Capital Southwest Corporation
12900 Preston Road, Suite 700
Dallas, Texas 75230
(972) 233-8242 Telephone Fax (972) 233-7362
June 29, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza
Washington, DC 20549
Gentlemen:
Pursuant to regulations of the Securities and Exchange Commission, submitted for
filing on behalf of Capital Southwest Corporation is the Company's Form 10-K405
for the year ended March 31, 1997.
This filing is being effected by direct transmission to the Commission's EDGAR
System.
Sincerely,
Susan Patterson
Controller
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------
FORM 10-K 405
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------------------------------------
For the Fiscal Year Ended March 31, 1997 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)of the Act:
Common Stock, $1.00 par value
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 period 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of May 1, 1997 was $142,654,636, based on the last sale price of
such stock as quoted by Nasdaq on such date (officers, directors and 5%
shareholders are considered affiliates for purposes of this calculation).
The number of shares of common stock outstanding as of May 1, 1997 was
3,767,051.
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<S> <C> <C>
Documents Incorporated by Reference Part of Form 10-K
----------------------------------- -----------------
(1) Annual Report to Shareholders for the Year Ended Parts I and II; and
March 31, 1997 Part IV, Item 14(a)(1) and (2)
(2) Proxy Statement for Annual Meeting of Shareholders Part III
to be held July 21, 1997
<PAGE>
</TABLE>
TABLE OF CONTENTS
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<S> <C> <C> <C>
Page
PART I
Item 1. Business.....................................................................................1
Item 2. Properties...................................................................................1
Item 3. Legal Proceedings............................................................................1
Item 4. Submission of Matters to a Vote of Security Holders..........................................1
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................2
Item 6. Selected Financial Data......................................................................2
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations..............................................................................2
Item 8. Financial Statements and Supplementary Data..................................................2
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.......................................................................3
PART III
Item 10. Directors and Executive Officers of the Registrant...........................................3
Item 11. Executive Compensation.......................................................................3
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................4
Item 13. Certain Relationships and Related Transactions...............................................4
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................4
Signatures ........................................................................................................5
Exhibit Index .....................................................................................................6
</TABLE>
<PAGE>
PART I
Item 1. Business
Capital Southwest Corporation (the "Company") was organized as a Texas
corporation on April 19, 1961. Until September 1969, the Company operated as a
licensee under the Small Business Investment Act of 1958. At that time, the
Company transferred to its wholly-owned subsidiary, Capital Southwest Venture
Corporation ("CSVC"), certain of its assets and its license as a small business
investment company ("SBIC"). CSVC is a closed-end, non-diversified investment
company of the management type. Prior to March 30, 1988, the Company was
registered as a closed-end, non-diversified investment company under the
Investment Company Act of 1940 (the "1940 Act"). On that date, the Company
elected to become a business development company subject to the provisions of
Sections 55 through 65 of the 1940 Act, as amended by the Small Business
Incentive Act of 1980.
The Company is a venture capital investment company whose objective is
to achieve capital appreciation through long-term investments in businesses
believed to have favorable growth potential. The Company participates in
start-up and early-stage financings, expansion financings and leveraged buyout
financings in a broad range of industry segments. The Company's portfolio is a
composite of investments in several companies in which the Company has major
interests as well as a number of developing companies and marketable securities
of established publicly-owned companies. The Company makes available significant
managerial assistance to the companies in which it invests and believes that
providing material assistance to such investee companies is critical to its
business development activities.
The twelve largest investments of the Company had a combined cost of
$41,943,522 and a value of $263,978,402, representing 90.0% of the value of the
Company's consolidated investment portfolio at March 31, 1997. For a narrative
description of the twelve largest investments, see "Twelve Largest Investments -
March 31, 1997" on pages 4 through 6 of the Company's Annual Report to
Shareholders for the Year Ended March 31, 1997 (the "1997 Annual Report") which
is herein incorporated by reference. Certain of the information presented on the
twelve largest investments has been obtained from the respective companies and,
in certain cases, from public filings of such companies. The financial
information presented on each of the respective companies is from such
companies' financial statements, which in some instances are unaudited.
The Company competes for attractive investment opportunities with
venture capital partnerships and corporations, venture capital affiliates of
industrial and financial companies, other SBICs and wealthy individuals.
The number of persons employed by the Company at March 31, 1997 was
eight.
Item 2. Properties
The Company maintains its offices at 12900 Preston Road, Suite 700,
Dallas, Texas, 75230, where it rents approximately 3,200 square feet of office
space pursuant to a lease agreement expiring in February 1998. The Company
believes that its offices are adequate to meet its current and expected future
needs.
Item 3. Legal Proceedings
The Company has no material pending legal proceedings to which it is a
party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
quarter ended March 31, 1997.
1
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information set forth under the captions "Shareholder Information -
Shareholders, Market Prices and Dividends" on page 27 of the 1997 Annual Report
are herein incorporated by reference.
Item 6. Selected Financial Data
"Selected Consolidated Financial Data" on page 26 of the 1997 Annual Report
is herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial ConditionI and Results
of Operations
Pages 23 through 25 of the Company's 1997 Annual Report are herein
incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 7 through 22 of the Company's 1997 Annual Report are herein
incorporated by reference. See also Item 14 of this Form 10-K - "Exhibits,
Financial Statement Schedules, and Reports on Form 8-K".
Selected Quarterly Financial Data (Unaudited)
---------------------------------------------
The following presents a summary of the unaudited quarterly
consolidated financial information for the years ended March 31, 1997 and 1996.
<TABLE>
<S> <C> <C> <C> <C> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(In thousands, except per share amounts)
1997
- ----
Net investment income $ 817 $ 829 $ 442 $ 486 $ 2,574
Net realized gain on investments - - 892 5,914 6,806
Net increase (decrease) in unrealized
appreciation of investments before
distributions 8,291 12,505 11,150 (9,141) 22,805
Net increase (decrease) in net assets
from operations before distributions 9,107 13,334 12,485 (2,741) 32,185
Net increase (decrease) in net assets
from operations before distributions
per share 2.42 3.54 3.31 (.73) 8.54
1996
- ----
Net investment income $ 816 $ 633 $ 934 $ 472 $ 2,855
Net realized gain (loss) on investments - - 12,358 (1,184) 11,174
Net increase (decrease) in unrealized
appreciation of investments before
distributions 2,613 27,272 (2,180) 11,041 38,746
Net increase in net assets from operations
before distributions 3,429 27,905 11,112 10,329 52,775
Net increase in net assets from operations
before distributions per share .91 7.41 2.95 2.74 14.01
</TABLE>
2
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the captions "Election of Directors" in
the Company's definitive Proxy Statement for Annual Meeting of Shareholders to
be held July 21, 1997, filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, on or about June 12, 1997 (the "1997 Proxy Statement") is
herein incorporated by reference.
Executive Officers of the Registrant
The officers of the Company, together with the offices in the Company
presently held by them, their business experience during the last five years and
their ages are as follows:
D.Scott Collier, age 34, has served as Vice President of the Company
since April 1995 and was an investment associate with the Company from 1991
to 1995.
J. Bruce Duty, age 46, has served as Senior Vice President of the
Company since 1993, Vice President of the Company from 1982 to 1993,
Secretary of the Company from 1980 to 1993 and Treasurer of the Company
from 1980 to January 1990.
Patrick F. Hamner, age 41, has served as Vice President of the Company
since 1986 and was an investment associate with the Company from 1982 to
1986.
Gary L. Martin, age 50, has been a director of the Company since July
1988 and has served as Vice President of the Company since 1984. He
previously served as Vice President of the Company from 1978 to 1980. Since
1980, Mr. Martin has served as President of The Whitmore Manufacturing
Company, a wholly-owned subsidiary of the Company.
Tim Smith, age 36, has served as Vice President and Secretary of the
Company since 1993, Treasurer of the Company since January 1990 and was an
investment associate with the Company from July 1989 to January 1990.
William R. Thomas, age 68, has served as Chairman of the Board of
Directors of the Company since 1982 and President of the Company since
1980. In addition, he has been a director of the Company since 1972 and was
previously Senior Vice President of the Company from 1969 to 1980.
No family relationship exists between any of the above-listed officers,
and there are no arrangements or understandings between any of them and any
other person pursuant to which they were selected as an officer. All officers
are elected to hold office for one year and until their successors are elected
and qualify.
Item 11. Executive Compensation
The information set forth under the caption "Compensation of Directors
and Executive Officers" in the 1997 Proxy Statement is herein incorporated by
reference.
