Twelve Largest Investments - March 31, 1999
Palm Harbor Homes, Inc. $125,682,000
--------------------------------------------------------------------------------
Palm Harbor Homes, Dallas, Texas, is an integrated manufactured housing
company, building, retailing, financing and insuring homes produced in 16 plants
in Alabama, Arizona, Florida, Georgia, North Carolina, Ohio, Oregon and Texas
and sold in 34 states by over 300 independent dealers and 120 company-owned
retail superstores. Palm Harbor manufactures high-quality, energy-efficient
homes designed to meet the need for affordable housing, particularly among
retirees and newly-formed families.
During the year ended March 26, 1999, Palm Harbor earned $40,177,000 ($1.69
per share) on net sales of $761,374,000, compared with earnings of $31,854,000
($1.35 per share) on net sales of $637,268,000 in the previous year. The March
31, 1999 closing Nasdaq bid price of Palm Harbor's common stock was $21.75 per
share.
At March 31, 1999, the $10,931,955 investment in Palm Harbor by Capital
Southwest and its subsidiary was valued at $125,682,000 ($16.00 per share)
consisting of 7,855,121 restricted shares of common stock, representing a
fully-diluted equity interest of 32.9%.
================================================================================
The RectorSeal Corporation $38,500,000
--------------------------------------------------------------------------------
The RectorSeal Corporation, with plants in Houston, Texas and Mount Vernon,
New York, manufactures specialty chemical products including pipe thread
sealants, firestop sealants, plastic solvent cements and other formulations for
plumbing and industrial applications. RectorSeal's subsidiary, Jet-Lube, Inc.,
with plants in Houston, England and Canada, produces anti-seize compounds,
specialty lubricants and other products used in industrial and oil field
applications. RectorSeal also owns a 20% equity interest in The ▇▇▇▇▇▇▇▇
Manufacturing Company (described subsequently).
During the year ended March 31, 1999, RectorSeal earned $3,839,000 on
revenues of $47,555,000, compared with earnings of $3,917,000 on revenues of
$42,218,000 in the previous year. RectorSeal's earnings do not reflect its 20%
equity in The ▇▇▇▇▇▇▇▇ Manufacturing Company.
At March 31, 1999, Capital Southwest owned 100% of RectorSeal's common
stock having a cost of $52,600 and a value of $38,500,000.
================================================================================
Skylawn Corporation $35,000,000
--------------------------------------------------------------------------------
Skylawn Corporation owns and operates cemeteries, mausoleums and mortuaries.
Skylawn's operations, all of which are in California, include a mausoleum and an
adjacent mortuary in Oakland and cemeteries and mausoleums in San Mateo,
Hayward, Sacramento and Napa, the latter three of which also have mortuaries at
the cemetery sites. All of these entities are well established and have provided
funeral services to their respective communities for many years.
For the fiscal year ended March 31, 1999, Skylawn Corporation earned
$2,069,000 on revenues of $21,444,000. In the previous year, Skylawn earned
$4,031,000 on revenues of $22,156,000.
At March 31, 1999, Capital Southwest owned 100% of Skylawn Corporation's
common stock, which had a cost of $4,510,400 and was valued at $35,000,000.
================================================================================
Mail-Well, Inc. $18,869,000
--------------------------------------------------------------------------------
Mail-Well, Inc., Englewood, Colorado, is a leading consolidator in the
fragmented printing industry, specializing in customized envelopes, high-impact
printing, consumer products labels and business communications documents.
Mail-Well has more than 13,000 employees and operates 110 plants and numerous
sales offices throughout North America.
For the year ended December 31, 1998, Mail-Well reported earnings of
$21,709,000 ($0.45 per share) on net sales of $1,504,686,000, compared with
earnings of $28,876,000 ($0.68 per share) on net sales of $1,073,937,000 in the
previous year. The March 31, 1999 closing NYSE market price of Mail-Well's
common stock was $13.375 per share.
At March 31, 1999, the $2,986,870 investment in Mail-Well by Capital
Southwest was valued at $18,869,000 ($9.00 per share) consisting of 2,096,588
restricted shares of common stock, representing a fully-diluted equity interest
of 3.4%.
6
Alamo Group Inc. $16,625,000
--------------------------------------------------------------------------------
Alamo Group Inc., Seguin, Texas, is a leading designer, manufacturer and
distributor of heavy-duty, tractor-mounted mowing and vegetation maintenance
equipment. Founded in 1969, Alamo Group operates 11 manufacturing facilities and
serves governmental, industrial and agricultural markets in the U.S. and Europe.
For the year ended December 31, 1998, ▇▇▇▇▇ reported consolidated earnings of
$4,115,000 ($0.42 per share) on net sales of $200,553,000, compared with
earnings of $13,600,000 ($1.41 per share) on net sales of $203,092,000 in the
previous year. The March 31, 1999 closing NYSE market price of Alamo's common
stock was $7.875 per share.
At March 31, 1999, the $575,000 investment in Alamo by Capital Southwest and
its subsidiary was valued at $16,625,000, consisting of 2,660,000 restricted
shares of common stock valued at $16,625,000 ($6.25 per share) and warrants for
62,500 shares, representing a fully-diluted equity interest of 27.0% at an
anticipated cost of $1,575,000.
================================================================================
Encore Wire Corporation $16,347,000
--------------------------------------------------------------------------------
Encore Wire Corporation, McKinney, Texas, manufactures a broad line of copper
electrical wire and cable including non-metallic sheathed cable, underground
feeder cable and THHN cable for residential, commercial and industrial
construction. Encore's products are sold through large-volume distributors and
building materials retailers.
For the year ended December 31, 1998, Encore reported net income of
$17,568,000 ($1.07 per share) on net sales of $244,044,000, compared with net
income of $21,693,000 ($1.31 per share) on net sales of $254,640,000 in the
previous year. The March 31, 1999 closing Nasdaq bid price of Encore's common
stock was $7.875 per share.
At March 31, 1999, the $5,800,000 investment in 2,724,500 shares of Encore's
restricted common stock by Capital Southwest and its subsidiary was valued at
$16,347,000 ($6.00 per share), representing a fully-diluted equity interest of
16.4%.
================================================================================
SDI Holding Corporation $12,000,000
--------------------------------------------------------------------------------
SDI Holding Corp., Greenville, South Carolina, through its subsidiary,
Sterling Diagnostic Imaging, Inc., manufactures and markets, on a world-wide
basis, x-ray imaging film, intensifying screens, cassettes, film development
chemicals and related equipment and services. A subsidiary, Direct Radiography
Corp., has developed and obtained FDA approval of a system for capturing,
storing and transmitting conventional x-ray images in a digital format.
During the year ended December 31, 1998, SDI reported net sales of
$522,705,000, compared with $526,642,000 in the previous year.
At March 31, 1999, Capital Southwest's $6,000,000 investment in the common
stock of SDI Holding Corp. was valued at $12,000,000, representing a
fully-diluted equity interest of 11.2%. (In May 1999 most of SDI's assets were
sold).
================================================================================
AT&T Corp. - Liberty Media Group $8,906,240
--------------------------------------------------------------------------------
AT&T Corp. - Liberty Media Group, New York, New York, acquired by AT&T as
part of Tele-Communications, Inc. in March 1999, produces, acquires and
distributes entertainment, sports and informational programming services and
electronic retailing services, which are delivered via cable television and
other technologies to viewers in the United States and overseas.
For the nine months ended September 30, 1998, AT&T Corp. - Liberty Media
Group reported an unaudited proforma net loss of $606,000,000 ($1.04 per share)
on net sales of $1,022,000,000. The March 31, 1999 closing NYSE market price of
AT&T Corp. - Series A Liberty Media Group common (tracking) stock was $52.5898
per share.
At March 31, 1999, Capital Southwest owned 169,353 unrestricted shares of
AT&T Corp. - Series A Liberty Media Group common stock, having a total cost of
$25 and a market value of $8,906,240 ($52.5898 per share).
7
The ▇▇▇▇▇▇▇▇ Manufacturing Company $8,800,000
--------------------------------------------------------------------------------
The ▇▇▇▇▇▇▇▇ Manufacturing Company, with plants in Rockwall, Texas and
Cleveland, Ohio, manufactures specialty lubricants for heavy equipment used in
surface mining, railroad and other industries, and produces water-based coatings
for the automotive and primary metals industries. ▇▇▇▇▇▇▇▇'▇ subsidiary, Fluid
Protection Corporation, manufactures fluid contamination control devices.
