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, 1999 Commission File Number: 814-61
CAPITAL SOUTHWEST CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-1072796
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
12900 Preston Road, Suite 700, Dallas, Texas 75230
(Address of principal executive offices including zip code)
(972) 233-8242
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
3,815,051 shares of Common Stock, $1 Par Value as of January 31, 2000
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
----------------------------------------------
Assets December 31, 1999 March 31, 1999
----------------- --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: December 31, 1999 - $23,380,865,
March 31, 1999 - $22,130,818) $ 200,632,779 $ 231,819,359
Companies 5% to 25% owned
(Cost: December 31, 1999 - $15,979,414,
March 31, 1999 - $18,841,914) 18,984,505 31,596,160
Companies less than 5% owned
(Cost: December 31, 1999 - $38,907,783,
March 31, 1999 - $32,607,282) 102,725,290 86,862,983
------------- -------------
Total investments
(Cost: December 31, 1999 - $78,268,062,
March 31, 1999 - $73,580,014) 322,342,574 350,278,502
Cash and cash equivalents 44,541,641 6,050,443
Receivables 263,343 315,707
Other assets 4,570,042 4,141,136
------------- -------------
Totals $ 371,717,600 $ 360,785,788
============= =============
Liabilities and Shareholders' Equity
Note payable to bank $ 35,000,000 $ --
Accrued interest and other liabilities 2,145,941 2,023,625
Income taxes payable 4,072,411 282,741
Deferred income taxes 85,356,885 97,247,457
Subordinated debenture 5,000,000 5,000,000
------------- -------------
Total liabilities 131,575,237 104,553,823
------------- -------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,252,416 shares
at December 31, 1999 and March 31, 1999 4,252,416 4,252,416
Additional capital 6,450,747 6,450,747
Undistributed net investment income 3,845,601 4,743,205
Undistributed net realized gain on investments 73,609,387 67,593,409
Unrealized appreciation of investments -
net of deferred income taxes 159,017,514 180,225,490
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent
to $62.95 per share at December 31, 1999,
and $67.16 per share at March 31, 1999,
on the 3,815,051 shares outstanding 240,142,363 256,231,965
------------- -------------
Totals $ 371,717,600 $ 360,785,788
============= =============
(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
1999 1998 1999 1998
---- ---- ---- ----
Investment income:
Interest $ 260,091 $ 266,174 $ 780,555 $ 990,815
Dividends 304,378 385,072 1,428,017 1,579,387
Management and directors' fees 125,624 124,850 406,300 415,300
------------ ------------ ------------ ------------
690,093 776,096 2,614,872 2,985,502
------------ ------------ ------------ ------------
Operating expenses
Interest 121,198 103,104 330,480 315,305
Salaries 301,548 406,783 631,425 913,202
Net pension expense (benefit) (108,996) (77,906) (326,988) (233,719)
Other operating expenses 216,906 194,420 474,128 559,991
------------ ------------ ------------ ------------
530,656 626,401 1,109,045 1,554,779
------------ ------------ ------------ ------------
Income before income taxes 159,437 149,695 1,505,827 1,430,723
Income tax expense 38,100 27,300 114,400 81,800
------------ ------------ ------------ ------------
Net investment income $ 121,337 $ 122,395 $ 1,391,427 $ 1,348,923
============ ============ ============ ============
Proceeds from disposition of
investments $ -- $ -- $ 14,892,513 $ 761,837
Cost of investments sold -- -- 5,662,000 --
------------ ------------ ------------ ------------
Realized gain on investments
before income taxes -- -- 9,230,513 761,837
Income tax expense (benefit) (16,145) -- 3,214,535 266,643
------------ ------------ ------------ ------------
Net realized gain on investments 16,145 -- 6,015,978 495,194
------------ ------------ ------------ ------------
Increase (decrease) in unrealized appreciation
of investments before income taxes 6,120,042 3,587,928 (32,623,976) (40,345,711)
Increase (decrease) in deferred income taxes
on appreciation of investments 2,144,000 1,256,000 (11,416,000) (14,120,000)
------------ ------------ ------------ ------------
Net increase (decrease) in unrealized
appreciation of investments 3,976,042 2,331,928 (21,207,976) (26,225,711)
------------ ------------ ------------ ------------
Net realized and unrealized gain (loss)
on investments $ 3,992,187 $ 2,331,928 $(15,191,998) $(25,730,517)
============ ============ ============ ============
Increase (decrease) in net assets from
operations $ 4,113,524 $ 2,454,323 $(13,800,571) $(24,381,594)
============ ============ ============ ============
(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, 1999 March 31, 1999
----------------- --------------
(Unaudited)
Operations
Net investment income $ 1,391,427 $ 1,761,718
Net realized gain on investments 6,015,978 994,949
Net decrease in unrealized
appreciation of investments (21,207,976) (41,232,545)
------------- -------------
Decrease in net assets from operations (13,800,571) (38,475,878)
Distributions from:
Undistributed net investment income (2,289,031) (2,280,411)