3
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the captions "Stock Ownership of
Certain Beneficial Owners" and "Election of Directors" in the 1997 Proxy
Statement is herein incorporated by reference.
Item 13. Certain Relationships and Related Transactions
There were no relationships or transactions within the meaning of this
item during the fiscal year ended March 31, 1997 or proposed for the fiscal year
ending March 31, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements included in pages 7 through 22 of
the Company's 1997 Annual Report are herein incorporated by reference:
(A) Portfolio of Investments - March 31, 1997
Consolidated Financial Statements of the Company and Subsidiary
Consolidated Statements of Financial Condition - March 31, 1997
and 1996
Consolidated Statements of Operations - Years Ended March 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Net Assets - Years Ended
March 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended March 31,
1997, 1996 and 1995
(B) Notes to Consolidated Financial Statements
(C) Notes to Portfolio of Investments
(D) Selected Per Share Data and Ratios
(E) Independent Auditors' Report
(a)(2) All schedules are omitted because they are not applicable or not
required, or the information is otherwise supplied.
(a)(3) See the Exhibit Index on page 6.
(b) The Company filed no reports on Form 8-K during the three months ended
March 31, 1997.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ William R. Thomas
By:--------------------------
(William R. Thomas, President
and Chairman of the Board)
Date: June 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
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Signature Title Date
--------- ----- ----
/s/ William R. Thomas
- --------------------------- President and Chairman June 26, 1997
(William R. Thomas) of the Board and Director
/s/ Gary L. Martin Director June 26, 1997
- ---------------------------
(Gary L. Martin)
/s/ Graeme W. Henderson
- ---------------------------
Director June 26, 1997
(Graeme W. Henderson)
/s/ James M. Nolan
- --------------------------- Director June 26, 1997
(James M. Nolan)
/s/ John H. Wilson
- --------------------------- Director June 26, 1997
(John H. Wilson)
/s/ Tim Smith
- --------------------------- Vice President and June 26, 1997
(Tim Smith) Secretary-Treasurer
(Financial and Accounting Officer)
</TABLE>
5
<PAGE>
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated
herein by reference to a prior filing, in accordance with Rule 12b-32 under the
Securities Exchange Act of 1934. (Asterisk denotes exhibits filed with this
report.)
Exhibit No. Description
----------- -----------
3.1(a) Articles of Incorporation and Articles of
Amendment to Articles of Incorporation,
dated June 25, 1969 (filed as Exhibit
1(a) and 1(b) to Amendment No. 3 to Form
N-2 for the fiscal year ended March 31,
1979).
3.1(b) Articles of Amendment to Articles of
Incorporation, dated July 20, 1987 (filed as
an exhibit to Form N-SAR for the six month
period ended September 30, 1987).
3.2 By-Laws of the Company, as amended (filed
as Exhibit 2 to AmendmentNo. 11 to Form N-2
for the fiscal year ended March 31, 1987).
4.1 Specimen of Common Stock certificate
(filed as Exhibit 4 to Amendment No. 3 to
Form N-2 for the fiscal year ended
March 31, 1979).
4.2 Subordinated debentures of CSVC
guaranteed by the Small Business
Administration (filed as Exhibit 5 to
Amendment No. 11 to Form N-2 for the
fiscal year ended March 31, 1987 and
Exhibit 4.3 to Form 10-K for the fiscal
year ended March 31, 1993).
10.1 The RectorSeal Corporation and Jet-Lube,
Inc. Employee Stock Ownership Plan as
revised and restated effective April 1,
1989.
10.3 Retirement Plan for Employees of Capital
Southwest Corporation and Its Affiliates as
amended and restated effective April 1, 1989
(filed as Exhibit 10.3 to Form 10-K for the
fiscal year ended March 31, 1995).
10.4 Capital Southwest Corporation and Its
Affiliates Restoration of Retirement Income
Plan for certain highly-compensated
superseded plan participants effective April
1, 1993 (filed as Exhibit 10.4 to Form 10-K
for the fiscal year ended March 31, 1995).
10.5 Capital Southwest Corporation Retirement
Income Restoration Plan as amended
and restated effective April 1, 1989
(filed as Exhibit 10.5 to Form 10-K for
the fiscal year ended March 31, 1995).
10.6 Form of Indemnification Agreement which
has been established with all directors
and executive officers of the Company
(filed as Exhibit 10.9 to Form 8-K dated
February 10, 1994).
10.7 Capital Southwest Corporation 1984
Incentive Stock Option Plan as amended and
restated as of April 20, 1987 (filed as
Exhibit 10.10 to Form 10-K for the fiscal
year ended March 31, 1990).
6
<PAGE>
Exhibit No. Description
----------- -----------
13. * Annual Report to Shareholders for the
fiscal year ended March 31, 1997.
21. List of subsidiaries of the Company
(filed as Exhibit 22 to Form 10-K for the
fiscal year ended March 31, 1992).
23. * Independent Auditors' Consent.
27. * Financial Data Schedule.
7
<PAGE>
Exhibit 13
Twelve Largest Investments-March 31, 1997
Palm Harbor Homes, Inc. $84,458,000
Palm Harbor Homes, Dallas, Texas, is an integrated manufactured housing
company, building, retailing, financing and insuring homes produced in 15
plants in Alabama, Arizona, Florida, North Carolina, Ohio, Oregon and Texas and
sold in 34 states by over 600 independent dealers and 59 company-owned or
affiliated retail superstores. Palm Harbor manufactures high-quality, energy-
efficient homes designed to meet the need for affordable housing, particulrly
among retirees and newly-formed families.
During the year ended March 28, 1997, Palm Harbor earned $24,739,000 ($1.68
per share on net sales of $563,192,000, compared with earnings of $14,978,000
($1.18 per share) on net sales of $417,214,000 in the previous year. The
March 31, 1997 closing Nasdaq bid price of Palm Harbor's common stock was $21.00
per share.
At March 31, 1997, the $10,931,955 investment in Palm Harbor by Capital
Southwest and its subsidiary was valued at $84,458,000 ($16.80 per share)
consisting of 5,027,276 restricted shares of common stock, representing a
fully-diluted equity interest of 33.2%.
Skylawn Corporation $42,000,000
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, 1997, Skylawn Corporation earned
$3,822,000 on revenues of $20,602,000. In the previous year, Skylawn
earned $4,462,000 on revenues of $22,939,000.
At March 31, 1997, Capital Southwest owned 100% of Skylawn
Corporation's common stock, which had a cost of $4,510,400 and was valued at
$42,000,000.
The RectorSeal Corporation $35,000,000
The RectorSeal Corporation, with plants in Houston 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 Whitmore Manufacturing Company
(described subsequently).
During the year ended March 31, 1997, RectorSeal earned $3,116,000 on
revenues of $37,988,000, compared with earnings of $3,014,000 on revenues of
$29,290,000 in the previous year. RectorSeal's earnings do not reflect its
20% equity in the Whitmore Manufacturing Company.
At March 31, 1997, Capital Southwest owned 100% of RectorSeal's common Stock
having a cost of $52,600 and a value of $35,000,000.
Alamo Group Inc. $31,777,000
Alamo Group Inc. is a leading designer, manufacturer and distributor of
heavy-duty, tractor-mounted mowing and vegetation maintenance equipment. Founded
in 1969, Alamo Group operates 12 manufacturing facilities and serves
agricultural, governmental and commercial markets in the U.S. and Europe.
For the year ended December 31, 1996, Alamo reported consolidated earnings of
$8,762,000 ($0.91 per share) on net sales of $183,595,000, compared with
earnings of $11,615,000 ($1.34 per share) on net sales of $163,852,000 in the
previous year. The March 31, 1997 closing NYSE market price of Alamo's common
stock was $15.875 per share.
At March 31, 1997, the $575,000 investment in Alamo by Capital Southwest and
its subsidiary was valued at $31,777,000, consisting of 2,660,000 restricted
shares of common stock valued at $31,654,000 ($11.90 per share) and warrants
valued at $123,000, representing a fully-diluted equity interest of 26.8% at an
anticipated cost of $1,575,000.
4
Encore Wire Corporation $16,381,000
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, 1996, Encore reported net income of
$7,159,000 ($1.00 per share) on net sales of $179,132,000, compared with a net
loss of $545,000 ($0.08 per share) on net sales of $151,308,000 in the previous
year. The March 31, 1997 closing Nasdaq bid price of Encore's common stock was
$18.25 per share.
