SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
General Form For Registration of Securities
Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
CAPITAL DIMENSIONS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 52-1139951
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Appletree Square, Suite 335
Bloomington, Minnesota 55425
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (612) 854-3007
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
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(Title of class)
ITEM 1. BUSINESS
GENERAL
The Company is a specialty finance company that invests in
minority-owned small businesses in a limited number of selected industries.
The Company believes that this market is under served by traditional
financing sources. The Company's investments are typically in the form of
secured debt securities with fixed interest rates, accompanied by warrants to
purchase equity interests for a nominal exercise price. The Company's
objectives are to achieve both (i) a high level of interest income from
secured debt securities, and (ii) long-term appreciation of its equity
interests in the companies it finances.
An important part of the Company's strategy for achieving its
objectives is to focus its investments in selected industries where there are
industry specific factors that limit the risk of the Company losing the
principal amount invested in debt securities, and where there is growth
potential in the value of the Company's equity interests. Based on this
strategy, the Company has concentrated its investments in the radio broadcast
industry, and to a lesser extent in the rural telephone industry and airport
food and beverage service industry. Within these industries the Company
seeks to invest in companies which it believes have significant potential for
growth, adequate collateral coverage, experienced management teams,
sophisticated outside equity investors and profitable operations. To date
the Company has found that it has been constrained by lack of capital rather
than lack of investment opportunities.
The Company seeks to enhance its investment return by borrowing a
portion of its investment capital at favorable rates from the U.S. Small
Business Administration ("SBA"). The Company is eligible for SBA funding as
a specialized small business investment company ("SSBIC") which is licensed
by the SBA. Because the Company is an SSBIC, acquiring ownership or control
of more than 10% of the Company's outstanding common stock requires prior SBA
approval of the stockholder.
The Company is based in Bloomington, Minnesota and invests
throughout the United States. It is structured as a closed-end investment
fund that is managed by a separate investment advisory firm, which is owned
and operated by the Company's officers. The Company is a business
development company ("BDC") for purposes of the Investment Company Act of
1940, as amended (the "1940 Act"). To date, the Company has been taxed as a
business corporation under Subchapter C of the tax code. Effective for its
fiscal year commencing July 1, 1997, the Company plans to seek to qualify for
"pass through" tax treatment as a regulated investment company ("RIC") under
Subchapter M of the tax code.
The Company plans to raise $20 million of additional capital
through a private placement of its common stock during the fiscal quarter
ending September 30, 1997. If completed, the proceeds of the offering will
be used to pay a dividend, which is currently estimated to be approximately
$3.0 to $5.0 million, to current stockholders in order to meet one of the
requirements for Subchapter M
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tax treatment. The remaining net proceeds will be used for making investments
in current and new portfolio companies.
The Company is the successor to an SSBIC which was organized in
1978 by Control Data Corporation. Under Control Data's ownership, the
Company principally made equity investments and did so in a wide variety of
industries. Following the Company's acquisition in 1987 by current senior
management and private investors, its strategy evolved over time to the
current strategy of making secured debt investments with equity
participations and focusing on a few selected industries.
The Company's office is located at Two Appletree Square, Suite 335,
Bloomington, Minnesota 55425 and its telephone number is (612) 854-3007.
OPERATING STRATEGY
FOCUS ON SELECTED INDUSTRIES. The Company's strategy has evolved
since the early 1990s to focus on a limited number of industries where
Company management can develop specific industry knowledge and where industry
conditions provide: (i) collateral of a type that allows the Company the
opportunity to recover its investment if the portfolio company fails; (ii)
growth potential for significant appreciation of the Company's equity
interests; (iii) a perceived shortage of investment capital on the general
terms offered by the Company; (iv) barriers to entry, such as licenses or
franchises, that limit competition; (v) active and sophisticated equity
investors who will refer pre-screened investment opportunities; and (vi)
other sources of complementary financing (equity capital, senior term debt,
lines of credit, etc.). It is unlikely that all of these factors will be
present in any industry in which the Company invests, and the Company may
invest in industries where only a few of these factors are present.
A substantial part of the Company's investments since the early
1990s have been in the radio broadcast industry, which comprised 70.1% of the
Company's investment portfolio as of March 31, 1997. The Company has also
invested in the rural telephone industry and the airport food and beverage
service industry, which comprised 14.9% and 8.8%, respectively, of the
Company's investment portfolio as of that date. The Company intends to
continue investing in these three industries, and to identify and develop new
investment opportunities in other selected industries where most of the
industry criteria referred to above are satisfied. To develop new investment
opportunities, the Company intends to expand its referral network of venture
capitalists, minority entrepreneurs, investment bankers, attorneys,
accountants, commercial bankers and business brokers.
INVESTMENT STRUCTURE. The Company's goal is to obtain on average
roughly half of its investment return from interest and fees and the other
half from equity appreciation. The Company typically structures its
investments as the purchase at face value of a debt security which is
accompanied by a warrant to acquire a portion of the portfolio company's
capital stock at a nominal exercise price. A typical investment by the
Company has been in the range of $500,000 to $3 million per portfolio
company, though the Company may make both smaller and larger investments.
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If the Company is able in the future to increase its capital for investment, it
is likely that the average investment size will increase.