Capital share transactions
Exercise of employee stock options -- 965,438
------------- -------------
Decrease in net assets (16,089,602) (39,790,851)
Net assets, beginning of period 256,231,965 296,022,816
------------- -------------
Net assets, end of period $ 240,142,363 $ 256,231,965
============= =============
(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
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Cash flows from operating activities
Increase (decrease) in net assets from operations $ 4,113,524 $ 2,454,323 $ (13,800,571) $ (24,381,594)
Adjustments to reconcile increase (decrease) in
net assets from operations to net cash provided
by operating activities:
Depreciation and amortization 7,493 6,178 21,652 18,533
Net pension benefit (108,996) (77,906) (326,988) (233,719)
Net realized and unrealized (gain) loss on
investments (3,992,187) (2,331,929) 15,191,998 25,730,516
Decrease in receivables 32,984 130,098 52,364 48,886
(Increase) decrease in other assets 4,029 27,475 (17,476) (34,968)
Increase in accrued interest
and other liabilities 81,435 152,713 2,385 9,742
Deferred income taxes 38,100 27,300 114,400 81,800
------------- ------------- ------------- -------------
Net cash provided by operating activities 176,382 388,252 1,237,764 1,239,196
------------- ------------- ------------- -------------
Cash flows from investing activities
Proceeds from disposition of investments -- -- 14,892,513 761,837
Purchases of securities (6,450,001) (1,897,860) (13,190,048) (13,170,132)
Maturities of securities 2,000,000 293,000 2,840,000 744,539
------------- ------------- ------------- -------------
Net cash provided (used) by investing activities (4,450,001) (1,604,860) 4,542,465 (11,663,756)
------------- ------------- ------------- -------------
Cash flows from financing activities
Increase (decrease) in note payable to bank 10,000,000 (40,000,000) 35,000,000 (100,000,000)
Distributions from undistributed net
investment income (1,526,021) (1,522,821) (2,289,031) (2,280,411)
Proceeds from exercise of employee
stock options -- 498,750 -- 680,438
------------- ------------- ------------- -------------
Net cash provided (used) by financing activities 8,473,979 (41,024,071) 32,710,969 (101,599,973)
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents 4,200,360 (42,240,679) 38,491,198 (112,024,533)
Cash and cash equivalents at beginning
of period 40,341,281 47,264,066 6,050,443 117,047,920
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 44,541,641 $ 5,023,387 $ 44,541,641 $ 5,023,387
============= ============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $204,719 $207,638 $404,171 $424,926
Income taxes $ 6,000 $ 5,000 $22,990 $ 13,500
(See Notes to Consolidated Financial Statements)
5
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
------------------------------------------
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements, which include the
accounts of Capital Southwest Corporation and its wholly-owned small business
investment company subsidiary (the "Company"), have been prepared on the value
basis in accordance with generally accepted accounting principles for investment
companies. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The financial statements included herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 6 of Regulation S-X.
The financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended March 31, 1999. Certain information and
footnotes normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted,
although the Company believes that the disclosures are adequate for a fair
presentation. The information reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the results of operations for the interim periods.
2. Summary of Per Share Information
Three Months Ended Nine Months Ended
December 31 December 31
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Investment income $ .18 $ .20 $ .68 $ .78
Operating expenses (.11) (.15) (.20) (.33)
Interest expense (.03) (.02) (.09) (.08)
Income taxes (.01) -- (.03) (.02)
--------- --------- --------- ---------
Net investment income .03 .03 .36 .35
Net realized gain on investments -- -- 1.58 .13
Net increase (decrease) in unrealized
appreciation of investments 1.05 .61 (5.55) (6.89)
Distributions from undistributed
net investment income (.40) (.40) (.60) (.60)
Exercise of employee stock options (1) -- (.13) -- (.21)
--------- --------- --------- ---------
Net increase (decrease) in net asset value .68 .11 (4.21) (7.22)
Net asset value:
Beginning of period 62.27 70.82 67.16 78.15
--------- --------- --------- ---------
End of period $ 62.95 $ 70.93 $ 62.95 $ 70.93
========= ========= ========= =========
Shares outstanding at end of period
(000s omitted) 3,815 3,807 3,815 3,807
(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, 1999 was $240,142,363, equivalent to
$62.95 per share after deducting an allowance of $22.30 per share for deferred
taxes on net unrealized appreciation. Assuming reinvestment of all dividends and
tax credits on retained long term capital gains, this represents a decrease of
8.9% during the past twelve months and a decrease of 3.8% during the past nine
months.
