SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------------------------------------
For the Fiscal Year Ended March 31, 2001 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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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 period 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 1, 2001 was $115,062,421, based on the last sale price of
such stock as quoted by Nasdaq on such date (officers, directors and 5%
shareholders are considered affiliates for purposes of this calculation).
The number of shares of common stock outstanding as of May 15, 2001 was
3,815,051.
Documents Incorporated by Reference Part of Form 10-K
----------------------------------- -----------------
(1) Annual Report to Shareholders for Parts I and II; and
the Year Ended March 31, 2001 Part IV, Item 14(a)(1) and (2)
(2) Proxy Statement for Annual Meeting of Part III
Shareholders to be held July 16, 2001
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business....................................................1
Item 2. Properties..................................................1
Item 3. Legal Proceedings...........................................1
Item 4. Submission of Matters to a Vote of Security Holders.........1
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................2
Item 6. Selected Financial Data.....................................2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................2
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk...............................................2
Item 8. Financial Statements and Supplementary Data.................2
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.......................3
PART III
Item 10. Directors and Executive Officers of the Registrant..........3
Item 11. Executive Compensation......................................4
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................4
Item 13. Certain Relationships and Related Transactions..............4
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ......................................4
Signatures ...................................................................5
Exhibit Index ................................................................6
PART I
Item 1. Business
Capital Southwest Corporation (the "Company") was organized as a Texas
corporation on April 19, 1961. Until September 1969, the Company operated as a
licensee under the Small Business Investment Act of 1958. At that time, the
Company transferred to its wholly-owned subsidiary, Capital Southwest Venture
Corporation ("CSVC"), certain of its assets and its license as a small business
investment company ("SBIC"). CSVC is a closed-end, non-diversified investment
company of the management type registered under the Investment Company Act of
1940 (the "1940 Act"). Prior to March 30, 1988, the Company was registered as a
closed-end, non-diversified investment company under the 1940 Act. On that date,
the Company elected to become a business development company subject to the
provisions of Sections 55 through 65 of the 1940 Act, as amended by the Small
Business Incentive Act of 1980.
The Company is a venture capital investment company whose objective is
to achieve capital appreciation through long-term investments in businesses
believed to have favorable growth potential. The Company's investments are
focused on early-stage financings, expansion financings, management buyouts and
recapitalizations in a broad range of industry segments. The portfolio is a
composite of companies in which the Company has major interests as well as a
number of developing companies and marketable securities of established
publicly-owned companies. The Company makes available significant managerial
assistance to the companies in which it invests and believes that providing
material assistance to such investee companies is critical to its business
development activities.
The twelve largest investments of the Company had a combined cost of
$50,379,546 and a value of $274,620,768, representing 86.9% of the value of the
Company's consolidated investment portfolio at March 31, 2001. For a narrative
description of the twelve largest investments, see "Twelve Largest Investments -
March 31, 2001" on pages 7 through 9 of the Company's Annual Report to
Shareholders for the Year Ended March 31, 2001 (the "2001 Annual Report") which
is herein incorporated by reference. Certain of the information presented on the
twelve largest investments has been obtained from the respective companies and,
in certain cases, from public filings of such companies. The financial
information presented on each of the respective companies is from such
companies' financial statements, which in some instances is unaudited.
The Company competes for attractive investment opportunities with
venture capital partnerships and corporations, venture capital affiliates of
industrial and financial companies, SBICs and wealthy individuals.
The number of persons employed by the Company at March 31, 2001 was
seven.
Item 2. Properties
The Company maintains its offices at 12900 Preston Road, Suite 700,
Dallas, Texas, 75230, where it rents approximately 3,700 square feet of office
space pursuant to a lease agreement expiring in February 2003. The Company
believes that its offices are adequate to meet its current and expected future
needs.
Item 3. Legal Proceedings
The Company has no material pending legal proceedings to which it is a
party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended March 31, 2001.
1
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Information set forth under the captions "Shareholder Information -
Shareholders, Market Prices and Dividends" on page 32 of the 2001 Annual Report
is herein incorporated by reference.
Item 6. Selected Financial Data
"Selected Consolidated Financial Data" on page 31 of the 2001 Annual
Report is herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 28 through 30 of the Company's 2001 Annual Report are herein
incorporated by reference.
Item 7A. 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 materially affected by foreign currency fluctuations.
The Company's investment in portfolio securities consists of fixed rate
debt securities which totaled $12,432,971 at March 31, 2001, equivalent to 3.94%
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 would 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.
Item 8. Financial Statements and Supplementary Data
Pages 10 through 27 of the Company's 2001 Annual Report are herein
incorporated by reference. See also Item 14 of this Form 10-K - "Exhibits,
Financial Statement Schedules, and Reports on Form 8-K".
2
Selected Quarterly Financial Data (Unaudited)
---------------------------------
The following presents a summary of the unaudited quarterly
consolidated financial information for the years ended March 31, 2001 and 2000.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
2001
- ----
Net investment income $ 25 $ 987 $ 434 $ 277 $ 1,723
Net realized gain (loss) on investments 1,442 -- (768) (3,905) (3,231)
Net increase (decrease) in unrealized
appreciation of investments (1,463) (2,678) (9,821) 7,492 (6,470)
Net increase (decrease) in net assets from
operations 4 (1,691) (10,155) 3,864 (7,978)
Net increase (decrease) in net assets from
operations per share -- (0.44) (2.66) 1.01 (2.09)
2000
- ----
Net investment income $ 547 $ 723 $ 121 $ 272 $ 1,663
Net realized gain on investments 5,090 910 16 4 6,020
Net increase (decrease) in unrealized
appreciation of investments 239 (25,423) 3,976 (3,542) (24,750)
Net increase (decrease) in net assets
from operations 5,876 (23,790) 4,113 (3,266) (17,067)
Net increase (decrease)in net assets from
operations per share 1.54 (6.23) 1.08 (0.86) (4.47)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Election of Directors" in
the Company's definitive Proxy Statement for Annual Meeting of Shareholders to
be held July 16, 2001, filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, on or about June 8, 2001 (the "2001 Proxy Statement") is
herein incorporated by reference.
Executive Officers of the Registrant
The officers of the Company, together with the offices in the Company
presently held by them, their business experience during the last five years and
their ages are as follows:
Patrick F. Hamner, age 45, has served as Vice President of the Company
since 1986 and was an investment associate with the Company from 1982
to 1986.
Gary L. Martin, age 54, has been a director of the Company since July 1988
and has served as Vice President of the Company since 1984. He
previously served as Vice President of the Company from 1978 to 1980.
Since 1980, Mr. Martin has served as President of The Whitmore
Manufacturing Company, a wholly-owned subsidiary of the Company.
Tim Smith, age 40, has served as Vice President and Secretary of the
Company since 1993, Treasurer of the Company since January 1990 and
was an investment associate with the Company from July 1989 to
January 1990.
William R. Thomas, age 72, has served as Chairman of the Board of Directors
of the Company since 1982 and President of the Company since 1980. In
addition, he has been a director of the Company since 1972 and was
previously Senior Vice President of the Company from 1969 to 1980.
3
No family relationship exists between any of the above-listed officers,
and there are no arrangements or understandings between any of them and any
other person pursuant to which they were selected as an officer. All officers
are elected to hold office for one year, subject to earlier termination by the
Company's board of directors.
Item 11. Executive Compensation
The information set forth under the caption "Compensation of Directors
and Executive Officers" in the 2001 Proxy Statement is herein incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the captions "Stock Ownership of
Certain Beneficial Owners" and "Election of Directors" in the 2001 Proxy
Statement is herein incorporated by reference.
Item 13. Certain Relationships and Related Transactions
There were no relationships or transactions within the meaning of this
item during the fiscal year ended March 31, 2001 or proposed for the fiscal year
ending March 31, 2002.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements included in pages 10 through 27 of
the Company's 2001 Annual Report are herein incorporated by reference:
(A) Portfolio of Investments - March 31, 2001
Consolidated Statements of Financial Condition - March 31, 2001
and 2000
Consolidated Statements of Operations - Years Ended March 31, 2001,
2000 and 1999
Consolidated Statements of Changes in Net Assets - Years Ended
March 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years Ended March 31, 2001,
2000 and 1999
(B) Notes to Consolidated Financial Statements
(C) Notes to Portfolio of Investments
(D) Selected Per Share Data and Ratios
(E) Independent Auditors' Report
(a)(2) All schedules are omitted because they are not applicable or not
required, or the information is otherwise supplied.
(a)(3) See the Exhibit Index on page 6.
(b) The Company filed no reports on Form 8-K during the three months ended
March 31, 2001.
4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ William R. Thomas
-----------------------------
(William R. Thomas, President
and Chairman of the Board)
Date: June 15, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ William R. Thomas
- --------------------------- President and Chairman June 15, 2001
(William R. Thomas) of the Board and Director
/s/ Gary L. Martin
- --------------------------- Director June 15, 2001
(Gary L. Martin)
/s/ Graeme W. Henderson
- --------------------------- Director June 15, 2001
(Graeme W. Henderson)
/s/ James M. Nolan
- --------------------------- Director June 15, 2001
(James M. Nolan)
/s/ John H. Wilson
- --------------------------- Director June 15, 2001
(John H. Wilson)
/s/ Tim Smith
- --------------------------- Vice President and June 15, 2001
(Tim Smith) Secretary-Treasurer
(Financial and Accounting Officer)
5
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated
herein by reference to a prior filing, in accordance with Rule 12b-32 under the
Securities Exchange Act of 1934. (Asterisk denotes exhibits filed with this
report.)
Exhibit No. Description
----------- -----------
3.1(a) Articles of Incorporation and Articles of Amendment
to Articles of Incorporation, dated June 25, 1969
(filed as Exhibit 1(a) and 1(b) to Amendment No. 3 to
Form N-2 for the fiscal year ended March 31, 1979).
3.1(b) Articles of Amendment to Articles of Incorporation,
dated July 20, 1987 (filed as an exhibit to Form
N-SAR for the six month period ended September 30,
1987).
3.2 By-Laws of the Company, as amended (filed as Exhibit
2 to Amendment No. 11 to Form N-2 for the fiscal year
ended March 31, 1987).
4.1 Specimen of Common Stock certificate (filed as
Exhibit 4 to Amendment No. 3 to Form N-2 for the
fiscal year ended March 31, 1979).
4.2 Subordinated debenture of CSVC guaranteed by the
Small Business Administration (filed as Exhibit 4.3
to Form 10-K for the fiscal year ended March 31,
1993).
10.1 The RectorSeal Corporation and Jet-Lube, Inc.
Employee Stock Ownership Plan as revised and restated
effective April 1, 1989 (filed as Exhibit 10.1 to
Form 10-K for the fiscal year ended March 31, 1996).
10.2 Amendment No. I to The RectorSeal Corporation and
Jet-Lube, Inc. Employee Stock Ownership Plan as
revised and restated effective April 1, 1989.
