SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------
For the Quarter Ended December 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
3,829,051 shares of Common Stock, $1 Par Value as of January 31, 2002
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
Assets December 31, March 31,
2001 2001
------------- -------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: December 31, 2001 - $23,194,865,
March 31, 2001 - $23,140,865) $ 239,605,999 $ 205,273,759
Companies 5% to 25% owned
(Cost: December 31, 2001 - $27,167,649,
March 31, 2001 - $17,642,756) 34,307,001 19,623,004
Companies less than 5% owned
(Cost: December 31, 2001 - $34,972,684,
March 31, 2001 - $46,818,025) 72,418,320 91,020,746
------------- -------------
Total investments
(Cost: December 31, 2001 - $85,335,198,
March 31, 2001 - $87,601,646) 346,331,320 315,917,509
Cash and cash equivalents 3,147,843 1,137,767
Receivables 1,438,116 264,377
Other assets 5,799,172 5,348,315
------------- -------------
Totals $ 356,716,451 $ 322,667,968
============= =============
Liabilities and Shareholders' Equity
Note payable to bank $ 6,500,000 $ 5,000,000
Notes payable to portfolio companies 5,000,000 6,000,000
Accrued interest and other liabilities 1,924,797 2,135,052
Deferred income taxes 89,644,765 77,924,303
Subordinated debenture 5,000,000 5,000,000
------------- -------------
Total liabilities 108,069,562 96,059,355
------------- -------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,266,416 shares
at December 31, 2001 and 4,252,416 shares
at March 31, 2001 4,266,416 4,252,416
Additional capital 6,935,497 6,450,747
Undistributed net investment income 2,988,642 3,550,573
Undistributed net realized gain on investments 71,016,512 70,382,314
Unrealized appreciation of investments -
net of deferred income taxes 170,473,124 149,005,865
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $64.94 per share on the 3,829,051 shares
outstanding at December 31, 2001, and $59.40
per share on the 3,815,051 shares outstanding
at March 31, 2001 248,646,889 226,608,613
------------- -------------
Totals $ 356,716,451 $ 322,667,968
============= =============
(See Notes to Consolidated Financial Statements)
2
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
------------------------ ------------------------
2001 2000 2001 2000
---- ---- ---- ----
Investment income:
Interest $ 85,171 $ 111,955 $ 258,330 $ 438,276
Dividends 1,172,883 772,382 2,584,641 2,249,054
Management and directors' fees 138,072 121,108 398,320 388,808
------------ ------------ ------------ ------------
1,396,126 1,005,445 3,241,291 3,076,138
------------ ------------ ------------ ------------
Operating expenses
Interest 218,303 313,701 752,522 848,721
Salaries 236,119 220,209 635,612 582,209
Net pension benefit (126,135) (121,542) (378,405) (364,626)
Other operating expenses 128,587 116,707 391,293 436,298
------------ ------------ ------------ ------------
456,874 529,075 1,401,022 1,502,602
------------ ------------ ------------ ------------
Income before income taxes 939,252 476,370 1,840,269 1,573,536
Income tax expense 19,249 42,601 107,569 127,800
------------ ------------ ------------ ------------
Net investment income $ 920,003 $ 433,769 $ 1,732,700 $ 1,445,736
============ ============ ============ ============
Proceeds from disposition of
investments $ 3,612,518 $ 160,669 $ 4,396,496 $ 7,207,377
Cost of investments sold 1,821,102 1,455,730 3,387,336 6,282,775
------------ ------------ ------------ ------------
Realized gain (loss) on investments
before income taxes 1,791,416 (1,295,061) 1,009,160 924,602
Income tax expense (benefit) 706,840 (526,803) 374,962 250,640
------------ ------------ ------------ ------------
Net realized gain (loss) on investments 1,084,576 (768,258) 634,198 673,962
------------ ------------ ------------ ------------
Increase (decrease) in unrealized appreciation
of investments before income taxes 11,222,404 (15,055,062) 32,680,259 (21,784,395)
Increase (decrease) in deferred income taxes
on appreciation of investments 3,926,000 (5,234,000) 11,213,000 (7,822,000)
------------ ------------ ------------ ------------
Net increase (decrease) in unrealized
appreciation of investments 7,296,404 (9,821,062) 21,467,259 (13,962,395)
------------ ------------ ------------ ------------
Net realized and unrealized gain (loss)
on investments $ 8,380,980 $(10,589,320) $ 22,101,457 $(13,288,433)
============ ============ ============ ============
Increase (decrease) in net assets from
operations $ 9,300,983 $(10,155,551) $ 23,834,157 $(11,842,697)