During the year ended March 31, 1999, ▇▇▇▇▇▇▇▇ reported net income of
$1,150,630 on net sales of $13,949,000, compared with net income of $118,424 on
net sales of $12,901,000 in the previous year. The company is owned 80% by
Capital Southwest and 20% by Capital Southwest's subsidiary, The RectorSeal
Corporation (described on page 6).
At March 31, 1999, the direct investment in ▇▇▇▇▇▇▇▇ by Capital Southwest was
valued at $8,800,000 and had a cost of $1,600,000.
================================================================================
AT&T Corp. $7,089,744
--------------------------------------------------------------------------------
AT&T Corp., New York, New York, is among the world's communications leaders,
providing voice, data and video telecommunications services. In March 1999, AT&T
Corp. acquired Tele-Communications, Inc., which owns and operates one of the
nation's largest cable television systems.
During the year ended December 31, 1998, AT&T Corp. reported net income of
$6,398,000,000 ($3.55 per share) on net sales of $53,223,000,000. The March 31,
1999 closing NYSE market price of AT&T Corp.-Series A common stock was $79.8125
per share.
At March 31, 1999, Capital Southwest owned 88,830 shares of unrestricted AT&T
Corp.-Series A common stock, having a total cost of $43 and a market value of
$7,089,744 ($79.8125 per share).
================================================================================
American Homestar Corporation $5,445,178
--------------------------------------------------------------------------------
American Homestar Corporation, League City, Texas, builds, retails and
finances manufactured housing, producing homes from its 14 plants and retailing
its products through 125 company-owned retail sales centers, 12 joint venture
retail sales centers, 75 retail franchisees and over 300 independent retail
locations in 28 states.
For the year ended May 31, 1998, American Homestar reported net income of
$17,683,000 ($0.98 per share) on net sales of $513,939,000. Unaudited earnings
for the nine months ended February 28, 1999 were $13,357,000 ($0.71 per share)
compared with $11,120,000 ($0.62 per share) during the same period in the prior
year. The March 31, 1999 closing Nasdaq bid price of American Homestar's stock
was $7.25 per share.
At March 31, 1999, Capital Southwest and its subsidiary owned 751,059
unrestricted shares of American Homestar common stock, having a cost of
$3,405,824 and a market value of $5,445,178 ($7.25 per share), representing a
fully-diluted equity interest of 4.1%.
================================================================================
Media Recovery, Inc. $5,415,000
--------------------------------------------------------------------------------
Media Recovery, Inc., ▇▇▇▇▇▇, Texas, distributes computer and office
automation supplies and accessories to corporate customers through its direct
sales force with 22 offices in 17 states and also manufactures and sells impact
and tilt monitoring devices used to detect mishandled shipments.
The net assets of Media Recovery were acquired for approximately $23,320,000
in November 1997, by Varix Corporation, which subsequently changed its name to
Media Recovery. During the eleven month period ended September 30, 1998, Media
Recovery reported net income of $1,028,000 on net sales of $62,351,000.
At March 31, 1999, the investment by Capital Southwest and its subsidiary in
4,800,000 shares of Series A convertible preferred stock was valued at its cost
of $5,415,000 and represented a fully-diluted equity interest of 68.2%.
8
Portfolio of Investments - March 31, 1999
Company Equity(a) Investment(b) Cost Value(c)
------------------------------------------------------------------------------------------------------------------------------------
+AT&T Corp. (formerly Tele-Communications,
Inc.-TCI Group) <1% ++88,830 shares Series A common stock $ 43 $ 7,089,744
New York, New York (acquired 3-9-99)
World communications leader, providing
voice, data and video telecommunications
services and cable television systems.
------------------------------------------------------------------------------------------------------------------------------------
+AT&T Corp. - Liberty Media Group (formerly <1% ++169,353 shares Series A common stock 25 8,906,240
Tele-Communications, Inc.-Liberty Media (acquired 3-9-99)
Group and TCI Ventures Group) New York,
New York
Production and distribution of cable
television programming services and
wireless and wireline communications
services.
------------------------------------------------------------------------------------------------------------------------------------
AIRFORMED COMPOSITES, INCORPORATED 51.8% 10% subordinated debentures, due 2007 (acquired
Charleston, South Carolina 12-12-97 and 5-6-98) 3,143,000 3,143,000
Airformed composite materials for use 425,000 shares Series A convertible preferred stock,
in absorbent specialty products. convertible into 425,000 shares of common stock
at $1.00 per share (acquired 12-12-97) 425,000 425,000
---------- ----------
3,568,000 3,568,000
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+ALAMO GROUP INC. 27.0% 2,660,000 shares common stock (acquired 4-1-73 and
Seguin, Texas 7-18-78) 575,000 16,625,000
Heavy-duty, tractor-mounted mowing Warrant to purchase 62,500 shares of common stock
and vegetation maintenance equipment at $16.00 per share, expiring 2000 (acquired
for governmental, industrial and 11-25-91) - -
agricultural markets. ---------- ----------
575,000 16,625,000
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ALL COMPONENTS, INC. 29.3% 14% subordinated debenture, due 2000 (acquired
9-16-94) 600,000 600,000
Farmers Branch, Texas 150,000 shares Series A convertible preferred stock,
Distribution and production of convertible into 600,000 shares of commonstock at
memory and other components to $0.25 per share (acquired 9-16-94) 150,000 3,325,000
personal computer manufacturers, 450,000 shares Series B preferred stock
retailers and value-added resellers. (acquired 9-16-94) 450,000 450,000
---------- ----------
1,200,000 4,375,000
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+ALLTEL CORPORATION <1% ++8,880 shares common stock (acquired 7-1-98) 108,355 553,890
Little Rock, Arkansas
Wireline and wireless communications
and information services.
------------------------------------------------------------------------------------------------------------------------------------
+AMERICAN HOMESTAR CORPORATION 4.1% ++751,059 shares common stock (acquired 8-31-93,
League City, Texas 7-12-94 and 3-28-96)
Integrated manufacturing, retailing 3,405,824 5,445,178
and financing of manufactured
housing produced in 14 plants.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
9
Company Equity(a) Investment(b) Cost Value c)
------------------------------------------------------------------------------------------------------------------------------------
AMFIBE, INC. 40.0% 2,000 shares Class B non-voting common stock (acquired
Martinsville, Virginia 6-15-94) $ 200,000 $1,600,000
Nylon monofilament yarns for the
textile industry.
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BALCO, INC. 85.2% 14% subordinated debentures, payable 1999 to 2002
Wichita, Kansas (acquired 8-13-91) 320,000 320,000
Specialty architectural products used 14% subordinated debenture, payable 1999 to 2002, last
in the construction and remodeling of maturing $250,000 convertible into 250,000 shares of
commercial and institutional buildings. common stock at $1.00 per share (acquired 6-1-91) 640,000 2,390,000
110,000 shares common stock and 60,920 shares Class B
non-voting common stock (acquired 10-25-83) 170,920 1,367,360
Warrants to purchase 85,000 shares of common stock
at $2.40 per share, expiring 2001 (acquired 8-13-91) - 476,000
---------- ----------
1,130,920 4,553,360
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CDC TECHNOLOGIES, INC. 19.7% 3,388 shares Series C convertible preferred stock,
Oxford, Connecticut convertible into 7,218 shares of common stock
Hematology and blood chemistry analyzers at $346.24 per share (acquired 10-15-97 and 9-10-98) 2,499,158 2,499,158
and reagents for veterinary and medical Warrants to purchase 339 shares of Series C
applications. convertible preferred stock at $737.65 per share
(acquired 12-17-97) - -
---------- ----------
2,499,158 2,499,158
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▇▇▇▇▇▇ TOOL COMPANY 66.2% 20,725 shares 5% convertible preferred stock
Houston, Texas convertible into 20,725 shares of common stock at
Polycrystalline diamond compacts $48.25 per share (acquired 8-10-98) 999,981 500,000
(PDCs) used in oil field drill bits 140,137 shares common stock (acquired 3-7-94
and in mining and industrial and 8-10-98) 2,329,963 2,000,000
applications. ---------- ----------
3,329,944 2,500,000
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DYNTEC, INC. 37.4% 1,710,766 shares Series A redeemable preferred stock
Louisville, Kentucky (acquired 6-24-98) 3,743,156 3,743,156
Multi-specialty dental services 1,710,766 shares Series B convertible preferred stock,
provided through Dentistry convertible into 1,710,766 shares of common stock
Plus Centers located in major at $0.004 per share (acquired 6-24-98) 6,844 6,844
shopping malls. ---------- ----------
3,750,000 3,750,000
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+ENCORE WIRE CORPORATION 16.4% 2,724,500 shares common stock (acquired 7-16-92,
McKinney, Texas 3-15-94, 4-28-94 and 10-7-98) 5,800,000 16,347,000
Electrical wire and cable for
residential and commercial use.