10.3 Retirement Plan for Employees of Capital Southwest
Corporation and Its Affiliates as amended and
restated effective April 1, 1989 (filed as Exhibit
10.3 to Form 10-K for the fiscal year ended March 31,
1995).
10.4 Amendments One and Two to Retirement Plan for
Employees of Capital Southwest Corporation and Its
Affiliates as amended and restated effective April 1,
1989.
10.5 Capital Southwest Corporation and Its Affiliates
Restoration of Retirement Income Plan for certain
highly-compensated superseded plan participants
effective April 1, 1993 (filed as Exhibit 10.4 to
Form 10-K for the fiscal year ended March 31, 1995).
10.6 Amendment One to Capital Southwest Corporation and
Its Affiliates Restoration of Retirement Income Plan
for certain highly-compensated superceded plan
participants effective April 1, 1993.
6
10.7 Capital Southwest Corporation Retirement Income
Restoration Plan as amended and restated effective
April 1, 1989 (filed as Exhibit 10.5 to Form 10-K for
the fiscal year ended March 31, 1995).
10.8 Form of Indemnification Agreement which has been
established with all directors and executive officers
of the Company (filed as Exhibit 10.9 to Form 8-K
dated February 10, 1994).
10.9 Capital Southwest Corporation 1984 Incentive Stock
Option Plan as amended and restated as of April 20,
1987 (filed as Exhibit 10.10 to Form 10-K for the
fiscal year ended March 31, 1990).
10.10 Capital Southwest Corporation 1999 Stock Option Plan.
Exhibit No. Description
----------- -----------
13. * Annual Report to Shareholders for the fiscal year
ended March 31, 2001.
21. List of subsidiaries of the Company.
23. * Independent Auditors' Consent.
7
Twelve Largest Investments - March 31, 2001
================================================================================
Palm Harbor Homes, Inc. $78,551,000
- --------------------------------------------------------------------------------
Palm Harbor Homes, Dallas, Texas, is an integrated manufactured housing
company, building, retailing, financing and insuring homes produced in 15 plants
in Alabama, Arizona, Florida, Georgia, North Carolina, Ohio, Oregon and Texas
and sold in 28 states by over 150 independent dealers and 145 company-owned
retail superstores. Palm Harbor manufactures high-quality, energy-efficient
homes designed to meet the need for affordable housing, particularly among
retirees and newly-formed families.
During the year ended March 30, 2001, Palm Harbor earned $19,829,000 ($0.87
per share) on net sales of $650,451,000, compared with earnings of $38,596,000
($1.66 per share) on net sales of $777,471,000 in the previous year. The March
30, 2001 closing Nasdaq bid price of Palm Harbor's common stock was $15.188 per
share.
At March 31, 2001, the $10,931,955 investment in Palm Harbor by Capital
Southwest and its subsidiary was valued at $78,551,000 ($10.00 per share),
consisting of 7,855,121 restricted shares of common stock, representing a
fully-diluted equity interest of 34.5%.
================================================================================
The RectorSeal Corporation $47,500,000
- --------------------------------------------------------------------------------
The RectorSeal Corporation, Houston, Texas, with two plants in Texas and a
plant in New York, manufactures chemical specialty products including pipe
thread sealants, firestop sealants, plastic solvent cements and other
formulations for plumbing and industrial applications. RectorSeal's major
subsidiary, Jet-Lube, Inc., with plants in Texas, England and Canada, produces
anti-seize compounds, specialty lubricants and other products used in industrial
and oil field applications. Another subsidiary, Cargo Chemical, produces a
limited line of automotive chemical products. RectorSeal also owns a 20% equity
interest in The Whitmore Manufacturing Company (described subsequently).
During the year ended March 31, 2001, RectorSeal earned $5,669,000 on
revenues of $56,240,000, compared with earnings of $4,988,000 on revenues of
$53,858,000 in the previous year. RectorSeal's earnings do not reflect its 20%
equity in The Whitmore Manufacturing Company.
At March 31, 2001, Capital Southwest owned 100% of RectorSeal's common stock
having a cost of $52,600 and a value of $47,500,000.
================================================================================
Skylawn Corporation $38,000,000
- --------------------------------------------------------------------------------
Skylawn Corporation, Hayward, California owns and operates cemeteries,
mausoleums and mortuaries. Skylawn's operations, all of which are in California,
include a mausoleum and an adjacent mortuary in Oakland and cemeteries and
mausoleums in San Mateo, Hayward, Sacramento and Napa, the latter three of which
also have mortuaries at the cemetery sites. These entities have provided
cemetery and funeral services to their respective communities for many years. A
captive insurance company and funeral and cemetery trusts enable Skylawn's
clients to make pre-need arrangements.
For the fiscal year ended March 31, 2001, Skylawn, earned $4,120,000 on
revenues of $25,799,000. In the previous year, Skylawn, after adopting a change
in accounting principle, earned $2,940,000 on revenues of $24,574,000. Before
this change, fiscal 2000 earnings were $4,163,000.
At March 31, 2001, Capital Southwest owned 100% of Skylawn Corporation's
common stock, which had a cost of $4,510,400 and was valued at $38,000,000.
================================================================================
Alamo Group Inc. $28,213,000
- --------------------------------------------------------------------------------
Alamo Group Inc., Seguin, Texas, is a leading designer, manufacturer and
distributor of heavy-duty, tractor-mounted mowing and other vegetation
maintenance equipment, power-sweeping equipment and replacement parts. Founded
in 1969, Alamo Group operates 11 manufacturing facilities and serves
governmental, industrial and agricultural markets in the U.S. and Europe.
For the year ended December 31, 2000, Alamo reported consolidated earnings of
$10,770,000 ($1.11 per share) on net sales of $215,874,000, compared with
earnings of $6,102,000 ($0.63 per share) on net sales of $176,608,000 in the
previous year. The March 30, 2001 closing NYSE market price of Alamo's common
stock was $14.30 per share.
At March 31, 2001, the $2,065,047 investment in Alamo by Capital Southwest
and its subsidiary was valued at $28,213,000 ($10.00 per share), consisting of
2,821,300 restricted shares of common stock, representing a fully-diluted equity
interest of 27.2%.
================================================================================
Media Recovery, Inc. $18,000,000
- --------------------------------------------------------------------------------
Media Recovery, Inc., Graham, Texas, distributes computer and office
automation supplies and accessories to corporate customers through its direct
sales force with 25 offices in 18 states. Its Shockwatch division manufactures
impact and tilt monitoring devices used to detect mishandled shipments. Media
Recovery's subsidiary, The Damage Prevention Company, Denver, Colorado,
manufactures dunnage products used to prevent damage in trucking, rail and
export container shipments.
During the year ended September 30, 2000, Media Recovery reported net income
of $3,139,000 on net sales of $92,705,000, compared with net income of
$2,418,000 on net sales of $88,707,000 in the previous year.
At March 31, 2001, the $5,415,000 investment in Media Recovery by Capital
Southwest and its subsidiary was valued at $18,000,000, consisting of 4,800,000
shares of Series A convertible preferred stock, representing a fully-diluted
equity interest of 68.2%.
================================================================================
Encore Wire Corporation $13,623,000
- --------------------------------------------------------------------------------
Encore Wire Corporation, McKinney, Texas, manufactures a broad line of copper
electrical wire and cable including non-metallic sheathed cable, underground
feeder cable and THHN cable for residential, commercial and industrial
construction. Encore's products are sold through large-volume distributors and
building materials retailers.
For the year ended December 31, 2000, Encore reported net income of
$8,050,000 ($0.52 per share) on net sales of $283,689,000, compared with net
income of $6,594,000 ($0.42 per share) on net sales of $229,670,000 in the
previous year. The March 30, 2001 closing Nasdaq bid price of Encore's common
stock was $7.813 per share.
At March 31, 2001, the $5,800,000 investment in 2,724,500 shares of Encore's
restricted common stock by Capital Southwest and its subsidiary was valued at
$13,623,000 ($5.00 per share), representing a fully-diluted equity interest of
17.1%.
================================================================================
Concert Industries Ltd. $11,162,000
- --------------------------------------------------------------------------------
Concert Industries Ltd., Vancouver, British Columbia, manufactures latex,
thermal and multi-bonded air-laid materials produced in state-of-the-art
facilities in Thurso, Quebec; Falkenhagen, Germany; Charleston, South Carolina;
and Gatineau, Quebec (to be launched in 2001). Its air-laid materials are used
as absorbent cores in feminine hygiene, specialty diapers and adult incontinence
products. Other applications are wet wipes, industrial wipes, food packaging
pads and disposable medical products.
During the year ended December 31, 2000, Concert reported net income of
C$7,375,000 (C$0.31 per share) on net sales of C$86,606,000, compared with net
income of C$5,388,000 (C$0.30 per share) on net sales of C$47,658,000 in the
previous year. The March 30, 2001 closing Toronto Stock Exchange market price of
Concert's common stock was C$6.30 (US$4.00) per share.
At March 31, 2001, the US$10,867,649 investment by Capital Southwest and its
subsidiary in a junior secured note, exchangeable subordinated debentures,
787,286 shares of common stock and a warrant to acquire 83,643 shares of common
stock was valued at US$11,162,000, representing a fully-diluted equity interest
of 9.8%.
================================================================================
AT&T Corp. - Liberty Media Group $9,483,768
- --------------------------------------------------------------------------------
AT&T Corp. - Liberty Media Group, New York, New York, acquired by AT&T as
part of Tele-Communications, Inc. in March 1999, produces, acquires and
distributes entertainment, sports and informational programming services and
electronic retailing services, which are delivered via cable television and
other technologies to viewers in the United States and overseas.
For the year ended December 31, 2000, Liberty Media Group reported net income
of $1.488 billion ($0.58 per share) on net sales of $1.526 billion compared with
a net loss of $2.081 billion ($0.80 per share) on net sales of $1.011 billion in
the previous year. The March 30, 2001 closing NYSE market price of Series A
Liberty Media Group common (tracking) stock was $14.00 per share.
At March 31, 2001, Capital Southwest owned 677,412 unrestricted shares of
Series A Liberty Media Group tracking stock, having a total cost of $25 and a
market value of $9,483,768 ($14.00 per share).
================================================================================
All Components, Inc. $8,750,000
- --------------------------------------------------------------------------------
All Components, Inc., Farmers Branch, Texas, distributes and produces memory
and other components for personal computer manufacturers, retailers and
value-added resellers. Through its Dallas-based sales and distribution center
and its contract manufacturing plants in Austin, Texas and Boise, Idaho, the
company serves over 2,000 customers throughout the United States.
During the year ended August 31, 2000, All Components reported net income of
$4,025,000 on net sales of $220,835,000, compared with net income of $2,542,000
on net sales of $157,932,000 in the previous year.
At March 31, 2001, the $150,000 investment in All Components by Capital
Southwest's subsidiary was valued at $8,750,000 consisting of 150,000 shares of
Series A convertible preferred stock, representing a 29.0% fully-diluted equity
interest.