============ ============ ============ ============
(See Notes to Consolidated Financial Statements)
3
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Net Assets
Nine Months Ended Year Ended
December 31, 2001 March 31, 2001
----------------- -----------------
(Unaudited)
Operations
Net investment income $ 1,732,700 $ 1,722,500
Net realized gain (loss) on investments 634,198 (3,230,987)
Net increase (decrease) in unrealized
appreciation of investments 21,467,259 (6,469,835)
----------------- -----------------
Increase (decrease) in net assets from operations 23,834,157 (7,978,322)
Distributions from:
Undistributed net investment income (2,294,631) (2,289,031)
Capital share transactions
Exercise of employee stock options 498,750 --
----------------- -----------------
Increase (decrease) in net assets 22,038,276 (10,267,353)
Net assets, beginning of period 226,608,613 236,875,966
----------------- -----------------
Net assets, end of period $ 248,646,889 $ 226,608,613
================= =================
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
----------- -----------
2001 2000 2001 2000
---- ---- ---- ----
Cash flows from operating activities
Increase (decrease) in net assets from operations $ 9,300,983 $(10,155,551) $ 23,834,157 $(11,842,697)
Adjustments to reconcile increase (decrease) in
net assets from operations to net cash provided
by operating activities:
Depreciation and amortization 6,841 7,298 18,661 21,761
Net pension benefit (126,135) (121,542) (378,405) (364,626)
Net realized and unrealized (gain) loss on
investments (8,380,980) 10,589,320 (22,101,457) 13,288,433
(Increase) decrease in receivables (628,743) 50,086 (1,173,739) (42,116)
Decrease in other assets 6,315 21,174 4,017 2,362
Increase (decrease) in accrued interest
and other liabilities (94,819) 12,973 (147,925) (66,578)
Decrease in accrued pension cost (52,487) (52,488) (157,460) (157,462)
Deferred income taxes 44,180 42,601 132,500 127,800
------------ ------------ ------------ ------------
Net cash provided by operating activities 75,155 393,871 30,349 966,877
------------ ------------ ------------ ------------
Cash flows from investing activities
Proceeds from disposition of investments 3,612,518 160,669 4,396,496 7,207,377
Purchases of securities (1,608,000) (4,854,456) (3,388,858) (15,226,007)
Maturities of securities 2,117,970 -- 2,267,970 240,000
Net cash provided by (used in) investing ------------ ------------ ------------ ------------
activities 4,122,488 (4,693,787) 3,275,608 (7,778,630)
------------ ------------ ------------ ------------
Cash flows from financing activities
Increase (decrease) in note payable to bank -- 35,000,000 1,500,000 (20,000,000)
Increase (decrease) in notes payable to
portfolio companies (1,500,000) 2,500,000 (1,000,000) 2,000,000
Distributions from undistributed net
investment income (1,531,621) (1,526,021) (2,294,631) (2,289,031)
Proceeds from exercise of employee stock
options -- -- 498,750 --
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities (3,031,621) 35,973,979 (1,295,881) (20,289,031)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 1,166,022 31,674,063 2,010,076 (27,100,784)
Cash and cash equivalents at beginning
of period 1,981,821 5,211,868 1,137,767 63,986,715
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 3,147,843 $ 36,885,931 $ 3,147,843 $ 36,885,931
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 315,153 $ 298,898 $ 845,479 $ 837,222
Income taxes $ -- $ -- $ -- $ --
(See Notes to Consolidated Financial Statements)
5
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
------------------------------------------
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements, which include the
accounts of Capital Southwest Corporation and its wholly-owned small business
investment company subsidiary (the "Company"), have been prepared on the value
basis in accordance with accounting principles generally accepted in the United
States of America for investment companies. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The financial statements included herein have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and the instructions to Form 10-Q and Article
6 of Regulation S-X. The financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended March 31, 2001. Certain
information and footnotes normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted, although the Company believes that the
disclosures are adequate for a fair presentation. The information reflects all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the interim periods.