The promissory notes which the Company purchases typically have a
five to seven year maturity, a fixed interest rate of approximately 12 to
14%, and generally require payment monthly of interest only, with all
principal due at maturity. These notes are typically collateralized by a
security interest in the assets of the portfolio company, and the
indebtedness and security interest may be either senior or subordinated to
indebtedness owed to other creditors. A personal guaranty by the major
stockholder(s) of the portfolio company or other collateral may also be
required. Generally there are no prepayment penalties and the notes may
provide that, in the event of a default, the applicable interest rate will
increase. The Company typically charges an origination and processing fee of
up to 3% of the amount of the note, which is paid by the portfolio company
from the proceeds invested by the Company.
SBA LEVERAGE TO ENHANCE INVESTMENT RETURN. Part of the Company's
strategy is to enhance the return on its investments by employing leverage in
the form of debt capital that has been obtained at favorable interest rates
from the SBA or in reliance on an SBA guaranty. As of March 31, 1997, the
Company had outstanding a total of $9.3 million in debt instruments held or
guaranteed by the SBA, consisting of (i) a promissory note with a principal
balance of $1.8 million which bears interest at 8.375% and matures on April
1, 2000, and (ii) two debentures with an aggregate principal balance of $7.5
million which each bear interest at 7.08% and mature in 2006. Subsequent to
March 31, 1997, the Company has applied to the SBA for an additional $3.0
million of debt financing, and the Company plans to apply for additional SBA
financing in the future. There is no assurance that this or any future SBA
financing will be available. Availability depends on annual Congressional
appropriations, the general discretion of the SBA, the Company's ability to
demonstrate its need for the financing, the demand for such financing from
SSBICs and small business investment companies ("SBICs") and the Company's
overall compliance with SBA regulations.
DESIRED CHARACTERISTICS OF PORTFOLIO COMPANIES
The Company's goal is to invest in companies in its selected
industries which meet most of the following criteria, although all the
criteria may not be met in every instance and their importance may vary
depending on the circumstances.
* GROWTH. In addition to generating sufficient cash flow to
service the prospective investment, the potential portfolio
company typically should have a projected annual growth rate
for operating income (income before interest, taxes,
depreciation and amortization) of at least 20%, or some other
factor (such as the prospect of upgrading a radio station
license) to increase its equity value. Since the Company's
strategy anticipates that approximately half of the Company's
total investment return will derive from the equity portion of
the investment, anticipated growth is a key factor in the
Company's assessment of an investment opportunity.
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* LIQUIDATION VALUE OF ASSETS. The expected liquidation value
of assets securing the debt to the Company is an important
component in the Company's investment decision. Liquidation
value includes both tangible assets, such as accounts
receivable, inventory, property, plant and equipment, and
intangible assets, such as customer lists, networks,
databases, government licenses and recurring revenue streams.
* SOPHISTICATED EQUITY INVESTORS. A potential portfolio company
should have sophisticated equity investors whose equity
position is subordinate to the Company's right of repayment.
These equity investors enhance the due diligence process and
the financial sophistication of the portfolio company and
provide increased controls and a potential source of follow-on
capital. The involvement of sophisticated equity investors
tends to increase the Company's confidence in a potential
portfolio company and its management team and the potential
long-term value of the portfolio company.
* EXPERIENCED MANAGEMENT TEAMS. The Company seeks potential
portfolio companies with experienced management teams who have
a significant ownership interest and the background necessary
to carry out the portfolio company's business plan.
* POSITIVE CASH FLOW. The Company generally focuses on
potential portfolio companies that either already have
positive cash flow from operations (income before interest,
taxes, depreciation and amortization) or appear to have strong
potential to achieve positive cash flow from operations within
one year. The Company typically will not invest in start-up
companies, except where the expected liquidation value of the
assets is sufficient to provide security for the Company's
debt investment and there are prospects for rapid growth.
* EXIT STRATEGY. Prior to making an investment, the Company
analyzes the capacity of the potential portfolio company to
repay the Company's debt investment and to experience a
liquidity event that would allow the Company to realize value
for its equity position. Liquidity events include a public
offering, a sale of the portfolio company or one or more of
its key assets, or a purchase by the portfolio company or
other equity holders of the Company's equity position. The
Company's investments are made with the expectation that the
debt investment will be repaid within five to seven years and
the equity portion of the investment will be liquidated for
cash within five to ten years.