================================================================================
The Whitmore Manufacturing Company $8,000,000
- --------------------------------------------------------------------------------
The Whitmore Manufacturing Company, with plants in Rockwall, Texas and
Cleveland, Ohio, manufactures specialty lubricants for heavy equipment used in
surface mining, railroads and other industries, and produces water-based
coatings for the automotive and primary metals industries. Whitmore's
subsidiary, Fluid Protection Corporation, manufactures fluid contamination
control devices.
During the year ended March 31, 2001, Whitmore reported net income of $41,000
on net sales of $11,536,000, compared with a net loss of $10,600 on net sales of
$13,176,000 in the previous year. The company is owned 80% by Capital Southwest
and 20% by Capital Southwest's subsidiary, The RectorSeal Corporation (described
on page 7).
At March 31, 2001, the direct investment in Whitmore by Capital Southwest was
valued at $8,000,000 and had a cost of $1,600,000.
================================================================================
Mail-Well, Inc. $7,338,000
- --------------------------------------------------------------------------------
Mail-Well, Inc., Englewood, Colorado, is a consolidator of companies engaged
in producing envelopes and labels and in printing for commercial applications
and for distributors. Mail-Well has approximately 15,000 employees and operates
more than 140 plants and numerous sales offices throughout North America and the
United Kingdom.
For the year ended December 31, 2000, Mail-Well reported earnings of
$27,618,000 ($0.56 per share) on net sales of $2,425,215,000, compared with
earnings of $64,482,000 ($1.20 per share) on net sales of $1,887,230,000 in the
previous year. The March 30, 2001 closing NYSE market price of Mail-Well's
common stock was $4.87 per share.
At March 31, 2001, the $2,986,870 investment in Mail-Well by Capital
Southwest was valued at $7,338,000 ($3.50 per share), consisting of 2,096,588
restricted shares of common stock, representing a fully-diluted equity interest
of 3.5%.
================================================================================
Organized Living, Inc. $6,000,000
- --------------------------------------------------------------------------------
Organized Living, Inc., Lenexa, Kansas, is a leading specialty retailer of
high quality products designed to provide storage and organization solutions for
customers' home and office needs. The company's superstores provide a one-stop
shopping destination for storage and organization products for every area of the
home including closets, kitchens, laundry rooms, pantries, bathrooms, bedrooms,
playrooms, garages and offices. Organized Living currently operates 14
superstores in retail areas in 12 states.
During the year ended March 31, 2001, Organized Living reported a net loss of
$3,483,000 on net sales of $49,408,000, compared with a net loss of $4,141,000
on net sales of $31,261,000 in the previous year.
At March 31, 2001, the investment by Capital Southwest in 2,500,001 shares of
Series D convertible preferred stock, was valued at its cost of $6,000,000 and
represented a fully-diluted equity interest of 10.0% to 12.7%.
Portfolio of Investments - March 31, 2001
Company Equity (a) Investment (b) Cost Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
+AT&T CORP. <1% ++133,245 shares Series A
New York, New York common stock (acquired 3-9-99) $ 43 $ 2,838,119
Major provider of telecommunications
services in four segments: business
long distance, consumer long distance,
broadband (cable) and wireless.
- -----------------------------------------------------------------------------------------------------------------------------------
+AT&T CORP. - Liberty Media Group <1% ++677,412 shares Series A
New York, New York common stock (acquired 3-9-99) 25 9,483,768
Production and distribution of cable
television programming services and wireless
and wireline communications services.
- -----------------------------------------------------------------------------------------------------------------------------------
+ALAMO GROUP INC. 27.2% 2,821,300 shares common stock
Seguin, Texas (acquired 4-1-73, 7-18-78 and
Tractor-mounted mowing and vegetation 9-9-99 thru 10-4-99) 2,065,047 28,213,000
maintenance equipment for governmental,
industrial and agricultural markets;
power-sweeping equipment for municipalities.
- -----------------------------------------------------------------------------------------------------------------------------------
ALL COMPONENTS, INC. 29.0% 150,000 shares Series A convertible
Farmers Branch, Texas preferred stock, convertible into
Distribution and production of memory and 600,000 shares of common stock at
other components for personal computer $0.25 per share (acquired 9-16-94) 150,000 8,750,000
manufacturers, retailers and value-added
resellers.
- -----------------------------------------------------------------------------------------------------------------------------------
+ALLTEL CORPORATION <1% ++8,880 shares common stock
Little Rock, Arkansas (acquired 7-1-98) 108,355 465,845
Wireline and wireless communications and
information services.
- -----------------------------------------------------------------------------------------------------------------------------------
BALCO, INC. 89.7% 14% subordinated debentures, payable
Wichita, Kansas 2001 to 2002 (acquired 8-13-91) 160,000 160,000
Specialty architectural products used in 14% subordinated debenture, payable
the construction and remodeling of 2001 to 2002, last maturing $250,000
commercial and institutional buildings. convertible into 250,000 shares of
common stock at $1.00 per share
(acquired 6-1-91) 320,000 820,000
110,000 shares common stock and 60,920
shares Class B non-voting common
stock (acquired 10-25-83) 170,920 512,760
Warrants to purchase 85,000 shares of
common stock at $2.40 per share,
expiring 2001 (acquired 8-13-91) - 51,000
----------- ------------
650,920 1,543,760
- -----------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
BOXX TECHNOLOGIES, INC. 9.6% 10% convertible promissory notes due
Austin, Texas 2001 (acquired 4-26-00) $ 500,000 $ 500,000
Workstations for computer graphics 1,000,000 shares Series B convertible
imaging and design. preferred stock, convertible into
1,000,000 shares of common stock at
$0.50 per share (acquired 8-20-99) 500,000 -
Warrants to purchase 80,000 shares of
series B preferred stock at $0.50
per share, expiring 2005
(acquired 4-26-00) - -
----------- ------------
1,000,000 500,000
- -----------------------------------------------------------------------------------------------------------------------------------
+CISCO SYSTEMS, INC. <1% ++17,217 shares common stock
(distributed by STARTech Seed Fund I) (acquired 3-19-01) 257,400 272,252
San Jose, California
Networking hardware, software and
services for the Internet.
- -----------------------------------------------------------------------------------------------------------------------------------
+CONCERT INDUSTRIES LTD. 9.8% Junior secured note, due 2004
Vancouver, British Columbia (acquired 5-31-00) 1,500,000 1,500,000
Manufacture and sale of latex, thermal 8% subordinated debentures due 2008,
and multi-bonded air-laid nonwoven fabrics $8,471,263 principal amount,
having superabsorbent properties. exchangeable for 2,046,199 shares of
common stock at $4.14 (C$6.525) per
share (acquired 5-31-00) 7,143,000 6,785,000
++365,000 shares common stock
(acquired 11-10-00, 11-14-00 and
12-1-00) 1,299,649 1,459,000
422,286 shares common stock
(acquired 5-31-00) 877,475 1,350,000
Warrant to purchase 83,643 shares of
common stock at C$6.00 (U$3.807) per
share, expiring 2002 (acquired
5-31-00) 47,525 68,000
----------- ------------
10,867,649 11,162,000
- -----------------------------------------------------------------------------------------------------------------------------------
+CYBERSOURCE CORPORATION <1% ++138,027 shares common stock
Mountain View, California (acquired 7-9-00) 1,000,000 241,547
Provides traditional and e-commerce
businesses with systems for processing
electronic payments.
- -----------------------------------------------------------------------------------------------------------------------------------
DENNIS TOOL COMPANY 66.2% 20,725 shares 5% convertible preferred
Houston, Texas stock, convertible into 20,725
Polycrystalline diamond compacts (PDCs) shares of common stock at $48.25 per
used in oil field drill bits and in share (acquired 8-10-98) 999,981 500,000
mining and industrial applications. 140,137 shares common stock (acquired
3-7-94 and 8-10-98) 2,329,963 2,830,000
----------- ------------
3,329,944 3,330,000
- -----------------------------------------------------------------------------------------------------------------------------------
+DREW SCIENTIFIC GROUP PLC <1% ++539,925 shares common stock
(formerly CDC Technologies, Inc.) (acquired 3-21-01) 3,139,161 546,620
Cumbria, England
Diagnostic medical equipment and
consumables.
- -----------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
+ENCORE WIRE CORPORATION 17.1% 2,724,500 shares common stock
McKinney, Texas (acquired 7-16-92, 3-15-94, 4-28-94
Electrical wire and cable for and 10-7-98) $ 5,800,000 $ 13,623,000
residential and commercial use.
- -----------------------------------------------------------------------------------------------------------------------------------
+FMC CORPORATION <1% ++6,430 shares common stock
Chicago, Illinois (acquired 6-6-86) 123,777 473,505
Machinery and chemicals in diversified
product areas.
- -----------------------------------------------------------------------------------------------------------------------------------
+GLOBAL CROSSING LTD. <1% ++64,242 shares common stock
Hamilton, Bermuda (acquired 9-28-99) 78,346 866,625
Diversified telecommunications company.
- -----------------------------------------------------------------------------------------------------------------------------------
HEELING, INC. 43.0% 10% subordinated debenture due 2006
Carrollton, Texas (acquired 10-30-00, 11-10-00
Heelys stealth skate shoes ("one wheel in and 12-7-00) 1,800,000 1,800,000
the heel") sold through specialty skate, 1,745,455 shares Series A preferred
lifestyle and sporting goods stores, (acquired 5-26-00) 480,000 480,000
footwear chains and over the Internet at 436,364 shares Series B convertible
Heelys.com. preferred stock, convertible into
436,364 shares of common stock at
$0.275 per share (acquired 5-26-00) 120,000 120,000
----------- ------------
2,400,000 2,400,000
- -----------------------------------------------------------------------------------------------------------------------------------
+HOLOGIC, INC. <1% ++158,205 shares common stock
Bedford, Massachusetts (acquired 8-27-99) 220,000 632,820
Medical instruments including bone
densitometers, mammography devices and
digital radiography systems.
- -----------------------------------------------------------------------------------------------------------------------------------
INTELLIGENT REASONING SYSTEMS, INC. 4.4% 705,128 shares Series B convertible
Austin, Texas preferred stock, convertible into
Automated optical inspection systems used 705,128 shares of common stock at
in the production of printed wired $0.60 per share (acquired 5-28-97) 423,077 -
assemblies and high density interconnects. 1,513,081 shares Series C convertible
preferred stock, convertible into
1,513,081 shares of common stock at
$0.74 per share (acquired 6-11-98) 1,119,679 2
Warrant to purchase 70,513 shares of
Series B convertible preferred stock
at $0.60 per share, expiring 2004
(acquired 11-21-97) - -
----------- ------------
1,542,756 2
- -----------------------------------------------------------------------------------------------------------------------------------
+KIMBERLY-CLARK CORPORATION <1% ++77,180 shares common stock
Irving, Texas (acquired 12-18-97) 2,396,926 5,235,119
Manufacturer of tissue, personal care and
health care products.