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+FMC CORPORATION <1% ++6,430 shares common stock (acquired 6-6-86) 123,777 317,480
Chicago, Illinois
Machinery and chemicals in
diversified product areas.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note b)
10
Company Equity (a) Investment (b) Cost Value c)
------------------------------------------------------------------------------------------------------------------------------------
+FRONTIER CORPORATION <1% ++31,338 shares common stock (acquired 12-20-95) $ 78,346 $1,625,659
Rochester, New York
Diversified telecommunications company.
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INTELLIGENT REASONING SYSTEMS, INC. 14.7% 705,128 shares Series B convertible preferred stock,
Austin, Texas convertible into 705,128 shares of common stock at
Machine vision systems for automatic $0.60 per share (acquired 5-28-97) 423,077 -
inspection of electronic circuit boards. 1,513,081 shares Series C convertible preferred stock,
convertible into 1,513,081 shares of common stock
at $0.74 per share (acquired 6-11-98) 1,119,679 2
Warrant to purchase 70,513 shares of Series B
convertible preferred stock at $.60 per share
(acquired 11-21-97) - -
---------- ----------
1,542,756 2
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+▇▇▇▇▇▇▇▇-▇▇▇▇▇ CORPORATION <1% ++77,180 shares common stock (acquired 12-18-97) 2,396,926 3,699,816
Irving, Texas
Manufacturer of tissue, personal care
and health care products.
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+MAIL-WELL, INC. 3.4% 2,096,588 shares common stock (acquired 2-18-94,
Englewood, Colorado 12-14-94, 7-27-95 and 11-10-98) 2,986,870 18,869,000
Customized envelopes, labels and
high-impact printing.
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MEDIA RECOVERY, INC. 68.2% 4,800,000 shares Series A convertible preferred
▇▇▇▇▇▇, Texas stock, convertible into 4,800,000 shares of
Computer and office automation common stock at $1.00 per share (acquired 11-4-97) 5,415,000 5,415,000
supplies and accessories;
impact and tilt monitoring devices
to detect mishandled shipments.
------------------------------------------------------------------------------------------------------------------------------------
+MYLAN LABORATORIES, INC. <1% ++128,286 shares common stock (acquired 11-20-91) 400,000 3,519,847
Pittsburgh, Pennsylvania
Proprietary and generic pharmaceutical products.
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+PALM HARBOR HOMES, INC. 32.9% 7,855,121 shares common stock (acquired 1-3-85,
Dallas, Texas 3-31-88 and 7-31-95) 10,931,955 125,682,000
Integrated manufacturing, retailing,
financing and insuring of manufactured
housing produced in 16 plants.
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+PETSMART, INC. <1% ++654,220 shares common stock (acquired 6-1-95) 2,878,733 5,233,760
Phoenix, Arizona
Retail chain of 548 stores selling pet
foods, supplies and services.
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+Publicly-owned company ++Unrestricted securities as defined in Note (b)
11
Company Equity(a) Investment(b) Cost Value (c)
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THE RECTORSEAL CORPORATION 100.0% 27,907 shares common stock (acquired 1-5-73 and
Houston, Texas 3-31-73) $ 52,600 $38,500,000
Chemical specialty products for
industrial, construction and
oil field applications; owns 20%
of ▇▇▇▇▇▇▇▇ Manufacturing.
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REWIND HOLDINGS, INC. 38.3% 12% subordinated notes, payable 1999 to 2003
Sugar Land, Texas (acquired 10-21-96, 8-13-97 and 8-11-98) 3,825,000 3,825,000
Owns ▇▇▇▇ ▇▇▇▇▇ Productions and Texas 375 shares 8% Series A convertible preferred
Video and Post,which produce radio and stock, convertible into 1,500 shares of common
television commercials and corporate stock at $250.00 per share (acquired 10-21-96) 375,000 375,000
communications videos. Warrant to purchase 600 shares of common stock
at $250 per share, expiring 2005(acquired 8-11-98) - -
---------- ----------
4,200,000 4,200,000
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SDI HOLDING CORP. 11.2% 60,305 shares common stock (acquired 3-26-96) 6,000,000 12,000,000
Greenville, South Carolina
Owns Sterling Diagnostic Imaging,
a manufacturer of medical x-ray
imaging film and direct radiography
systems.
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SKYLAWN CORPORATION 100.0% 1,449,026 shares common stock (acquired 7-16-69) 4,510,400 35,000,000
Hayward, California
Cemeteries, mausoleums and mortuaries
located in northern California.
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+SPRINT CORPORATION - FON Group <1% ++36,000 shares common stock (acquired 6-20-84) 449,654 3,532,500
Kansas City, Missouri
Diversified telecommunications company.
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+SPRINT CORPORATION - PCS Group <1% ++18,000 shares common stock (acquired 11-23-98) 53,991 797,625
Kansas City, Missouri
Domestic wireless telephony services.
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TCI HOLDINGS, INC. (formerly Westmarc - 21 shares 12% Series C cumulative compounding preferred
Communications, Inc.) stock (acquired 1-30-90) - 508,000
Denver, Colorado
Cable television systems and microwave
relay systems.
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TEXAS PETROCHEMICAL HOLDINGS, INC. 5.0% 30,000 shares common stock (acquired 6-27-96) 3,000,000 750,000
Houston, Texas
Butadiene for synthetic rubber, MTBE
for gasoline octane enhancement and
butylenes for varied applications.
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
12
Company Equity (a) Investment (b) Cost Value(c)
------------------------------------------------------------------------------------------------------------------------------------
TEXAS SHREDDER, INC. 53.3% 14% subordinated debentures, payable 1999 (acquired
San Antonio, Texas 3-6-91 and 6-1-98) $ 617,970 $ 617,970
Design and manufacture of heavy-duty 3,296 shares Series A preferred stock (acquired 3-6-91
shredder systems for recycling steel and 6-1-98) 329,600 329,600
and other materials from junk 750 shares Series B convertible preferred stock,
automobiles. convertible into 7,500 shares of common stock at
$10.00 per share (acquired 3-6-91) 75,000 2,625,000
---------- ----------
1,022,570 3,572,570
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THE ▇▇▇▇▇▇▇▇ MANUFACTURING COMPANY 80.0% 80 shares common stock (acquired 8-31-79) 1,600,000 8,800,000
Rockwall, Texas
Specialized mining and industrial
lubricants; automotive transit
coatings.
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MISCELLANEOUS 100.0% Humac Company - 1,041,000 shares common stock
(acquired 1-31-75 and 12-31-75) - 159,000
- STARTech Seed Fund I - Limited partnership 225,000 225,000
<1% +TCI Satellite Entertainment, Inc.-++18,000 shares
Series A common stock (acquired 12-4-96) - 11,250
<1% +Triton Energy Corporation -++6,022 shares common
stock (acquired 12-15-86) 144,167 47,423
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TOTAL INVESTMENTS $73,580,014 $350,278,502
=========== ============
------------------------------------------------------------------------------------------------------------------------------------
+Publicly-owned company ++Unrestricted securities as defined in Note (b)
Notes to Portfolio of Investments
(a) The percentages in the "Equity" column express the potential equity
interests held by Capital Southwest Corporation and Capital Southwest Venture
Corporation (together, the "Company") in each issuer. Each percentage represents
the amount of the issuer's common stock the Company owns or can acquire as a
percentage of the issuer's total outstanding common shares, plus shares reserved
for all outstanding warrants, convertible securities and employee stock options.
The symbol "<1%" indicates that the Company holds a potential equity interest of
less than one percent.
(b) Unrestricted securities (indicated by ++) are freely marketable securities
having readily available market quotations. All other securities are restricted
securities which are subject to one or more restrictions on resale and are not
freely marketable. At March 31, 1999, restricted securities represented
approximately 88% of the value of the consolidated investment portfolio.
(c) Under the valuation policy of the Company, unrestricted securities are
valued at the closing sale price for listed securities and at the closing bid
price for over-the-counter securities on the valuation date. Restricted
securities, including securities of publicly-owned companies which are subject
to restrictions on resale, are valued at fair value as determined by the Board
of Directors. Fair value is considered to be the amount which the Company may
reasonably expect to receive for portfolio securities if such securities were
sold on the valuation date. Valuations as of any particular date, however, are
not necessarily indicative of amounts which may ultimately be realized as a
result of future sales or other dispositions of securities.
