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, 2000 Commission File Number: 814-61 CAPITAL SOUTHWEST CORPORATION (Exact name of registrant as specified in its charter) Texas 75-1072796 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 12900 Preston Road, Suite 700, Dallas, Texas 75230 (Address of principal executive offices including zip code) (972) 233-8242 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 3,815,051 shares of Common Stock, $1 Par Value as of January 31, 2001
<TABLE> <CAPTION> PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Financial Condition ---------------------------------------------- Assets December 31, 2000 March 31, 2000 ----------------- -------------- (Unaudited) <S> <C> <C> Investments at market or fair value Companies more than 25% owned (Cost: December 31, 2000 - $23,140,865, March 31, 2000 - $23,380,865) $201,860,759 $200,608,759 Companies 5% to 25% owned (Cost: December 31, 2000 - $23,731,917, March 31, 2000 - $22,579,414) 18,930,006 22,760,506 Companies less than 5% owned (Cost: December 31, 2000 - $46,832,889, March 31, 2000 - $39,042,158) 89,757,209 100,259,870 ------------ ------------ Total investments (Cost: December 31, 2000 - $93,705,671, March 31, 2000 - $85,002,437) 310,547,974 323,629,135 Cash and cash equivalents 36,885,931 63,986,715 Receivables 280,710 238,594 Other assets 5,185,676 4,731,360 ------------ ------------ Totals $352,900,291 $392,585,804 ============ ============ Liabilities and Shareholders' Equity Notes payable to bank $ 40,000,000 $ 60,000,000 Notes payable to subsidiaries 7,000,000 5,000,000 Accrued interest and other liabilities 2,110,203 2,220,753 Deferred income taxes 76,045,850 83,489,085 Subordinated debenture 5,000,000 5,000,000 ------------ ------------ Total liabilities 130,156,053 155,709,838 ------------ ------------ Shareholders' equity Common stock, $1 par value: authorized, 5,000,000 shares; issued, 4,252,416 shares at December 31, 2000 and March 31, 2000 4,252,416 4,252,416 Additional capital 6,450,747 6,450,747 Undistributed net investment income 3,273,809 4,117,104 Undistributed net realized gain on investments 74,287,263 73,613,301 Unrealized appreciation of investments - net of deferred income taxes 141,513,305 155,475,700 Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302) ----------- ------------ Net assets at market or fair value, equivalent to $58.39 per share at December 31, 2000, and $62.09 per share at March 31, 2000, on the 3,815,051 shares outstanding 222,744,238 236,875,966 ------------ ------------ Totals $352,900,291 $392,585,804 ============ ============ </TABLE> (See Notes to Consolidated Financial Statements) 2
<TABLE> <CAPTION> CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Operations ------------------------------------- (Unaudited) Three Months Ended Nine Months Ended December 31 December 31 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Investment income: Interest $ 111,955 $ 260,091 $ 438,276 $ 780,555 Dividends 772,382 304,378 2,249,054 1,428,017 Management and directors' fees 121,108 125,624 388,808 406,300 ------------ ------------ ------------ ------------ 1,005,445 690,093 3,076,138 2,614,872 ------------ ------------ ------------ ------------ Operating expenses Interest 313,701 121,198 848,721 330,480 Salaries 220,209 301,548 582,209 631,425 Net pension expense (benefit) (121,542) (108,996) (364,626) (326,988) Other operating expenses 116,707 216,906 436,298 474,128 ------------ ------------ ------------ ------------ 529,075 530,656 1,502,602 1,109,045 ------------ ------------ ------------ ------------ Income before income taxes 476,370 159,437 1,573,536 1,505,827 Income tax expense 42,601 38,100 127,800 114,400 ------------ ------------ ------------ ------------ Net investment income $ 433,769 $ 121,337 $ 1,445,736 $ 1,391,427 ============ ============ ============ ============ Proceeds from disposition of investments $ 160,669 $ -- $ 7,207,377 $ 14,892,513 Cost of investments sold 1,455,730 -- 6,282,775 5,662,000 ------------ ------------ ------------ ------------ Realized gain (loss) on investments before income taxes (1,295,061) -- 924,602 9,230,513 Income tax expense (benefit) (526,803) (16,145) 250,640 3,214,535 ------------ ------------ ------------ ------------ Net realized gain (loss) on investments (768,258) 16,145 673,962 6,015,978 ------------ ------------ ------------ ------------ Increase (decrease) in unrealized appreciation of investments before income taxes (15,055,062) 6,120,042 (21,784,395) (32,623,976) Increase (decrease) in deferred income taxes on appreciation of investments (5,234,000) 2,144,000 (7,822,000) (11,416,000) ------------ ------------ ------------ ------------ Net increase (decrease) in unrealized appreciation of investments (9,821,062) 3,976,042 (13,962,395) (21,207,976) ------------ ------------ ------------ ------------ Net realized and unrealized gain (loss) on investments $(10,589,320) $ 3,992,187 $(13,288,433) $(15,191,998) ============ ============ ============ ============ Increase (decrease) in net assets from