- -----------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
+MAIL-WELL, INC. 3.5% 2,096,588 shares common stock
Englewood, Colorado (acquired 2-18-94, 12-14-94, 7-27-95
Envelopes, labels and commercial printing. and 11-10-98) $ 2,986,870 $ 7,338,000
- -----------------------------------------------------------------------------------------------------------------------------------
MEDIA RECOVERY, INC. 68.2% 4,800,000 shares Series A convertible
Graham, Texas preferred stock, convertible into
Computer and office automation supplies 4,800,000 shares of common stock at
and accessories; impact and tilt $1.00 per share (acquired 11-4-97) 5,415,000 18,000,000
monitoring devices to detect mishandled
shipments; dunnage for protecting
shipments.
- -----------------------------------------------------------------------------------------------------------------------------------
+MYLAN LABORATORIES, INC. <1% ++128,286 shares common stock
Pittsburgh, Pennsylvania (acquired 11-20-91) 400,000 3,316,193
Proprietary and generic pharmaceutical
products.
- -----------------------------------------------------------------------------------------------------------------------------------
ORGANIZED LIVING, INC. 10.0%-12.7% 2,500,001 shares Series D convertible
Lenexa, Kansas preferred stock, convertible into
Specialty retailer of products designed 2,500,000 to 3,333,334 shares of
to provide home and office storage and common stock at $1.80 to $2.40 per
organization solutions. share (acquired 1-7-00 and
10-30-00) 6,000,000 6,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
+PALM HARBOR HOMES, INC. 34.5% 7,855,121 shares common stock
Dallas, Texas (acquired 1-3-85, 3-31-88 and
Integrated manufacturing, retailing, 7-31-95) 10,931,955 78,551,000
financing and insuring of manufactured
housing produced in 15 plants.
- -----------------------------------------------------------------------------------------------------------------------------------
+PETSMART, INC. <1% ++654,220 shares common stock
Phoenix, Arizona (acquired 6-1-95) 2,878,733 2,616,880
Retail chain of more than 500 stores
selling pet foods, supplies and services.
- -----------------------------------------------------------------------------------------------------------------------------------
THE RECTORSEAL CORPORATION 100.0% 27,907 shares common stock (acquired
Houston, Texas 1-5-73 and 3-31-73) 52,600 47,500,000
Chemical specialty products for
industrial, construction, oil field and
automotive applications; owns 20% of
Whitmore Manufacturing.
- -----------------------------------------------------------------------------------------------------------------------------------
REWIND HOLDINGS, INC. 37.5% 12% subordinated notes, payable 2001
Sugar Land, Texas to 2004 (acquired 10-21-96, 8-13-97,
Owns Bill Young Productions, Texas Video 8-11-98 and 2-15-01) 3,948,750 1,000,000
and Post, and Extreme Communications, 375 shares 8% Series A convertible
which produce radio and television preferred stock, convertible into
commercials and corporate communications 1,500,000 shares of common stock at
videos. $0.25 per share (acquired 10-21-96) 375,000 -
Warrants to purchase 723,750 shares
of common stock at $0.25 per share,
expiring 2005 and 2008 (acquired
8-11-98 and 2-15-01) - -
----------- ------------
4,323,750 1,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
SKYLAWN CORPORATION 100.0% 1,449,026 shares common stock
Hayward, California (acquired 7-16-69) $ 4,510,400 $ 38,000,000
Cemeteries, mausoleums and mortuaries
located in northern California.
- -----------------------------------------------------------------------------------------------------------------------------------
+SPRINT CORPORATION - FON Group <1% ++72,000 shares common stock
Westwood, Kansas (acquired 6-20-84) 449,654 1,583,280
Diversified telecommunications company.
- -----------------------------------------------------------------------------------------------------------------------------------
+SPRINT CORPORATION - PCS Group <1% ++36,000 shares common stock
Overland Park, Kansas (acquired 11-23-98) 53,991 684,000
Domestic wireless telephony services.
- -----------------------------------------------------------------------------------------------------------------------------------
SPROCKETS.COM, INC. 7.0% 10% subordinated convertible
Boston, Massachusetts promissory notes due 2001 and 2002
Provides web-based file transfer and (acquired 9-15-00, 11-3-00 and
collaboration platforms to facilitate the 3-20-01) 544,371 1
creation of visual media from multiple 2,192,982 shares Series A-2 redeemable
locations. convertible preferred stock,
convertible into 2,192,982 shares of
common stock at $0.342 per share
(acquired 5-11-00) 750,000 -
Warrants to purchase 562,866 shares of
common stock at $0.342 per share,
expiring 2005 and 2006 (acquired
9-15-00, 11-3-00 and 3-20-01) 5,629 -
----------- ------------
1,300,000 1
- -----------------------------------------------------------------------------------------------------------------------------------
TCI HOLDINGS, INC. - 21 shares 12% Series C cumulative
Denver, Colorado compounding preferred stock
Cable television systems and microwave (acquired 1-30-90) - 677,250
relay systems.
- -----------------------------------------------------------------------------------------------------------------------------------
TEXAS CAPITAL BANCSHARES, INC. 3.3% 344,828 shares common stock
Dallas, Texas (acquired 5-1-00) 5,000,006 5,000,006
Owns both Texas Capital Bank, NA, which
serves middle market clients, and Bank
Direct, an Internet bank.
- -----------------------------------------------------------------------------------------------------------------------------------
TEXAS PETROCHEMICAL HOLDINGS, INC. 5.0% 30,000 shares common stock
Houston, Texas (acquired 6-27-96) 3,000,000 1
Butadiene for synthetic rubber, MTBE for
gasoline octane enhancement and butylenes
for varied applications.
- -----------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Company Equity (a) Investment (b) Cost Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
TEXAS SHREDDER, INC. 53.3% 14% subordinated debentures, payable
San Antonio, Texas 2001 (acquired 3-6-91 and 6-1-98) $ 617,970 $ 617,970
Design and manufacture of heavy-duty 3,296 shares Series A preferred stock
shredder systems for recycling steel and (acquired 3-6-91 and 6-1-98) 329,600 329,600
other materials from junk automobiles. 750 shares Series B convertible
preferred stock, convertible into
750,000 shares of common stock at
$0.10 per share (acquired 3-6-91) 75,000 3,187,500
----------- ------------
1,022,570 4,135,070
- -----------------------------------------------------------------------------------------------------------------------------------
VOCALDATA, INC. 2.8% 650,001 shares Series A convertible
Richardson, Texas preferred stock, convertible into
Hardware and software for customer premises 1,300,002 shares of common stock at
telephony equipment based on Voice Over $0.875 per share (acquired 11-4-99
Internet Protocol. and 12-3-99) 1,137,500 1,290,918
200,287 shares Series B convertible
preferred stock, convertible into
200,287 shares of common stock at
$1.759 per share (acquired 10-26-00) 352,305 198,887
----------- ------------
1,489,805 1,489,805
- -----------------------------------------------------------------------------------------------------------------------------------
THE WHITMORE MANUFACTURING COMPANY 80.0% 80 shares common stock
Rockwall, Texas (acquired 8-31-79) 1,600,000 8,000,000
Specialized mining and industrial
lubricants; automotive transit coatings.
- -----------------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS - Diamond State Ventures, L.P. - 1.9%
limited partnership interest
(acquired 10-12-99) 119,196 119,196
- First Capital Group of Texas III,
L.P. - 3.3% limited partnership
interest (acquired 12-26-00) 100,000 100,000
100.0% Humac Company - 1,041,000 shares
common stock (acquired 1-31-75 and
12-31-75) - 136,000
<1% +Liberty Satellite & Technology,
Inc. - ++18,000 shares Series A
common stock (acquired 12-4-96) - 29,812
- STARTech Seed Fund I - 12.6% limited
partnership interest (acquired
4-17-98) 242,600 500,000
- STARTech Seed Fund II - 3.1% limited
partnership interest (acquired
4-28-00) 450,000 450,000
<1% +Triton Energy Limited - ++6,022
shares common stock (acquired
12-15-86) 144,167 113,033
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $87,601,646 $315,917,509
=========== ============
- -----------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Notes to Portfolio of Investments
(a) The percentages in the "Equity" column express the potential equity
interests held by Capital Southwest Corporation and Capital Southwest Venture
Corporation (together, the "Company") in each issuer. Each percentage represents
the amount of the issuer's common stock the Company owns or can acquire as a
percentage of the issuer's total outstanding common shares, plus shares reserved
for all outstanding warrants, convertible securities and employee stock options.
The symbol "<1%" indicates that the Company holds a potential equity interest of
less than one percent.
(b) Unrestricted securities (indicated by ++) are freely marketable securities
having readily available market quotations. All other securities are restricted
securities which are subject to one or more restrictions on resale and are not
freely marketable. At March 31, 2001, restricted securities represented
approximately 90% of the value of the consolidated investment portfolio.
(c) Under the valuation policy of the Company, unrestricted securities are
valued at the closing sale price for listed securities and at the closing bid
price for Nasdaq securities on the valuation date. Restricted securities,
including securities of publicly-owned companies which are subject to
restrictions on resale, are valued at fair value as determined by the Board of
Directors. Fair value is considered to be the amount which the Company may
reasonably expect to receive for portfolio securities if such securities were
sold on the valuation date. Valuations as of any particular date, however, are
not necessarily indicative of amounts which may ultimately be realized as a
result of future sales or other dispositions of securities.
Among the factors considered by the Board of Directors in determining the
fair value of restricted securities are the financial condition and operating
results of the issuer, the long-term potential of the business of the issuer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses, the proportion of
the issuer's securities owned by the Company, the nature and duration of resale
restrictions and the nature of any rights enabling the Company to require the
issuer to register restricted securities under applicable securities laws. In
determining the fair value of restricted securities, the Board of Directors
considers the inherent value of such securities without regard to the
restrictive feature and adjusts for any diminution in value resulting from
restrictions on resale.
(d) Agreements between certain issuers and the Company provide that the issuers
will bear substantially all costs in connection with the disposition of common
stocks, including those costs involved in registration under the Securities Act
of 1933 but excluding underwriting discounts and commissions. These agreements,
which cover common stocks owned at March 31, 2001 and common stocks which may be
acquired thereafter through exercise of warrants and conversion of debentures
and preferred stocks, apply to restricted securities of all issuers in the
investment portfolio of the Company except securities of the following issuers,
which are not obligated to bear registration costs: Humac Company, Skylawn
Corporation and The Whitmore Manufacturing Company.
(e) The descriptions of the companies and ownership percentages shown in the
portfolio of investments were obtained from published reports and other sources
believed to be reliable, are supplemental and are not covered by the report of
independent auditors. Acquisition dates indicated are the dates specific
securities were acquired. Certain securities were received in exchange for or
upon conversion or exercise of other securities previously acquired.