December 31 December 31
1999 1998
---- ----
Net assets $240,142,363 $270,041,249
Shares outstanding 3,815,051 3,807,051
Net assets per share $62.95 $70.93
Interest income in the nine months ended December 31, 1999 decreased
from the year-ago period primarily because of the suspension of interest
accruals related to one of our portfolio companies. During the nine months ended
December 31, 1999 and 1998, the Company recorded dividend income from the
following sources:
Nine Months Ended
December 31
-----------
1999 1998
---- ----
AT&T $ 117,256 $ 0
Alamo Group Inc. 621,478 877,800
Kimberly-Clark Corporation 60,200 57,885
The RectorSeal Corporation 240,000 240,000
Skylawn Corporation 150,000 150,000
TCI Holdings, Inc./Westmarc Communications, Inc. 60,953 60,953
Texas Shredder, Inc. 30,345 30,345
The Whitmore Manufacturing Company 60,000 60,000
Other 87,785 102,404
---------- ----------
$1,428,017 $1,579,387
========== ==========
Salaries in the nine months ended December 31, 1999 decreased from
the year-ago period primarily due to reductions in staff. Other operating
expenses in the nine months ended December 31, 1999 decreased from the year-ago
period primarily due to the payment in the prior period of a finders fee related
to an investment.
During the nine months ended December 31, 1999, the Company reported a
realized gain before income taxes of $9,230,513 including a gain of $8,580,232
on our investment in SDI Holding Corp. 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
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
AT&T/Tele-Communications-
TCI Group $ 974,354 $ 1,853,727 $ (319,232) $ 2,777,013
AT&T-Liberty Media Group/Tele-
Communications LM & TCI
Ventures Group 6,604,767 1,700,428 10,336,495 1,975,495
Airformed Composites, Inc. (2,568,000) - (2,568,000) -
Alamo Group Inc. (200,000) - 1,634,053 (10,640,000)
All Components, Inc. - - 1,975,000 1,225,000
American Homestar Corporation 23,470 (4,975,766) (2,511,354) (5,820,707)
Amfibe, Inc. - (2,400,000) (600,000) (2,400,000)
Balco, Inc. (2,023,680) 1,517,760 (2,023,680) 3,422,440
CDC Technologies, Inc. (2,999,156) - (2,999,156) -
Dennis Tool Company (600,000) (800,000) (600,000) (2,799,944)
Dyntec, Inc. (750,000) - (4,499,998) -
Encore Wire Corporation - (300,000) - (16,288,000)
Global Crossing Ltd./Frontier Corp. 1,505,672 207,614 1,582,426 45,048
Intelligent Reasoning Systems, Inc. - (1,542,754) - (1,542,754)
Kimberly-Clark Corporation 979,221 1,080,520 1,350,650 337,662
Mail-Well, Inc. - 2,085,140 2,097,000 (10,407,860)
Media Recovery, Inc. 2,585,000 615,000 2,585,000 615,000
Mylan Laboratories, Inc. 873,949 256,572 (288,643) 1,090,431
Palm Harbor Homes, Inc. - - (31,421,000) (4,713,000)
PETsMART, Inc. 1,247,106 2,514,659 (1,553,773) 40,890
Rewind Holdings, Inc. (1,825,001) - (2,200,000) -
Sprint Corporation-FON Group 940,500 496,988 1,314,000 652,238
Sprint Corporation-PCS Group 502,875 355,762 1,047,375 355,762
The Whitmore Manufacturing Co. - 800,000 - 2,000,000
During the quarter ended December 31, 1999, the Company made new
investments of $1,200,000 and additional investments of $5,250,001 in existing
portfolio companies.
On January 3, 2000, the Company repaid the $35,000,000 note payable to
bank from its cash and cash equivalents.
The Company has agreed, subject to certain conditions, to invest up to
$8,750,000 in seven portfolio companies.
8
The Company to date has not encountered any significant problems with
its computer hardware or software, nor is it aware of any problems with its
major service providers or its portfolio companies related to the Year 2000
issues. The Company has not incurred any material costs related to Year 2000
issues. As in the past, any future costs will be expensed as incurred, funded by
operating cash flows, and expected to be immaterial to the Company's results of
operations, liquidity, or capital resources.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is subject to financial market risks, including changes in
marketable equity security prices. The Company does not use derivative financial
instruments to mitigate any of these risks. The return on the Company's
investments is not affected by foreign currency fluctuations.
The Company's investment in portfolio securities consists of fixed rate
debt securities which totalled $8,087,972 at December 31, 1999, equivalent to
2.51% 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) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
Date: February 4, 2000 By: /s/ William R. Thomas
------------------------ ---------------------
William R. Thomas
President
Date: February 4, 2000 By: /s/ Tim Smith
------------------------ ----------------------
Tim Smith
Vice President & Secretary-Treasurer