13
Notes to Portfolio of Investments (continued)
Among the factors considered by the Board of Directors in determining the
fair value of restricted securities are the financial condition and operating
results of the issuer, the long-term potential of the business of the issuer,
the market for and recent sales prices of the issuer's securities, the values of
similar securities issued by companies in similar businesses, the proportion of
the issuer's securities owned by the Company, the nature and duration of resale
restrictions and the nature of any rights enabling the Company to require the
issuer to register restricted securities under applicable securities laws. In
determining the fair value of restricted securities, the Board of Directors
considers the inherent value of such securities without regard to the
restrictive feature and adjusts for any diminution in value resulting from
restrictions on resale.
(d) Agreements between certain issuers and the Company provide that the issuers
will bear substantially all costs in connection with the disposition of common
stocks, including those costs involved in registration under the Securities Act
of 1933 but excluding underwriting discounts and commissions. These agreements,
which cover common stocks owned at March 31, 1999 and common stocks which may be
acquired thereafter through exercise of warrants and conversion of debentures
and preferred stocks, apply to restricted securities of all issuers in the
investment portfolio of the Company except securities of the following issuers,
which are not obligated to bear registration costs: Humac Company, Skylawn
Corporation and The ▇▇▇▇▇▇▇▇ Manufacturing Company.
(e) The descriptions of the companies and ownership percentages shown in the
portfolio of investments were obtained from published reports and other sources
believed to be reliable, are supplemental and are not covered by the report of
independent auditors. Acquisition dates indicated are the dates specific
securities were acquired. Certain securities were received in exchange for or
upon conversion or exercise of other securities previously acquired.
Portfolio Changes During the Year
New Investments and Additions to Previous Investments
Amount
------------
Airformed Composites, Incorporated........................$ 1,343,000
CDC Technologies, Inc..................................... 1,249,579
▇▇▇▇▇▇ Tool Company....................................... 2,999,944
Dyntec, Inc............................................... 3,750,000
Encore Wire Corporation................................... 1,700,000
Intelligent Reasoning Systems, Inc........................ 1,119,679
Mail-Well, Inc............................................ 97,860
Rewind Holdings, Inc...................................... 600,000
STARTech Seed Fund I...................................... 225,000
Texas Shredder, Inc....................................... 85,070
------------
$ 13,170,132
============
Dispositions
Amount
Cost Received
--------- ------------
Cherokee Communications, Inc............ $ - $ 200,508
PTS Holdings, Inc....................... - 1,330,183
--------- ------------
$ - $ 1,530,691
========= ============
Repayments Received..................... $ 744,539
============
14
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Financial Condition
March 31
----------------------------
Assets 1999 1998
------------ ------------
Investments at market or fair value (Notes 1
and 2)
Companies more than 25% owned
(Cost: 1999 - $22,130,818,
1998 - $19,370,874).......................... $231,819,359 $266,370,919
Companies 5% to 25% owned
(Cost: 1999 - $18,841,914,
1998 - $14,984,195).......................... 31,596,160 43,044,195
Companies less than 5% owned
(Cost: 1999 - $32,607,282,
1998 - $26,799,352).......................... 86,862,983 91,871,340
------------ ------------
Total investments
(Cost: 1999 - $73,580,014,
1998 - $61,154,421).......................... 350,278,502 401,286,454
Cash and cash equivalents......................... 6,050,443 117,047,920
Receivables....................................... 315,707 332,873
Other assets (Note 8)............................. 4,141,136 3,656,308
------------ ------------
Totals......................................... $360,785,788 $522,323,555
============ ============
March 31
----------------------------
Liabilities and Shareholders' Equity 1999 1998
------------ -------------
Note payable to bank (Note 4) .................... $ - $100,000,000
Accrued interest and other liabilities (Note 8)... 2,023,625 1,961,382
Income taxes payable.............................. 282,741 -
Deferred income taxes (Note 3).................... 97,247,457 119,339,357
Subordinated debenture (Note 5)................... 5,000,000 5,000,000
------------ ------------
Total liabilities ............ 104,553,823 226,300,739
------------ ------------
Shareholders' equity (Notes 3 and 6)
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,252,416
shares at March 31, 1999 and 4,225,316
shares at March 31, 1998..................... 4,252,416 4,225,316
Additional capital............................. 6,450,747 5,512,409
Undistributed net investment
income....................................... 4,743,205 5,261,898
Undistributed net realized gain on
investments.................................. 67,593,409 66,598,460
Unrealized appreciation of investments -
net of deferred income taxes................. 180,225,490 221,458,035
Treasury stock - at cost
(437,365 shares)............................. (7,033,302) (7,033,302)
------------ ------------
Net assets at market or fair value, equivalent
to $67.16 per share on the 3,815,051
shares outstanding at March 31, 1999,
and $78.15 per share on the 3,787,951
shares outstanding at March 31, 1998......... 256,231,965 296,022,816
------------ ------------
Totals..................... $360,785,788 $522,323,555
============ ============
See Notes to Consolidated Financial Statements
15
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Operations
Years Ended March 31
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Investment income (Note 9):
Interest ..................................................... $ 1,307,668 $ 2,025,024 $ 1,371,802
Dividends .................................................... 1,966,360 2,237,293 2,774,321
Management and directors' fees ............................... 538,650 569,900 586,900
------------- ------------- -------------
3,812,678 4,832,217 4,733,023
------------- ------------- -------------
Operating expenses:
Interest ..................................................... 416,174 426,962 634,667
Salaries ..................................................... 1,109,699 1,206,478 1,147,294
Net pension expense (benefit) (Note 8) ....................... (311,625) (313,511) (349,903)
Other operating expenses (Note 7) ............................ 727,612 674,466 599,578
------------- ------------- -------------
1,941,860 1,994,395 2,031,636
------------- ------------- -------------
Income before income taxes ...................................... 1,870,818 2,837,822 2,701,387
Income tax expense (Note 3) ..................................... 109,100 111,678 127,325
------------- ------------- -------------
Net investment income ........................................... $ 1,761,718 $ 2,726,144 $ 2,574,062
============= ============= =============
Proceeds from disposition of investments ........................ $ 1,530,691 $ 16,669,892 $ 14,177,580
Cost of investments sold (Note 1) ............................... -- 6,764,823 3,619,369
------------- ------------- -------------
Realized gain on investments before income taxes (Note 9) ....... 1,530,691 9,905,069 10,558,211
Income tax expense .............................................. 535,742 3,420,177 3,752,425
------------- ------------- -------------
Net realized gain on investments ................................ 994,949 6,484,892 6,805,786
------------- ------------- -------------
Increase (decrease) in unrealized appreciation of investments
before income taxes ............................................ (63,433,545) 106,748,923 34,996,750
Increase (decrease) in deferred income taxes on appreciation
of investments (Note 3) ........................................ (22,201,000) 37,361,000 12,192,000
------------- ------------- -------------
Net increase (decrease) in unrealized appreciation of investments (41,232,545) 69,387,923 22,804,750
------------- ------------- -------------
Net realized and unrealized gain (loss) on investments .......... $ (40,237,596) $ 75,872,815 $ 29,610,536
============= ============= =============
Increase (decrease) in net assets from operations ............... $ (38,475,878) $ 78,598,959 $ 32,184,598
============= ============= =============
See Notes to Consolidated Financial Statements
16
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Changes in Net Assets
Years Ended March 31
----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Operations
Net investment income......................................................... $ 1,761,718 $ 2,726,144 $ 2,574,062
Net realized gain on investments ............................................. 994,949 6,484,892 6,805,786
Net increase (decrease) in unrealized appreciation of investments ............ (41,232,545) 69,387,923 22,804,750
------------- ------------- -------------
Increase (decrease) in net assets from operations ........................... (38,475,878) 78,598,959 32,184,598
Distributions from:
Undistributed net investment income .......................................... (2,280,411) (2,268,451) (2,260,231)
Capital share transactions
Exercise of employee stock options ........................................... 965,438 720,188 --
------------- ------------- -------------
Increase (decrease) in net assets ........................................... (39,790,851) 77,050,696 29,924,367
Net assets, beginning of year ................................................... 296,022,816 218,972,120 189,047,753
------------- ------------- -------------
Net assets, end of year ......................................................... $ 256,231,965 $ 296,022,816 $ 218,972,120
============= ============= =============
See Notes to Consolidated Financial Statements
17
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Cash Flows
Years Ended March 31
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities
Increase (decrease) in net assets from operations.......................... $ (38,475,878) $ 78,598,959 $ 32,184,598
Adjustments to reconcile increase in net assets from operations to
net cash provided by
operating activities:
Depreciation and amortization ........................................... 24,667 23,770 31,240
Net pension benefit ..................................................... (311,625) (313,511) (349,903)
Net realized and unrealized (gain) loss on investments .................. 40,237,596 (75,872,815) (29,610,536)
(Increase) decrease in receivables ...................................... 17,166 (53,058) 5,187
