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 quarterly period ended September 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. 3,829,051 shares of Common Stock, $1 Par Value as of October 31, 2001
<TABLE> <CAPTION> PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Financial Condition ---------------------------------------------- Assets September 30, 2001 March 31, 2001 ------------------ -------------- (Unaudited) <S> <C> <C> Investments at market or fair value Companies more than 25% owned (Cost: September 30, 2001 - $23,194,865 March 31, 2001 - $23,140,865) $ 223,893,999 $ 205,273,759 Companies 5% to 25% owned (Cost: September 30, 2001 - $27,167,649 March 31, 2001 - $17,642,756) 37,066,001 19,623,004 Companies less than 5% owned (Cost: September 30, 2001 - $37,303,756 March 31, 2001 - $46,818,025) 76,479,988 91,020,746 ------------- ------------- Total investments (Cost: September 30, 2001- $87,666,270 March 31, 2001 - $87,601,646) 337,439,988 315,917,509 Cash and cash equivalents 1,981,821 1,137,767 Receivables 809,373 264,377 Other assets 5,654,483 5,348,315 ------------- ------------- Totals $ 345,885,665 $ 322,667,968 ============= ============= Liabilities and Shareholders' Equity Note payable to bank $ 6,500,000 $ 5,000,000 Notes payable to portfolio companies 6,500,000 6,000,000 Accrued interest and other liabilities 2,040,393 2,135,052 Deferred income taxes 84,967,745 77,924,303 Subordinated debenture 5,000,000 5,000,000 ------------- ------------- Total liabilities 105,008,138 96,059,355 ------------- ------------- Shareholders' equity Common stock, $1 par value: authorized, 5,000,000 shares; issued, 4,266,416 shares at September 30, 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 3,600,260 3,550,573 Undistributed net realized gain on investments 69,931,936 70,382,314 Unrealized appreciation of investments - net of deferred income taxes 163,176,720 149,005,865 Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302) ------------- ------------- Net assets at market or fair value, equivalent to $62.91 per share on the 3,829,051 shares outstanding at September 30, 2001, and $59.40 per share on the 3,815,051 shares outstanding at March 31, 2001 240,877,527 226,608,613 ------------- ------------- Totals $ 345,885,665 $ 322,667,968 ============= ============= </TABLE> (See Notes to Consolidated Financial Statements) 2
<TABLE> <CAPTION> CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Operations ------------------------------------- (Unaudited) Three Months Ended Six Months Ended September 30 September 30 --------------------- --------------------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Investment income: Interest $ 81,901 $ 159,801 $ 173,159 $ 326,321 Dividends 705,879 1,188,336 1,411,758 1,476,672 Management and directors' fees 121,148 128,600 260,248 267,700 ------------- ------------- ------------- ------------- 908,928 1,476,737 1,845,165 2,070,693 ------------- ------------- ------------- ------------- Operating expenses: Interest 262,418 282,474 534,219 535,020 Salaries 206,160 188,750 399,493 362,000 Net pension benefit (130,728) (134,088) (252,270) (243,084) Other operating expenses 142,026 124,304 262,706 319,591 ------------- ------------- ------------- ------------- 479,876 461,440 944,148 973,527 ------------- ------------- ------------- ------------- Income before income taxes 429,052 1,015,297 901,017 1,097,166 Income tax expense 45,720 28,706 88,320 85,199 ------------- ------------- ------------- ------------- Net investment income $ 383,332 $ 986,591 $ 812,697 $ 1,011,967 ============= ============= ============= ============= Proceeds from disposition of investments $ 783,978 $ -- $ 783,978 $ 7,046,708 Cost of investments sold 1,566,234 -- 1,566,234 4,827,045 ------------- ------------- ------------- ------------- Realized gain (loss) on investments before income taxes (782,256) -- (782,256) 2,219,663 Income tax expense (benefit) (331,878) -- (331,878) 777,443 ------------- ------------- ------------- ------------- Net realized gain (loss) on investments (450,378) -- (450,378) 1,442,220 ------------- ------------- ------------- ------------- Increase (decrease) in unrealized appreciation of investments before income taxes (1,795,205) (4,121,223) 21,457,855 (6,729,333) Increase (decrease) in deferred income taxes on appreciation of investments (656,000) (1,443,000) 7,287,000 (2,588,000) ------------- ------------- ------------- ------------- Net increase (decrease) in unrealized appreciation of investments (1,139,205) (2,678,223) 14,170,855 (4,141,333) ------------- ------------- ------------- ------------- Net realized and unrealized gain (loss) on investments $ (1,589,583) $ (2,678,223) $ 13,720,477 $ (2,699,113) ============= ============= ============= ============= Increase (decrease) in net assets from operations $ (1,206,251) $ (1,691,632) $ 14,533,174 $ (1,687,146) ============= ============= ============= ============= </TABLE> (See Notes to Consolidated Financial Statements) 3