At March 31, 1997, the $4,100,000 investment in 1,122,000 shares of Encore's
restricted common stock by Capital Southwest and its subsidiary was valued at
$16,381,000 ($14.60 per share), representing a fully-diluted equity interest of
14.6%.
PETsMART, Inc. $13,084,400
PETsMART, Inc., Phoenix, Arizona, is the nation's leading operator of
superstores specializing in pet food, pet supplies and pet services, including
full scale veterinary care. PETsMART currently operates 397 superstores in North
America and the United Kingdom.
For the year ended February 2, 1997, PETsMART reported net income of
$20,591,000 ($0.17 per share) on net sales of $1,501,017,000, compared with a
net loss of $7,018,000 ($0.06 per share) on net sales of $1,168,056,000 in the
previous year. The March 31, 1997 closing Nasdaq bid price of PETsMART's common
stock was $20.00 per share.
At March 31, 1997, Capital Southwest and its subsidiary owned 654,220
unrestricted shares of PETsMART common stock, having a cost of $2,878,733 and a
market value of $13,084,400 ($20.00 per share).
Mail-Well, Inc. $10,966,000
Mail-Well, Inc., Englewood, Colorado, is a leading envelope manufacturer and
printer in the United States and Canada, specializing in customized envelopes
and high-impact color printing. Mail-Well operates over 50 plants and numerous
sales offices throughout North America.
For the year ended December 31, 1996, Mail-Well reported earnings of
$16,927,000 ($1.42 per share) on net sales of $778,524,000, compared with
earnings of $10,373,000 ($1.36 per share) on net sales of $596,803,000 in the
previous year. The March 31, 1997 closing Nasdaq bid price of Mail-Well's common
stock was $19.75 per share.
At March 31, 1997, the $2,889,010 investment in Mail-Well by Capital
Southwest was valued at $10,966,000 ($15.80 per share) consisting of 694,063
restricted shares of common stock, representing a fully-diluted equity interest
of 5.3%.
American Homestar Corporation $8,512,002
American Homestar Corporation, League City, Texas, builds, retails and
finances manufactured housing, producing homes from its eight plants and
retailing its products through 52 company-owned retail sales centers and more
than 300 independent dealers in 24 states.
For the year ended May 31, 1996, American Homestar reported net income of
$9,756,000 ($0.98 per share) on net sales of $231,232,000. Unaudited earnings
for the nine months ended February 28, 1997 were $9,713,000 ($0.87 per share)
compared with $6,423,000 ($0.67 per share) during the same period in the
preceding year. The March 31, 1997 closing Nasdaq bid price of American
Homestar's stock was $17.00 per share.
At March 31, 1997, Capital Southwest and its subsidiary owned 500,706
unrestricted shares of American Homestar common stock, having a cost of
$3,405,824 and a market value of $8,512,002 ($17.00 per share), representing a
fully-diluted equity interest of 4.2%.
5
<PAGE>
PTS Holdings, Inc. $6,800,000
PTS Holdings, Inc. Anaheim, California, through its subsidiary, Power
Paragon, manufactures power systems which provide continuous high-quality
electric power for military and commercial equipment. Operating divisions based
in California, Arizona and Germany produce power conditioning systems for the
U.S. Navy and navies of other countries, uninterruptible power supplies for
commercial installations including computer facilities, and power conversion
devices for aerospace, industrial and commercial use.
For the year ended June 30, 1996, PTS reported net income of $6,681,000 on
net sales of $79,950,000. Earnings for the nine months ended March 31, 1997 were
$3,119,000, compared with $4,329,000 during the same period in the preceding
year.
At March 31, 1997, Capital Southwest's $2,000,000 investment in the common
stock of PTS Holdings, Inc. was valued at $6,800,000 and represents a
fully-diluted equity interest of 21.6%.
The Whitmore Manufacturing Company $6,000,000
The Whitmore Manufacturing Company, with plants in Rockwall, Texas and
Cleveland, Ohio, manufactures specialty lubricants for heavy equipment used in
surface mining and other industries, and produces transit coatings for the
automobile industry. Whitmore's subsidiary, Hanson-Loran Company, Inc., Buena
Park, California, produces floor-finishing compounds, supplies and equipment for
supermarkets.
During the year ended March 31, 1997, Whitmore reported net income of
$971,000 on net sales of $17,431,000, compared with a net loss of $611,000 on
net sales of $16,829,000 in the previous year. The company is owned 80% by
Capital Southwest and 20% by Capital Southwest's subsidiary, The RectorSeal
Corporation (described on a previous page).
At March 31, 1997, the direct investment in Whitmore by Capital Southwest
was valued at $6,000,000 and had a cost of $1,600,000. Our Company's direct and
indirect equity in Whitmore's income for the year ended March 31, 1997 was
$971,000.
SDI Holding Corp. $6,000,000
SDI Holding Corp., Glasgow, Delaware, 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., is
developing a system, scheduled for 1998 introduction, which will capture, store
and transmit conventional x-ray images in a digital format.
The net assets of the Diagnostic Imaging business were purchased from E. I.
DuPont de Nemours for approximately $315 million in March 1996. The operations
acquired by SDI recorded 1995 sales of $539 million and 1996 sales of $500
million.
At March 31, 1997, Capital Southwest's $6,000,000 investment in the common
stock of SDI Holding Corp. was valued at cost and represents a fully-diluted
equity interest of 10.6%.
Rewind Holdings, Inc. $3,000,000
Rewind Holdings, Inc., Sugar Land, Texas, through its wholly-owned
subsidiary, Bill Young Productions, Inc., is the leading producer of radio and
television commercials for the touring entertainment industry and is a
nationally-recognized producer of music videos, commercials and other
productions.
In October 1996, Capital Southwest's subsidiary invested $3,000,000 in a 12%
subordinated note and 8% convertible preferred stock of Rewind Holdings, Inc.,
which acquired the outstanding common stock of Bill Young Productions, Inc. The
operations acquired by Rewind reported revenues of $6,928,000 during the twelve
months ended September 30, 1996.
At March 31, 1997, the investment by Capital Southwest's subsidiary
consisting of $2,625,000 in a 12% subordinated note and $375,000 in 8%
convertible preferred stock was valued at cost and represents a fully-diluted
equity interest of 40.7%.
6
<PAGE>
Portfolio of Investments - March 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Company Equity (a) Investment (b) Cost Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
=ALAMO GROUP INC. 26.8% 2,660,000 shares common stock (acquired $ 575,000 $31,654,000
San Antonio, Texas 4-1-73 and 7-18-78)
Heavy-duty, tractor-mounted mowing and
vegetation maintenance equipment for Warrant to purchase 62,500 shares of common
agricultural and governmental markets. stock at $16.00 per share, expiring 2000 - 123,000
(acquired 11-25-91) ----------- -----------
575,000 31,777,000
- -----------------------------------------------------------------------------------------------------------------------------------
ALL COMPONENTS, INC. 30.0% 14% subordinated debenture, due 1999
Addison, Texas (acquired 9-16-94) 600,000 600,000
Distribution and production of memory and 150,000 shares Series A convertible
other components to personal computer preferred stock (acquired 9-16-94) 150,000 1,150,000
manufacturers, retailers and value-added 450,000 shares Series B preferred stock 450,000 450,000
resellers. (acquired 9-16-94) -------- ---------
1,200,000 2,200,000
- -----------------------------------------------------------------------------------------------------------------------------------
=AMERICAN HOMESTAR CORPORATION 4.2% ++500,706 shares common stock
League City, Texas (acquired 8-31-93, 7-12-94 and 3-28-96) 3,405,824 8,512,002
Manufacturing, retailing and financing
of manufactured housing sold in 24 states.
- -----------------------------------------------------------------------------------------------------------------------------------
AMFIBE, INC. 40.0% 2,000 shares Class B non-voting
Martinsville, Virginia stock (acquired 6-15-94) 200,000 1,600,000
Nylon monofilament yarns for the textile
industry.