(Increase) decrease in other assets ..................................... (47,315) (7,035) (17,812)
Increase (decrease) in accrued interest and other liabilities ........... (74,670) 46,649 (66,361)
Deferred income taxes ................................................... 109,100 109,729 122,500
------------- ------------- -------------
Net cash provided by operating activities .................................. 1,479,041 2,532,688 2,298,913
------------- ------------- -------------
Cash flows from investing activities
Proceeds from disposition of investments ................................... 1,530,691 16,669,892 14,177,580
Purchases of securities .................................................... (13,170,132) (9,709,195) (6,023,684)
Maturities of securities ................................................... 744,539 1,697,866 1,040,500
Income taxes paid on realized gain on investments .......................... (266,643) (6,604,549) (6,268,782)
------------- ------------- -------------
Net cash provided (used) by investing activities ........................... (11,161,545) 2,054,014 2,925,614
------------- ------------- -------------
Cash flows from financing activities
Increase (decrease) in note payable to bank ................................ (100,000,000) 100,000,000 (50,000,000)
Repayment of subordinated debenture ........................................ -- -- (6,000,000)
Distributions from undistributed net investment income ..................... (2,280,411) (2,268,451) (2,260,231)
Proceeds from exercise of employee stock options ........................... 965,438 720,188 --
------------- ------------- -------------
Net cash provided (used) by financing activities ........................... (101,314,973) 98,451,737 (58,260,231)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ....................... (110,997,477) 103,038,439 (53,035,704)
Cash and cash equivalents at beginning of year ............................. 117,047,920 14,009,481 67,045,185
------------- ------------- -------------
Cash and cash equivalents at end of year................................... $ 6,050,443 $ 117,047,920 $ 14,009,481
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:Interest..................................... $ 424,926 $ 400,000 $ 691,397
Income taxes................................. $ 288,838 $ 6,621,499 $ 6,270,291
See Notes to Consolidated Financial Statements
18
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Capital Southwest Corporation ("CSC") is a business development company
subject to regulation under the Investment Company Act of 1940. Capital
Southwest Venture Corporation ("CSVC"), a wholly-owned subsidiary of CSC, is a
Federal licensee under the Small Business Investment Act of 1958. The following
is a summary of significant accounting policies followed in the preparation of
the consolidated financial statements of CSC and CSVC (together, the "Company"):
Principles of Consolidation. The consolidated financial statements have
been prepared on the value method of accounting in accordance with generally
accepted accounting principles for investment companies. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents. All temporary cash investments having a maturity
of three months or less when purchased are considered to be cash equivalents.
Portfolio Security Valuations. Investments are stated at market or fair
value determined by the Board of Directors as described in the Notes to
Portfolio of Investments and Note 2 below. The average cost method is used in
determining cost of investments sold.
2. Valuation of Investments
The consolidated financial statements as of March 31, 1999 and 1998 include
securities valued at $309,498,090 (88% of the value of the consolidated
investment portfolio) and $356,464,614 (89% of the value of the consolidated
investment portfolio), respectively, whose values have been determined by the
Board of Directors in the absence of readily ascertainable market values.
Because of the inherent uncertainty of valuation, these values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
3. Income taxes
For the tax years ended December 31, 1998, 1997 and 1996, CSC and CSVC
qualified to be taxed as regulated investment companies ("RICs") under
applicable provisions of the Internal Revenue Code. As RICs, CSC and CSVC must
distribute at least 90% of their taxable net investment income (investment
company taxable income) and may either distribute or retain their taxable net
realized gain on investments (capital gains). Both CSC and CSVC intend to meet
the applicable qualifications to be taxed as RICs in future years; however,
either company's ability to meet certain portfolio diversification requirements
of RICs in future years may not be controllable by such company.
No provision was made for Federal income taxes on the investment company
taxable income of CSC and CSVC for the 1999, 1998 and 1997 fiscal years. Such
income was distributed to shareholders in the form of cash dividends for which
CSC and CSVC receive a tax deduction. With respect to net investment income, the
income tax expense for each of the three years ended March 31, 1999 includes a
deferred tax provision related to the net pension benefit.
CSC and CSVC may not qualify or elect to be taxed as RICs in future years.
Therefore, consolidated deferred Federal income taxes of $96,473,000 and
$118,674,000 have been provided on net unrealized appreciation of investments of
$276,698,488 and $340,132,033 at March 31, 1999 and 1998, respectively. Such
appreciation is not included in taxable income until realized. Deferred income
taxes on net unrealized appreciation of investments have been provided at the
then currently effective maximum Federal corporate tax rate on capital gains of
35% at March 31, 1999 and 1998.
19
4. Note Payable to Bank
The note payable to bank at March 31, 1998 was an unsecured note with
interest payable at 6.51%. The note was paid in full on April 1, 1998.
5. Subordinated Debenture
The subordinated debenture of $5,000,000 outstanding at March 31, 1999 and
1998 is payable to others and guaranteed by the Small Business Administration
("SBA"), bears interest at 8.0% and matures in 2002.
6. Employee Stock Option Plan
Under the 1984 Incentive Stock Option Plan, options to purchase 42,000
shares of the Company's common stock at $35.625 per share (the adjusted market
price at the time of grant) were outstanding at March 31, 1999. Options on
36,625 shares were exercisable at March 31, 1999. During the year ended March
31, 1999, options for 27,100 shares were exercised. Outstanding options expire
in 2003. The 1984 Incentive Stock Option Plan expired in 1994 and no options
have been authorized or granted since that date. At March 31, 1999 and 1998, the
dilution of net assets per share arising from options outstanding was not
material.
7. Employee Stock Ownership Plan
The Company and one of its wholly-owned subsidiaries sponsor a qualified
employee stock ownership plan ("ESOP") in which certain employees participate.
Contributions to the plan, which are invested in Company stock, are made at the
discretion of the Company's Board of Directors. A participant's interest in
contributions to the ESOP fully vests after five years of active service. During
the three years ended March 31, the Company made contributions to the ESOP,
which were charged against net investment income, of $35,079 in 1999, $67,763 in
1998 and $54,104 in 1997.
8. Retirement Plans
On April 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 132, Employers' Disclosures about Pension and other
Post-retirement Benefits. SFAS No. 132 revises employers' disclosures about
pension and other post-retirement benefit plans. SFAS No. 132 does not change
the method of accounting for such plans.
The Company sponsors a qualified defined benefit pension plan which covers
its employees and employees of certain of its wholly-owned subsidiaries. The
following information about the plan represents amounts and information related
to the Company's participation in the plan and is presented as though the
Company sponsored a single-employer plan. Benefits are based on years of service
and an average of the highest five consecutive years of compensation during the
last ten years of employment. The funding policy of the plan is to contribute
annual amounts that are currently deductible for tax reporting purposes. No
contribution was made to the plan during the three years ended March 31, 1999.
The following tables set forth the plan's benefit obligations and fair
value of plan assets at March 31, 1999, 1998 and 1997:
Years Ended March 31
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Change in benefit obligation
Benefit obligation at beginning
of year......................... $ 3,059,555 $ 2,376,257 $ 2,289,114
Service cost.......................... 68,710 52,388 47,662
Interest cost......................... 199,301 204,328 174,792
Amendments............................ (149,171) -- --
Actuarial gain (loss)................. 205,810 495,668 (66,225)
Benefits paid......................... (69,086) (69,086) (69,086)
----------- ----------- -----------
Benefit obligation at end of year..... $ 3,315,119 $ 3,059,555 $ 2,376,257
=========== =========== ===========
Change in plan assets
Fair value of plan assets at beginning
of year........................ $11,314,714 $ 7,820,401 $ 6,927,656
Actual return on plan assets......... (1,171,030) 3,563,399 961,831
Benefits paid........................ (69,086) (69,086) (69,086)
----------- ----------- -----------
Fair value of plan assets at end of
year............................ $10,074,598 $11,314,714 $ 7,820,401
=========== =========== ===========
20
The following table sets forth the qualified plan's funded status and
amounts recognized in the Company's consolidated statements of financial
condition:
March 31
--------------------------
1999 1998
----------- -----------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $2,915,453 in 1999
and $2,602,654 in 1998...................... $(2,990,205) $(2,665,123)
=========== ===========
Projected benefit obligation for service rendered
to date..................................... $(3,315,119) $(3,059,555)
Plan assets at fair value*....................... 10,074,598 11,314,714
----------- -----------
Excess of plan assets over the projected benefit
obligation.................................. 6,759,479 8,255,159
Unrecognized net (gain) loss from past experience
different from that assumed and effects of
changes in assumptions...................... (2,192,798) (4,214,675)
Prior service costs not yet recognized........... (174,288) (36,440)
Unrecognized net assets being amortized over
19 years.................................... (442,970) (516,801)
----------- -----------
Prepaid pension cost included in other assets.... $ 3,949,423 $ 3,487,243
=========== ===========
-------------
*Primarily equities and bonds including approximately 29,800 shares of common
stock of the Company.
