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 September 30, 1997 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.
3,773,601 shares of Common Stock, $1 Par Value as of October 31, 1997
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
Assets September 30, 1997 March 31, 1997
----------------- -------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: September 30, 1997 - $20,552,361,
March 31, 1997 - $20,552,361) $ 240,374,920 $ 203,399,920
Companies 5% to 25% owned
(Cost: September 30, 1997 - $19,979,904,
March 31, 1997 - $19,979,904) 60,420,002 35,747,002
Companies less than 5% owned
(Cost: September 30, 1997 - $16,920,117,
March 31, 1997 - $19,375,650) 50,123,448 54,144,104
------------- -------------
Total investments
(Cost: September 30, 1997- $57,452,382,
March 31, 1997 - $59,907,915) 350,918,370 293,291,026
Cash and cash equivalents 30,959,954 14,009,481
Receivables 332,888 279,815
Other assets 3,436,777 3,180,171
------------- -------------
Totals $ 385,647,989 $ 310,760,493
============= =============
Liabilities and Shareholders' Equity
Accrued interest and other liabilities $ 1,723,714 $ 1,735,372
Income taxes payable 8,001,363 3,184,373
Deferred income taxes 102,952,428 81,868,628
Subordinated debentures 5,000,000 5,000,000
------------- -------------
Total liabilities 117,677,505 91,788,373
------------- -------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,210,966 shares
at September 30, 1997 and 4,204,416 shares
at March 31, 1997 4,210,966 4,204,416
Additional capital 4,965,665 4,813,121
Undistributed net investment income 5,643,760 4,804,205
Undistributed net realized gain on investments 69,059,406 60,113,568
Unrealized appreciation of investments -
net of deferred income taxes 191,123,989 152,070,112
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
------------- -------------
Net assets at market or fair value, equivalent to $71.01 per share on the
3,773,601 shares outstanding at September 30, 1997, and $58.13 per share
on the 3,767,051 shares outstanding at March 31, 1997 267,970,484 218,972,120
------------- -------------
Totals $ 385,647,989 $ 310,760,493
============= =============
(See Notes to Consolidated Financial Statements)
2
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30
------------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
Investment income:
Interest $ 589,637 $ 314,755 $ 989,669 $ 684,702
Dividends 324,381 802,483 1,098,238 1,604,967
Management and directors' fees 138,600 141,100 269,700 298,200
------------ ------------ ------------ ------------
1,052,618 1,258,338 2,357,607 2,587,869
------------ ------------ ------------ ------------
Operating expenses:
Interest 103,103 194,997 205,111 430,610
Salaries 208,500 198,611 418,124 388,882
Net pension expense (benefit) (69,279) (122,777) (156,755) (174,952)
Other operating expenses 118,214 110,915 241,438 232,039
------------ ------------ ------------ ------------
360,538 381,746 707,918 876,579
------------ ------------ ------------ ------------
Income before income taxes 692,080 876,592 1,649,689 1,711,290
Income tax expense 26,124 47,825 56,724 65,825
------------ ------------ ------------ -------------
Net investment income $ 665,956 $ 828,767 $ 1,592,965 $ 1,645,465
============ ============ ============ ============
Proceeds from disposition of investments $ 1,267,880 $ -- $ 16,442,059 $ --
Cost of investments sold 199,115 -- 2,679,231 --
------------ ------------ ------------ ------------
Realized gain on investments before
income taxes 1,068,765 -- 13,762,828 --
Income tax expense 374,068 -- 4,816,990 --
------------ ------------ ------------ ------------
Net realized gain on investments 694,697 -- 8,945,838 --
------------- ------------ ------------ ------------
Increase in unrealized appreciation
of investments before income taxes 34,680,421 19,238,921 60,082,877 31,992,581
Increase in deferred income taxes on
appreciation of investments 12,138,000 6,734,000 21,029,000 11,197,000