- -----------------------------------------------------------------------------------------------------------------------------------
BALCO, INC. 86.0% 14% subordinated debentures, payable 1998
Wichita, Kansas to 2002 (acquired 8-13-91) 400,000 400,000
Specialty architectural products used 14% subordinated debenture, payable 1998
the construction and remodeling of commercial to 2002, last maturing $250,000
and institutional buildings. convertible into 250,000 shares of
common stock at $1.00 per share
(acquired 6-1-91) 800,000 800,000
110,000 shares common stock and 60,920
shares Class B non-voting stock
(acquired 10-25-83) 170,920 170,920
Warrants to purchase 85,000 shares of
common stock a $2.40 per share, expiring - -
2001 (acquired 8-13-91) ------- -------
1,370,920 1,370,920
- -----------------------------------------------------------------------------------------------------------------------------------
=DATA RACE, INC. 2.9% ++176,105 shares common stock 480,116 2,333,000
San Antonio, Texas (acquired 10-7-92)
Statistical multiplexers, custom 35,507 shares common stock 94,698 235,000
data/fax/voice modems and local and wide (acquired 2-3-97) ------- ---------
area network connectivity products. 574,814 2,568,000
- -----------------------------------------------------------------------------------------------------------------------------------
=Publicly-owned company ++Unrestricted securities as defined in Note (b)
7
<PAGE>
Company Equity (a) Investment (b) Cost Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
DENNIS TOOL COMPANY 46.1% 98,687 shares common stock (acquired 3-7-94) $ 330,000 $ 2,305,000
Houston, Texas
Polycrystalline diamond compacts
(PDCs) used in oil field drill bits and in
mining and industrial applications.
- -----------------------------------------------------------------------------------------------------------------------------------
DYMETROL COMPANY, INC. 33.8% 15% subordinated notes, payable quarterly
Hockessin, Delaware 1998 to 1999(acquired 5-27-93) 774,379 774,379
Nylon strapping for packaging 19,912 shares common stock, non-voting 199,115 199,115
applications and copolyester elastomeric (acquired 5-27-93) ------- -------
tape used in automobiles. 973,494 973,494
- ------------------------------------------------------------------------------------------------------------------------------------
=ENCORE WIRE CORPORATION 14.6% 1,122,000 shares common stock (acquired 7-16-92,
McKinney, Texas 3-15-94 and 4-28-94) 4,100,000 16,381,000
Electrical wire and cable for residential
and commercial use.
- -----------------------------------------------------------------------------------------------------------------------------------
=FMC CORPORATION <1% ++6,430 shares common stock (acquired 6-6-86) 123,778 393,838
Chicago, Illinois
Machinery and chemicals in
diversified product areas.
- -----------------------------------------------------------------------------------------------------------------------------------
=FRONTIER CORPORATION <1% ++31,338 shares common stock (acquired 12-20-95) 78,346 560,167
Rochester, New York
Diversified telecommunications company.
- -----------------------------------------------------------------------------------------------------------------------------------
LIL' THINGS, INC. 7.3% 2,250,000 shares Class A cumulative preferred stock,
Arlington, Texas convertible into 2,250,000 shares of common
Retail chain of superstores selling stock at $1.00 per share (acquired 2-12-93
products for children from and 12-1-93) 2,250,000 -
birth to six years. 666,666 shares Class B cumulative preferred
stock, convertible into 746,268 shares of common
stock at at $1.34 per share (acquired 9-15-94) 1,000,000 -
617,410 shares Class C cumulative preferred stock,
convertible into 617,410 shares of common stock
at $1.20 per share (acquired 12-4-95) 740,894 2
Warrants to purchase 58,842 shares of common
stock at $.01 per share, expiring 2000 - -
(acquired 11-6-95)
--------- ---------
3,990,894 2
- -----------------------------------------------------------------------------------------------------------------------------------
=MAIL-WELL, INC. 5.3% 694,063 shares common stock (acquired 2-18-94,
Englewood, Colorado 12-14-94 and 7-27-95) 2,889,010 10,966,000
Customized envelopes and high-impact
color printing.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
=Publicly-owned company ++Unrestricted securities as defined in Note (b)
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Company Equity (a) Investment (b) Cost Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
=MYLAN LABORATORIES INC. <1% ++128,286 shares common stock $ 400,000 $ 1,908,254
Pittsburgh, Pennsylvania (acquired 11-20-91)
Proprietary and generic pharmaceutical
products.
- -----------------------------------------------------------------------------------------------------------------------------------
PTS HOLDINGS, INC. 21.6% 200,000 shares Class B non-voting common stock
Anaheim, California stock (acquired 11-21-94) 2,000,000 6,800,000
Power systems for military and
commercial applications.
- -----------------------------------------------------------------------------------------------------------------------------------
=PALM HARBOR HOMES, INC. 33.2% 5,027,276 shares common stock (acquired 1-3-85,
Dallas, Texas 3-31-88 and 7-31-95) 10,931,955 84,458,000
Integrated manufacturing, retailing,
financing and insuring of manufactured
housing sold in 34 states.
- -----------------------------------------------------------------------------------------------------------------------------------
=PETSMART, INC. <1% ++654,220 shares common stock (acquired 6-1-95) 2,878,733 13,084,400
Phoenix, Arizona
Retail chain of superstores selling
pet foods, supplies and services.
- -----------------------------------------------------------------------------------------------------------------------------------
THE RECTORSEAL CORPORATION 100.0% 27,907 shares common stock (acquired 1-5-73 and
Houston, Texas 3-31-73) 52,600 35,000,000
Chemical specialty products for
industrial, construction and
oil field applications; owns 20%
of Whitmore Manufacturing.
- -----------------------------------------------------------------------------------------------------------------------------------
REWIND HOLDINGS, INC. 40.7% 12% subordinated note, payable 2003
Sugar Land, Texas (acquired 10-21-96) 2,625,000 2,625,000
Production of radio and television 375 shares 8% Series A convertible preferred
commercials and music videos. stock (acquired 10-21-96) 375,000 375,000
--------- ---------
3,000,000 3,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
SDI HOLDING CORP. 10.6% 60,000 shares common stock (acquired 3-26-96) 6,000,000 6,000,000
Glasgow, Delaware
Owns Sterling Diagnostic Imaging,
a manufacturer of x-ray imaging film
and direct radiography systems.
- -----------------------------------------------------------------------------------------------------------------------------------
SKYLAWN CORPORATION 100.0% 1,449,026 shares common stock 4,510,400 42,000,000
Hayward, California (acquired 7-16-69)
Cemeteries, mausoleums and
mortuaries located in northern
California.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
=Publicly-owned company ++Unrestricted securities as defined in Note (b)
9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Company Equity (a) Investment (b) Cost Value (c)
- -----------------------------------------------------------------------------------------------------------------------------------
=SPRINT CORPORATION <1% ++36,000 shares common stock
Westwood, Kansas (acquired 6-20-84) $ 503,645 $ 1,633,500
Diversified telecommunications
company.
- -----------------------------------------------------------------------------------------------------------------------------------
=TECNOL MEDICAL PRODUCTS, INC. <1% ++183,764 shares common stock
Fort Worth, Texas (acquired 2-7-92 and 5-11-94) 2,396,926 2,894,283
Disposable medical products for
health-care facilities.
- -----------------------------------------------------------------------------------------------------------------------------------
=TELE-COMMUNICATIONS, INC. - TCI Group <1% ++180,000 shares Series A common stock 68 2,137,500
Englewood, Colorado (acquired 6-3-69)
Operation of the nation's largest
cable television system.
- -----------------------------------------------------------------------------------------------------------------------------------
=TELE-COMMUNICATIONS, INC. - <1% ++67,500 shares Series A common stock - 1,341,563
Liberty Media Group (acquired 8-4-95)
Englewood, Colorado
Production and distribution of cable
television programming services.
- -----------------------------------------------------------------------------------------------------------------------------------
TEXAS PETROCHEMICAL HOLDINGS, INC. 5.4% 30,000 shares common stock 3,000,000 2,400,000
Houston, Texas (acquired 6-27-96)
Butadiene for synthetic rubber,
MTBE for gasoline octane
enhancement and butylenes for
varied applications.
- -----------------------------------------------------------------------------------------------------------------------------------
TEXAS SHREDDER, INC. 45.7% 14% subordinated debentures, payable
San Antonio, Texas 1997 to 1999 (acquired 3-6-91) 1,012,500 1,012,500
Design and manufacture of heavy-duty 3,000 shares Series A preferred stock
shredder systems for recycling steel (acquired 3-6-91) 300,000 300,000
and other materials from junk automobiles. 750 shares Series B preferred stock,
convertible into 7,500 shares of common
stock at $10.00 per share (acquired 3-6-91) 75,000 1,500,000
--------- ---------
1,387,500 2,812,500
- -----------------------------------------------------------------------------------------------------------------------------------
=TRITON ENERGY CORPORATION <1% ++6,022 shares common stock 144,167 233,353
Dallas, Texas (acquired 12-15-86)
Oil and gas exploration and
development.