Components of net pension benefit related to the qualified plan include the
following:
Years Ended March 31
--------------------------------------
1999 1998 1997
----------- ------------ -----------
Service cost - benefits earned during
the year.........................$ 68,710 $ 52,388 $ 47,662
Interest cost on projected benefit
obligation....................... 199,301 204,328 174,792
Actual return on assets............... 1,171,030 (3,563,399) (961,831)
Net amortization and deferral......... (1,901,221) 2,813,811 257,580
----------- ------------ -----------
Net pension expense (benefit) from
qualified plan...................$ (462,180) $ (492,872) $ (481,797)
=========== =========== ===========
The Company also sponsors an unfunded Retirement Restoration Plan, which is
a nonqualified plan that provides for the payment, upon retirement, of the
difference between the maximum annual payment permissible under the qualified
retirement plan pursuant to Federal limitations and the amount which would
otherwise have been payable under the qualified plan.
The following table sets forth the Retirement Restoration Plan's benefit
obligation at March 31, 1999, 1998 and 1997:
Years Ended March 31
-------------------------------------
1999 1998 1997
---------- ---------- ----------
Change in benefit obligation
Benefit obligation at beginning
of year........................ $2,051,899 $1,474,701 $1,465,570
Service cost......................... 13,087 5,958 3,846
Interest cost........................ 117,635 142,735 108,215
Amendments........................... 83,360 -- --
Actuarial gain (loss)................ (99,801) 428,505 (102,930)
---------- ---------- ----------
Benefit obligation at end of year $2,166,180 $2,051,899 $1,474,701
========== ========== ==========
The following table sets forth the status of the Retirement Restoration
Plan and the amounts recognized in the consolidated statements of financial
condition:
March 31
--------------------------
1999 1998
----------- ------------
Projected benefit obligation...................... $(2,166,180) $(2,051,899)
Unrecognized net (gain) loss from past ex-
perience different from that assumed
and effects of changes in assumptions 306,416 406,217
Unrecognized prior service costs.................. 83,360 --
Unrecognized net obligation....................... 39,656 59,489
----------- -----------
Accrued pension cost included in other liabilities $(1,736,748) $(1,586,193)
=========== ===========
The Retirement Restoration Plan expenses recognized during the years ended
March 31, 1999, 1998 and 1997 of $150,555, $179,361 and $131,894, respectively,
are offset against the net pension benefit from the qualified plan.
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.5% and 5.0%, respectively, at March 31,
1999, 7.0% and 5.0%, respectively, at March 31, 1998 and 8.0% and 5.0%,
respectively, at March 31, 1997. The expected long-term rate of return used to
project estimated earnings on plan assets for the qualified plan was 8.5% for
the years ended March 31, 1999, 1998 and 1997. The calculations also assume
retirement at age 65, the normal retirement age.
21
9. Sources of Income
Income was derived from the following sources:
Investment Income Realized Gain
--------------------------------- (Loss) on
Years Ended Investments
March 31 Other Before Income
1999 Interest Dividends Income Taxes
---- --------------------------------- --------------
Companies more than
25% owned.......... $ 140,000 $1,644,270 $490,900 $ -
Companies 5% to 25%
owned.............. 3,495 - 34,750 -
Companies less than
5% owned........... 688,210 322,090 13,000 1,530,691
Other sources,
including temporary
investments........ 475,963 - - -
------------------------------------------------
$1,307,668 $1,966,360 $538,650 $ 1,530,691
=================================================
1998
----
Companies more than
25% owned.......... $ 168,000 $1,985,200 $518,900 $ -
Companies 5% to 25%
owned.............. 8,706 - 35,500 (3,990,894)
Companies less than
5% owned........... 609,187 252,093 15,500 13,895,963
Other sources,
including temporary
investments........ 1,239,131 - - -
-------------------------------------------------
$2,025,024 $2,237,293 $569,900 $ 9,905,069
=================================================
1997
----
Companies more than
25% owned.......... $ 237,600 $2,454,895 $531,400 $ -
Companies 5% to 25%
owned.............. - - 55,500 2,844,272
Companies less than
5% owned........... 496,847 319,426 - 7,713,939
Other sources,
including temporary
investments........ 637,355 - - -
-------------------------------------------------
$1,371,802 $2,774,321 $586,900 $ 10,558,211
=================================================
10. Summarized Financial Information of Unconsolidated
Subsidiaries
The Company has three significant wholly-owned subsidiaries - The
RectorSeal Corporation, The ▇▇▇▇▇▇▇▇ Manufacturing Company and Skylawn
Corporation - which are neither investment companies nor business development
companies. Accordingly, the accounts of such subsidiaries are not included with
those of the Company. Summarized combined financial information of the three
subsidiaries is as follows:
(all figures in thousands) March 31
------------------------------
1999 1998
-------- --------
Condensed Balance Sheet Data
Assets
Cash and temporary
investments........................ $ 12,130 $ 13,496
Receivables.......................... 26,350 21,769
Inventories.......................... 34,373 34,452
Property, plant and equipment........ 33,152 29,223
Other assets......................... 18,402 12,316
-------- ---------
Totals............................. $124,407 $ 111,256
======== =========
Liabilities and Shareholder's Equity
Long-term debt....................... $ 11,685 $ 5,540
Other liabilities.................... 13,901 12,836
Shareholder's equity................. 98,821 92,880
-------- ---------
Totals............................. $124,407 $ 111,256
======== =========
Condensed Statements of Income 1999 1998 1997
-------- ------- -------
Revenues............................. $ 82,948 $ 77,275 $ 70,890
Costs and operating expenses......... $ 72,780 $ 66,223 $ 61,760
Net income.......................... $ 7,059 $ 8,066 $ 7,909
11. Commitments
The Company has agreed, subject to certain conditions, to invest up to
$2,900,000 in three portfolio companies.
The Company leases office space under an operating lease which requires
base annual rentals of approximately $58,000 through February, 2003. For the
three years ended March 31, total rental expense charged to investment income
was $58,798 in 1999, $44,285 in 1998 and $43,844 in 1997.
22
Selected Per Share Data and Ratios
Years Ended March
---------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------
Investment income............................................................ $ 1.00 $ 1.28 $ 1.26 $ 1.64 $ 1.37
Operating expenses........................................................... (.40) (.42) (.37) (.41) (.32)
Interest expense............................................................. (.11) (.11) (.17) (.45) (.37)
Income taxes................................................................. (.03) (.03) (.03) (.02) (.01)
---------------------------------------------
Net investment income........................................................ .46 .72 .69 .76 .67
Distributions from undistributed net investment income....................... (.60) (.60) (.60) (.60) (.60)
Net realized gain on investments............................................. .26 1.71 1.81 2.97 .04
Distributions from undistributed net realized gain on investments............ - - - (.04) -
Net increase (decrease) in unrealized appreciation of investments
before distributions........................................................ (10.81) 18.32 6.05 10.28 3.64
Distributions from unrealized appreciation of investments.................... - - - (2.46) -
Exercise of employee stock options*.......................................... (.30) (.13) - (.19) (.10)
---------------------------------------------
Increase (decrease) in net asset value....................................... (10.99) 20.02 7.95 10.72 3.65
Net asset value:
Beginning of year.......................................................... 78.15 58.13 50.18 39.46 35.81
--------------------------------------------
End of year................................................................ $67.16 $78.15 $58.13 $50.18 $39.46
============================================
Ratio of operating expenses to average net assets............................ .6% .6% .7% .9% .9%
Ratio of net investment income to average net assets......................... 6% 1.1% 1.2% 1.7% 1.8%
Portfolio turnover rate...................................................... .2% 2.5% 1.6% 4.5% 1.3%
Shares outstanding at end of period (000s omitted)........................... 3,815 3,788 3,767 3,767 3,735
---------------
*Net decrease is due to exercise of employee stock options at less than
beginning of period net asset value.