THE COMPANY'S INVESTMENT PORTFOLIO
The Company's investment portfolio, as of March 31, 1997, consisted
of the following 18 portfolio companies:
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ESTIMATED FAIR
INVESTMENT TYPE; VALUE AS OF
PORTFOLIO COMPANY DATE OF INITIAL INVESTMENT COST MARCH 31, 1997
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RADIO BROADCASTING:
Citywide Communications, Inc. Secured Subordinated Debt $ 720,001 $ 720,001
650 Wooddale Boulevard with Warrants; 12/13/96
Baton Rouge, LA 70806
Davis Broadcasting, Inc. (1) Secured Senior Debt with 575,050 1,016,469
1115 Fourteenth Street Warrants; 6/29/92
Columbus, GA 31902
Davis Broadcasting of Charlotte, Inc.(1) Secured Senior Debt with 1,187,022 1,187,022
2303 West Morehead Street Warrants; 8/18/95
Charlotte, NC 28208
Eclectic Enterprises, Inc. Secured Senior Debt with 757,918 757,918
111 Marquette Avenue, Suite 100 Warrants; 7/18/95
Minneapolis, MN 55401
Progressive Media Group, Inc. Secured Senior Debt with 1,775,997 1,775,997
298 Commerce Circle Warrants; 2/10/94
Sacramento, CA 95815
Radio One, Inc. (2) Unsecured Senior Debt with 3,653,773 5,522,773
4001 Nebraska Avenue NW Warrants; 11/2/87
Washington, DC 20016
Seque Communications Corporation Secured Senior Debt with 1,969,740 1,969,740
32215 124th Street Warrants; 6/15/92
Princeton, MN 55371-3327
Z-Spanish Radio Network, Inc. Secured Subordinated Debt 3,200,458 3,200,458
4058 Flying C Road with Warrants; 9/5/96
Cameron Park, CA 95682 ------------ ------------
TOTAL RADIO BROADCASTING..... 13,839,959 16,150,378
RURAL TELEPHONE AND OTHER
COMMUNICATIONS:
First American Communications Secured Senior Debt with 2,261,698 2,661,698
Enterprise (1) Warrants; 10/24/95
2403 North Washington Avenue
Durant, OK 74701
KTEN Television Limited Partnership Secured Subordinated Debt 481,010 776,463
101 E. Main, Suite 300 with limited partnership
Box 1450 ("LP") Interest; 9/2/94
Denison, TX 75021 ------------ ------------
TOTAL RURAL TELEPHONE AND
OTHER COMMUNICATIONS....... 2,742,708 3,438,161
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AIRPORT FOOD AND BEVERAGE SERVICE:
F. Howell, Ltd. (1) Secured Senior Debt with 330,032 330,032
6805 Landover Hills Lane LP Interest; 10/01/96
Arlington, TX 76017
MultiRestaurants Concepts, Ltd. (1) Secured Subordinated Debt 1,694,409 1,694,409
8008 Cedar Springs Road with LP Interest; 12/22/94
LB 19, Terminal Bldg.
Dallas, TX 75235 ------------ ------------
TOTAL FOR AIRPORT FOOD AND
BEVERAGE SERVICE ............ 2,024,441 2,024,441
OTHER INDUSTRIES:
Applied Intelligent Systems, Inc. (3) Common Stock; 7/24/87 7,492 7,492
110 Parkland Plaza
Ann Arbor, MI 48103-6201
(Computer vision systems)
Cardinal Health Systems, Inc. (3) Secured Senior Debt with 741,447 445,738
4600 West 77th Street, Suite 150 Warrants and Common
Edina, MN 55435-4923 Stock; 10/01/85
(PC based education for MDs)
Micromedics, Inc. (3) Common Stock; 11/17/82 58,828 273,295
1285 Corporate Center Drive
Suite 150
Eagan, MN 55121-1256
(Micro Surgical Med. Equip.)
Quality Travel Services, Inc. Secured Senior Debt; 63,033 63,033
8891 Airport Road 2/02/96
Minneapolis, MN 55449
(Travel products)
RioStar II Corporation Secured Subordinated Debt; 433,097 433,097
2800 Routh Street, Suite 210 12/31/93
Dallas, TX 75201
(Restaurants)
Transportation Development LP Secured Senior Debt with 853,000 187,500
7000 57th Avenue North, Suite 123 LP Interest; 6/13/89
Crystal, MN 55428
(Taxi) ------------ ------------
TOTAL FOR OTHER INDUSTRIES.... 2,156,897 1,410,155
GRAND TOTAL.................... $20,764,005 $23,023,135
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(1) Portfolio companies where a Company officer is a member of the Board of
Directors.
(2) On May 19, 1997 Radio One, Inc. raised $75 million in a public debt offering
and the Company converted its debt investment to preferred stock carrying a 15%
cumulative dividend.
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(3) Portfolio companies for which the Company's investment was made before 1987
by prior management.
FOCUS ON SELECTED INDUSTRIES
RADIO BROADCAST. The Company's portfolio currently is concentrated in the
radio broadcast industry, where as of March 31, 1997 the Company held
investments in eight companies that operate 48 radio stations in 20 geographic
markets. These companies comprised 70.1% of the estimated fair value of the
Company's portfolio as of March 31, 1997. The radio stations operated by these
companies include both AM and FM stations, large and small size listener
markets, and a wide variety of programming formats. The Company believes the
radio broadcast industry has an attractive investment profile because: (i) there
are multiple sources of equity financing for radio stations that develop and
pre-qualify potential investments; (ii) commercial radio licenses and broadcast
equipment have realizable value as collateral, even if the radio station is off
the air or otherwise not a going concern; (iii) the acquisition market for radio
stations is relatively well developed, with established brokers and potential
buyers; (iv) there are recognized valuation methods that apply on a nationwide
basis and a number of qualified companies that provide appraisals of radio
station properties; and (v) in management's experience, there has been a
shortage of investors who will provide $1 to $5 million of debt financing, which
includes the range of debt investments sought by the Company.
