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, 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 January 31, 2002
<TABLE> <CAPTION> PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Financial Condition Assets December 31, March 31, 2001 2001 ------------- ------------- (Unaudited) <S> <C> <C> Investments at market or fair value Companies more than 25% owned (Cost: December 31, 2001 - $23,194,865, March 31, 2001 - $23,140,865) $ 239,605,999 $ 205,273,759 Companies 5% to 25% owned (Cost: December 31, 2001 - $27,167,649, March 31, 2001 - $17,642,756) 34,307,001 19,623,004 Companies less than 5% owned (Cost: December 31, 2001 - $34,972,684, March 31, 2001 - $46,818,025) 72,418,320 91,020,746 ------------- ------------- Total investments (Cost: December 31, 2001 - $85,335,198, March 31, 2001 - $87,601,646) 346,331,320 315,917,509 Cash and cash equivalents 3,147,843 1,137,767 Receivables 1,438,116 264,377 Other assets 5,799,172 5,348,315 ------------- ------------- Totals $ 356,716,451 $ 322,667,968 ============= ============= Liabilities and Shareholders' Equity Note payable to bank $ 6,500,000 $ 5,000,000 Notes payable to portfolio companies 5,000,000 6,000,000 Accrued interest and other liabilities 1,924,797 2,135,052 Deferred income taxes 89,644,765 77,924,303 Subordinated debenture 5,000,000 5,000,000 ------------- ------------- Total liabilities 108,069,562 96,059,355 ------------- ------------- Shareholders' equity Common stock, $1 par value: authorized, 5,000,000 shares; issued, 4,266,416 shares at December 31, 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 2,988,642 3,550,573 Undistributed net realized gain on investments 71,016,512 70,382,314 Unrealized appreciation of investments - net of deferred income taxes 170,473,124 149,005,865 Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302) ------------- ------------- Net assets at market or fair value, equivalent to $64.94 per share on the 3,829,051 shares outstanding at December 31, 2001, and $59.40 per share on the 3,815,051 shares outstanding at March 31, 2001 248,646,889 226,608,613 ------------- ------------- Totals $ 356,716,451 $ 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 Nine Months Ended December 31 December 31 ------------------------ ------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Investment income: Interest $ 85,171 $ 111,955 $ 258,330 $ 438,276 Dividends 1,172,883 772,382 2,584,641 2,249,054 Management and directors' fees 138,072 121,108 398,320 388,808 ------------ ------------ ------------ ------------ 1,396,126 1,005,445 3,241,291 3,076,138 ------------ ------------ ------------ ------------ Operating expenses Interest 218,303 313,701 752,522 848,721 Salaries 236,119 220,209 635,612 582,209 Net pension benefit (126,135) (121,542) (378,405) (364,626) Other operating expenses 128,587 116,707 391,293 436,298 ------------ ------------ ------------ ------------ 456,874 529,075 1,401,022 1,502,602 ------------ ------------ ------------ ------------ Income before income taxes 939,252 476,370 1,840,269 1,573,536 Income tax expense 19,249 42,601 107,569 127,800 ------------ ------------ ------------ ------------ Net investment income $ 920,003 $ 433,769 $ 1,732,700 $ 1,445,736 ============ ============ ============ ============ Proceeds from disposition of investments $ 3,612,518 $ 160,669 $ 4,396,496 $ 7,207,377 Cost of investments sold 1,821,102 1,455,730 3,387,336 6,282,775 ------------ ------------ ------------ ------------ Realized gain (loss) on investments before income taxes 1,791,416 (1,295,061) 1,009,160 924,602 Income tax expense (benefit) 706,840 (526,803) 374,962 250,640 ------------ ------------ ------------ ------------ Net realized gain (loss) on investments 1,084,576 (768,258) 634,198 673,962 ------------ ------------ ------------ ------------ Increase (decrease) in unrealized appreciation of investments before income taxes 11,222,404 (15,055,062) 32,680,259 (21,784,395) Increase (decrease) in deferred income taxes on appreciation of investments 3,926,000 (5,234,000) 11,213,000 (7,822,000) ------------ ------------ ------------ ------------ Net increase (decrease) in unrealized appreciation of investments 7,296,404 (9,821,062) 21,467,259 (13,962,395) ------------ ------------ ------------ ------------ Net realized and unrealized gain (loss) on investments $ 8,380,980 $(10,589,320) $ 22,101,457 $(13,288,433) ============ ============ ============ ============ Increase (decrease) in net assets from operations $ 9,300,983 $(10,155,551) $ 23,834,157 $(11,842,697) ============ ============ ============ ============ </TABLE> (See Notes to Consolidated Financial Statements) 3