23
Independent Auditors' Report
The Board of Directors and Shareholders of
Capital Southwest Corporation:
We have audited the accompanying consolidated statements of financial
condition of Capital Southwest Corporation and subsidiary as of March 31, 1999
and 1998, including the portfolio of investments as of March 31, 1999, and the
related consolidated statements of operations, changes in net assets, and cash
flows for each of the years in the three-year period ended March 31, 1999 and
the selected per share data and ratios for each of the years in the five-year
period ended March 31, 1999. These financial statements and per share data and
ratios are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and per share data and
ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per share data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of securities owned as of March
31, 1999 and 1998, by examination of such securities held by the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the consolidated financial statements and selected per share
data and ratios referred to above present fairly, in all material respects, the
financial position of Capital Southwest Corporation and subsidiary as of March
31, 1999 and 1998, and the results of their operations, the changes in their net
assets and their cash flows for each of the years in the three-year period ended
March 31, 1999, and the selected per share data and ratios for each of the years
in the five-year period ended March 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Dallas, Texas
April 23, 1999
24
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The composite measure of the Company's financial performance in the
Consolidated Statements of Operations is captioned "Increase (decrease) in net
assets from operations" and consists of three elements. The first is "Net
investment income", which is the difference between the Company's income from
interest, dividends and fees and its combined operating and interest expenses,
net of applicable income taxes. The second element is "Net realized gain on
investments", which is the difference between the proceeds received from
disposition of portfolio securities and their stated cost, net of applicable
income tax expense. The third element is the "Net increase (decrease) in
unrealized appreciation of investments", which is the net change in the market
or fair value of the Company's investment portfolio, compared with stated cost,
net of an increase or decrease in deferred income taxes which would become
payable if the unrealized appreciation were realized through the sale or other
disposition of the investment portfolio. It should be noted that the "Net
realized gain on investments" and "Net increase (decrease) in unrealized
appreciation of investments" are directly related in that when an appreciated
portfolio security is sold to realize a gain, a corresponding decrease in net
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 net unrealized
appreciation occurs.
Net Investment Income
The Company's principal objective is to achieve capital appreciation.
Therefore, a significant portion of the investment portfolio is structured to
maximize the potential return from equity participation and provides minimal
current yield in the form of interest or dividends. The Company also earns
interest income from the short-term investment of cash funds, and the annual
amount of such income varies based upon the average level of funds invested
during the year and fluctuations in short-term interest rates. During the three
years ended March 31, the Company had interest income from temporary cash
investments of $476,000 in 1999, $1,239,000 in 1998 and $637,000 in 1997. The
Company also receives management fees from its wholly-owned subsidiaries which
aggregated $458,400 in the year ended March 31, 1999, $494,400 in the year ended
March 31, 1998 and $506,400 in the year ended March 31, 1997. During the three
years ended March 31, 1999, the Company recorded dividend income from the
following sources:
Years Ended March 31
----------------------------------
1999 1998 1997
---------- ---------- ----------
Alamo Group Inc. ................... $1,170,400 $1,064,000 $ 1,064,000
Cherokee Communications, Inc....... - - 108,789
▇▇▇▇▇▇▇▇ - ▇▇▇▇▇ Corporation........ 77,952 19,295 -
The RectorSeal Corporation.......... 240,000 501,200 940,895
Skylawn Corporation................. 150,000 300,000 450,000
Texas Shredder, Inc. ............... 40,460 37,500 37,500
Westmarc Communications............. 81,270 81,270 81,270
The ▇▇▇▇▇▇▇▇ Manufacturing Company.. 60,000 120,000 -
Other............................... 146,278 114,028 91,867
---------- ---------- ----------
$1,966,360 $2,237,293 $2,774,321
========== ========== ==========
Total operating expenses, excluding interest expense, decreased by $41,747 or
2.7% and increased by $170,464 or 12.2% during the years ended March 31, 1999
and 1998, respectively. Due to the nature of its business, the majority of the
Company's operating expenses are related to employee and director compensation,
office expenses, legal and accounting fees and the net pension benefit. Interest
expense, the majority of which is related to the SBA-guaranteed subordinated
debenture, decreased by $10,788 and $207,705 during the years ended March 31,
1999 and 1998, respectively.
Net Realized Gain on Investments
Net realized gain on investments was $994,949 (after income tax expense of
$535,742) during the year ended March 31, 1999, compared with a gain of
$6,484,892 (after income tax expense of $3,420,177) during 1998 and a gain of
$6,805,786 (after income tax expense of $3,752,425) during 1997. Management does
not attempt to maintain a comparable level of realized gains from year to year,
but instead attempts to maximize total investment portfolio appreciation. This
strategy often dictates the long-term holding of portfolio securities in pursuit
of increased values and increased unrealized appreciation, but may at opportune
times dictate realizing gains through the disposition of certain portfolio
investments.
25
Net Increase (Decrease) in Unrealized Appreciation of Investments
For the three years ended March 31, the Company recorded an increase
(decrease) in unrealized appreciation of investments before income taxes of
$(63,433,545), $106,748,923 and $34,996,750 in 1999, 1998 and 1997,
respectively. As explained in the first paragraph of this discussion and
analysis, the realization of gains or losses results in a corresponding decrease
or increase in unrealized appreciation of investments. Set forth in the
following table are the significant increases and decreases in unrealized
appreciation (before the related change in deferred income taxes and excluding
the effect of gains or losses realized during the year) by portfolio company for
securities held at the end of each year.
Years Ended March 31
----------------------------------------
1999 1998 1997
------------ ------------ ------------
AT&T Corp......................... $ 3,532,591 $ 1,419,678 $(1,192,500)
AT&T Corp.-Liberty Media Group.... 3,131,973 4,432,679 165,938
Alamo Group Inc. ................. (20,615,000) 5,463,000 (6,432,000)
All Components, Inc............... 1,225,000 950,000 1,000,000
American Homestar Corporation..... (11,547,532) 8,480,708 550,792
Amfibe, Inc....................... (2,400,000) 2,400,000 1,400,000
Balco, Inc........................ 3,422,440 - -
▇▇▇▇▇▇ Tool Company............... (3,299,944) 495,000 1,105,000
Encore Wire Corporation........... (19,013,000) 17,279,000 9,782,000
Intelligent Reasoning Systems, Inc (1,542,754) - -
Mail-Well, Inc. .................. (6,214,860) 14,020,000 6,830,000
Palm Harbor Homes, Inc............ (12,568,000) 53,792,000 13,372,000
PETsMART, Inc. ................... (1,758,216) (6,092,424) 1,226,663
SDI Holding Corp.................. 6,000,000 - -
Skylawn Corporation............... (7,000,000) - (3,000,000)
Sprint Corporation-FON Group...... 1,149,741 803,250 265,500
The ▇▇▇▇▇▇▇▇ Manufacturing
Company.................... 2,800,000 - 1,200,000
A description of the investments listed above and other material components
of the investment portfolio is included elsewhere in this report under the
caption "Portfolio of Investments - March 31, 1999."
Deferred Taxes on Unrealized Appreciation of Investments
The Company provides for deferred Federal income taxes on net unrealized
appreciation of investments. Such taxes would become payable at such time as
unrealized appreciation is realized through the sale or other disposition of
those components of the investment portfolio which would result in taxable
transactions. At March 31, 1999 consolidated deferred Federal income taxes of
$96,473,000 were provided on net unrealized appreciation of investments of
$276,698,488 compared with deferred taxes of $118,674,000 on net unrealized
appreciation of $340,132,033 at March 31, 1998. Deferred income taxes at March
31, 1999 and 1998 were provided at the then currently effective maximum Federal
corporate tax rate on capital gains of 35%.
Portfolio Investments
During the year ended March 31, 1999, the Company invested $13,170,132 in
various portfolio securities listed elsewhere in this report under the caption
"Portfolio Changes During the Year," which also lists dispositions of portfolio
securities. During the 1998 and 1997 fiscal years, the Company invested a total
of $9,709,195 and $6,023,684, respectively.
Financial Liquidity and Capital Resources
At March 31, 1999, the Company had cash and cash equivalents of $6.1
million. Pursuant to Small Business Administration ("SBA") regulations, cash and
cash equivalents of $2.7 million held by CSVC may not be transferred or advanced
to CSC without the consent of the SBA. Under current SBA regulations and subject
to SBA's approval of its credit application, CSVC would be entitled to borrow up
to $48.3 million in addition to the $5 million presently outstanding.
Approximately $40.8 million of the Company's investment portfolio is represented
by unrestricted publicly-traded securities, which have an ascertainable market
value and represent a primary source of liquidity.
26
Funds to be used by the Company for operating or investment purposes may be
transferred in the form of dividends, management fees or loans from Skylawn
Corporation, The RectorSeal Corporation and The ▇▇▇▇▇▇▇▇ Manufacturing Company,
wholly-owned subsidiaries of the Company, to the extent of their available cash
reserves and borrowing capacities.