Portfolio Changes During the Year
New Investments and Additions to Previous Investments
Amount
------------
Airformed Composites, Inc. ............................ $ 500,000
Amfibe, Inc............................................ 5,210
BOXX Technologies, Inc. ............................... 500,000
CDC Technologies, Inc. ................................ 40,003
Concert Industries Ltd. ............................... 3,799,649
Diamond State Ventures, L.P. .......................... 47,321
Dyntec, Inc. .......................................... 3,835
First Capital Group of Texas III, L.P. ................ 100,000
Heeling, Inc. ......................................... 2,700,000
Organized Living, Inc. ................................ 1,000,000
Rewind Holdings, Inc. ................................. 123,750
Sprockets.com, Inc. ................................... 1,300,000
STARTech Seed Fund II ................................. 450,000
Texas Capital Bancshares, Inc. ....................... 5,000,006
VocalData, Inc. ....................................... 352,305
------------
$ 15,922,079
============
Dispositions and Write-offs
Amount
Cost Received
------------- -------------
All Components, Inc. ................... $ 450,000 $ 450,000
American Homestar Corporation .......... 3,405,824 12,922
Amfibe, Inc. .......................... 205,210 6,179,200
Dyntec, Inc. ........................... 4,503,835 174,000
iChoose, Inc. .......................... 1,100,001 -
SDI Investments Liquidating Trust ...... 118,000 841,255
Vonova Corporation (formerly International
Talk.com, Inc.)....................... 3,000,000 -
------------- -------------
$ 12,782,870 $ 7,657,377
============= =============
Repayments Received..................... $ 540,000
=============
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Financial Condition
March 31
---------------------------
Assets 2001 2000
------------ ------------
Investments at market or fair value (Notes
1, 2 and 10)
Companies more than 25% owned
(Cost: 2001 - $23,140,865,
2000 - $23,380,865)................... $205,273,759 $200,608,759
Companies 5% to 25% owned
(Cost: 2001 - $17,642,756,
2000 - $22,579,414)................... 19,623,004 22,760,506
Companies less than 5% owned
(Cost: 2001 - $46,818,025,
2000 - $39,042,158)................... 91,020,746 100,259,870
------------ ------------
Total investments
(Cost: 2001 - $87,601,646,
2000 - $85,002,437)................... 315,917,509 323,629,135
Cash and cash equivalents.................. 1,137,767 63,986,715
Receivables................................ 264,377 238,594
Other assets (Note 8)...................... 5,348,315 4,731,360
------------ ------------
Totals.................................. $322,667,968 $392,585,804
============ ============
March 31
---------------------------
Liabilities and Shareholders' Equity 2001 2000
------------ ------------
Note payable to bank (Note 4) ............. $ 5,000,000 $ 60,000,000
Notes payable to portfolio companies (Note 4) 6,000,000 5,000,000
Accrued interest and other liabilities (Note 8) 2,135,052 2,220,753
Deferred income taxes (Note 3)............. 77,924,303 83,489,085
Subordinated debenture (Note 5)............ 5,000,000 5,000,000
------------ ------------
Total liabilities ..... 96,059,355 155,709,838
------------ ------------
Shareholders' equity (Notes 3 and 6)
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,252,416
shares at March 31, 2001 and
March 31, 2000........................ 4,252,416 4,252,416
Additional capital...................... 6,450,747 6,450,747
Undistributed net investment
income................................ 3,550,573 4,117,104
Undistributed net realized gain on
investments........................... 70,382,314 73,613,301
Unrealized appreciation of investments -
net of deferred income taxes.......... 149,005,865 155,475,700
Treasury stock - at cost
(437,365 shares)...................... (7,033,302) (7,033,302)
------------ ------------
Net assets at market or fair value, equivalent
to $59.40 per share at March 31, 2001,
and $62.09 per share at March 31, 2000
on the 3,815,051 shares outstanding... 226,608,613 236,875,966
------------ ------------
Totals.................................. $322,667,968 $392,585,804
============ ============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Operations
Years Ended March 31
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Investment income (Note 9):
Interest ........................................................................ $ 542,241 $ 884,152 $ 1,307,668
Dividends ....................................................................... 2,955,833 1,878,853 1,966,360
Management and directors' fees .................................................. 530,400 525,400 538,650
------------ ------------ ------------
4,028,474 3,288,405 3,812,678
------------ ------------ ------------
Operating expenses:
Interest ........................................................................ 1,144,337 456,262 416,174
Salaries ........................................................................ 850,959 804,933 1,109,699
Net pension expense (benefit) (Note 8) .......................................... (486,174) (435,984) (311,625)
Other operating expenses (Notes 7 and 11) ....................................... 614,861 657,770 727,612
------------ ------------ ------------
2,123,983 1,482,981 1,941,860
------------ ------------ ------------
Income before income taxes ......................................................... 1,904,491 1,805,424 1,870,818
Income tax expense (Note 3) ........................................................ 181,991 142,494 109,100
------------ ------------ ------------
Net investment income .............................................................. $ 1,722,500 $ 1,662,930 $ 1,761,718
============ ============ ============
Proceeds from disposition of investments ........................................... $ 7,657,377 $ 14,893,442 $ 1,530,691
Cost of investments sold (Note 1) .................................................. 12,782,870 5,662,000 --
------------ ------------ ------------
Realized gain (loss) on investments before income taxes (Note 9) ................... (5,125,493) 9,231,442 1,530,691
Income tax expense (benefit) ....................................................... (1,894,506) 3,211,550 535,742
------------ ------------ ------------
Net realized gain (loss) on investments ............................................ (3,230,987) 6,019,892 994,949
------------ ------------ ------------
Decrease in unrealized appreciation of investments before income taxes ............. (10,310,835) (38,071,790) (63,433,545)
Decrease in deferred income taxes on appreciation of investments (Note 3) .......... (3,841,000) (13,322,000) (22,201,000)
------------ ------------ ------------
Net decrease in unrealized appreciation of investments ............................. (6,469,835) (24,749,790) (41,232,545)
------------ ------------ ------------
Net realized and unrealized loss on investments .................................... $ (9,700,822) $(18,729,898) $(40,237,596)
============ ============ ============
Decrease in net assets from operations.............................................. $ (7,978,322) $(17,066,968) $(38,475,878)
============ ============ ============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Changes in Net Assets
Years Ended March 31
-----------------------------------------------
2001 2000 1999
------------- ------------- -------------
Operations
Net investment income ................................ $ 1,722,500 $ 1,662,930 $ 1,761,718
Net realized gain (loss) on investments .............. (3,230,987) 6,019,892 994,949
Net decrease in unrealized appreciation of investments (6,469,835) (24,749,790) (41,232,545)
------------- ------------- -------------
Decrease in net assets from operations ............... (7,978,322) (17,066,968) (38,475,878)
Distributions from:
Undistributed net investment income .................. (2,289,031) (2,289,031) (2,280,411)
Capital share transactions
Exercise of employee stock options ................... -- -- 965,438
------------- ------------- -------------
Decrease in net assets ............................... (10,267,353) (19,355,999) (39,790,851)
Net assets, beginning of year ........................... 236,875,966 256,231,965 296,022,816
------------- ------------- -------------
Net assets, end of year ................................. $ 226,608,613 $ 236,875,966 $ 256,231,965
============= ============= =============
See Notes to Consolidated Financial Statements
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Cash Flows
Years Ended March 31
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
Cash flows from operating activities
Decrease in net assets from operations ............................................. $ (7,978,322) $ (17,066,968) $ (38,475,878)
Adjustments to reconcile decrease in net assets from operations to net cash provided
by operating activities:
Depreciation and amortization ................................................... 29,891 31,976 24,667
Net pension benefit ............................................................. (486,174) (435,984) (311,625)
Net realized and unrealized loss on investments ................................. 9,700,822 18,729,898 40,237,596
(Increase) decrease in receivables .............................................. (25,783) 77,113 17,166
Increase in other assets ........................................................ (8,923) (44,754) (47,315)
Increase (decrease) in accrued interest and other liabilities ................... (27,179) 41,504 (74,670)
Decrease in accrued pension cost ................................................ (209,947) -- --
Deferred income taxes ........................................................... 170,400 152,600 109,100
------------- ------------- -------------
Net cash provided by operating activities .......................................... 1,164,785 1,485,385 1,479,041
------------- ------------- -------------
Cash flows from investing activities
Proceeds from disposition of investments ........................................... 7,657,377 14,893,442 1,530,691
Purchases of securities ............................................................ (15,922,079) (21,924,423) (13,170,132)
Maturities of securities ........................................................... 540,000 4,840,000 744,539
Income taxes paid on realized gain on investments .................................. -- (4,069,101) (266,643)
------------- ------------- -------------
Net cash used by investing activities .............................................. (7,724,702) (6,260,082) (11,161,545)
------------- ------------- -------------
Cash flows from financing activities
Increase (decrease) in notes payable to bank ....................................... (55,000,000) 60,000,000 (100,000,000)
Increase in notes payable to portfolio companies ................................... 1,000,000 5,000,000 --
Distributions from undistributed net investment income ............................. (2,289,031) (2,289,031) (2,280,411)
Proceeds from exercise of employee stock options ................................... -- -- 965,438
------------- ------------- -------------
Net cash provided (used) by financing activities ................................... (56,289,031) 62,710,969 (101,314,973)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ............................... (62,848,948) 57,936,272 (110,997,477)
Cash and cash equivalents at beginning of year ..................................... 63,986,715 6,050,443 117,047,920
------------- ------------- -------------
Cash and cash equivalents at end of year ........................................... $ 1,137,767 $ 63,986,715 $ 6,050,443
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest ............................................ $ 1,144,558 $ 436,023 $ 424,926
Income taxes ........................................ $ 11,591 $ 4,092,891 $ 288,838
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Capital Southwest Corporation ("CSC") is a business development company
subject to regulation under the Investment Company Act of 1940. Capital
Southwest Venture Corporation ("CSVC"), a wholly-owned subsidiary of CSC, is a
Federal licensee under the Small Business Investment Act of 1958. The following
is a summary of significant accounting policies followed in the preparation of
the consolidated financial statements of CSC and CSVC (together, the "Company"):
Principles of Consolidation. The consolidated financial statements have
been prepared on the value method of accounting 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.
Cash and Cash Equivalents. All temporary cash investments having a maturity
of three months or less when purchased are considered to be cash equivalents.
Investments. Investments are stated at market or fair value determined by
the Board of Directors as described in the Notes to Portfolio of Investments and
Note 2 below. The average cost method is used in determining cost of investments
sold. Investments are recorded on a trade date basis. Dividends are recognized
on the ex-dividend date and interest income is accrued daily.
Segment Information. The Company operates and manages its business in a
singular segment. As an investment company, the Company invests in portfolio
companies in various industries and geographic areas as presented in the
portfolio of investments.
2. Valuation of Investments
The consolidated financial statements as of March 31, 2001 and 2000 include
securities valued at $285,059,091 (90% of the value of the consolidated
investment portfolio) and $272,736,962 (84% of the value of the consolidated
investment portfolio), respectively, whose values have been determined by the
Board of Directors in the absence of readily ascertainable market values.