------------- ------------- ------------- ------------
Net increase in unrealized
appreciation of investments 22,542,421 12,504,921 39,053,877 20,795,581
------------- ------------- ------------- -----------
Net realized and unrealized gain
on investments $ 23,237,118 $ 12,504,921 $ 47,999,715 $ 20,795,581
============= ============ ============ ============
Increase in net assets from operations $ 23,903,074 $ 13,333,688 $ 49,592,680 $ 22,441,046
============= ============ ============ ============
(See Notes to Consolidated Financial Statements)
3
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Net Assets
Six Months Ended Year Ended
September 30, 1997 March 31, 1997
------------------ --------------
(Unaudited)
Operations
Net investment income $ 1,592,965 $ 2,574,062
Net realized gain on investments 8,945,838 6,805,786
Net increase in unrealized appreciation
of investments 39,053,877 22,804,750
------------- -------------
Increase in net assets from operations 49,592,680 32,184,598
Distributions from:
Undistributed net investment income (753,410) (2,260,231)
Capital share transactions
Exercise of employee stock options 159,094 --
------------- -------------
Increase in net assets 48,998,364 29,924,367
Net assets, beginning of period 218,972,120 189,047,753
------------- -------------
Net assets, end of period $ 267,970,484 $ 218,972,120
============= =============
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended Six Months Ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Cash flows from operating activities
Increase in net assets from operations $ 23,903,074 $ 13,333,688 $ 49,592,680 $ 22,441,046
Adjustments to reconcile increase in net
assets from operations to net cash
provided by operating activities:
Depreciation and amortization 5,942 5,709 11,885 16,180
Net pension benefit (69,279) (122,777) (156,755) (174,952)
Net realized and unrealized gain
on investments (23,237,118) (12,504,921) (47,999,715) (20,795,581)
(Increase) decrease in receivables (91,951) 212,808 (53,073) 132,623
(Increase) decrease in other assets 8,774 19,619 (22,056) (13,696)
Increase (decrease) in accrued interest
and other liabilities 96,666 (106,307) (101,338) (174,502)
Deferred income taxes 24,200 43,000 54,800 61,000
------------ ------------ ------------ ------------
Net cash provided by operating activities 640,308 880,819 1,326,428 1,492,118
------------ ------------ ------------ ------------
Cash flows from investing activities
Proceeds from disposition of investments 14,075,989 -- 16,442,059 --
Purchases of securities (800,000) -- (1,223,077) (3,000,000)
Maturities of securities 999,379 -- 999,379 --
------------ ------------ ------------ ------------
Net cash provided (used) by investing
activities 14,275,368 -- 16,218,361 (3,000,000)
------------ ------------ ------------ ------------
Cash flows from financing activities
Decrease in note payable to bank -- -- -- (50,000,000)
Repayment of subordinated debenture -- (6,000,000) -- (6,000,000)
Distributions from undistributed net
investment income -- -- (753,410) (753,410)
Proceeds from exercise of employee
stock options 159,094 -- 159,094 --
------------ ------------ ------------ ------------
Net cash provided (used) by financing activities 159,094 (6,000,000) (594,316) (56,753,410)
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 15,074,770 (5,119,181) 16,950,473 (58,261,292)
Cash and cash equivalents at beginning
of period 15,885,184 13,903,074 14,009,481 67,045,185
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 30,959,954 $ 8,783,893 $ 30,959,954 $ 8,783,893
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ 264,658 $ 199,452 $ 490,849
Income taxes $ 6,022 $ 9 $ 6,022 $ 9
(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, 1997. Certain information and footnotes
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes that the disclosures are adequate for a fair presentation. The
information reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods.