- -----------------------------------------------------------------------------------------------------------------------------------
VARIX CORPORATION 100.0% 12% promissory notes due 1997
Richardson, Texas (acquired 12-5-86, 3-21-88 and 1-31-90) 566,486 325,000
Formerly developed software for 1,514,566 shares preferred stock,
computer-aided design of convertible into 3 shares of common stock
electronic circuits. at $171,667 per share (acquired 6-1-84 and
3-21-88) 515,000 -
37 shares common stock (acquired 6-2-86,
3-21-88 and 1-31-90) 100,000 -
--------- ----------
1,181,486 325,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
=Publicly-owned company ++Unrestricted securities as defined in Note (b)
10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Company Equity (a) Investment (b) Cost Value(c)
- -----------------------------------------------------------------------------------------------------------------------------------
WESTMARC COMMUNICATIONS, INC. - 21 shares 12% Series C preferred stock
Denver, Colorado (acquired 1-3-90) $ - $ 508,000
Cable television systems and microwave
relay systems.
- -----------------------------------------------------------------------------------------------------------------------------------
THE WHITMORE MANUFACTURING COMPANY 80.0% 80 shares common stock (acquired 8-31-79) 1,600,000 6,000,000
Rockwall, Texas
Specialized mining and industrial
lubricants; automotive transit coatings;
floor-finishing compounds and equipment.
- -----------------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS - Cherokee Communications, Inc. - Escrowed
funds - 639,000
98.8% Humac Company - 1,041,000 shares common stock
(acquired 1-31-75 and 12-31-75) - 164,000
<1% =360degree Communications Company -
++12,000 shares common stock (acquired 3-7-96) 108,355 207,000
<1% =TCI Satellite Entertainment, Inc. -
++18,000 Series A common stock
(acquired 12-4-96) - 137,250
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $59,907,915 $293,291,026
=========== ==============
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
=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, 1997, 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.
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
11
<PAGE>
Notes to Portfolio of Investments (continued)
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, 1997 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 Whitmore 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
------
Data Race, Inc............................................$ 23,684
Rewind Holdings, Inc. .................................... 3,000,000
Texas Petrochemical Holdings, Inc......................... 3,000,000
-----------
$ 6,023,684
===========
Dispositions
Amount
Cost Received
---- --------
Cherokee Communications, Inc............ $ 2,400,000 $ 10,113,939
Columbia Scientific Industries Corporation 0 23,551
Data Race, Inc.......................... 1,219,369 4,040,090
------------ --------------
$ 3,619,369 $ 14,177,580
=========== ============
Repayments Received..................... $ 1,040,500
=============
12
<PAGE>
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Financial Condition
March 31
--------
Assets 1997 1996
------------- -------
Investments at market or fair value (Notes 1
and 2)
Companies more than 25% owned
(Cost: 1997 - $20,552,361,
1996 - $21,480,361).................. $203,399,920 $191,043,920
Companies 5% to 25% owned
(Cost: 1997 - $19,979,904,
1996 - $18,750,404).................. 35,747,002 19,633,672
Companies less than 5% owned
(Cost: 1997 - $19,375,650,
1996 - $18,313,335).................. 54,144,104 46,252,869
-------------- --------------
Total investments
(Cost: 1997 - $59,907,915,
1996 - $58,544,100).................. 293,291,026 256,930,461
Cash and cash equivalents................. 14,009,481 67,045,185
Receivables............................... 279,815 285,002
Other assets (Note 8)..................... 3,180,171 2,711,802
------------------------------
Totals............... $310,760,493 $326,972,450
============ ============
March 31
--------
Liabilities and Shareholders' Equity 1997 1996
----------- -----------
Note payable to bank (Note 4) ............ $ - $ 50,000,000
Accrued interest and other liabilities (Note 8) 1,735,372 1,669,839
Income taxes payable...................... 3,184,373 6,050,730
Deferred income taxes (Note 3)............ 81,868,628 69,204,128
Subordinated debentures (Note 5).......... 5,000,000 11,000,000
-----------------------------
Total liabilities .... 91,788,373 137,924,697
-------------- -------------
Shareholders' equity (Notes 3 and 6)
Common stock, $1 par value: authorized,
5,000,000 shares; issued, 4,204,416
shares at March 31, 1997, and
March 31, 1996....................... 4,204,416 4,204,416
Additional capital..................... 4,813,121 4,813,121
Undistributed net investment
income............................... 4,804,205 4,490,374
Undistributed net realized gain on
investments.......................... 60,113,568 53,307,782
Unrealized appreciation of investments -
net of deferred income taxes......... 152,070,112 129,265,362
Treasury stock - at cost
(437,365 shares)..................... (7,033,302) (7,033,302)
---------------- -------------
Net assets at market or fair value,
equivalent to $58.13 per share at
March 31, 1997, and $50.18 per share
at March 31, 1996, on the 3,767,051
shares outstanding................... 218,972,120 189,047,753
------------- -------------
Totals............. $310,760,493 $326,972,450
============ ============
See Notes to Consolidated Financial Statements
13
<PAGE>
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Operations
<TABLE>
<S> <C>
Years Ended March 31
---------------------------------------------
1997 1996 1995
---------- ------------ ----------
Investment income (Note 9):
Interest........................................................................... $ 1,371,802 $ 2,018,308 $ 1,952,557
Dividends.......................................................................... 2,774,321 3,597,004 2,629,384
Management and directors' fees..................................................... 586,900 561,950 523,750
-------------- -------------- --------------
4,733,023 6,177,262 5,105,691
-------------- -------------- --------------
Operating expenses:
Interest........................................................................... 634,667 1,700,003 1,394,266
Salaries........................................................................... 1,147,294 1,112,640 913,555
Net pension expense (benefit) (Note 8)............................................. (349,903) (208,701) (241,430)
Other operating expenses........................................................... 599,578 642,955 541,243
------------- ------------- ------------
2,031,636 3,246,897 2,607,634
------------ ------------- ------------
Income before income taxes............................................................ 2,701,387 2,930,365 2,498,057
Income tax expense (Note 3)........................................................... 127,325 75,448 51,404
-------------- ------------ ------------
Net investment income ................................................................ $ 2,574,062 $ 2,854,917 $ 2,446,653
============ ============ ============
Proceeds from disposition of investments.............................................. $14,177,580 $21,470,173 $ 1,702,276
Cost of investments sold (Note 1)..................................................... 3,619,369 4,938,933 1,483,194
------------- ------------- -------------
Realized gain on investments before income taxes (Note 9)............................. 10,558,211 16,531,240 219,082
Income tax expense ................................................................... 3,752,425 5,357,215 76,679
------------- ------------- ---------------
Net realized gain on investments...................................................... 6,805,786 11,174,025 142,403
------------- -----------
Increase in unrealized appreciation of investments before income taxes and distributions.34,996,750 54,619,668 20,898,731
Increase in deferred income taxes on appreciation of investments (Note 3)............. 12,192,000 15,874,000 7,315,000
------------ ------------ -------------
Net increase in unrealized appreciation of investments before distributions......... 22,804,750 38,745,668 13,583,731
------------- ------------ ------------
Net realized and unrealized gain on investments before distributions.................. $29,610,536 $49,919,693 $13,726,134
=========== =========== ===========
Increase in net assets from operations before distributions........................... $32,184,598 $52,774,610 $16,172,787
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
14
<PAGE>
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Changes in Net Assets
<TABLE>
Years Ended March 31
----------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------- ------------- -----------
Operations
Net investment income........................................................... $ 2,574,062 $ 2,854,917 $ 2,446,653
Net realized gain on investments................................................. 6,805,786 11,174,025 142,403
Net increase in unrealized appreciation of investments before distributions...... 22,804,750 38,745,668 13,583,731
-------------- -------------- --------------
Increase in net assets from operations before distributions...................... 32,184,598 52,774,610 16,172,787
Distributions from:
Undistributed net investment income............................................. (2,260,231) (2,253,831) (2,241,031)
Undistributed net realized gain on investments.................................. - (153,376) -
Unrealized appreciation of investments.......................................... - (9,264,304) -
Capital share transactions
Exercise of employee stock options.............................................. - 574,750 384,750
----------------------------------------------