Recent liberalization of the laws governing ownership of multiple radio
stations has resulted in substantial consolidation of the radio station market.
This consolidation, together with record industry revenues, has driven values
for radio stations to historic highs. While this has substantially increased
the value of the Company's radio station equity investments, it has also made it
more difficult for the Company to find new investment opportunities on
attractive terms.
RURAL TELEPHONE. As of March 31, 1997, the Company had invested in a
business which owned one rural telephone company. Subsequent to March 31, 1997
the Company made an additional investment in this business in connection with
its acquisition of two additional rural telephone companies. The Company
considers the rural telephone industry to be attractive, and plans to seek
additional investments in this area. Rural telephone companies enjoy limited
competition, barriers to entry by potential competitors, a "franchise value,"
and the potential to increase profitability through the growth of related
businesses, such as cellular telephone and cable services.
AIRPORT FOOD AND BEVERAGE SERVICE. The Company has invested in two
companies that operate 22 food and beverage outlets (with an additional three
under construction ) and three retail outlets (with an additional two under
construction) in the Dallas/Ft. Worth, Dallas Love Field and Corpus Christi
airports. The Company considers this industry attractive, and is actively
seeking additional investment opportunities in the industry, because typically:
(i) there is limited and controlled competition within an airport; (ii) in the
event of a liquidation, the right to the premises in the airport has a value
beyond that normally associated with food service businesses; (iii) airports are
actively recruiting minority-owned vendors; (iv) the businesses in which the
Company invests
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are often franchisees of well-known and proven food service systems (e.g. Burger
King, Chili's, Pizza Hut and Taco Bell) that have national support
organizations; and (v) airports generally study sales patterns before choosing a
food service concept for a particular space, thus increasing the likelihood of
success.
OTHER INDUSTRIES. The Company intends to identify other industries for
potential investments to the extent management deems it appropriate in order to
maintain a large number of investment opportunities relative to the Company's
investment capital. To date, the Company has been limited in its efforts to
undertake new investments due to lack of investment capital, rather than a lack
of investment opportunities.
VALUATION OF INVESTMENTS
The Company's Board of Directors values the debt and equity securities in
the Company's portfolio at least semi-annually based on a variety of relevant
factors specified by the SBA. The Company adjusts its valuation of an
investment quarterly for material changes. Debt securities are generally valued
at the amount of the outstanding principal, unless management believes that the
prospect of collection is impaired. Equity securities are valued on the basis
of quotations in public or private markets (where available), appraisals, the
financial strength and profitability of the portfolio company, the level of
confidence in management and the business prospects of the portfolio company.
As an SSBIC, the Company is required by applicable SBA regulations to submit
such valuations to the SBA semi-annually. For further discussion of the
Company's valuation policies, see Note 1 to the Company's Financial Statements.
REALIZATION ON INVESTMENTS
The Company's investments in portfolio companies are made with the
expectation that the debt investment will be repaid within five to seven years
and that the equity portion of the investment will be liquidated for cash in
five to ten years. Typically, the Company realizes its return and exits its
investment in a portfolio company when the business is sold or refinanced by
others, the securities held by the Company are redeemed, the business is
liquidated or the portfolio company conducts a public offering.
DELINQUENCIES AND NON-ACCRUALS ON INVESTMENTS
From time to time, some of the Company's portfolio companies are delinquent
in their payment obligations to the Company. When such delinquencies occur, the
Company analyzes the reason it occurred, whether it can be cured, its likely
effect on both the portfolio company and the Company's investment, and the value
of any collateral securing the investment. From this assessment the Company
determines whether it will seek to waive, amend or restructure the terms of the
investment, attempt to cause a sale or liquidation of the portfolio company, or
take legal action. A waiver, amendment or restructure of the delinquent
obligation is often conditioned on the portfolio company agreeing to actions
such as increasing the size or improving the terms of the
9
Company's equity interest, obtaining additional equity from other sources,
making management changes or selling assets.
A payment delinquency also causes management to reassess the valuation
and future accounting treatment for the Company's investment in the portfolio
company. If management believes that the value of the collateral securing
the debt investment (or other circumstances, such as a third party guaranty)
makes it likely that both principal and interest will be recovered, then the
Company will continue to accrue interest on the debt security as it comes
due, even though the interest is not actually paid at that time. However, if
management believes that interest owed on the debt instrument will not be
collected, then the debt investment is placed on non-accrual status, and any
further interest income is recognized only when cash is received. If
management believes that the prospect of recovering the principal of a debt
investment is impaired, then it records unrealized depreciation to reflect
the estimated fair value and thereafter payments of interest are treated as
reductions in the principal amount of the indebtedness.
As of March 31, 1997, two portfolio companies were materially delinquent in
making principal and interest payments owed to the Company. The Company carries
these investments at a fair value of approximately $2.2 million. In one of
these cases, the Company has continued to accrue interest on its investment (a
total of $576,000 of such interest accruals as of March 31, 1997) because, based
on the value of the collateral securing the investment, the Company believes
that it is probable that both principal and interest will be recovered, though
there is no assurance of this. The Company has brought suit against this
portfolio company and certain of its principals, as described in Item 8 below,
to foreclose on the Company's security interest. In the other material
delinquency case, the Company ceased accruals of interest in October 1996, and
the portfolio company has agreed to sell real estate it owns to repay its
indebtedness to the Company. The Company has not recorded any unrealized
depreciation because management believes that the carrying value on this
investment will be recovered.
