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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, 2002 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 July 31, 2002
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
CAPITAL SOUTHWEST CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
----------------------------------------------
Assets June 30, 2002 March 31, 2002
-------------- --------------
(Unaudited)
Investments at market or fair value
Companies more than 25% owned
(Cost: June 30, 2002 - $23,114,865
March 31, 2002 - $23,194,865) $ 228,731,000 $ 243,024,999
Companies 5% to 25% owned
(Cost: June 30, 2002 - $27,120,124
March 31, 2002 - $27,167,649) 30,032,003 34,943,003
Companies less than 5% owned
(Cost: June 30, 2002 - $29,907,047,
March 31, 2002 - $31,831,341) 64,333,787 69,513,064
-------------- --------------
Total investments
(Cost: June 30, 2002 - $80,142,036,
March 31, 2002 - $82,193,855) 323,096,790 347,481,066
Cash and cash equivalents 66,548,774 1,977,180
Receivables 135,058 1,753,297
Other assets 6,140,438 5,971,361
-------------- --------------
Totals $ 395,921,060 $ 357,182,904
============== ==============
Liabilities and Shareholders' Equity
Notes payable to bank $ 73,500,000 $ 6,500,000
Notes payable to portfolio company 2,500,000 2,500,000
Accrued interest and other liabilities 1,887,855 2,018,140
Deferred income taxes 82,679,325 90,673,722
Subordinated debenture -- 5,000,000
-------------- --------------
Total liabilities 160,567,180 106,691,862
-------------- --------------
Shareholders' equity
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,266,416 shares
at June 30, 2002 and March 31, 2002 4,266,416 4,266,416
Additional capital 6,935,497 6,935,497
Undistributed net investment income 3,007,367 3,297,838
Undistributed net realized gain on investments 69,526,146 69,844,380
Unrealized appreciation of investments -
net of deferred income taxes 158,651,756 173,180,213
Treasury stock - at cost (437,365 shares) (7,033,302) (7,033,302)
-------------- --------------
Net assets at market or fair value, equivalent
to $61.47 per share at June 30, 2002, and
$65.42 per share at March 31, 2002 on the
3,829,051 shares outstanding 235,353,880 250,491,042
-------------- --------------
Totals $ 395,921,060 $ 357,182,904
============== ==============
(See Notes to Consolidated Financial Statements)
2
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
-------------------------------------
(Unaudited)
Three Months Ended
June 30,
2002 2001
------------ ------------
Investment income:
Interest $ 64,675 $ 91,258
Dividends 708,992 705,879
Management and directors' fees 131,350 139,100
------------ ------------
905,017 936,237
------------ ------------
Operating expenses:
Salaries 200,750 193,333
Net pension benefit (126,135) (121,542)
Other operating expenses 149,907 120,680
------------ ------------
224,522 192,471
------------ ------------
Income before interest expense and income taxes 680,495 743,766
Interest expense 160,956 271,801
------------ ------------
Income before income taxes 519,539 471,965
Income tax expense 44,200 42,600
------------ ------------
Net investment income $ 475,339 $ 429,365
============ ============
Proceeds from disposition of investments $ 1,459,220 $ --
Cost of investments sold 2,012,051 --
------------ ------------
Realized loss on investments before income taxes (552,831) --
Income tax benefit (234,597) --
------------ ------------
Net realized loss on investments (318,234) --
------------ ------------
Increase (decrease) in unrealized appreciation
of investments before income taxes (22,332,457) 23,253,060
Increase (decrease) in deferred income
taxes on appreciation of investments (7,804,000) 7,943,000
------------ ------------
Net increase (decrease) in unrealized
appreciation of investments (14,528,457) 15,310,060
------------ ------------
Net realized and unrealized gain (loss)
on investments $(14,846,691) $ 15,310,060
============ ============
Increase (decrease) in net assets from operations $(14,371,352) $ 15,739,425
============ ============
(See Notes to Consolidated Financial Statements)
3
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Changes in Net Assets
------------------------------------------------
Three Months Ended Year Ended
June 30, 2002 March 31, 2002
------------------ -----------------
(Unaudited)
Operations
Net investment income $ 475,339 $ 2,041,896
Net realized loss on investments (318,234) (537,934)
Net increase (decrease) in unrealized appreciation
of investments (14,528,457) 24,174,348
------------------ -----------------
Increase (decrease) in net assets from operations (14,371,352) 25,678,310
Distributions from:
Undistributed net investment income (765,810) (2,294,631)
Capital share transactions
Exercise of employee stock options -- 498,750
------------------ -----------------
Increase (decrease) in net assets (15,137,162) 23,882,429
Net assets, beginning of period 250,491,042 226,608,613
------------------ -----------------
Net assets, end of period $ 235,353,880 $ 250,491,042
================== =================
(See Notes to Consolidated Financial Statements)
4
CAPITAL SOUTHWEST CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
Three Months Ended
June 30,
--------
2002 2001
------------ ------------
Cash flows from operating activities
Increase (decrease) in net assets from operations $(14,371,352) $ 15,739,425
Adjustments to reconcile increase (decrease) in net
assets from operations to net cash provided by
operating activities:
Depreciation and amortization 5,399 5,821
Net pension benefit (126,135) (121,542)
Net realized and unrealized (gain) loss
on investments 14,846,691 (15,310,060)
Decrease in receivables 1,618,239 128,786
Increase in other assets (16,630) (15,104)
Decrease in accrued interest
and other liabilities (120,175) (139,492)
Decrease in accrued pension cost (41,820) (52,487)