<TABLE> <CAPTION> CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Changes in Net Assets ------------------------------------------------ Six Months Ended Year Ended September 30, 2001 March 31, 2001 ------------------ -------------- (Unaudited) <S> <C> <C> Operations Net investment income $ 812,697 $ 1,722,500 Net realized loss on investments (450,378) (3,230,987) Net increase (decrease) in unrealized appreciation of investments 14,170,855 (6,469,835) ------------- ------------- Increase (decrease )in net assets from operations 14,533,174 (7,978,322) Distributions from: Undistributed net investment income (763,010) (2,289,031) Capital share transactions Exercise of stock options 498,750 -- ------------- ------------- Increase (decrease) in net assets 14,268,914 (10,267,353) Net assets, beginning of period 226,608,613 236,875,966 ------------- ------------- Net assets, end of period $ 240,877,527 $ 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 Six Months Ended September 30 September 30 ------------ ------------ 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Cash flows from operating activities Increase (decrease) in net assets from operations $ (1,206,251) $ (1,691,632) $ 14,533,174 $ (1,687,146) Adjustments to reconcile increase (decrease) in net assets from operations to net cash provided by (used in) operating activities: Depreciation and amortization 5,999 7,242 11,820 14,463 Net pension benefit (130,728) (134,088) (252,270) (243,084) Net realized and unrealized (gain) loss on investments 1,589,583 2,678,223 (13,720,477) 2,699,113 Increase in receivables (673,782) (201,142) (544,996) (92,202) (Increase) decrease in other assets 12,806 10,891 (2,298) (18,812) Increase (decrease) in accrued interest and other liabilities 86,386 105,586 (53,106) (79,551) Decrease in accrued pension cost (52,486) (52,487) (104,973) (104,974) Deferred income taxes 45,720 28,706 88,320 85,199 ------------- ------------- ------------- ------------- Net cash provided by (used in) operating activities (322,753) 751,299 (44,806) 573,006 ------------- ------------- ------------- ------------- Cash flows from investing activities Proceeds from disposition of investments 783,978 -- 783,978 7,046,708 Purchases of securities (1,282,929) (262,500) (1,780,858) (10,371,551) Maturities of securities -- -- 150,000 240,000 ------------- ------------- ------------- ------------- Net cash used in investing activities (498,951) (262,500) (846,880) (3,084,843) ------------- ------------- ------------- ------------- Cash flows from financing activities Increase (decrease) in note payable to bank (60,000,000) 5,000,000 1,500,000 (55,000,000) Increase (decrease) in notes payable to portfolio companies 500,000 (5,000,000) 500,000 (500,000) Distributions from undistributed net investment income -- -- (763,010) (763,010) Proceeds from exercise of employee stock options 498,750 -- 498,750 -- ------------- ------------- ------------- ------------- Net cash provided by (used in) financing activities (59,001,250) -- 1,735,740 (56,263,010) ------------- ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents (59,822,954) 488,799 844,054 (58,774,847) Cash and cash equivalents at beginning of period 61,804,775 4,723,069 1,137,767 63,986,715 ------------- ------------- ------------- ------------- Cash and cash equivalents at end of period $ 1,981,821 $ 5,211,868 $ 1,981,821 $ 5,211,868 ============= ============= ============= ============= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 176,452 $ 177,220 $ 530,326 $ 538,324 Income taxes $ -- $ -- $ -- $ -- </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 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 Six Months Ended September 30 September 30 ------------ ------------ 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Investment income $ .24 $ .39 $ .48 $ .54 Operating expenses (.06) (.05) (.11) (.12) Interest expense (.07) (.07) (.14) (.14) Income taxes (.01) (.01) (.02) (.02) ------ ------ ------ ------ Net investment income .10 .26 .21 .26 Net realized gain (loss) on investments (.12) - (.12) .38 Net increase (decrease) in unrealized appreciation of investments (.31) (.70) 3.70 (1.08) Distributions from undistributed net investment income - - (.20) (.20) Exercise of employee stock options (1) (.08) - (.08) - ------ ------ ------ ------ Net increase (decrease) in net asset value (.41) (.44) 3.51 (.64) Net asset value: Beginning of period 63.32 61.89 59.40 62.09 ------ ------ ------ ------ End of period $62.91 $61.45 $62.91 $61.45 ====== ====== ====== ====== Shares outstanding at end of period (000s omitted) 3,829 3,815 3,829 3,815 </TABLE> (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 September 30, 2001 was $240,877,527 equivalent to $62.91 per share after deducting an allowance of $22.62 per share for deferred taxes on net unrealized appreciation. Assuming reinvestment of all dividends, this represents an increase of 3.5% during the past twelve months. September 30, September 30, 2001 2000 ---- ---- Net assets $240,877,527 $234,425,810 Shares outstanding 3,829,051 3,815,051 Net assets per share $62.91 $61.45 Interest income in the six months ended September 30, 2001 decreased from the year-ago period primarily because of a decrease in average idle funds invested. During the six months ended September 30, 2001 and 2000, the Company recorded dividend income from the following sources: Six Months Ended September 30 ------------ 2001 2000 ---- ---- AT&T Corp. $ 9,993 $ 58,628 Alamo Group Inc. 338,556 338,556 Dennis Tool Company 24,999 24,999 Kimberly-Clark Corporation 43,221 41,677 The RectorSeal Corporation 480,000 480,000 Skylawn Corporation 300,000 300,000 TCI Holdings, Inc 40,635 40,635 Texas Shredder, Inc. 20,230 20,230 The Whitmore Manufacturing Company 120,000 120,000 Other 34,124 51,947 ----------- ----------- $ 1,411,758 $ 1,476,672 =========== =========== Other operating expenses in the six months ended September 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. During the six months ended September 30, 2001, the Company reported a realized loss before income taxes of $782,256 which included a loss of $830,238 on our investment in CyberSource Corporation. It should be noted that a realized loss before income taxes occurs when a depreciated portfolio security is sold to realize a loss and a corresponding increase in unrealized appreciation occurs by transferring the loss associated with the transaction from being "unrealized" to being "realized." Conversely, when a gain is realized on an appreciated portfolio security, a decrease 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 Six Months Ended September 30 September 30 ------------ ------------ 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> AT&T Corp. $ (359,751) $ (299,801) $ (266,480) $ (3,605,943) Alamo Group Inc -- -- -- 1,410,000 All Components, Inc. (1,750,000) 3,450,000 (1,750,000) 3,450,000 Balco, Inc. 1,482,240 -- 1,482,240 -- Concert Industries Ltd. 902,000 90,000 2,332,000 90,000 Dennis Tool Company (1,130,000) 842,000 (1,130,000) 842,000 Encore Wire Corporation 1,363,000 2,725,000 5,449,000 -- Liberty Media Corporation (3,244,804) (4,149,149) (880,636) (7,726,731) Mail-Well, Inc. (524,000) (5,766,000) (1,572,000) (5,766,000) Media Recovery, Inc. -- -- -- 5,000,000 Mylan Laboratories, Inc. 576,004 1,130,520 868,496 (72,161) Organized Living, Inc. -- -- (2,500,000) -- Palm Harbor Homes, Inc. -- -- 15,710,000 -- PETsMART, Inc. 307,482 899,552 1,975,744 1,103,996 The RectorSeal Corporation -- -- 2,500,000 3,500,000 Skylawn Corporation -- -- -- 3,000,000 Sprint Corporation-FON Group 190,800 (1,597,500) 145,440 (2,425,500) Sprint Corporation-PCS Group 77,040 (877,500) 262,440 (1,093,500) VocalData, Inc. (749,998) -- (1,489,803) -- </TABLE> During the quarter ended September 30, 2001, the Company made new investments of $774,000 and additional investments of $508,929 in existing portfolio companies. The Company has agreed, subject to certain conditions, to invest up to $4,053,946 in seven portfolio companies. 8
<TABLE> <CAPTION> 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 $4,997,970 at September 30, 2001, equivalent to 1.5% 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 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on July 16, 2001, with the following results of elections and approval: Votes Cast ------------------------------------- Against/ Abstentions/ For Withheld Non-Votes --------- -------- --------- <S> <C> <C> <C> a. The following Directors were elected to serve until the next Annual Meeting of Stockholders: Graeme W. Henderson 3,444,147 15,397 355,507 Gary L. Martin 3,443,747 15,797 355,507 James M. Nolan 3,444,147 15,397 355,507 William R. Thomas 3,443,746 15,798 355,507 John H. Wilson 3,443,547 15,997 355,507 b. KPMG LLP was approved as the Company's auditors for the 2002 fiscal year. 3,450,739 4,980 359,332 </TABLE> 9
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. 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 2, 2001 By: /s/ William R. Thomas ------------------------- ------------------------- William R. Thomas President Date: November 2, 2001 By: /s/ Susan K. Hodgson ------------------------- ------------------------- Susan K. Hodgson Secretary-Treasurer 10