In addition to the investment on non-accrual status referred to immediately
above, the Company has three other debt investments which have been restructured
and on which the Company was not accruing interest as of March 31, 1997. Each
of these three portfolio companies is in a work-out process, and under the
restructured terms the Company has agreed with each of them that payments are
due to the Company only when and as funds are received by the portfolio company.
One of these investments (approximately $430,000) is about to be liquidated with
full recovery of principal and all contractual interest, which will result in
recognition of approximately $44,000 of interest income. For the second
restructured investment (having a fair value of approximately $1.9 million),
management expects to recover all principal and may recover some or all
contractual interest. The third restructured investment has been depreciated to
a fair value of approximately $187,500 as of March 31, 1997.
The Company has experienced numerous defaults by portfolio companies that
do not involve delinquent payments, and the Company expects such non-monetary
defaults to occur from time to time in the future. Many of these defaults are
not material. As in the case with payment delinquencies, the Company attempts
to assess promptly the reason the default occurred, whether
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it can be cured, and its likely affect on both the portfolio company and the
Company's investment. The Company then determines what action is appropriate.
TEMPORARY INVESTMENTS
Pending investment in the types of securities described above, the Company
typically invests its funds principally in repurchase agreements with federally
insured financial institutions that are collateralized by securities issued or
guaranteed by the federal government. The Company may also temporarily invest
in securities issued or guaranteed by the federal government or a federal
government agency that mature in 15 months or less, or deposits in or
certificates of deposit issued by federally insured financial institutions
having a net worth of $50 million or more which mature in one year or less.
SBA REGULATION
As an SSBIC, the Company is subject to SBA regulations which cover many
aspects of its operations and ownership. These regulations generally apply
equally to both SSBICs and SBICs. The SBA's regulations include, without
limitation, the following requirements:
(i) The businesses in which the Company invests must at the time of
investment meet the SBA definition of "small" by having a net worth of $18
million or less or an average annual net income of $6 million or less, or by
meeting certain other industry-based criteria.
(ii) The businesses in which the Company invests must be at least 50%
owned by persons who are either socially or economically disadvantaged, as
defined by SBA regulations. These regulations define such a disadvantage to
exist on the basis of either (i) membership in one or more specified minority
groups (which includes Blacks, American Indians, Eskimos, and persons of
Mexican, Puerto Rican, Cuban, Filipino or Asian extraction), or (ii) individual
factors such as income, education, handicap, geographic location or service in
the Armed Forces during the Vietnam War era. This requirement is applicable to
SSBICs, but not to SBICs.
(iii) The maximum annual interest or financing cost charged to a
portfolio company (exclusive of an origination or processing fee of up to 3%)
generally may not exceed the greater of 14% for debt investments with an equity
participation, 19% for debt investments without an equity participation, or
specified higher limitations if the average cost of the Company's financing
provided by the SBA exceeds 8%.
(iv) Total financing and commitments to any single portfolio company
may not exceed 30% of an SSBICs, or 20% of an SBICs, regulatory capital. An
SSBIC may not provide investment funds for certain purposes, such as investment
outside of the United States and its territories.
(v) The maturity of debt financing generally may not be less than
four nor more than 20 years.
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(vi) Prior approval by the SBA is required for any proposed transfer
of control of an SSBIC or the acquisition of more than 10% of an SSBIC's
outstanding capital stock.
(vii) Prior approval by the SBA is required for an SSBIC to merge,
consolidate, or engage in a corporate reorganization.
(viii) Any management and advisory services provided by an SSBIC for a
fee must be in accordance with a written contract and must satisfy certain
record-keeping requirements.
(ix) There are restrictions on the ability of an SSBIC to repurchase
its capital stock, retire its debentures, or provide funding to its officers,
directors, employees or their affiliates.
(x) There are limitations on any officer, director or 10% or more
stockholder becoming an officer, director or 10% or more stockholder of another
SSBIC.
SBA FUNDING
As an SSBIC, the Company is eligible to receive a portion of its financing
from the SBA (often referred to as "leverage") at favorable rates to supplement
its investment capital obtained from non-governmental (i.e. "private") sources.
The terms of the SBA's programs for funding SBICs and SSBICs have varied over
the years. These programs were significantly modified, and the funding
distinctions between SBICs and SSBICs generally eliminated, by federal
legislation enacted on October 1, 1996. This legislation also terminated the
SBA's authority to issue new SSBIC licenses. Existing SSBICs such as the
Company have the right to remain as SSBICs or, with the approval of their
stockholders, remove the restriction requiring that their investments be in
minority-owned businesses.
Under current law, the SBA provides funding to both SBICs and SSBICs by
providing a government guarantee for fixed rate subordinated debentures or
participating preferred securities which are issued by the SBIC or SSBIC and
sold through the SBIC Funding Corp. The interest rate on these debentures is
based on the prevailing market rate and they typically have a ten year term.