<TABLE> <CAPTION> CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY Consolidated Statements of Changes in Net Assets Nine Months Ended Year Ended December 31, 2001 March 31, 2001 ----------------- ----------------- (Unaudited) <S> <C> <C> Operations Net investment income $ 1,732,700 $ 1,722,500 Net realized gain (loss) on investments 634,198 (3,230,987) Net increase (decrease) in unrealized appreciation of investments 21,467,259 (6,469,835) ----------------- ----------------- Increase (decrease) in net assets from operations 23,834,157 (7,978,322) Distributions from: Undistributed net investment income (2,294,631) (2,289,031) Capital share transactions Exercise of employee stock options 498,750 -- ----------------- ----------------- Increase (decrease) in net assets 22,038,276 (10,267,353) Net assets, beginning of period 226,608,613 236,875,966 ----------------- ----------------- Net assets, end of period $ 248,646,889 $ 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 Nine Months Ended December 31 December 31 ----------- ----------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Cash flows from operating activities Increase (decrease) in net assets from operations $ 9,300,983 $(10,155,551) $ 23,834,157 $(11,842,697) Adjustments to reconcile increase (decrease) in net assets from operations to net cash provided by operating activities: Depreciation and amortization 6,841 7,298 18,661 21,761 Net pension benefit (126,135) (121,542) (378,405) (364,626) Net realized and unrealized (gain) loss on investments (8,380,980) 10,589,320 (22,101,457) 13,288,433 (Increase) decrease in receivables (628,743) 50,086 (1,173,739) (42,116) Decrease in other assets 6,315 21,174 4,017 2,362 Increase (decrease) in accrued interest and other liabilities (94,819) 12,973 (147,925) (66,578) Decrease in accrued pension cost (52,487) (52,488) (157,460) (157,462) Deferred income taxes 44,180 42,601 132,500 127,800 ------------ ------------ ------------ ------------ Net cash provided by operating activities 75,155 393,871 30,349 966,877 ------------ ------------ ------------ ------------ Cash flows from investing activities Proceeds from disposition of investments 3,612,518 160,669 4,396,496 7,207,377 Purchases of securities (1,608,000) (4,854,456) (3,388,858) (15,226,007) Maturities of securities 2,117,970 -- 2,267,970 240,000 Net cash provided by (used in) investing ------------ ------------ ------------ ------------ activities 4,122,488 (4,693,787) 3,275,608 (7,778,630) ------------ ------------ ------------ ------------ Cash flows from financing activities Increase (decrease) in note payable to bank -- 35,000,000 1,500,000 (20,000,000) Increase (decrease) in notes payable to portfolio companies (1,500,000) 2,500,000 (1,000,000) 2,000,000 Distributions from undistributed net investment income (1,531,621) (1,526,021) (2,294,631) (2,289,031) Proceeds from exercise of employee stock options -- -- 498,750 -- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities (3,031,621) 35,973,979 (1,295,881) (20,289,031) ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,166,022 31,674,063 2,010,076 (27,100,784) Cash and cash equivalents at beginning of period 1,981,821 5,211,868 1,137,767 63,986,715 ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period $ 3,147,843 $ 36,885,931 $ 3,147,843 $ 36,885,931 ============ ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 315,153 $ 298,898 $ 845,479 $ 837,222 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 Nine Months Ended December 31 December 31 ----------- ----------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Investment income $ .37 $ .26 $ .85 $ .80 Operating expenses (.06) (.05) (.17) (.17) Interest expense (.06) (.08) (.20) (.22) Income taxes (.01) (.01) (.03) (.03) --------- --------- --------- --------- Net investment income .24 .12 .45 .38 Net realized gain (loss) on investments .28 (.20) .16 .18 Net increase (decrease) in unrealized appreciation of investments 1.91 (2.58) 5.61 (3.66) Distributions from undistributed net investment income (.40) (.40) (.60) (.60) Exercise of employee stock options (1) -- -- (.08) -- --------- --------- --------- --------- Net increase (decrease) in net asset value 2.03 (3.06) 5.54 (3.70) Net asset value: Beginning of period 62.91 61.45 59.40 62.09 --------- --------- --------- --------- End of period $ 64.94 $ 58.39 $ 64.94 $ 58.39 ========= ========= ========= ========= 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 December 31, 2001 was $248,646,889, equivalent to $64.94 per share after deducting an allowance of $23.64 per share for deferred taxes on net unrealized appreciation. Assuming reinvestment of all dividends, this represents an increase of 12.3% during the past twelve months. December 31 December 31 2001 2000 ---- ---- Net assets $248,646,889 $222,744,238 Shares outstanding 3,829,051 3,815,051 Net assets per share $64.94 $58.39 Interest income in the nine months ended December 31, 2001 decreased from the year-ago period primarily because of a decrease in average idle funds invested. During the nine months ended December 31, 2001 and 2000, the Company recorded dividend income from the following sources: Nine Months Ended December 31 2001 2000 ---- ---- AT&T Corp. $ 14,990 $ 63,624 Alamo Group Inc. 507,834 507,834 Dennis Tool Company 37,499 37,499 Kimberly-Clark Corporation 64,831 62,516 The RectorSeal Corporation 720,000 720,000 Skylawn Corporation 919,480 508,275 TCI Holdings, Inc. 60,953 60,953 Texas Shredder, Inc. 30,345 30,345 The Whitmore Manufacturing Company 180,000 180,000 Other 48,709 78,008 ---------- ---------- $2,584,641 $2,249,054 ========== ========== Interest expense related to the notes payable to portfolio companies during the three months ended December 31, 2001 and 2000 was $45,469 and $98,350, respectively and for the nine months ended December 31, 2001 and 2000 was $190,938 and $339,662, respectively. During the nine months ended December 31, 2001, the Company reported a realized gain before income taxes of $1,009,160 which included a gain of $2,152,594 on our investment in Mylan Laboratories, Inc., a loss of $813,117 on our investment in CyberSource Corporation and a loss of $396,589 on our investment in Photon Dynamics, 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 ----------- ----------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> AT&T Corp. $ (154,565) $ (1,615,596) $ (421,045) $ (5,221,539) All Components, Inc. -- -- (1,750,000) 3,450,000 Concert Industries Ltd. (2,259,000) 615,351 73,000 705,351 Encore Wire Corporation -- (1,363,000) 5,449,000 (1,363,000) Liberty Media Corporation (formerly AT&T-Liberty Media Group) 880,636 (3,175,369) -- (10,902,100) Mail-Well, Inc. (525,000) (524,000) (2,097,000) (6,290,000) Media Recovery, Inc. (3,000,000) 5,000,000 (3,000,000) 10,000,000 Organized Living, Inc. -- -- (2,500,000) -- Palm Harbor Homes, Inc. 15,710,000 (7,855,000) 31,420,000 (7,855,000) PETsMART, Inc. 1,910,322 (1,185,773) 3,886,066 (81,777) The RectorSeal Corporation -- -- 2,500,000 3,500,000 Skylawn Corporation -- -- -- 3,000,000 Sprint Corporation-FON Group (282,960) (648,000) (137,520) (3,073,500) Sprint Corporation-PCS Group (67,680) (528,750) 194,760 (1,622,250) </TABLE> During the quarter ended December 31, 2001, the Company made a new investment of $1,500,000 and an additional investment of $108,000 in an existing portfolio company. The Company has agreed, subject to certain conditions, to invest up to $3,395,946 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 totaled $2,880,000 at December 31, 2001, equivalent to 0.8% 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) 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 8, 2002 By: /s/ William R. Thomas ------------------------------ ------------------------------------- William R. Thomas President Date: February 8, 2002 By: /s/ Susan K. Hodgson ------------------------------ ------------------------------------- Susan K. Hodgson, Secretary-Treasurer 10