Deferred income taxes 44,200 42,600
------------ ------------
Net cash provided by operating activities 1,838,417 277,947
------------ ------------
Cash flows from investing activities
Proceeds from disposition of investments 1,459,220 --
Purchases of securities (40,233) (497,929)
Maturities of securities 80,000 150,000
------------ ------------
Net cash provided by (used in) investing activities 1,498,987 (347,929)
------------ ------------
Cash flows from financing activities
Increase in notes payable to bank 67,000,000 61,500,000
Decrease in subordinated debenture (5,000,000) --
Distributions from undistributed net investment income (765,810) (763,010)
------------ ------------
Net cash provided by financing activities 61,234,190 60,736,990
------------ ------------
Net increase in cash and cash equivalents 64,571,594 60,667,008
Cash and cash equivalents at beginning
of period 1,977,180 1,137,767
------------ ------------
Cash and cash equivalents at end of period $ 66,548,774 $ 61,804,775
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 276,064 $ 353,874
Income taxes $ 0 $ 0
(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 fair
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, 2002. 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
June 30
-------
2002 2001
--------- ---------
Investment income $ .23 $ .24
Operating expenses (.06) (.05)
Interest expense (.04) (.07)
Income taxes (.01) (.01)
--------- ---------
Net investment income .12 .11
Distributions from undistributed
net investment income (.20) (.20)
Net realized loss on investments (.08) --
Net increase (decrease) in unrealized appreciation
of investments after deferred taxes (3.79) 4.01
--------- ---------
Increase (decrease) in net asset value (3.95) 3.92
Net asset value:
Beginning of period 65.42 59.40
--------- ---------
End of period $ 61.47 $ 63.32
========= =========
Increase (decrease) in deferred taxes on unrealized appreciation $ (2.03) $ 2.08
Deferred taxes on unrealized appreciation:
Beginning of period 24.05 20.79
--------- ---------
End of period $ 22.02 $ 22.87
========= =========
Shares outstanding at end of period
(000s omitted) 3,829 3,815
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net asset value at June 30, 2002 was $235,353,880, equivalent to $61.47
per share after deducting an allowance of $22.02 per share for deferred taxes on
net unrealized appreciation. Assuming reinvestment of all dividends, this
represents a decrease of 2.1% during the past twelve months and 5.8% during the
past three months.
June 30, June 30,
2002 2001
------------ ------------
Net assets $235,353,880 $241,585,028
Shares outstanding 3,829,051 3,815,051
Net assets per share $ 61.47 $ 63.32
Interest income in the three months ended June 30, 2002 decreased from
the year-ago period primarily because of a decrease in loans to portfolio
companies. During the three months ended June 30, 2002 and 2001, the Company
recorded dividend income from the following sources:
Three Months Ended
June 30
-------
2002 2001
-------- --------
AT&T Corp. $ 4,997 $ 4,997
Alamo Group Inc. 169,278 169,278
Kimberly-Clark Corporation 23,154 21,610
The RectorSeal Corporation 240,000 240,000
Skylawn Corporation 150,000 150,000
TCI Holdings, Inc. 20,318 20,318
The Whitmore Manufacturing Company 60,000 60,000
Other 41,245 39,676
-------- --------
$708,992 $705,879
======== ========
Interest expense in the three months ended June 30, 2002 decreased from
the year-ago period primarily due to a decrease in interest rates. Other
operating expenses in the three months ended June 30, 2002 increased from the
year-ago period primarily due to professional fees related to a prior
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
-------
2002 2001
------------ ------------
Balco, Inc. $ 2,000,000 $ --
Concert Industries Ltd. (2,186,000) 1,430,000
Encore Wire Corporation (2,725,000) 4,086,000
Liberty Media Corporation (formerly
AT&T-Liberty Media Group) (1,788,368) 2,364,168
Mail-Well, Inc. (1,363,000) (1,048,000)
Organized Living, Inc. -- (2,500,000)
Palm Harbor Homes, Inc. (15,710,000) 15,710,000
PETsMART, Inc. 1,081,042 1,668,262
The RectorSeal Corporation -- 2,500,000
At June 30, 2002, the value of our investment in Palm Harbor Homes,
Inc. was reduced due to the increasingly unfavorable outlook for the
manufacturing industry and because Palm Harbor reported its first quarterly loss
in 13 years for the three months ended June 30, 2002. Conversely, at June 30,
2001, the value of our Palm Harbor investment had been increased in recognition
of Palm Harbor's ability to maintain a reduced but acceptable level of earnings
despite the difficult condition of the manufactured housing industry.
On June 3, 2002, the Company repaid the $5,000,000 subordinated
debenture to the Small Business Administration ("SBA") from its cash and cash
equivalents.
On July 1, 2002, the Company repaid the $65,000,000 note payable to
bank from its cash and cash equivalents.
The Company has agreed, subject to certain conditions, to invest up to
$5,989,346 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 $2,800,000 at June 30, 2002, equivalent to 0.87%
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.
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 3. Quantitative and Qualitative Disclosure About Market Risk
(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) Exhibits
Exhibit 99.1- Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Chief Executive Officer of the Corporation.
Exhibit 99.2- Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of the Chief Financial Officer of the Corporation.
(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: August 9, 2002 By: /s/ William R. Thomas
--------------- ----------------------------------
William R. Thomas, President
Date: August 9, 2002 By: /s/ Susan K. Hodgson
--------------- ----------------------------------
Susan K. Hodgson, Secretary-Treasurer
10