2. Summary of Per Share Information
Three Months Ended Six Months Ended
September 30 September 30
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- -----
Investment income $ .28 $ .33 $ .63 $ .69
Operating expenses (.07) (.05) (.13) (.12)
Interest expense (.03) (.05) (.06) (.11)
Income taxes (.01) (.01) (.02) (.02)
-------- -------- -------- --------
Net investment income .17 .22 .42 .44
Net realized gain on investments .18 -- 2.37 --
Net increase in unrealized appreciation
of investments 5.97 3.32 10.35 5.52
Distributions from undistributed
net investment income -- -- (.20) (.20)
Exercise of employee stock options (1) (.06) -- (.06) --
-------- -------- -------- --------
Net increase in net asset value 6.26 3.54 12.88 5.76
Net asset value:
Beginning of period 64.75 52.40 58.13 50.18
-------- -------- -------- --------
End of period $ 71.01 $ 55.94 $ 71.01 $ 55.94
======== ======== ======== ========
Shares outstanding at end of period
(000s omitted) 3,774 3,767 3,774 3,767
======== ======== ======== ========
(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
Interest income in the six months ended September 30, 1997 increased from
the year-ago period primarily because of interest payments by a new portfolio
company and an increase in average idle funds invested. During the six months
ended September 30, 1997 and 1996, the Company recorded dividend income from the
following sources:
Six Months Ended
September 30
----------------
1997 1996
---- ----
The RectorSeal Corporation $ 240,000 $ 600,001
Alamo Group Inc. 532,000 532,000
Skylawn Corporation 150,000 300,000
Cherokee Communications, Inc. - 72,000
Westmarc Communications, Inc. 40,635 40,635
The Whitmore Manufacturing Company 60,000 -
Other 75,603 60,331
---------- ----------
$1,098,238 $1,604,967
========== ==========
Interest expense in the six months ended September 30, 1997 decreased from
the year-ago period due to the repayment of a subordinated debenture on
September 1, 1996.
During the six months ended September 30, 1997, the Company reported a
realized gain before income taxes of $13,762,828. It should be noted that a
realized gain before income taxes and a decrease in unrealized appreciation
before income taxes are directly related in that when an appreciated portfolio
security is sold to realize a gain, 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.
Set forth in the following table are the significant increases and
decreases in unrealized appreciation (before the related change in deferred
taxes and excluding the effect of gains or losses realized during the periods)
by portfolio company:
Three Months Ended Six Months Ended
September 30 September 30
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
Alamo Group Inc. $4,021,000 $(2,143,000) $ 8,308,000 $(6,968,000)
All Components, Inc. 950,000 - 950,000 -
American Homestar Corporation 1,064,001 (500,705) 3,129,413 1,552,185
Amfibe, Inc. 2,400,000 - 2,400,000 600,000
Data Race, Inc. (142,028) 830,000 71,248 830,000
Encore Wire Corporation 11,220,000 5,171,000 17,279,000 5,326,000
LiL' Things, Inc. - (917,540) - (1,835,670)
Mail-Well, Inc. - 1,824,000 8,294,000 1,833,000
Mylan Laboratories, Inc. 986,198 (32,071) 970,163 (497,108)
Palm Harbor Homes, Inc. 14,328,000 12,568,000 28,656,000 21,918,000
PETsMART, Inc. (858,664) 1,308,440 (6,460,423) 4,906,650
The RectorSeal Corporation - 2,000,000 - 2,000,000
Tecnol Medical Products, Inc. (367,528) (826,938) 780,997 (574,262)
Tele-Communications - TCI Group (325,804) (562,500) 202,946 (652,500)
Tele-Communications - LM Group 383,906 95,625 645,468 112,500
Tele-Communications - TCI Ventures 1,350,583 - 1,350,583 -
Texas Petrochemical Holdings, Inc. (900,000) - (900,000) -
Texas Shredder, Inc. 1,125,000 250,000 1,125,000 250,000
7
During the quarter ended September 30, 1997, the Company made two new
investments totaling $800,000.
The Company has agreed, subject to certain conditions, to invest up to
$12,544,923 in four portfolio companies.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on July 21, 1997, with the
following results of elections and approval:
Votes Cast
--------------------------------------------
Against/ Abstentions/
For Withheld Non-Votes
---- -------- ---------
a. The following Directors were elected to serve until
the next Annual Meeting of Stockholders:
Graeme W. Henderson 3,029,754 7,068 730,229
Gary L. Martin 3,036,241 583 730,227
James M. Nolan 3,036,241 583 730,227
William R. Thomas 3,035,841 983 730,227
John H. Wilson 3,036,241 583 730,227
b. KPMG Peat Marwick LLP was approved as the
Company's auditors for the 1998 fiscal year. 3,025,211 6,688 735,152
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.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL SOUTHWEST CORPORATION
Date: November 13,1997 By: /s/ William R. Thomas
----------------------------
William R. Thomas, President
Date: November 13,1997 By: /s/Tim Smith
----------------------------
Tim Smith, Vice President
and Secretary-Treasurer
9