Increase in net assets......................................................... 29,924,367 41,677,849 14,316,506
Net assets, beginning of year..................................................... 189,047,753 147,369,904 133,053,398
------------- ------------- -------------
Net assets, end of year .......................................................... $ 218,972,120 $189,047,753 $147,369,904
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
15
<PAGE>
Capital Southwest Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
Years Ended March 31
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ -------
Cash flows from operating activities
Increase in net assets from operations before distributions.................... $ 32,184,598 $ 52,774,610 $ 16,172,787
Adjustments to reconcile increase in net assets from operations before
distributions to net cash provided by operating activities:
Depreciation and amortization................................................. 31,240 33,439 42,623
Net pension benefit........................................................... (349,903) (208,701) (241,430)
Net realized and unrealized gain on investments............................... (29,610,536) (49,919,693) (13,793,624)
(Increase) decrease in receivables............................................ 5,187 (41,369) 63,301
(Increase) decrease in other assets........................................... (17,812) 28,950 (18,354)
Increase (decrease) in accrued interest and other liabilities................. (66,361) 48,075 7,092
Deferred income taxes......................................................... 122,500 72,640 84,500
-------------- ---------------- -----------
Net cash provided by operating activities...................................... 2,298,913 2,787,951 2,316,895
--------------- ------------ ------------
Cash flows from investing activities
Proceeds from disposition of investments...................................... 14,177,580 21,470,173 1,611,976
Purchases of securities....................................................... (6,023,684) (19,406,816) (9,556,876)
Maturities of securities...................................................... 1,040,500 5,515,824 574,625
Income taxes paid on realized gain on investments............................. (6,268,782) - -
------------- ---------- -----------
Net cash provided (used) by investing activities.............................. 2,925,614 7,579,181 (7,370,275)
------------- ------------ ------------
Cash flows from financing activities
Increase (decrease) in note payable to bank.................................... (50,000,000) 50,000,000 (75,000,000)
Repayment of subordinated debentures........................................... (6,000,000) - (4,000,000)
Distributions from undistributed net investment income......................... (2,260,231) (2,253,831) (2,241,031)
Distributions from undistributed net realized gain on investments.............. - (15,842) -
Proceeds from exercise of employee stock options............................... - 574,750 384,750
--------------- ------------- -----------
Net cash provided (used) by financing activities............................... (58,260,231) 48,305,077 (80,856,281)
--------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents........................... (53,035,704) 58,672,209 (85,909,661)
Cash and cash equivalents at beginning of year................................. 67,045,185 8,372,976 94,282,637
--------------- -------------- ------------
Cash and cash equivalents at end of year....................................... $ 14,009,481 $ 67,045,185 $ 8,372,976
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for: Interest....................................... $ 691,397 $ 1,653,277 $ 1,419,883
Income taxes................................... $ 6,270,291 $ 483 $ 15,049
</TABLE>
Supplemental disclosure of financing activities:
On July 31, 1995, Capital Southwest Corporation distributed to its
shareholders 940,184 shares of common stock of Palm Harbor Homes, Inc.,
which had a cost of $137,534 and a fair market value of $10.00 per share, or
$9,401,838, as adjusted for a 5-for-4 stock split on August 2, 1996.
See Notes to Consolidated Financial Statements
16
<PAGE>
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, 1997 and 1996 include
securities valued at $257,914,916 (88% of the value of the consolidated
investment portfolio) and $223,234,086 (87% 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, 1996, 1995 and 1994, 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 1997, 1996 and 1995 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, 1997 includes a
deferred tax provision related to the net pension benefit.
With respect to the net increase in unrealized appreciation of investments
before distributions during fiscal 1996, the increase in deferred income taxes
on appreciation of investments at the Federal statutory rate of 35% differs from
the amounts reported in the financial statements due to the distribution of
appreciated securities with no associated tax liability.
CSC and CSVC may not qualify or elect to be taxed as RICs in future years.
Therefore, consolidated deferred Federal income taxes of $81,313,000 and
$69,121,000 have been provided on net unrealized appreciation of investments of
$233,383,111 and $198,386,361 at March 31, 1997 and 1996, 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, 1997 and 1996.
17
<PAGE>
4. Notes Payable to Bank
The Company has an unsecured $15,000,000 revolving line of credit, all of
which was available at March 31, 1997. The revolving line of credit bears
interest at the bank's base rate less .50%, and matures on July 31, 1997. The
note payable to bank at March 31, 1996 was an unsecured note with interest
payable at 6.24%. The note was paid in full on April 1, 1996.
5. Subordinated Debentures
The subordinated debentures, payable to others and guaranteed by the Small
Business Administration ("SBA"), are as follows:
March 31
--------
1997 1996
---- ----
8.75%, due in 1996........................... $ - $ 6,000,000
8.00%, due in 2002........................... 5,000,000 5,000,000
----------- ------------
Total $ 5,000,000 $ 11,000,000
============= =============
6. Employee Stock Option Plan
Under the 1984 Incentive Stock Option Plan, options to purchase 90,000
shares at prices ranging from $23.25 to $39.1875 per share (the adjusted market
prices at the time of grant) were outstanding at March 31, 1997. Options on
53,825 shares were exercisable at March 31, 1997. During the year ended March
31, 1997, no options were exercised. Outstanding options expire 2000 through
2003. The 1984 Incentive Stock Option Plan expired in 1994 and no options have
been authorized or granted since that date. At March 31, 1997 and 1996, 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 $54,104 in
1997, $76,341 in 1996 and $19,338 in 1995.
8. Retirement Plan
The Company sponsors a 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, 1997.
Components of net pension benefit related to the qualified plan include the
following:
Years Ended March 31
--------------------
1997 1996 1995
---- ---- ----
Service cost - benefits earned during
the year.................... $ 47,662 $ 42,184 $ 36,661
Interest cost on projected benefit
obligation.................. 174,792 165,906 148,318
Actual return on assets.......... (961,831) (1,421,745) (94,881)
Net amortization and deferral.... 257,580 873,696 (469,483)
--------- ------------ ----------
Net pension expense (benefit) from
qualified plan.............. $(481,797) $ (339,959) $ (379,385)
========= ========== ==========
18
<PAGE>
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated statements of financial condition:
March 31
--------
1997 1996
---- ----
Actuarial present value of benefit
obligations: Accumulated benefit obligation,
including vested benefits of $2,017,257 in
1997 and $2,002,992 in 1996............ $(2,082,399) $ (2,056,275)
============ =============
Projected benefit obligation for service rendered to
date................................... $(2,376,257) $ (2,289,114)
Plan assets at fair value*.................. 7,820,401 6,927,656
------------ -------------
Excess of plan assets over the projected benefit
obligation............................. 5,444,144 4,638,542
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions................. (1,819,422) (1,418,507)
Prior service costs not yet recognized...... (39,719) (42,998)
Unrecognized net assets being amortized over
19 years............................... (590,632) (664,463)
------------ ------------
Prepaid pension cost included in other asset $ 2,994,371 $ (2,512,574)
============ =============
- --------------
*Primarily equities and bonds including approximately 29,200 shares of common
stock of the Company.
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 8.0% and 5.0%, respectively, at March 31,
1997, 7.75% and 5.25%, respectively, at March 31, 1996 and 8.0% and 5.5%,
respectively, at March 31, 1995. The expected long-term rate of return used to
project estimated earnings on plan assets was 8.5% for the years ended March 31,
1997, 1996 and 1995. The calculations also assume retirement at age 65, the
normal retirement age.
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 status of the Retirement Restoration
Plan and the amounts recognized in the consolidated statements of financial
condition:
March 31
--------
1997 1996
---- ----
Projected benefit obligation..................... $(1,474,701) $(1,465,570)
Unrecognized net (gain) loss from past experience
different from that assumed and effects of
changes in assumptions................. (11,453) 91,477
Unrecognized net obligation................. 79,322 99,155
------------ -------------
Accrued pension cost included in other liabilities $(1,406,832) $(1,274,938)
============ =============
The expenses recognized during the years ended March 31, 1997, 1996 and 1995 of
$131,894, $131,258 and $137,955, respectively, are offset against the net
pension benefit from the qualified plan.