There is a user fee of 3% of the principal amount of the debentures guaranteed
by the SBA, plus an annual fee of 1% of the principal amount. The maximum
amount of debenture financing which is available to an SSBIC is generally 300%
of its paid-in capital and surplus, but other eligibility requirements and the
availability of funds to the SBA can impose lower limitations in practice. The
Company understands that the fiscal 1998 budget which President Clinton
submitted to Congress proposes $376 million in SBA funding for debentures, a 25%
increase over the amount for fiscal 1997. There is no assurance that these
funds will actually be appropriated or, if appropriated, that any of these funds
would be made available to the Company.
As of March 31, 1997, the Company had outstanding a total of $9.3 million
in debt instruments held by the SBA, consisting of (i) a promissory note with a
principal balance of $1.8 million which bears interest at 8.375% and matures on
April 1, 2000, and (ii) two debentures with an aggregate principal balance of
$7.5 million which each bear interest at 7.08% and mature in 2006.
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The Company plans to seek additional SBA debenture financing in the future as it
is needed to make investments, but there is no assurance that it will be
obtained. Availability depends not only on appropriations by the Congress, but
also the general discretion of the SBA, the Company's ability to demonstrate its
need for the financing, and the Company maintaining overall compliance with SBA
regulations.
The Company is subject to a Repurchase Agreement dated March 31, 1993 with
the SBA (the "Repurchase Agreement") under which the Company redeemed at a
substantial discount all of the Company's then outstanding 3% Preferred Stock,
having a par value of $10.0 million, which had been issued to the SBA under a
funding program that was subsequently discontinued. The redemption price was
paid by the Company issuing to the SBA the promissory note referred to above,
which had an original face amount of $3.6 million and a remaining principal
balance of $1.8 million as of March 31, 1997. As a condition to the redemption
of the 3% Preferred Stock, the Company granted the SBA a liquidating interest in
a newly created restricted capital surplus account equal to the amount of the
repurchase discount of $6.4 million. This liquidating interest is being
amortized over an 84 month period on a straight line basis, and as of March 31,
1997 had been reduced to $2.8 million. Should the Company default under the
Repurchase Agreement at any time (there have been no defaults to date), the
liquidating interest will become fixed at the level immediately preceding the
event of default and will not decline further until the default is cured or
waived. The liquidating interest will expire on the later of (i) 60 months from
the date of the Repurchase Agreement (i.e. March 31, 1998), (ii) the date the
repurchase note is paid in full, or (iii) if an event of default has occurred
and the default has been cured or waived, the later date on which the
liquidating interest is fully amortized.
Should the Company voluntarily or involuntarily liquidate prior to the
expiration of the liquidating interest, any assets which are available, after
the payment of all debts of the Company, shall be distributed first to the SBA
until the amount of the then remaining liquidating interest has been distributed
to the SBA. That payment, if any, would be prior in right to any payments of
the Company's stockholders. For financial reporting purposes, the Company's
balance sheet shows a restricted capital account equal to the value of the SBA's
liquidating interest. As the liquidating interest declines, the restricted
capital account is reduced and additional paid-in capital is increased. The
Repurchase Agreement provides that the amount of the discount from the
repurchase of the 3% Preferred Stock may not be used for obtaining SBA leverage.
MARKETING FOR INVESTMENT OPPORTUNITIES
Almost all of the Company's investment opportunities have developed from
management's contacts with other investors in minority-owned businesses and with
existing investors in the industries in which the Company focuses its
investments. Management is continually seeking to broaden its contacts and
increase its visibility among minority-owned business investors and participants
in selected industries. This is done by attending industry trade shows,
cultivating relationships with existing investors in target industries,
identifying potential minority entrepreneurs, and studying target industry
periodicals and literature.
13
COMPETITION
The Company's principal competitors include non-traditional lenders,
venture capital firms and financial institutions. Many of these entities have
greater financial and managerial resources than the Company. The Company
believes that it competes primarily on the basis of its reputation as an
investor in minority-owned businesses, its contacts among minority entrepreneurs
and other minority-owned business investors, its flexibility in structuring the
specific terms of investments, the reduced access to investment capital from
traditional sources which is faced by many minority-owned businesses, and
reduced competition from other financing sources for investments in the $1 to $3
million range.
EMPLOYEES
The Company currently has five full-time employees, all of whom are
officers of the Company. These individuals are also employed by Capital
Dimensions Management Corporation ("CDMC"), which since April 1, 1997 has
provided management services under an agreement with the Company. See "Item 5.
Directors and Executive Officers."
TAXATION AS A REGULATED INVESTMENT COMPANY
The Company's plan is to become eligible and elect to be taxed as a
regulated investment company ("RIC") under Subchapter M of the Internal Revenue
Code for its fiscal year beginning July 1, 1997. Under Subchapter M, if the
Company satisfies certain requirements as to the sources of its income, the
diversification of its assets, and the distribution to stockholders of its
pre-RIC earnings and profits (currently estimated to be approximately $3.0 to
$5.0 million), the Company generally will be eligible to be taxed as a pass
through entity which acts as a partial conduit of income to its stockholders.