2. Summary of Per Share Information
Three Months Ended Nine Months Ended
December 31 December 31
----------- -----------
2001 2000 2001 2000
---- ---- ---- ----
Investment income $ .37 $ .26 $ .85 $ .80
Operating expenses (.06) (.05) (.17) (.17)
Interest expense (.06) (.08) (.20) (.22)
Income taxes (.01) (.01) (.03) (.03)
--------- --------- --------- ---------
Net investment income .24 .12 .45 .38
Net realized gain (loss) on investments .28 (.20) .16 .18
Net increase (decrease) in unrealized
appreciation of investments 1.91 (2.58) 5.61 (3.66)
Distributions from undistributed
net investment income (.40) (.40) (.60) (.60)
Exercise of employee stock options (1) -- -- (.08) --
--------- --------- --------- ---------
Net increase (decrease) in net asset value 2.03 (3.06) 5.54 (3.70)
Net asset value:
Beginning of period 62.91 61.45 59.40 62.09
--------- --------- --------- ---------
End of period $ 64.94 $ 58.39 $ 64.94 $ 58.39
========= ========= ========= =========
Shares outstanding at end of period
(000s omitted) 3,829 3,815 3,829 3,815
(1) Net decrease is due to the exercise of employee stock options at prices
less than beginning of period net asset value.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net asset value at December 31, 2001 was $248,646,889, equivalent to $64.94
per share after deducting an allowance of $23.64 per share for deferred taxes on
net unrealized appreciation. Assuming reinvestment of all dividends, this
represents an increase of 12.3% during the past twelve months.
December 31 December 31
2001 2000
---- ----
Net assets $248,646,889 $222,744,238
Shares outstanding 3,829,051 3,815,051
Net assets per share $64.94 $58.39
Interest income in the nine months ended December 31, 2001 decreased from
the year-ago period primarily because of a decrease in average idle funds
invested. During the nine months ended December 31, 2001 and 2000, the Company
recorded dividend income from the following sources:
Nine Months Ended
December 31
2001 2000
---- ----
AT&T Corp. $ 14,990 $ 63,624
Alamo Group Inc. 507,834 507,834
Dennis Tool Company 37,499 37,499
Kimberly-Clark Corporation 64,831 62,516
The RectorSeal Corporation 720,000 720,000
Skylawn Corporation 919,480 508,275
TCI Holdings, Inc. 60,953 60,953
Texas Shredder, Inc. 30,345 30,345
The Whitmore Manufacturing Company 180,000 180,000
Other 48,709 78,008
---------- ----------
$2,584,641 $2,249,054
========== ==========
Interest expense related to the notes payable to portfolio companies during
the three months ended December 31, 2001 and 2000 was $45,469 and $98,350,
respectively and for the nine months ended December 31, 2001 and 2000 was
$190,938 and $339,662, respectively.