Because of the inherent uncertainty of valuation, these values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
3. Income taxes
For the tax years ended December 31, 2000, 1999 and 1998, CSC and CSVC
qualified to be taxed as regulated investment companies ("RICs") under
applicable provisions of the Internal Revenue Code. As RICs, CSC and CSVC must
distribute at least 90% of their taxable net investment income (investment
company taxable income) and may either distribute or retain their taxable net
realized gain on investments (capital gains). Both CSC and CSVC intend to meet
the applicable qualifications to be taxed as RICs in future years; however,
either company's ability to meet certain portfolio diversification requirements
of RICs in future years may not be controllable by such company.
No material provision was made for Federal income taxes on the investment
company taxable income of CSC and CSVC for the 2001, 2000 and 1999 fiscal years.
Such income was distributed to shareholders in the form of cash dividends for
which CSC and CSVC receive a tax deduction. With respect to net investment
income, the income tax expense for each of the three years ended March 31, 2001
includes a deferred tax provision related to the net pension benefit.
CSC and CSVC may not qualify or elect to be taxed as RICs in future years.
Therefore, consolidated deferred Federal income taxes of $79,310,000 and
$83,151,000 have been provided on net unrealized appreciation of investments of
$228,315,863 and $238,626,698 at March 31, 2001 and 2000, respectively. Such
appreciation is not included in taxable income until realized. Deferred income
taxes on net unrealized appreciation of investments have been provided at the
then currently effective maximum Federal corporate tax rate on capital gains of
35% at March 31, 2001 and 2000.
4. Notes Payable
The note payable to bank at March 31, 2001 was an unsecured $15,000,000
revolving line of credit, of which $5,000,000 had been drawn. The revolving line
of credit bears interest at the bank's base rate less .50% or LIBOR plus 1.25%
and matures on July 31, 2002. The note payable to bank at March 31, 2000 was an
unsecured note with interest payable at 6.48%. The note was paid in full on
April 3, 2000.
The notes payable to portfolio companies were demand promissory notes to
Skylawn Corporation and The Whitmore Manufacturing Company with interest payable
at prime minus 2.25%. Interest expense on these notes were $421,870 in 2001 and
$14,218 in 2000.
5. Subordinated Debenture
The subordinated debenture of $5,000,000 outstanding at March 31, 2001 and
2000 is payable to others and guaranteed by the Small Business Administration
("SBA"), bears interest at 8.0% and matures June 1, 2002.
6. Employee Stock Option Plan
Under the 1984 Incentive Stock Option Plan, options to purchase 42,000
shares of the Company's common stock at $35.625 per share (the adjusted market
price at the time of grant) were outstanding and exercisable at March 31, 2001
and expire in 2003. The 1984 Incentive Stock Option Plan expired in 1994.
Under the 1999 Stock Option Plan, 140,000 shares of common stock were
reserved for issuance to employees and officers of the Company. Options to
purchase 32,000 shares at a price of $77.00 per share (the market price at the
time of grant) and 6,000 shares at $84.70 were granted during the year ended
March 31, 2000 and remain outstanding at March 31, 2001, thus leaving a total of
102,000 options available for future grant. Such options expire ten years from
the date of grant and are generally exercisable on or after the first
anniversary of the date of grant in eight annual installments. At March 31,
2001, 7,750 shares were exercisable.
At March 31, 2001 and 2000, the dilution of net assets per share arising
from options outstanding was not material.
7. Employee Stock Ownership Plan
The Company and one of its wholly-owned portfolio companies sponsor a
qualified employee stock ownership plan ("ESOP") in which certain employees
participate. Contributions to the plan, which are invested in Company stock, are
made at the discretion of the Company's Board of Directors. A participant's
interest in contributions to the ESOP fully vests after five years of active
service. During the three years ended March 31, the Company made contributions
to the ESOP, which were charged against net investment income, of $42,997 in
2001, $43,862 in 2000 and $35,079 in 1999.
8. Retirement Plans
The Company sponsors a qualified defined benefit pension plan which covers
its employees and employees of certain of its wholly-owned portfolio companies.
The following information about the plan represents amounts and information
related to the Company's participation in the plan and is presented as though
the Company sponsored a single-employer plan. Benefits are based on years of
service and an average of the highest five consecutive years of compensation
during the last ten years of employment. The funding policy of the plan is to
contribute annual amounts that are currently deductible for tax reporting
purposes. No contribution was made to the plan during the three years ended
March 31, 2001.
The following tables set forth the plan's benefit obligations and fair
value of plan assets at March 31, 2001, 2000 and 1999:
Years Ended March 31
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Change in benefit obligation
Benefit obligation at beginning
of year ........................ $ 3,260,366 $ 3,315,119 $ 3,059,555
Service cost ......................... 50,961 43,818 68,710
Interest cost ........................ 205,976 193,397 199,301
Amendments ........................... -- -- (149,171)
Actuarial gain (loss) ................ 59,571 (201,158) 205,810
Benefits paid ........................ (321,205) (90,810) (69,086)
------------ ------------ ------------
Benefit obligation at end of year .... $ 3,255,669 $ 3,260,366 $ 3,315,119
============ ============ ============
Change in plan assets
Fair value of plan assets at beginning
of year ........................ $ 9,837,547 $ 10,074,598 $ 11,314,714
Actual return on plan assets ......... (758,307) (146,241) (1,171,030)
Benefits paid ........................ (321,205) (90,810) (69,086)
------------ ------------ ------------
Fair value of plan assets at end of
year ............................ $ 8,758,035 $ 9,837,547 $ 10,074,598
============ ============ ============
The following table sets forth the qualified plan's funded status and
amounts recognized in the Company's consolidated statements of financial
condition:
March 31
--------------------------
2001 2000
----------- -----------
Actuarial present value of benefit obligations:
Accumulated benefit obligation ................ $(2,938,747) $(2,965,576)
=========== ===========
Projected benefit obligation for service rendered to
date .......................................... $(3,255,669) $(3,260,366)
Plan assets at fair value* ......................... 8,758,035 9,837,547
----------- -----------
Excess of plan assets over the projected benefit
obligation .................................... 5,502,366 6,577,181
Unrecognized net (gain) loss from past experience
different from that assumed and effects of
changes in assumptions ........................ 109,379 (1,518,207)
Prior service costs not yet recognized ............. (151,642) (162,965)
Unrecognized net assets being amortized over
19 years ...................................... (295,308) (369,139)
----------- -----------
Prepaid pension cost included in other assets ...... $ 5,164,795 $ 4,526,870
=========== ===========
- -------------
*Primarily equities and bonds including approximately 30,000 shares of common
stock of the Company.
Components of net pension benefit related to the qualified plan include the
following:
Years Ended March 31
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Service cost - benefits earned during
the year ....................... $ 50,961 $ 43,818 $ 68,710
Interest cost on projected benefit
obligation ..................... 205,976 193,397 199,301
Actual return on assets ............. 758,307 146,241 1,171,030
Net amortization and deferral ....... (1,653,169) (960,903) (1,901,221)
----------- ----------- -----------
Net pension expense (benefit) from
qualified plan ................. $ (637,925) $ (577,447) $ (462,180)
=========== =========== ===========
The Company also sponsors an unfunded Retirement Restoration Plan, which is
a nonqualified plan that provides for the payment, upon retirement, of the
difference between the maximum annual payment permissible under the qualified
retirement plan pursuant to Federal limitations and the amount which would
otherwise have been payable under the qualified plan.
The following table sets forth the Retirement Restoration Plan's benefit
obligation at March 31, 2001, 2000 and 1999:
Years Ended March 31
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Change in benefit obligation
Benefit obligation at beginning
of year ....................... $ 2,026,495 $ 2,166,180 $ 2,051,899
Service cost ........................ 4,945 4,089 13,087
Interest cost ....................... 113,497 117,541 117,635
Amendments .......................... -- -- 83,360
Actuarial gain (loss) ............... (176,776) (261,315) (99,801)
Benefits paid ....................... (209,947) -- --
----------- ----------- -----------
Benefit obligation at end of year.... $ 1,758,214 $ 2,026,495 $ 2,166,180
=========== =========== ===========
The following table sets forth the status of the Retirement Restoration
Plan and the amounts recognized in the consolidated statements of financial
condition:
March 31
--------------------------
2001 2000
----------- -----------
Projected benefit obligation ....................... $(1,758,214) $(2,026,495)
Unrecognized net (gain) loss from past ex-
perience different from that assumed
and effects of changes in assumptions ......... (131,675) 45,101
Unrecognized prior service costs ................... 69,875 83,360
Unrecognized net obligation ........................ -- 19,823
----------- -----------
Accrued pension cost included in other liabilities.. $(1,820,014) $(1,878,211)
=========== ===========
The Retirement Restoration Plan expenses recognized during the years ended
March 31, 2001, 2000 and 1999 of $151,751, $141,463 and $150,555, respectively,
are offset against the net pension benefit from the qualified plan.
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.5% and 5.0%, respectively, at March 31,
2001, March 31, 2000 and March 31, 1999. The expected long-term rate of return
used to project estimated earnings on plan assets for the qualified plan was
7.5% for the years ended March 31, 2001 and March 31, 2000 and 8.5% for the year
ended March 31, 1999. The calculations also assume retirement at age 65, the
normal retirement age.
9. Sources of Income
Income was derived from the following sources:
Investment Income Realized Gain
Years Ended --------------------------------------- (Loss) on
March 31 Investments
- -------- Other Before Income
2001 Interest Dividends Income Taxes
- ---- ----------- ----------- ----------- -------------
Companies more than
25% owned ......... $ 72,800 $ 2,585,386 $ 494,900 $ --
Companies 5% to 25%
owned ............. -- -- -- (3,000,000)
Companies less than
5% owned .......... 217,080 370,447 35,500 (2,125,493)
Other sources,
including temporary
investments ....... 252,361 -- -- --
----------- ----------- ----------- -----------
$ 542,241 $ 2,955,833 $ 530,400 $(5,125,493)
=========== =========== =========== ===========
2000
- ----
Companies more than
25% owned ......... $ 106,400 $ 1,440,755 $ 487,400 $ --
Companies 5% to 25%
owned ............. -- -- (1,500) 8,133,870
Companies less than
5% owned .......... 173,105 438,098 39,500 1,097,572
Other sources,
including temporary
investments ....... 604,647 -- -- --
----------- ----------- ----------- -----------
$ 884,152 $ 1,878,853 $ 525,400 $ 9,231,442
=========== =========== =========== ===========
1999
- ----
Companies more than
25% owned ......... $ 140,000 $ 1,644,270 $ 490,900 $ --
Companies 5% to 25%
owned ............. 3,495 -- 34,750 --
Companies less than
5% owned .......... 688,210 322,090 13,000 1,530,691
Other sources,
including temporary
investments ....... 475,963 -- -- --
----------- ----------- ----------- -----------
$ 1,307,668 $ 1,966,360 $ 538,650 $ 1,530,691
=========== =========== =========== ===========
10. Summarized Financial Information of Wholly-Owned Portfolio Companies
The Company has three significant wholly-owned portfolio companies - The
RectorSeal Corporation, The Whitmore Manufacturing Company and Skylawn
Corporation - which are neither investment companies nor business development
companies. Accordingly, the accounts of such portfolio companies are not
included with those of the Company. Summarized combined financial information of
the three portfolio companies is as follows:
(all figures in thousands) March 31
------------------------------
2001 2000
-------- --------
Condensed Balance Sheet Data
Assets
Cash and temporary
investments ...................... $ 14,815 $ 12,547
Receivables ........................ 30,504 30,022
Inventories ........................ 37,536 36,523
Property, plant and equipment ...... 38,609 34,604
Other assets ....................... 19,781 19,671
-------- --------
Totals ........................... $141,245 $133,367
======== ========
Liabilities and Shareholder's Equity
Long-term debt ..................... $ 8,334 $ 9,669
Other liabilities .................. 19,412 17,205
Shareholder's equity ............... 113,499 106,493
-------- --------
Totals ........................... $141,245 $133,367
======== ========
Condensed Statements of Income 2001 2000 1999
-------- -------- --------
Revenues............................ $ 93,575 $ 91,608 $ 83,426
Costs and operating expenses........ $ 81,087 $ 79,237 $ 72,566
Net income.......................... $ 9,830 $ 7,917 $ 7,021
11. Commitments
The Company has agreed, subject to certain conditions, to invest up to
$3,881,154 in six portfolio companies.