operations $(10,155,551) $ 4,113,524 $(11,842,697) $(13,800,571) ============ ============ ============ ============ </TABLE> (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, 2000 March 31, 2000 ----------------- -------------- (Unaudited) Operations Net investment income $ 1,445,736 $ 1,662,930 Net realized gain on investments 673,962 6,019,892 Net decrease in unrealized appreciation of investments (13,962,395) (24,749,790) ------------- ------------- Decrease in net assets from operations (11,842,697) (17,066,968) Distributions from: Undistributed net investment income (2,289,031) (2,289,031) ------------- ------------- Decrease in net assets (14,131,728) (19,355,999) Net assets, beginning of period 236,875,966 256,231,965 ------------- ------------- Net assets, end of period $ 222,744,238 $ 236,875,966 ============= ============= (See Notes to Consolidated Financial Statements) 4
<TABLE> <CAPTION> CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows ------------------------------------- (Unaudited) Three Months Ended Nine Months Ended December 31 December 31 ----------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Cash flows from operating activities Increase (decrease) in net assets from operations $(10,155,551) $ 4,113,524 $(11,842,697) $(13,800,571) Adjustments to reconcile increase (decrease) in net assets from operations to net cash provided by operating activities: Depreciation and amortization 7,298 7,493 21,761 21,652 Net pension benefit (121,542) (108,996) (364,626) (326,988) Net realized and unrealized (gain) loss on investments 10,589,320 (3,992,187) 13,288,433 15,191,998 (Increase) decrease in receivables 50,086 32,984 (42,116) 52,364 (Increase) decrease in other assets 21,174 4,029 2,362 (17,476) Increase (decrease) in accrued interest and other liabilities 12,973 81,435 (66,578) 2,385 Decrease in accrued pension cost (52,488) -- (157,462) -- Deferred income taxes 42,601 38,100 127,800 114,400 ------------ ------------ ------------ ------------ Net cash provided by operating activities 393,871 176,382 966,877 1,237,764 ------------ ------------ ------------ ------------ Cash flows from investing activities Proceeds from disposition of investments 160,669 -- 7,207,377 14,892,513 Purchases of securities (4,854,456) (6,450,001) (15,226,007) (13,190,048) Maturities of securities -- 2,000,000 240,000 2,840,000 ------------ ------------ ------------ ------------ Net cash provided (used) by investing activities (4,693,787) (4,450,001) (7,778,630) 4,542,465 ------------ ------------ ------------ ------------ Cash flows from financing activities Increase (decrease) in notes payable to bank 35,000,000 10,000,000 (20,000,000) 35,000,000 Increase in notes payable to subsidiaries 2,500,000 -- 2,000,000 -- Distributions from undistributed net investment income (1,526,021) (1,526,021) (2,289,031) (2,289,031) ------------ ------------ ------------ ------------ Net cash provided (used) by financing activities 35,973,979 8,473,979 (20,289,031) 32,710,969 ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 31,674,063 4,200,360 (27,100,784) 38,491,198 Cash and cash equivalents at beginning of period 5,211,868 40,341,281 63,986,715 6,050,443 ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ 36,885,931 $ 44,541,641 $ 36,885,931 $ 44,541,641 ============ ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 298,898 $ 204,719 $ 837,222 $ 404,171 Income taxes $ -- $ 6,000 $ -- $ 22,990 </TABLE> (See Notes to Consolidated Financial Statements) 5
<TABLE> <CAPTION> CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements ------------------------------------------ (Unaudited) 1. Basis of Presentation The accompanying consolidated financial statements, which include the accounts of Capital Southwest Corporation and its wholly-owned small business investment company subsidiary (the "Company"), have been prepared on the value basis in accordance with generally accepted accounting principles for investment companies. All significant intercompany accounts and transactions have been eliminated in consolidation. The financial statements included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 6 of Regulation S-X. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended March 31, 2000. Certain information and footnotes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes that the disclosures are adequate for a fair presentation. The information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods. 2. Summary of Per Share Information Three Months Ended Nine Months Ended December 31 December 31 ----------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Investment income $ .26 $ .18 $ .80 $ .68 Operating expenses (.05) (.11) (.17) (.20) Interest expense (.08) (.03) (.22) (.09) Income taxes (.01) (.01) (.03) (.03) ------- -------- ------- ------- Net investment income .12 .03 .38 .36 Net realized gain (loss) on investments (.20) - .18 1.58 Net increase (decrease) in unrealized appreciation of investments (2.58) 1.05 (3.66) (5.55) Distributions from undistributed net investment income (.40) (.40) (.60) (.60) ------- ------- ------- ------- Net increase (decrease) in net asset value (3.06) .68 (3.70) (4.21) Net asset value: Beginning of period 61.45 62.27 62.09 67.16 ------- ------- ------- ------- End of period $ 58.39 $ 62.95 $ 58.39 $ 62.95 ======= ======= ======= ======= Shares outstanding at end of period (000s omitted) 3,815 3,815 3,815 3,815 </TABLE> 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net asset value at December 31, 2000 was $222,744,238, equivalent to $58.39 per share after deducting an allowance of $19.75 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 6.2% during the past twelve months and a decrease of 4.9% during the past nine months. December 31 December 31 2000 1999 ---- ---- Net assets $222,744,238 $240,142,363 Shares outstanding 3,815,051 3,815,051 Net assets per share $58.39 $62.95 Interest income in the nine months ended December 31, 2000 decreased from the year-ago period primarily because of a decrease in average idle funds invested. During the nine months ended December 31, 2000 and 1999, the Company recorded dividend income from the following sources: Nine Months Ended December 31 ----------- 2000 1999 ---- ---- AT&T $ 63,624 $ 117,256 Alamo Group Inc. 507,834 621,478 Dennis Tool Company 37,499 24,999 Kimberly-Clark Corporation 62,516 60,200 The RectorSeal Corporation 720,000 240,000 Skylawn Corporation 508,275 150,000 TCI Holdings, Inc. 60,953 60,953 Texas Shredder, Inc. 30,345 30,345 The Whitmore Manufacturing Company 180,000 60,000 Other 78,008 62,786 ---------- ---------- $2,249,054 $1,428,017 ========== ========== Interest expense in the nine months ended December 31, 2000 increased from the year-ago period due to increased borrowings from the bank and subsidiaries. During the nine months ended December 31, 2000, the Company reported a realized gain before income taxes of $924,602 including a gain of $5,973,990 on our investment in Amfibe, Inc. and a loss of $4,329,835 on our investment in Dyntec, Inc. It should be noted that a realized gain before income taxes occurs when an appreciated portfolio security is sold to realize a gain and a corresponding decrease in unrealized appreciation occurs by transferring the gain associated with the transaction from being "unrealized" to being "realized". Conversely, when a loss is realized on a depreciated portfolio security, an increase in unrealized appreciation occurs. 7
<TABLE> <CAPTION> 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 ----------- ----------- 2000 1999 2000 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> AT&T $(1,615,596) $ 974,354 $ (5,221,539) $ (319,232) AT&T-Liberty Media Group (3,175,369) 6,604,767 (10,902,100) 10,336,495 Alamo Group Inc. - (200,000) 1,410,000 1,634,053 All Components, Inc. - - 3,450,000 1,975,000 American Homestar Corporation (583,094) 23,470 (864,741) (2,511,354) Balco, Inc. - (2,023,680) - (2,023,680) CDC Technologies, Inc. 629,995 (2,999,156) 629,995 (2,999,156) Dennis Tool Company 588,000 (600,000) 1,430,000 (600,000) Encore Wire Corporation (1,363,000) - (1,363,000) - Global Crossing Ltd./Frontier Corp. (1,072,038) 1,505,672 (1,710,443) 1,582,426 Kimberly-Clark Corporation 1,148,245 979,221 1,133,774 1,350,650 Mail-Well, Inc. (524,000) - (6,290,000) 2,097,000 Media Recovery, Inc. 5,000,000 2,585,000 10,000,000 2,585,000 Palm Harbor Homes, Inc. (7,855,000) - (7,855,000) (31,421,000) PETsMART, Inc. (1,185,773) 1,247,106 (81,777) (1,553,773) The RectorSeal Corporation - - 3,500,000 - Rewind Holdings, Inc. (1,000,000) (1,825,001) (1,000,000) (2,200,000) Skylawn Corporation - - 3,000,000 - Sprint Corporation-FON Group (648,000) 940,500 (3,073,500) 1,314,000 Sprint Corporation-PCS Group (528,750) 502,875 (1,622,250) 1,047,375 Sprockets.com, Inc. (1,249,999) - (1,249,999) - Vonova Corporation (1,999,998) - (2,999,998) - </TABLE> During the quarter ended December 31, 2000, the Company made new investments of $100,000 and additional investments of $4,754,456 in existing portfolio companies. On January 2, 2001, the Company repaid $35,000,000 of the $40,000,000 notes payable to bank from its cash and cash equivalents. The Company has agreed, subject to certain conditions, to invest up to $5,203,476 in six portfolio companies. 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company is subject to financial market risks, including changes in marketable equity security prices. The Company does not use derivative financial instruments to mitigate any of these risks. The return on the Company's investments is not affected by foreign currency fluctuations. The Company's investment in portfolio securities consists of fixed rate debt securities which totalled $13,538,971 at December 31, 2000, equivalent to 4.36% 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 2, 2001 By: /s/ William R. Thomas ------------------------- --------------------------------------- William R. Thomas President Date: February 2, 2001 By: /s/ Tim Smith ------------------------- --------------------------------------- Tim Smith Vice President & Secretary-Treasurer 10