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 June 30, 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. 3,815,051 shares of Common Stock, $1 Par Value as of July 31, 2001
<TABLE> <CAPTION> PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Financial Condition ---------------------------------------------- Assets June 30, 2001 March 31, 2001 ------------- -------------- (Unaudited) <S> <C> <C> Investments at market or fair value Companies more than 25% owned (Cost: June 30, 2001 - $23,194,865, March 31, 2001 - $23,140,865) $ 223,542,759 $ 205,273,759 Companies 5% to 25% owned (Cost: June 30, 2001 - $17,642,756, March 31, 2001 - $17,642,756) 21,209,004 19,623,004 Companies less than 5% owned (Cost: June 30, 2001 - $47,111,954, March 31, 2001 - $46,818,025) 94,766,735 91,020,746 ------------- ------------- Total investments (Cost: June 30, 2001 - $87,949,575, March 31, 2001 - $87,601,646) 339,518,498 315,917,509 Cash and cash equivalents 61,804,775 1,137,767 Receivables 135,591 264,377 Other assets 5,517,078 5,348,315 ------------- ------------- Totals $ 406,975,942 $ 322,667,968 ============= ============= Liabilities and Shareholders' Equity Notes payable to bank $ 66,500,000 $ 5,000,000 Notes payable to portfolio companies 6,000,000 6,000,000 Accrued interest and other liabilities 1,981,011 2,135,052 Deferred income taxes 85,909,903 77,924,303 Subordinated debenture 5,000,000 5,000,000 ------------- ------------- Total liabilities 165,390,914 96,059,355 ------------- ------------- Shareholders' equity Common stock, $1 par value: authorized, 5,000,000 shares; issued, 4,252,416 shares at June 30, 2001 and March 31, 2001 4,252,416 4,252,416 Additional capital 6,450,747 6,450,747 Undistributed net investment income 3,216,928 3,550,573 Undistributed net realized gain on investments 70,382,314 70,382,314 Unrealized appreciation of investments - net of deferred income taxes 164,315,925 149,005,865 Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302) ------------- ------------- Net assets at market or fair value, equivalent to $63.32 per share at June 30, 2001, and $59.40 per share at March 31, 2001 on the 3,815,051 shares outstanding 241,585,028 226,608,613 ------------- ------------- Totals $ 406,975,942 $ 322,667,968 ============= ============= </TABLE> (See Notes to Consolidated Financial Statements) 2
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Operations ------------------------------------- (Unaudited) Three Months Ended June 30, 2001 2000 ---- ---- Investment income: Interest $ 91,258 $ 166,520 Dividends 705,879 288,336 Management and directors' fees 139,100 139,100 ------------ ------------ 936,237 593,956 ------------ ------------ Operating expenses: Interest 271,801 252,546 Salaries 193,333 173,250 Net pension benefit (121,542) (108,996) Other operating expenses 120,680 195,287 ------------ ------------ 464,272 512,087 ------------ ------------ Income before income taxes 471,965 81,869 Income tax expense 42,600 56,493 ------------ ------------ Net investment income $ 429,365 $ 25,376 ============ ============ Proceeds from disposition of investments $ -- $ 7,046,708 Cost of investments sold -- 4,827,045 ------------ ------------ Realized gain on investments before income taxes -- 2,219,663 Income tax expense -- 777,443 ------------ ------------ Net realized gain on investments -- 1,442,220 ------------ ------------ Increase (decrease) in unrealized appreciation of investments before income taxes 23,253,060 (2,608,110) Increase (decrease) in deferred income taxes on appreciation of investments 7,943,000 (1,145,000) ------------ ------------ Net increase (decrease) in unrealized appreciation of investments 15,310,060 (1,463,110) ------------ ------------ Net realized and unrealized gain (loss) on investments $ 15,310,060 $ (20,890) ============ ============ Increase in net assets from operations $ 15,739,425 $ 4,486 ============ ============ (See Notes to Consolidated Financial Statements) 3
<TABLE> <CAPTION> CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Changes in Net Assets ------------------------------------------------ Three Months Ended Year Ended June 30, 2001 March 31, 2001 ------------- -------------- (Unaudited) <S> <C> <C> Operations Net investment income $ 429,365 $ 1,722,500 Net realized loss on investments -- (3,230,987) Net increase (decrease) in unrealized appreciation of investments 15,310,060 (6,469,835) ------------- ------------- Increase (decrease) in net assets from operations 15,739,425 (7,978,322) Distributions from: Undistributed net investment income (763,010) (2,289,031) ------------- ------------- Increase (decrease) in net assets 14,976,415 (10,267,353) Net assets, beginning of period 226,608,613 236,875,966 ------------- ------------- Net assets, end of period $ 241,585,028 $ 226,608,613 ============= ============= </TABLE> (See Notes to Consolidated Financial Statements) 4