During the nine months ended December 31, 2001, the Company reported a
realized gain before income taxes of $1,009,160 which included a gain of
$2,152,594 on our investment in Mylan Laboratories, Inc., a loss of $813,117 on
our investment in CyberSource Corporation and a loss of $396,589 on our
investment in Photon Dynamics, Inc. It should be noted that a realized gain
before income taxes occurs when an appreciated portfolio security is sold to
realize a gain and a corresponding decrease in unrealized appreciation occurs by
transferring the gain associated with the transaction from being "unrealized" to
being "realized". Conversely, when a loss is realized on a depreciated portfolio
security, an increase in unrealized appreciation occurs.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Set forth in the following table are the significant increases and
decreases in unrealized appreciation (before the related change in deferred
taxes and excluding the effect of gains or losses realized during the periods)
by portfolio company:
Three Months Ended Nine Months Ended
December 31 December 31
----------- -----------
2001 2000 2001 2000
---- ---- ---- ----
AT&T Corp. $ (154,565) $ (1,615,596) $ (421,045) $ (5,221,539)
All Components, Inc. -- -- (1,750,000) 3,450,000
Concert Industries Ltd. (2,259,000) 615,351 73,000 705,351
Encore Wire Corporation -- (1,363,000) 5,449,000 (1,363,000)
Liberty Media Corporation (formerly
AT&T-Liberty Media Group) 880,636 (3,175,369) -- (10,902,100)
Mail-Well, Inc. (525,000) (524,000) (2,097,000) (6,290,000)
Media Recovery, Inc. (3,000,000) 5,000,000 (3,000,000) 10,000,000
Organized Living, Inc. -- -- (2,500,000) --
Palm Harbor Homes, Inc. 15,710,000 (7,855,000) 31,420,000 (7,855,000)
PETsMART, Inc. 1,910,322 (1,185,773) 3,886,066 (81,777)
The RectorSeal Corporation -- -- 2,500,000 3,500,000
Skylawn Corporation -- -- -- 3,000,000
Sprint Corporation-FON Group (282,960) (648,000) (137,520) (3,073,500)
Sprint Corporation-PCS Group (67,680) (528,750) 194,760 (1,622,250)
During the quarter ended December 31, 2001, the Company made a new
investment of $1,500,000 and an additional investment of $108,000 in an existing
portfolio company.
The Company has agreed, subject to certain conditions, to invest up to
$3,395,946 in six portfolio companies.
8
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is subject to financial market risks, including changes in
marketable equity security prices. The Company does not use derivative financial
instruments to mitigate any of these risks. The return on the Company's
investments is not affected by foreign currency fluctuations.
The Company's investment in portfolio securities consists of fixed rate
debt securities which totaled $2,880,000 at December 31, 2001, equivalent to
0.8% of the value of the Company's total investments. Since these debt
securities usually have relatively high fixed rates of interest, minor changes
in market yields of publicly-traded debt securities have little or no effect on
the values of debt securities in the Company's portfolio and no effect on
interest income. On the other hand, significant changes in the market yields of
publicly-traded debt securities may have a material effect on the values of debt
securities in our portfolio. The Company's investments in debt securities are
generally held to maturity and their fair values are determined on the basis of
the terms of the debt security and the financial condition of the issuer.
A portion of the Company's investment portfolio consists of debt and equity
securities of private companies. The Company anticipates little or no effect on
the values of these investments from modest changes in public market equity
valuations. Should significant changes in market valuations of comparable
publicly-owned companies occur, there may be a corresponding effect on
valuations of private companies, which would affect the value and the amount and
timing of proceeds eventually realized from these investments. A portion of the
Company's investment portfolio also consists of restricted common stocks and
warrants to purchase common stocks of publicly-owned companies. The fair values
of these restricted securities are influenced by the nature of applicable resale
restrictions, the underlying earnings and financial condition of the issuer, and
the market valuations of comparable publicly-owned companies. A portion of the
Company's investment portfolio also consists of unrestricted, freely marketable
common stocks of publicly-owned companies. These freely marketable investments
are directly exposed to equity price risks, in that a change in an issuer's
public market equity price would result in an identical change in the fair value
of the Company's investment in such security.
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
Date: February 8, 2002 By: /s/ William R. Thomas
------------------------------ -------------------------------------
William R. Thomas
President
Date: February 8, 2002 By: /s/ Susan K. Hodgson
------------------------------ -------------------------------------
Susan K. Hodgson, Secretary-Treasurer
10