Management believes that the Company's cash and cash equivalents are
adequate to meet its expected requirements. Consistent with the long- term
strategy of the Company, the disposition of investments from time to time may
also be an important source of funds for future investment activities.
Year 2000
Many computer software systems in use today cannot properly process
date-related information from and after January 1, 2000. Should any of the
computer systems employed by our major portfolio companies fail to process this
type of information properly, it could have a negative impact on the Company's
shareholders. The Company has reviewed its computer system and determined that
it will be Year 2000 compliant. In addition, the Company has inquired of its
major service providers as well as its major portfolio companies to determine if
they will be prepared for the Year 2000. All have indicated they are taking the
necessary steps to be Year 2000 compliant. It is anticipated that the Company
will incur no material expenses related to the Year 2000 issues.
Impact of Inflation
The Company does not believe that its business is materially affected by
inflation, other than the impact which inflation may have on the securities
markets, the valuations of business enterprises and the relationship of such
valuations to underlying earnings, all of which will influence the value of the
Company's investments.
Risks
Pursuant to Section 64(b)(1) of the Investment Company Act of 1940, a
business development company is required to describe the risk factors involved
in an investment in the securities of such company due to the nature of the
company's investment portfolio. Accordingly the Company states that:
The Company's objective is to achieve capital appreciation through
investments in businesses believed to have favorable growth potential. Such
businesses are often undercapitalized small companies which lack management
depth and have not yet attained profitability. The Company's venture investments
often include securities which do not yield interest or dividends and are
subject to legal or contractual restrictions on resale, which restrictions
adversely affect the liquidity and marketability of such securities.
Because of the speculative nature of the Company's investments and the lack
of any market for the securities initially purchased by the Company, there is a
significantly greater risk of loss than is the case with traditional investment
securities. The high-risk, long-term nature of the Company's venture investment
activities may prevent shareholders of the Company from achieving price
appreciation and dividend distributions.
27
Selected Consolidated Financial Data
(all figures in thousands except per share data)
1989 1990 1991 1992 1993 1994 1995 1996 1997
-----------------------------------------------------------------------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost.......... $ 29,665 $ 32,212 $ 31,593 $ 34,929 $ 33,953 $ 41,993 $ 49,730 $ 58,544 $ 59,908
Unrealized appreciation...... 97,134 99,903 107,120 100,277 113,153 132,212 153,031 198,386 233,383
---------- --------- --------- -------- --------- --------- --------- -------- ---------
Investments at market or
fair value................ 126,799 132,115 138,713 135,206 147,106 174,205 202,761 256,930 293,291
Total assets................. 131,365 185,231 149,975 208,871 176,422 270,874 213,811 326,972 310,760
Subordinated debentures...... 15,000 15,000 15,000 11,000 15,000 15,000 11,000 11,000 5,000
Deferred taxes on
unrealized appreciation... 32,619 33,608 36,063 33,761 38,112 45,932 53,247 69,121 81,313
Net assets................... 83,124 94,610 97,139 107,522 121,455 133,053 147,370 189,048 218,972
Shares outstanding........... 3,563 3,617 3,617 3,644 3,681 3,715 3,735 3,767 3,767
------------------------------------------------------------------------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income........ $ 716 $ 1,737 $ 2,090 $ 2,363 $ 2,189 $ 2,870 $ 2,447 $ 2,855 $ 2,574
Net realized gain (loss) on
investments............... 27 12,722 (2,515) 14,313 5,099 (475) 142 11,174 6,806
Net increase (decrease) in
unrealized appreciation
before distributions...... 5,075 1,780 4,762 (4,541) 8,524 11,160 13,584 38,746 22,804
---------- --------- --------- -------- --------- --------- --------- -------- ---------
Increase (decrease) in net
assets from operations
before distributions...... 5,818 16,239 4,337 12,135 15,812 13,555 16,173 52,775 32,184
Cash dividends paid.......... (1,069) (5,197) (1,809) (2,181) (2,202) (2,228) (2,241) (2,270) (2,260)
Securities dividends......... - - - - - - - (9,402) -
Employee stock options
exercised................. - 444 - 429 322 272 385 575 -
---------- --------- --------- -------- --------- --------- --------- -------- ---------
Increase (decrease) in net assets 4,749 11,486 2,528 10,383 13,932 11,599 14,317 41,678 29,924
-----------------------------------------------------------------------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation... $ 9.15 $ 9.29 $ 9.97 $ 9.27 $ 10.35 $ 12.36 $ 14.26 $ 18.35 $ 21.59
Net assets................... 23.33 26.16 26.86 29.51 32.99 35.81 39.46 50.18 58.13
Closing market price......... 18.25 21.375 20.75 24.25 36.50 38.125 38.00 60.00 67.875
Cash dividends paid.......... 0.30 1.44 .50 .60 .60 .60 .60 .60 .60
Securities dividends......... - - - - - - - 2.50 -
1998 1999
--------------------------------------------------------------
Financial Position (as of March 31)
Investments at cost.......... $ 61,154 $ 73,580
Unrealized appreciation...... 340,132 276,698
-------- --------
Investments at market or
fair value................ 401,286 350,278
Total assets................. 522,324 360,786
Subordinated debentures...... 5,000 5,000
Deferred taxes on
unrealized appreciation... 118,674 96,473
Net assets................... 296,023 256,232
Shares outstanding........... 3,788 3,815
--------------------------------------------------------------
Changes in Net Assets (years ended March 31)
Net investment income........ $ 2,726 $ 1,762
Net realized gain (loss) on
investments............... 6,485 995
Net increase (decrease) in
unrealized appreciation
before distributions...... 69,388 (41,233)
-------- --------
Increase (decrease) in net
assets from operations
before distributions...... 78,599 (38,476)
Cash dividends paid.......... (2,268) (2,280)
Securities dividends......... - -
Employee stock options
exercised................. 720 965
-------- --------
Increase (decrease) in net assets 77,051 (39,791)
--------------------------------------------------------------
Per Share Data (as of March 31)
Deferred taxes on
unrealized appreciation... $ 31.33 $ 25.29
Net assets................... 78.15 67.16
Closing market price......... 94.00 73.00
Cash dividends paid.......... .60 .60
Securities dividends......... - -
28
Shareholder Information
Stock Transfer Agent
American Stock Transfer & Trust Company, ▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
(telephone ▇▇▇-▇▇▇-▇▇▇▇) serves as transfer agent for the Company's common
stock. Certificates to be transferred should be mailed directly to the transfer
agent, preferably by registered mail.
Shareholders
The Company had approximately 900 record holders of its common stock at March
31, 1999. This total does not include an estimated 2,100 shareholders with
shares held under beneficial ownership in nominee name or within clearinghouse
positions of brokerage firms or banks.
Market Prices
The Company's common stock is traded on The Nasdaq Stock Market (National
Market) under the symbol CSWC. The following high and low selling prices for the
shares during each quarter of the last two fiscal years were taken from
quotations provided to the Company by Nasdaq:
Quarter Ended High Low
-------------------------------------------------------------------------
June 30, 1997.................................... $73 $65
September 30, 1997............................... 76 68
December 31, 1997................................ 94 73 1/2
March 31, 1998................................... 100 82
Quarter Ended High Low
-------------------------------------------------------------------------
June 30, 1998.................................... $106 $ 92
September 30, 1998............................... 103 81 3/8
December 31, 1998................................ 88 3/4 55
March 31, 1999................................... 89 67 1/2
Dividends
The payment dates and amounts of cash dividends per share since April 1, 1997
are as follows:
Payment Date Cash Dividend
-----------------------------------------------------------------------
May 30, 1997.............................................. $0.20
November 28, 1997......................................... 0.40
May 29, 1998.............................................. 0.20
November 30, 1998......................................... 0.40
May 28, 1999.............................................. 0.20
The amounts and timing of cash dividend payments have generally been dictated
by requirements of the Internal Revenue Code regarding the distribution of
taxable net investment income of regulated investment companies.
Automatic Dividend Reinvestment and Optional Cash Contribution Plan
As a service to its shareholders, the Company offers an Automatic Dividend
Reinvestment and Optional Cash Contribution Plan for shareholders of record who
own a minimum of 25 shares. The Company pays all costs of administration of the
Plan except brokerage transaction fees. Upon request, shareholders may obtain
information on the Plan from the Company, ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇▇. Telephone (▇▇▇) ▇▇▇-▇▇▇▇. Questions and answers about the Plan are
on the next page.
Annual Meeting
The Annual Meeting of Shareholders of Capital Southwest Corporation will be
held on Monday, July 19, 1999, at 10:00 a.m. in the North Dallas Bank Tower
Meeting Room (first floor), ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇.
29