19
<PAGE>
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
1997 Interest Dividends Income Taxes
- -------------------------------------------------------------------------------
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
================================================
1996
- ----
Companies more than
25% owned........ $ 755,146 $3,101,219 $545,200 $ -
Companies 5% to 25%
owned............ 2,730 - 16,750 17,954,600
Companies less than
5% owned......... 568,915 495,785 - (1,423,360)
Other sources,
including temporary
investments...... 691,517 - - -
--------------------------------------------------
$2,018,308 $3,597,004 $561,950 $16,531,240
================================================
1995
- ----
Companies more than
25% owned....... $ 661,252 $2,269,312 $501,500 $ -
Companies 5% to 25%
owned............ 2,083 - 22,250 774,943
Companies less than
5% owned......... 618,073 360,072 - (408,506)
Other sources,
including temporary
investments...... 671,149 - - (147,355)
--------------------------------------------------
$1,952,557 $2,629,384 $523,750 $ 219,082
================================================
<PAGE>
10. Summarized Financial Information of Unconsolidated
Subsidiaries
The Company has three significant wholly-owned subsidiaries - The
RectorSeal Corporation, The Whitmore 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
---------------------------
1997 1996
-------- -----
Condensed Balance Sheet Data
Assets
Cash and temporary
investments........................ $11,240 $11,444
Receivables.......................... 22,762 20,517
Inventories.......................... 32,825 31,209
Property, plant and equipment........ 19,252 15,910
Other assets......................... 11,553 12,238
-------- --------
Totals............................. $97,632 $91,318
======= =======
Liabilities and Shareholder's Equity
Long-term debt.......................$ 681 $ 2,092
Other liabilities.................... 11,486 10,533
Shareholder's equity................. 85,465 78,693
-------- --------
Totals............................. $97,632 $91,318
======= =======
Condensed Statements of Income 1997 1996 1995
-------- ------- ------
Revenues............................. $76,021 $69,058 $63,987
Costs and operating expenses......... $67,088 $60,050 $56,373
Net income........................... $ 7,909 $ 6,865 $ 6,186
11. Commitments and Contingencies
The Company leases office space under an operating lease which requires
base annual rentals of $44,285 through February 1998 and provides one five-year
renewal option subject to certain rental escalations. For the three years ended
March 31, total rental expense charged to investment income was $43,844 in 1997,
$43,449 in 1996 and $42,754 in 1995.
20
<PAGE>
Selected Per Share Data and Ratios
<TABLE>
<S> <C>
Years Ended March
------------------------------
1997 1996 1995 1994 1993
---------------------------------------------
Investment income............................................................. $ 1.26 $ 1.64 $ 1.37 $ 1.48 $ 1.34
Operating expenses............................................................ (.37) (.41) (.32) (.30) (.37)
Interest expense.............................................................. (.17) (.45) (.37) (.39) (.37)
Income taxes.................................................................. (.03) (.02) (.01) (.02) (.01)
----------------------------------------------
Net investment income......................................................... .69 .76 .67 .77 .59
Distributions from undistributed net investment income........................ (.60) (.60) (.60) (.60) (.60)
Net realized gain (loss) on investments....................................... 1.81 2.97 .04 (.13) 1.39
Distributions from undistributed net realized gain on investments............. - (.04) - - -
Net increase in unrealized appreciation of investments before distributions... 6.05 10.28 3.64 3.00 2.32
Distributions from unrealized appreciation of investments..................... - (2.46) - - -
Exercise of employee stock options*........................................... - (.19) (.10) (.22) (.22)
-----------------------------------------------
Increase in net asset value................................................... 7.95 10.72 3.65 2.82 3.48
Net asset value:
Beginning of year........................................................... 50.18 39.46 35.81 32.99 29.51
----------------------------------------------
End of year................................................................. $58.13 $50.18 $39.46 $35.81 $32.99
==============================================
Ratio of operating expenses to average net assets............................. .7% .9% .9% .9% 1.2%
Ratio of net investment income to average net assets.......................... 1.2% 1.7% 1.8% 2.3% 1.9%
Portfolio turnover rate....................................................... 1.6% 4.5% 1.3% 1.3% 5.2%
Shares outstanding at end of period (000s omitted)............................ 3,767 3,767 3,735 3,715 3,681
</TABLE>
*Net decrease is due to exercise of employee stock options at less than
beginning of period net asset value.
21
<PAGE>
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, 1997 and 1996,
the portfolio of investments as of March 31, 1997, 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, 1997 and the selected per
share data and ratios for each of the years in the five-year period ended
March 31, 1997. 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, 1997 and 1996, 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, 1997 and 1996, 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, 1997 and the selected per share data and ratios for each of the years
in the five-year period ended March 31, 1997, in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
April 25, 1997
22
<PAGE>
Management's Discussion and Analysis
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 in net assets from
operations before distributions" 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 in unrealized
appreciation of investments before distributions", 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 was 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 in unrealized appreciation of
investments before distributions" 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 $637,000 in 1997, $687,000 in 1996 and $667,000 in 1995. The
Company also receives management fees from its wholly-owned subsidiaries which
aggregated $506,400 in the year ended March 31, 1997, $523,200 in the year ended
March 31, 1996 and $480,000 in the year ended March 31, 1995. During the three
years ended March 31, 1997, the Company recorded dividend income from the
following sources:
Years Ended March 31
--------------------
1997 1996 1995
---- ---- ----
Alamo Group Inc. ................ $1,064,000 $1,064,000 $ 984,200
Cherokee Communications, Inc. ... 108,789 144,000 180,000
Humac Company.................... - 208,200 -
The RectorSeal Corporation....... 940,895 1,529,019 1,285,112
Skylawn Corporation.............. 450,000 300,000 -
Texas Shredder, Inc. ............ 37,500 178,125 -
Other............................ 173,137 173,660 180,072
----------- ------------------------
$2,774,321 $3,597,004 $2,629,384
========== ========== ==========
Total operating expenses, excluding interest expense, decreased by $149,925
or 9.7% and increased by $333,526 or 27.5% during the years ended March 31, 1997
and 1996, 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
debentures, decreased by $1,065,336 and increased by $305,737 during the years
ended March 31, 1997 and 1996, respectively.
Net Realized Gain on Investments
Net realized gain on investments was $6,805,786 (after income tax expense of
$3,752,425) during the year ended March 31, 1997, compared with a gain of
$11,174,025 (after income tax expense of $5,357,215) during 1996 and a gain of
$142,403 (after income tax expense of $76,679) during 1995. 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
23
<PAGE>
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.
Net Increase in Unrealized Appreciation of Investments
For the three years ended March 31, the Company recorded an increase in
unrealized appreciation of investments before income taxes and distributions of
$34,996,750, $54,619,668 and $20,898,731 in 1997, 1996 and 1995, 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 distributions 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
--------------------
1997 1996 1997
---- ---- ----
Alamo Group Inc................ $(6,432,000) $ 3,652,000 $ 103,000
All Components, Inc............ 1,000,000 - -
American Homestar Corporation.. 550,792 3,834,276 921,434
Amfibe, Inc.................... 1,400,000 - -
Data Race, Inc................. 2,118,317 (1,905,300) 920,600
Dennis Tool Company............ 1,105,000 (500,000) -
Encore Wire Corporation....... 9,782,000 (5,812,000) 358,250
LiL' Things, Inc............... (1,835,670) (2,155,222) -
Mail-Well, Inc. ............... 6,830,000 1,246,990 -
Mylan Laboratories, Inc........ (785,752) (21,381) 1,218,717
PTS Holdings, Inc.............. 4,800,000 - -
Palm Harbor Homes, Inc......... 13,372,000 39,931,777 14,096,600
PETsMART, Inc. ................ 1,226,663 7,059,004 1,639,320
The RectorSeal Corporation..... 7,000,000 3,000,000 5,300,000
Skylawn Corporation............ (3,000,000) 5,000,000 (7,000,000)
Tecnol Medical Products, Inc. . (321,587) (275,646) 1,017,758
Tele-Communications, Inc....... (1,192,500) (450,000) 45,000
Texas Shredder, Inc............ 250,000 1,175,000 749,998
The Whitmore Manufacturing
Company................... 1,200,000 (1,200,000) (400,000)
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, 1997."
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, 1997, consolidated deferred Federal income taxes of
$81,313,000 were provided on net unrealized appreciation of investments of
$233,383,111 compared with deferred taxes of $69,121,000 on net unrealized
appreciation of $198,386,361 at March 31, 1996. Deferred income taxes at March
31, 1997 and 1996 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, 1997, the Company invested $6,023,684 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 1996 and 1995 fiscal years, the Company invested a total
of $19,406,816 and $9,556,876, respectively.