In order to continue to be eligible for Subchapter M treatment, in each fiscal
year the Company must, in general, (i) derive at least 90% of its gross income
from dividends, interest and gains from the sale or disposition of securities,
(ii) derive less than 30% of its gross income from the sale or disposition of
securities held for less than three months, (iii) meet certain investment
diversification requirements, and (iv) distribute to stockholders at least 90%
of its net income (other than long-term capital gains). There can be no
assurance that the Company will be able to obtain and maintain eligibility for
Subchapter M tax treatment. SBA regulations may limit the Company's ability to
distribute to stockholders at least 90% of its net income.
THE COMPANY'S OPERATIONS AS A BDC
In order to meet one of the requirements for taxation under Subchapter M of
the Internal Revenue Code, the Company anticipates that shortly after this Form
10 is filed it will also file an election to be regulated as a business
development company ("BDC") under the 1940 Act. As a BDC, the Company may not
acquire any asset other than "Qualifying Assets" unless, at the time the
acquisition is made, Qualifying Assets represent at least 70% of the value of
the Company's total assets. The principal categories of Qualifying Assets
relevant to the Company's business are:
14
(i) securities purchased in private transactions from an "eligible
portfolio company," which is any issuer that (a) is organized and has its
principal place of business in the United States, (b) is not an investment
company, other than a SBIC wholly-owned by the BDC, and (c) does not have any
class of publicly-traded securities on which a broker may extend margin credit;
(ii) securities received in exchange for or distributed with respect
to securities described above, or pursuant to the exercise of options, warrants
or rights relating to such securities; and
(iii) cash, cash items, Government securities, or high quality debt
securities maturing in one year or less from the time of investment.
As a BDC the Company may not change the nature of its business so as to cease to
be, or withdraw its election as, a BDC unless authorized by vote of a majority
(as defined in the 1940 Act) of the Company's shares.
ITEM 2. SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The following tables set forth selected financial data of the Company,
which should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and with the Company's
Financial Statements and Notes thereto included elsewhere in this document. The
selected statement of operations and balance sheet data as of and for the year
ended June 30, 1996 have been derived from the financial statements of the
Company which have been audited by Deloitte & Touche LLP, independent auditors,
whose report is included elsewhere in this document. The selected statement of
operations and balance sheet data set forth below as of June 30, 1995 and for
the two years ended June 30, 1995 and 1994 have been derived from the financial
statements of the Company which have been audited by Lurie, Besikof, Lapidus &
Co., LLP, independent auditors, whose report is included elsewhere in this
document. The selected statement of operations and balance sheet data set forth
below as of June 30, 1994 and 1993, and December 31, 1992 and 1991 and for the
six months ended June 30, 1993 and the years ended December 31, 1992 and 1991
have been derived from audited financial statements not included in this
document. The selected statement of operations and balance sheet data set forth
below as of March 31, 1997 and for the nine months ended March 31, 1997 and 1996
have been derived from the Company's unaudited financial statements, which
reflect, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of financial
position and results of operations for those periods. The Company's operating
results for the nine months ended March 31, 1997 are not necessarily indicative
of the results that may be expected for the entire fiscal year ending June 30,
1997.
15
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months
Year Ended Ended Nine Months
December 31, June 30,(1) Year Ended June 30, Ended March 31,
---------------- ---------- -------------------------- -----------------
1991 1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Interest income (2) $ 1,042 $ 855 $ 460 $ 1,109 $ 1,304 $ 1,573 $ 1,151 $ 1,862
Operating expenses:
Interest expense 287 209 130 278 242 251 166 345
General and administrative expense 570 472 263 526 523 630 464 667
Other (income) expense (5) 26 67 90 48 51 43 71
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses 852 707 460 894 813 932 673 1,083
--------- --------- --------- --------- --------- --------- --------- ---------
Net operating income 190 148 0 215 491 641 478 779
Gains (losses) on investments in
small business concerns:
Realized 244 414 (4) 1,278 3,663 508 462 (95)
Unrealized (755) 782 647 (2,288) (1,153) 1,423 336 1,509
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes
and other charges (321) 1,344 643 (795) 3,001 2,571 1,276 2,192
Income (loss) before income taxes (3) 71 1,704 643 (795) 3,001 2,571 1,276 2,192
Income taxes 2 533 372 220 893
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) 71 1,702 643 (795) 2,468 2,199 1,056 1,299
Dividends on preferred stock to SBA
paid or restricted 300 300 30 120 120 120 90 56
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) applicable to common stock (229) 1,402 613 (915) 2,348 2,079 966 1,243
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per common share (4) ($.13) $.78 $.31 $(.47) $1.19 $1.09 $.49 $.73
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted average common and
common equivalent shares outstanding(4) 1,800,000 1,801,914 1,963,362 1,962,948 1,980,102 1,912,227 1,964,301 1,761,681
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
December 31, June 30,(1) June 30, March 31,
--------------- ----------- -------------------------- ---------
1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Investments at cost $ 14,502 $ 15,474 $ 15,442 $ 16,083 $ 15,200 $ 17,513 $ 20,764
Unrealized appreciation (depreciation)
on investments 1,338 2,121 2,769 480 (672) 750 2,259
--------- --------- --------- --------- --------- --------- --------
Investments at estimated fair value 15,840 17,594 18,211 16,563 14,528 18,263 23,023
Cash and cash equivalents 1,461 1,145 1,254 1,667 5,975 3,878 3,027
Total assets 17,750 19,090 19,727 18,544 21,090 23,360 27,009
Debentures and notes payable to SBA 3,000 3,000 3,476 3,070 2,632 4,168 9,286
Total liabilities 4,073 4,067 3,508 3,120 3,197 4,563 9,947
Redeemable preferred stock 3,030 3,150 3,270 3,010
Total stockholders' equity (4) $ 13,317 $ 15,023 $ 13,189 $ 12,274 $ 14,623 $ 15,787 $ 17,062
Six Months
Year Ended Ended Nine Months
December 31, June 30,(1) Year Ended June 30, Ended March 31,
---------------- ---------- -------------------------- -----------------
1991 1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
OTHER SELECTED DATA:
Number of portfolio companies
at period end 28 29 27 22 18 17 18 18
Number of new portfolio companies 2 3 5 5 5 3
New advances to portfolio companies $ 1,257 $ 2,470 $ 286 $ 1,281 $ 1,000 $ 6,539 $ 5,121 $ 3,025
Proceeds from liquidation of investments 1,038 562 381 2,276 3,760 3,896 3,870 120
Estimated Fair value of investment
portfolio at period end 15,840 17,594 18,211 16,563 14,528 18,263 15,942 23,023
_________________
(1) In 1993, the Company changed its fiscal year end from December 31 to
June 30, resulting in a six-month transition period.