<TABLE> <CAPTION> CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows ------------------------------------- (Unaudited) Three Months Ended June 30, 2001 2000 ---- ---- <S> <C> <C> Cash flows from operating activities Increase in net assets from operations $ 15,739,425 $ 4,486 Adjustments to reconcile increase in net assets from operations to net cash provided by (used in) operating activities: Depreciation and amortization 5,821 7,221 Net pension benefit (121,542) (108,996) Net realized and unrealized (gain) loss on investments (15,310,060) 20,890 Decrease in receivables 128,786 108,940 Increase in other assets (15,104) (29,703) Decrease in accrued interest and other liabilities (139,492) (185,137) Decrease in accrued pension cost (52,487) (52,487) Deferred income taxes 42,600 56,493 ------------ ------------ Net cash provided by (used in) operating activities 277,947 (178,293) ------------ ------------ Cash flows from investing activities Proceeds from disposition of investments -- 7,046,708 Purchases of securities (497,929) (10,109,051) Maturities of securities 150,000 240,000 ------------ ------------ Net cash used in investing activities (347,929) (2,822,343) ------------ ------------ Cash flows from financing activities Increase (decrease) in notes payable to bank 61,500,000 (60,000,000) Increase in notes payable to portfolio companies -- 4,500,000 Distributions from undistributed net investment income (763,010) (763,010) ------------ ------------ Net cash provided by (used in) financing activities 60,736,990 (56,263,010) ------------ ------------ Net increase (decrease) in cash and cash equivalents 60,667,008 (59,263,646) Cash and cash equivalents at beginning of period 1,137,767 63,986,715 ------------ ------------ Cash and cash equivalents at end of period $ 61,804,775 $ 4,723,069 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 353,874 $ 361,104 Income taxes $ 0 $ 0 </TABLE> (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 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 June 30 ------- 2001 2000 ---- ---- Investment income $ .24 $ .15 Operating expenses (.05) (.07) Interest expense (.07) (.07) Income taxes (.01) (.01) -------- -------- Net investment income .11 - Net realized gain on investments - .38 Net increase (decrease) in unrealized appreciation of investments 4.01 (.38) Distributions from undistributed net investment income (.20) (.20) -------- -------- Net increase (decrease) in net asset value 3.92 (.20) Net asset value: Beginning of period 59.40 62.09 -------- -------- End of period $ 63.32 $ 61.89 ======== ======== Shares outstanding at end of period (000s omitted) 3,815 3,815 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net asset value at June 30, 2001 was $241,585,028, equivalent to $63.32 per share after deducting an allowance of $22.87 per share for deferred taxes on net unrealized appreciation. Assuming reinvestment of all dividends, this represents an increase of 3.4% during the past twelve months and 6.9% during the past three months. June 30, June 30, 2001 2000 ---- ---- Net assets $241,585,028 $236,117,442 Shares outstanding 3,815,051 3,815,051 Net assets per share $63.32 $61.89 Interest income in the three months ended June 30, 2001 decreased from the year-ago period primarily because of a decrease in average idle funds invested. During the three months ended June 30, 2001 and 2000, the Company recorded dividend income from the following sources: Three Months Ended June 30 ------- 2001 2000 ---- ---- AT&T Corp. $ 4,997 $ 29,314 Alamo Group Inc. 169,278 169,278 Kimberly-Clark Corporation 21,610 20,839 The RectorSeal Corporation 240,000 - Skylawn Corporation 150,000 - TCI Holdings, Inc. 20,318 20,318 The Whitmore Manufacturing Company 60,000 - Other 39,676 48,587 ---------- ---------- $ 705,879 $ 288,336 ========== ========== Interest expense in the three months ended June 30, 2001 increased from the year-ago period due to increased borrowings from the bank. Other operating expenses in the three months ended June 30, 2001 decreased from the year-ago period primarily due to legal fees incurred in the prior year related to documentation of the exchange of an investment. 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 changes in deferred taxes and excluding the effect of gains or losses realized during the periods) by portfolio company: Three Months Ended June 30 ------- 2001 2000 ---- ---- AT&T Corp. 93,271 (3,306,142) AT&T-Liberty Media Group 2,364,168 (3,577,582) Alamo Group Inc. - 1,410,000 Concert Industries Ltd. 1,430,000 - Encore Wire Corporation 4,086,000 (2,725,000) Mail-Well, Inc. (1,048,000) - Media Recovery, Inc. - 5,000,000 Mylan Laboratories, Inc. 292,492 (1,202,681) Organized Living, Inc. (2,500,000) - Palm Harbor Homes, Inc. 15,710,000 - PETsMART, Inc. 1,668,262 204,444 The RectorSeal Corporation 2,500,000 3,500,000 Skylawn Corporation - 3,000,000 During the quarter ended June 30, 2001, the Company made new investments of $26,000 and additional investments of $471,929 in existing portfolio companies. On July 2, 2001, the Company repaid the $60,000,000 note payable to bank from its cash and cash equivalents. The Company has agreed, subject to certain conditions, to invest up to $3,686,874 in six portfolio companies. 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 $5,497,971 at June 30, 2001, equivalent to 1.62% 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. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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: August 10, 2001 By: /s/ William R. Thomas ---------------------------- --------------------------------------- William R. Thomas, President Date: August 10, 2001 By: /s/ Susan K. Hodgson ---------------------------- --------------------------------------- Susan K. Hodgson, Secretary-Treasurer 10