The Company leases office space under an operating lease which requires
base annual rentals of approximately $58,000 through February, 2003. For the
three years ended March 31, total rental expense charged to investment income
was $58,145 in 2001, $57,479 in 2000 and $58,798 in 1999.
Selected Per Share Data and Ratios
Years Ended March
-----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Investment income ............................................... $ 1.06 $ .86 $ 1.00 $ 1.28 $ 1.26
Operating expenses .............................................. (.26) (.27) (.40) (.42) (.37)
Interest expense ................................................ (.30) (.12) (.11) (.11) (.17)
Income taxes .................................................... (.05) (.03) (.03) (.03) (.03)
--------- --------- --------- --------- ---------
Net investment income ........................................... .45 .44 .46 .72 .69
Distributions from undistributed net investment income .......... (.60) (.60) (.60) (.60) (.60)
Net realized gain (loss) on investments ......................... (.85) 1.58 .26 1.71 1.81
Net increase (decrease) in unrealized appreciation of investments (1.69) (6.49) (10.81) 18.32 6.05
Exercise of employee stock options* ............................. -- -- (.30) (.13) --
--------- --------- --------- --------- ---------
Increase (decrease) in net asset value .......................... (2.69) (5.07) (10.99) 20.02 7.95
Net asset value:
Beginning of year ............................................. 62.09 67.16 78.15 58.13 50.18
--------- --------- --------- --------- ---------
End of year ................................................... $ 59.40 $ 62.09 $ 67.16 $ 78.15 $ 58.13
========= ========= ========= ========= =========
Ratio of operating expenses to average net assets ............... .4% .4% .6% .6% .7%
Ratio of net investment income to average net assets ............ .7% .7% .6% 1.1% 1.2%
Portfolio turnover rate ......................................... 2.6% 4.3% .2% 2.5% 1.6%
Shares outstanding at end of period (000s omitted) .............. 3,815 3,815 3,815 3,788 3,767
- ---------------
*Net decrease is due to exercise of employee stock options at less than
beginning of period net asset value.
Independent Auditors' Report
The Board of Directors and Shareholders
Capital Southwest Corporation:
We have audited the accompanying consolidated statements of financial
condition of Capital Southwest Corporation and subsidiary as of March 31, 2001
and 2000, including the portfolio of investments as of March 31, 2001, and the
related consolidated statements of operations, changes in net assets, and cash
flows for each of the years in the three-year period ended March 31, 2001 and
the selected per share data and ratios for each of the years in the five-year
period ended March 31, 2001. These financial statements and per share data and
ratios are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and per share data and
ratios based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and per share data and ratios are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included verification of
securities owned as of March 31, 2001 and 2000, by examination of such
securities held by the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements and selected per share
data and ratios referred to above present fairly, in all material respects, the
financial position of Capital Southwest Corporation and subsidiary as of March
31, 2001 and 2000, the results of their operations, the changes in their net
assets and their cash flows for each of the years in the three-year period ended
March 31, 2001, and the selected per share data and ratios for each of the years
in the five-year period ended March 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Dallas, Texas
April 20, 2001
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The composite measure of the Company's financial performance in the
Consolidated Statements of Operations is captioned "Decrease in net assets from
operations" and consists of three elements. The first is "Net investment
income", which is the difference between the Company's income from interest,
dividends and fees and its combined operating and interest expenses, net of
applicable income taxes. The second element is "Net realized gain (loss) on
investments", which is the difference between the proceeds received from
disposition of portfolio securities and their stated cost, net of applicable
income tax expense. The third element is the "Net decrease in unrealized
appreciation of investments", which is the net change in the market or fair
value of the Company's investment portfolio, compared with stated cost, net of a
decrease in deferred income taxes which would become payable if the unrealized
appreciation were realized through the sale or other disposition of the
investment portfolio. It should be noted that the "Net realized gain (loss) on
investments" and "Net decrease in unrealized appreciation of investments" are
directly related in that when an appreciated portfolio security is sold to
realize a gain, a corresponding decrease in net 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 net unrealized appreciation occurs.
Net Investment Income
The Company's principal objective is to achieve capital appreciation.
Therefore, a significant portion of the investment portfolio is structured to
maximize the potential return from equity participation and provides minimal
current yield in the form of interest or dividends. The Company also earns
interest income from the short-term investment of cash funds, and the annual
amount of such income varies based upon the average level of funds invested
during the year and fluctuations in short-term interest rates. During the three
years ended March 31, the Company had interest income from temporary cash
investments of $249,000 in 2001, $599,000 in 2000 and $476,000 in 1999. The
Company also receives management fees from its wholly-owned portfolio companies
which aggregated $458,400 in each of the years ended March 31, 2001, March 31,
2000 and March 31, 1999. During the three years ended March 31, 2001, the
Company recorded dividend income from the following sources:
Years Ended March 31
------------------------------------
2001 2000 1999
---------- ---------- ----------
AT&T Corp. ......................... $ 68,621 $ 146,570 $ --
Alamo Group Inc. ................... 677,112 790,756 1,170,400
Dennis Tool Company ................ 49,999 49,999 --
Kimberly-Clark Corporation ......... 84,126 81,039 77,952
The RectorSeal Corporation ......... 960,000 240,000 240,000
Skylawn Corporation ................ 658,275 300,000 150,000
TCI Holdings, Inc./Westmarc
Communications .................. 81,270 81,270 81,270
Texas Shredder, Inc. ............... 40,460 40,460 40,460
The Whitmore Manufacturing Company . 240,000 60,000 60,000
Other .............................. 95,970 88,759 146,278
---------- ---------- ----------
$2,955,833 $1,878,853 $1,966,360
========== ========== ==========
Total operating expenses, excluding interest expense, decreased by $47,073
or 4.6% and by $498,967 or 32.7% during the years ended March 31, 2001 and 2000,
respectively. Due to the nature of its business, the majority of the Company's
operating expenses are related to employee and director compensation, office
expenses, legal and accounting fees and the net pension benefit. Interest
expense increased by $688,075 and by $40,088 during the years ended March 31,
2001 and 2000, respectively, due to increased borrowings.
Net Realized Gain (Loss) on Investments
Net realized loss on investments was $3,230,987 (after income tax benefit
of $1,894,506) during the year ended March 31, 2001, compared with a gain of
$6,019,892 (after income tax expense of $3,211,550) during 2000 and a gain of
$994,949 (after income tax expense of $535,742) during 1999. Management does not
attempt to maintain a comparable level of realized gains from year to year, but
instead attempts to maximize total investment portfolio appreciation. This
strategy often dictates the long-term holding of portfolio securities in pursuit
of increased values and increased unrealized appreciation, but may at opportune
times dictate realizing gains through the disposition of certain portfolio
investments.
Net Decrease in Unrealized Appreciation of Investments
For the three years ended March 31, the Company recorded a decrease in
unrealized appreciation of investments before income taxes of $10,310,835,
$38,071,790 and $63,433,545 in 2001, 2000 and 1999, respectively. As explained
in the first paragraph of this discussion and analysis, the realization of gains
or losses results in a corresponding decrease or increase in unrealized
appreciation of investments. Set forth in the following table are the
significant increases and decreases in unrealized appreciation (before the
related change in deferred income taxes and excluding the effect of gains or
losses realized during the year) by portfolio company for securities held at the
end of each year.
Years Ended March 31
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
AT&T Corp. .................... $ (4,681,896) $ 430,271 $ 3,532,591
AT&T Corp.-Liberty Media Group (10,605,732) 11,183,260 3,131,973
Alamo Group Inc. .............. 2,821,000 7,276,953 (20,615,000)
All Components, Inc. .......... 3,450,000 1,975,000 1,225,000
American Homestar Corporation . -- (4,224,707) (11,547,532)
Amfibe, Inc. .................. -- 3,900,000 (2,400,000)
Balco, Inc. ................... -- (2,529,600) 3,422,440
CDC Technologies, Inc/Drew
Scientific Group PLC ... (2,592,541) (3,099,156) --
Dennis Tool Company ........... 1,430,000 (600,000) (3,299,944)
Dyntec, Inc. .................. -- (4,499,998) --
Encore Wire Corporation ....... -- (2,724,000) (19,013,000)
Global Crossing Ltd./Frontier
Corporation ............ (1,763,282) 1,004,248 605,215
Mail-Well, Inc. ............... (6,290,000) (5,241,000) (6,214,860)
Media Recovery, Inc. .......... 10,000,000 2,585,000 615,000
Palm Harbor Homes, Inc. ....... (7,855,000) (39,276,000) (12,568,000)
PETsMART, Inc. ................ 654,220 (3,271,100) (1,758,216)
The RectorSeal Corporation .... 5,500,000 3,500,000 --
Rewind Holdings, Inc. ......... (1,123,750) (2,200,000) --
SDI Holding Corp. ............. -- -- 6,000,000
Skylawn Corporation ........... 3,000,000 -- (7,000,000)
Sprint Corporation-FON Group .. (2,952,720) 1,003,500 1,149,741
Sprint Corporation-PCS Group .. (1,674,000) 1,560,375 743,634
Sprockets.com, Inc. ........... (1,299,999) -- --
The Whitmore Manufacturing
Company ................ -- (800,000) 2,800,000
A description of the investments listed above and other material components
of the investment portfolio is included elsewhere in this report under the
caption "Portfolio of Investments - March 31, 2001."
Deferred Taxes on Unrealized Appreciation of Investments
The Company provides for deferred Federal income taxes on net unrealized
appreciation of investments. Such taxes would become payable at such time as
unrealized appreciation is realized through the sale or other disposition of
those components of the investment portfolio which would result in taxable
transactions. At March 31, 2001 consolidated deferred Federal income taxes of
$79,310,000 were provided on net unrealized appreciation of investments of
$228,315,863 compared with deferred taxes of $83,151,000 on net unrealized
appreciation of $238,626,698 at March 31, 2000. Deferred income taxes at March
31, 2001 and 2000 were provided at the then currently effective maximum Federal
corporate tax rate on capital gains of 35%.