Financial Liquidity and Capital Resources
At March 31, 1997, the Company had cash and cash equivalents of $14.0
million. Pursuant to Small Business Administration ("SBA") regulations, cash and
cash equivalents of $11.5 million held by CSVC may not be transferred or
advanced to CSC without the consent of the SBA. The Company also has an
unsecured $15,000,000 revolving line of credit, all of which was available at
March 31, 1997. Under current SBA regulations and subject to SBA's approval of
its credit application, CSVC would be entitled to borrow up to $43.2 million in
addition to the $5 million presently outstanding. Approximately $35.4 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.
24
<PAGE>
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 Whitmore 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.
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.
25
<PAGE>
Selected Consolidated Financial Data
(all figures in thousands except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position
(as of March 31)
Investments at cost........$ 21,241 $ 28,478 $ 29,665 $ 32,212 $ 31,593 $ 34,929 $ 33,953 $ 41,993 $ 49,730 $ 58,544 $ 59,908
Unrealized appreciation.... 65,290 89,512 97,134 99,903 107,120 100,277 113,153 132,212 153,031 198,386 233,383
--------- --------- -------- -------- -------- --------- --------- --------- -------- -------- -------
Investments at market or
fair value.............. 86,531 117,990 126,799 132,115 138,713 135,206 147,106 174,205 202,761 256,930 293,291
Total assets............... 137,520 183,941 131,365 185,231 149,975 208,871 176,422 270,874 213,811 326,972 310,760
Subordinated debentures.... 16,000 15,000 15,000 15,000 15,000 11,000 15,000 15,000 11,000 11,000 5,000
Deferred taxes on
unrealized appreciation. 21,837* 30,073 32,619 33,608 36,063 33,761 38,112 45,932 53,247 69,121 81,313
Net assets................. 66,367* 78,376 83,124 94,610 97,139 107,522 121,455 133,053 147,370 189,048 218,972
Shares outstanding**....... 3,776 3,563 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...... $ 45 $ 22 $ 716 $ 1,737 $ 2,090 $ 2,363 $ 2,189 $ 2,870 $ 2,447 $ 2,855 $ 2,574
Net realized gain (loss) on
investments............. 8,157 497 27 12,722 (2,515) 14,313 5,099 (475) 142 11,174 6,806
Net increase (decrease) in
unrealized appreciation
before distributions.... 10,105* 15,986 5,075 1,780 4,762 (4,541) 8,524 11,160 13,584 38,746 22,804
------- ------ ------- ------- -------- ------- -------- -------- ------ ------- -------
Increase in net assets
from operations before
distributions........... 18,307* 16,505 5,818 16,239 4,337 12,135 15,812 13,555 16,173 52,775 32,184
Cash dividends paid..... (425) (378) (1,069) (5,197) (1,809) (2,181) (2,202) (2,228) (2,241) (2,270) (2,260)
Securities dividends.... - - - - - - - - - (9,402) -
Treasury stock acquired. (2,563) (4,118) - - - - - - - - -
Employee stock options
exercised............... - - - 444 - 429 322 272 385 575 -
--------- ------- ------ ------ ------ -------- ------- ------- -------- ------- -------
Increase in net assets.. 15,319* 12,009 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... $ 5.78* $ 8.44 $ 9.15 $ 9.29 $ 9.97 $ 9.27 $ 10.35 $ 12.36 $ 14.26 $ 18.35 $ 21.59
Net assets................. 17.58* 22.00 23.33 26.16 26.86 29.51 32.99 35.81 39.46 50.18 58.13
% Increase............... 36.2% 25.1% 6.0% 12.1% 2.7% 9.9% 11.8% 8.5% 10.2% 27.2% 15.8%
Closing market price....... 17.50 16.75 18.25 21.375 20.75 24.25 36.50 38.125 38.00 60.00 67.875
Cash dividends paid........ 0.1075 0.10 0.30 1.44 .50 .60 .60 .60 .60 .60 .60
Securities dividends....... - - - - - - - - - 2.50 -
</TABLE>
- --------------
* Restated on a pro forma basis to reflect a change in method of accounting for
deferred income taxes.
** Shares outstanding and per share amounts have been restated to give effect to
a two-for-one stock split in September 1987.
26
<PAGE>
Shareholder Information
Stock Transfer Agent
American Stock Transfer & Trust Company, 40 Wall Street, New York, NY 10005
(telephone 800-937-5449) 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, 1997. This total does not include an estimated 1,600 shareholders with
shares held under beneficial ownership in nominee name or within clearinghouse
positions of brokerage firms or banks.
Market Prices
The common stock of Capital Southwest Corporation is traded in the
over-the-counter market through the National Association of Securities Dealers
Automated Quotation ("Nasdaq") National Market System 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 the
National Association of Securities Dealers, Inc.
Quarter Ended High Low
- ------------------------------------------------------------------------
June 30, 1995.................................... $45 $37 3/4
September 30, 1995............................... 45 3/4 41 1/2
December 31, 1995................................ 51 1/2 44 1/4
March 31, 1996................................... 60 50 1/2
Quarter Ended High Low
- ------------------------------------------------------------------------
June 30, 1996.................................... $66 $57 1/2
September 30, 1996............................... 73 63 1/2
December 31, 1996................................ 72 1/2 67 1/4
March 31, 1997................................... 72 65 3/8
Dividends
The payment dates and amounts of cash dividends per share since April 1,
1995, are as follows:
Payment Date Cash Dividend
- ------------ -------------
May 31, 1995.............................................. $0.20
November 30, 1995......................................... 0.40
May 31, 1996.............................................. 0.20
November 29, 1996......................................... 0.40
May 30, 1997.............................................. 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.
A dividend of one share of Palm Harbor Homes, Inc. common stock for each five
shares of Capital Southwest common stock was paid on July 31, 1995. Cash
payments were made in lieu of Palm Harbor stock to record holders of fewer than
50 shares of Capital Southwest and in lieu of fractional shares.
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, 12900 Preston Road, Suite 700, Dallas,
Texas 75230 (telephone 972-233-8242).
Annual Meeting
The Annual Meeting of Shareholders of Capital Southwest Corporation will be
held on Monday, July 21, 1997, at 10:00 a.m. in the North Dallas Bank Tower
Meeting Room (first floor), 12900 Preston Road, Dallas, Texas.
27
<PAGE>
KPMG Peat Marwick LLP
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Capital Southwest Corporation:
We consent to incorporation by reference in the registration statement (No.
33-43881) on Form S-8 of Capital Southwest Corporation of our report dated April
25, 1997, relating to the consolidated statements of financial condition of
Capital Southwest Corporation and subsidiary as of March 31, 1997 and 1996, the
portfolio of investments as of March 31, 1997, 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, 1997 and the selected per share
data and ratios for each of the years in the five-year period ended March 31,
1997, which report appears in the annual report to shareholders for the year
ended March 31, 1997 and is incorporated by reference in the annual report on
Form 10-K of Capital Southwest Corporation.
KPMG Peat Marwick LLP
Dallas, Texas
June 26, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at March 31, 1997 (audited)
and the Consolidatd Statement of Operations for the year ended March 31, 1997
(audited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000017313
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 59,907,915
<INVESTMENTS-AT-VALUE> 293,291,026
<RECEIVABLES> 279,815
<ASSETS-OTHER> 3,180,171
<OTHER-ITEMS-ASSETS> 14,009,481
<TOTAL-ASSETS> 310,760,493
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 5,000,000
<OTHER-ITEMS-LIABILITIES> 86,788,373
<TOTAL-LIABILITIES> 91,788,373
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,984,235
<SHARES-COMMON-STOCK> 3,767,051
<SHARES-COMMON-PRIOR> 3,797,051
<ACCUMULATED-NII-CURRENT> 4,804,205
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 60,113,568
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 152,070,112
<NET-ASSETS> 218,972,120
<DIVIDEND-INCOME> 2,774,321
<INTEREST-INCOME> 1,371,802
<OTHER-INCOME> 586,900
<EXPENSES-NET> 2,031,636
<NET-INVESTMENT-INCOME> 2,574,062
<REALIZED-GAINS-CURRENT> 6,805,786
<APPREC-INCREASE-CURRENT> 22,804,750
<NET-CHANGE-FROM-OPS> 32,184,598
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,260,231
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 29,924,367
<ACCUMULATED-NII-PRIOR> 4,490,374
<ACCUMULATED-GAINS-PRIOR> 53,307,782
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 634,667
<GROSS-EXPENSE> 2,031,636
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 50.18
<PER-SHARE-NII> .69
<PER-SHARE-GAIN-APPREC> 7.86
<PER-SHARE-DIVIDEND> (.60)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 58.13
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
