24,999 24,999
Kimberly-Clark Corporation 41,677 40,134
The RectorSeal Corporation 480,000 240,000
Skylawn Corporation 300,000 150,000
TCI Holdings, Inc/Westmarc
Communications, Inc. 40,635 40,635
Texas Shredder, Inc. 20,230 20,230
The Whitmore Manufacturing Company 120,000 60,000
Other 51,947 36,813
------------ ------------
$ 1,476,672 $ 1,123,639
============ ============
Interest expense in the six months ended September 30, 2000 increased
from the year-ago period due to borrowings from the bank and subsidiaries. Other
operating expenses in the six months ended September 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 six months ended September 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 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
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
AT&T/Tele-Communications- $ (299,801) $ (1,640,579) $ (3,605,943) $ (1,293,586)
TCI Group
AT&T-Liberty Media Group/Tele- (4,149,149) 190,522 (7,726,731) 3,731,728
Communications LM&TCI
Ventures Group
Alamo Group Inc -- 1,834,053 1,410,000 1,834,053
All Components, Inc. 3,450,000 1,975,000 3,450,000 1,975,000
American Homestar Corporation 140,824 (2,159,294) (281,647) (2,534,824)
Dennis Tool Company 842,000 -- 842,000 --
Encore Wire Corporation 2,725,000 -- -- --
iChoose, Inc. -- -- (1,100,000) --
International Talk.com, Inc. (1,000,000) -- (1,000,000) --
Mail-Well, Inc. (5,766,000) -- (5,766,000) 2,097,000
Media Recovery, Inc. -- -- 5,000,000 --
Mylan Laboratories, Inc. 1,130,520 (1,042,324) (72,161) (1,162,592)
Palm Harbor Homes, Inc. -- (31,421,000) -- (31,421,000)
PETsMART, Inc. 899,552 (4,231,985) 1,103,996 (2,800,879)
The RectorSeal Corporation -- -- 3,500,000 --
Skylawn Corporation -- -- 3,000,000 --
Sprint Corporation-FON Group (1,597,500) 90,000 (2,425,500) 373,500
Sprint Corporation-PCS Group (877,500) 316,125 (1,093,500) 544,500
Texas Petrochemical Holdings, Inc. -- (749,999) -- (749,999)
During the quarter ended September 30, 2000, the Company made
additional investments of $262,500 in existing portfolio companies.
The Company has agreed, subject to certain conditions, to invest up to
$4,965,625 in six portfolio companies.
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 $11,948,413 at September 30, 2000, equivalent to
3.7% 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 17, 2000, 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 3,379,677 4,475 430,899
Gary L. Martin 3,379,309 4,843 430,899
James M. Nolan 3,379,677 4,475 430,899
William R. Thomas 3,379,277 4,875 430,899
John H. Wilson 3,379,677 4,475 430,899
b. KPMG LLP was approved as the Company's
auditors for the 2001 fiscal year. 3,373,508 5,883 435,660
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 3, 2000 By: /s/ William R. Thomas
-------------------------- --------------------------------------
William R. Thomas
President
Date: November 3, 2000 By: /s/ Tim Smith
-------------------------- --------------------------------------
Tim Smith
Vice President & Secretary-Treasurer
10
6 0000017313 Capital Southwest Corporation 1 US Dollars 3-MOS MAR-31-2000 APR-01-2000 SEP-30-2000 1 90,306,943 322,204,308 330,796 5,054,669 5,211,868 332,801,641 0 5,000,000 93,375,831 98,375,831 0 3,669,861 3,815,051 3,815,051 4,366,061 0 75,055,521 0 151,334,367 234,425,810 1,476,672 326,321 267,700 973,527 1,011,967 1,442,220 (4,141,333) (1,687,146) 0 763,010 0 0 0 0 0 (2,450,156) 4,117,104 73,613,301 0 0 0 535,020 973,527 0 62.09 .26 (.70) (.20) 0 0 61.45 0