Portfolio Investments
During the year ended March 31, 2001, the Company invested $15,922,079 in
various portfolio securities listed elsewhere in this report under the caption
"Portfolio Changes During the Year," which also lists dispositions and
write-offs of portfolio securities. During the 2000 and 1999 fiscal years, the
Company invested a total of $21,924,423 and $13,170,132, respectively.
Financial Liquidity and Capital Resources
At March 31, 2001, the Company had cash and cash equivalents of $1.1
million. Pursuant to Small Business Administration ("SBA") regulations, cash and
cash equivalents of $0.1 million held by CSVC may not be transferred or advanced
to CSC without the consent of the SBA. Under current SBA regulations and subject
to SBA's approval of its credit application, CSVC would be entitled to borrow up
to $58.3 million in addition to the $5 million presently outstanding. The
Company also has an unsecured $15,000,000 revolving line of credit from a
commercial bank, of which $10,000,000 was available at March 31, 2001. With the
exception of a capital gain distribution made in the form of a distribution of
the stock of a portfolio company in the fiscal year ended March 31, 1996, the
Company has elected to retain all gains realized during the past 33 years.
Retention of future gains is viewed as an important source of funds to sustain
the Company's investment activity. Approximately $30.9 million of the Company's
investment portfolio is represented by unrestricted publicly-traded securities,
which have an ascertainable market value and represent a primary source of
liquidity.
Funds to be used by the Company for operating or investment purposes may be
transferred in the form of dividends, management fees or loans from Skylawn
Corporation, The RectorSeal Corporation and The Whitmore Manufacturing Company,
wholly-owned portfolio companies of the Company, to the extent of their
available cash reserves and borrowing capacities.
Management believes that the Company's cash and cash equivalents and cash
available from other sources described above are adequate to meet its expected
requirements. Consistent with the long-term strategy of the Company, the
disposition of investments from time to time may also be an important source of
funds for future investment activities.
Impact of Inflation
The Company does not believe that its business is materially affected by
inflation, other than the impact which inflation may have on the securities
markets, the valuations of business enterprises and the relationship of such
valuations to underlying earnings, all of which will influence the value of the
Company's investments.
Risks
Pursuant to Section 64(b)(1) of the Investment Company Act of 1940, a
business development company is required to describe the risk factors involved
in an investment in the securities of such company due to the nature of the
company's investment portfolio. Accordingly the Company states that:
The Company's objective is to achieve capital appreciation through
investments in businesses believed to have favorable growth potential. Such
businesses are often undercapitalized small companies which lack management
depth and have not yet attained profitability. The Company's venture investments
often include securities which do not yield interest or dividends and are
subject to legal or contractual restrictions on resale, which restrictions
adversely affect the liquidity and marketability of such securities.
Because of the speculative nature of the Company's investments and the lack
of any market for the securities initially purchased by the Company, there is a
significantly greater risk of loss than is the case with traditional investment
securities. The high-risk, long-term nature of the Company's venture investment
activities may prevent shareholders of the Company from achieving price
appreciation and dividend distributions.
Selected Consolidated Financial Data
(all figures in thousands except per share data)
1991 1992 1993 1994 1995 1996 1997 1998
- -------------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
Financial Position (as of March 31)
Investments at cost ........................ $ 31,593 $ 34,929 $ 33,953 $ 41,993 $ 49,730 $ 58,544 $ 59,908 $ 61,154
Unrealized appreciation .................... 107,120 100,277 113,153 132,212 153,031 198,386 233,383 340,132
-------- -------- -------- -------- -------- -------- -------- --------
Investments at market or
fair value .............................. 138,713 135,206 147,106 174,205 202,761 256,930 293,291 401,286
Total assets ............................... 149,975 208,871 176,422 270,874 213,811 326,972 310,760 522,324
Subordinated debentures .................... 15,000 11,000 15,000 15,000 11,000 11,000 5,000 5,000
Deferred taxes on
unrealized appreciation ................. 36,063 33,761 38,112 45,932 53,247 69,121 81,313 118,674
Net assets ................................. 97,139 107,522 121,455 133,053 147,370 189,048 218,972 296,023
Shares outstanding ......................... 3,617 3,644 3,681 3,715 3,735 3,767 3,767 3,788
- ----------------------------------------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ...................... $ 2,090 $ 2,363 $ 2,189 $ 2,870 $ 2,447 $ 2,855 $ 2,574 $ 2,726
Net realized gain (loss) on
investments ............................. (2,515) 14,313 5,099 (475) 142 11,174 6,806 6,485
Net increase (decrease) in
unrealized appreciation
before distributions .................... 4,762 (4,541) 8,524 11,160 13,584 38,746 22,804 69,388
-------- -------- -------- -------- -------- -------- -------- --------
Increase (decrease) in net
assets from operations
before distributions .................... 4,337 12,135 15,812 13,555 16,173 52,775 32,184 78,599
Cash dividends paid ........................ (1,809) (2,181) (2,202) (2,228) (2,241) (2,270) (2,260) (2,268)
Securities dividends ....................... -- -- -- -- -- (9,402) -- --
Employee stock options
exercised ............................... -- 429 322 272 385 575 -- 720
-------- -------- -------- -------- -------- -------- -------- --------
Increase (decrease) in net assets .......... 2,528 10,383 13,932 11,599 14,317 41,678 29,924 77,051
- ----------------------------------------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation ................. $ 9.97 $ 9.27 $ 10.35 $ 12.36 $ 14.26 $ 18.35 $ 21.59 $ 31.33
Net assets ................................. 26.86 29.51 32.99 35.81 39.46 50.18 58.13 78.15
Closing market price ....................... 20.75 24.25 36.50 38.125 38.00 60.00 67.875 94.00
Cash dividends paid ........................ .50 .60 .60 .60 .60 .60 .60 .60
Securities dividends ....................... -- -- -- -- -- 2.50 -- --
1999 2000 2001
- -------------------------------------------- -------- -------- --------
Financial Position (as of March 31)
Investments at cost ........................ $ 73,580 $ 85,002 $ 87,602
Unrealized appreciation .................... 276,698 238,627 228,316
-------- -------- --------
Investments at market or
fair value .............................. 350,278 323,629 315,918
Total assets ............................... 360,786 392,586 322,668
Subordinated debentures .................... 5,000 5,000 5,000
Deferred taxes on
unrealized appreciation ................. 96,473 83,151 79,310
Net assets ................................. 256,232 236,876 226,609
Shares outstanding ......................... 3,815 3,815 3,815
- ---------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income ...................... $ 1,762 $ 1,663 $ 1,723
Net realized gain (loss) on
investments ............................. 995 6,020 (3,231)
Net increase (decrease) in
unrealized appreciation
before distributions .................... (41,233) (24,750) (6,470)
-------- -------- --------
Increase (decrease) in net
assets from operations
before distributions .................... (38,476) (17,067) (7,978)
Cash dividends paid ........................ (2,280) (2,289) (2,289)
Securities dividends ....................... -- -- --
Employee stock options
exercised ............................... 965 -- --
-------- -------- --------
Increase (decrease) in net assets .......... (39,791) (19,356) (10,267)
- ---------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation ................. $ 25.29 $ 21.80 $ 20.79
Net assets ................................. 67.16 62.09 59.40
Closing market price ....................... 73.00 54.75 65.00
Cash dividends paid ........................ .60 .60 .60
Securities dividends ....................... -- -- --
Shareholder Information
Stock Transfer Agent
American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY 10038
(telephone 800-937-5449) serves as transfer agent for the Company's common
stock. Certificates to be transferred should be mailed directly to the transfer
agent, preferably by registered mail.
Shareholders
The Company had approximately 900 record holders of its common stock at
March 31, 2001. This total does not include an estimated 1,800 shareholders with
shares held under beneficial ownership in nominee name or within clearinghouse
positions of brokerage firms or banks.
Market Prices
The Company's common stock trades on The Nasdaq Stock Market under the
symbol CSWC. The following high and low selling prices for the shares during
each quarter of the last two fiscal years were taken from quotations provided to
the Company by Nasdaq:
Quarter Ended High Low
- ------------------------------------------------------------------------
June 30, 1999.................................... $82 $71 1/8
September 30, 1999............................... 81 71
December 31, 1999................................ 70 7/8 56
March 31, 2000................................... 60 44
Quarter Ended High Low
- ------------------------------------------------------------------------
June 30, 2000.................................... $61 1/4 $53
September 30, 2000............................... 62 1/2 57
December 31, 2000............................... 59 3/4 50 5/8
March 31, 2001................................... 68 1/8 52
Dividends
The payment dates and amounts of cash dividends per share since April 1,
1999 are as follows:
Payment Date Cash Dividend
- -----------------------------------------------------------------------
May 28, 1999.............................................. $0.20
November 30, 1999......................................... 0.40
May 31, 2000.............................................. 0.20
November 30, 2000......................................... 0.40
May 31, 2001.............................................. 0.20
The amounts and timing of cash dividend payments have generally been
dictated by requirements of the Internal Revenue Code regarding the distribution
of taxable net investment income (ordinary income) of regulated investment
companies. Instead of distributing realized long-term capital gains to
shareholders, the Company has ordinarily elected to retain such gains to fund
future investments.
Automatic Dividend Reinvestment and Optional Cash Contribution Plan
As a service to its shareholders, the Company offers an Automatic Dividend
Reinvestment and Optional Cash Contribution Plan for shareholders of record who
own a minimum of 25 shares. The Company pays all costs of administration of the
Plan except brokerage transaction fees. Upon request, shareholders may obtain
information on the Plan from the Company, 12900 Preston Road, Suite 700, Dallas,
Texas 75230. Telephone (972) 233-8242. Questions and answers about the Plan are
on the next page.
Annual Meeting
The Annual Meeting of Shareholders of Capital Southwest Corporation will be
held on Monday, July 16, 2001, at 10:00 a.m. in the North Dallas Bank Tower
Meeting Room (first floor), 12900 Preston Road, Dallas, Texas.
Independent Auditors' Consent
The Board of Directors
Capital Southwest Corporation:
We consent to incorporation by reference in the registration statement (No.
33-43881) on Form S-8 of Capital Southwest Corporation of our report dated April
20, 2001, relating to the consolidated statements of financial condition of
Capital Southwest Corporation and subsidiary as of March 31, 2001 and 2000, the
portfolio of investments as of March 31, 2001, and the related consolidated
statements of operations, changes in net assets, and cash flows for each of the
years in the three-year period ended March 31, 2001, and the selected per share
data and ratios for each of the years in the five-year period ended March 31,
2001, which report appears in the annual report to shareholders for the year
ended March 31, 2001, and is incorporated by reference in the annual report on
Form 10-K of Capital Southwest Corporation.
KPMG LLP
Dallas, Texas
June 14, 2001