(2) The year ended December 31, 1991 includes $69,000 of dividend income.
(3) During each of the years ended December 31, 1991 and 1992, the
Company had negative goodwill amortization of $392,268. This negative
goodwill related to the management buy out in 1987 and was fully
amortized by December 31, 1992.
16
(4) The Company's Board of Directors approved a 3-for-1 stock split
issued in the form of a 200% dividend effective May 31, 1997 to
shareholders of record on May 31, 1997. All share and per share
amounts have been restated to reflect this stock split.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the preceding "Selected
Historical Financial and Other Data," the Company's Financial Statements and
Notes thereto and the other financial data included elsewhere in this document.
The dollar amounts below have been rounded in order to simplify their
presentation. However, the ratios and percentages are calculated using the
detailed financial information contained in the Financial Statements and the
Notes thereto and the financial data included elsewhere in this document.
References to years are for the respective fiscal years ended June 30, unless
otherwise noted.
OVERVIEW
The Company's principal investment objectives are to achieve a high level
of income from both interest on loans and debt securities, generally referred to
as "debt investments" and long-term appreciation in the value of equity
interests in its portfolio companies. The Company's debt investments are
typically secured, have relatively high fixed interest rates, and are
accompanied by warrants to purchase equity securities of the borrower. In
addition to interest on debt investments, the Company also typically collects an
origination fee on each debt investment.
The Company's financial performance is composed of four primary elements.
The first is "income before gains (losses) in small business concerns," which is
the difference between the Company's income from interest and fees and its total
operating expenses, including interest expense. Interest income is earned on
debt investments and the temporary investment of funds available for investment
in portfolio companies, which are presented in the Company's balance sheets as
cash equivalents. The second element is "realized gains (losses) on
investments," which is the difference between the proceeds received from the
disposition of portfolio assets in the aggregate during the period and the cost
of such portfolio assets. The third element is the "change in unrealized
appreciation (depreciation) of investments," which is the net change in the
estimated fair values of the Company's portfolio assets at the end of the period
as compared with their estimated fair values at the beginning of the period or
the cost of the portfolio asset, if purchased during the period. Generally,
"realized gains (losses) on investments" and "changes in unrealized appreciation
(depreciation) of investments" are inversely related. When an appreciated asset
is sold to realize a gain, a decrease in unrealized appreciation occurs when the
gain associated with the asset is transferred from the "unrealized" category to
the "realized" category. Conversely, when a loss is realized by the sale or
other disposition of a depreciated portfolio asset, the reclassification of the
loss from "unrealized" to "realized" causes an increase in unrealized
appreciation and an increase in realized loss. The fourth element is "tax
expense". The Company is currently taxed as a "C" corporation. Following the
filing of this Form 10, the Company intends to qualify for taxation under
17
Subchapter M. For a discussion of Subchapter M, see "Business--Taxation as a
Regulated Investment Company" in Item 1 of this Form 10.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997 AND 1996
INTEREST INCOME. During the nine months ended March 31, 1997, the Company
earned interest on debt investments of $1.7 million, an 85% increase over the
$941,000 earned in the nine-month period ended March 31, 1996. This increase in
interest income resulted primarily from increases in the dollar amount of debt
investments outstanding during the applicable periods, as there were no material
changes in the average interest rate earned. The Company's debt investments (at
cost) increased to $19.6 million at March 31, 1997, an increase of 35% from
$14.5 million at March 31, 1996. During the nine months ended March 31, 1997,
the Company earned interest on funds available for investment of $126,000, a 40%
decrease from the $210,000 earned during the first nine months of 1996. This
decrease was the result of portfolio investing and the resultant lower balances
of funds available for investment during the nine months ended March 31, 1997.
INTEREST EXPENSE. The Company's interest expense, which related to the SBA
financing, was $345,000 for the first nine months of 1997, a 108% increase over
the $166,000 for the comparable period in 1996. The change in interest expense
is directly related to the level of borrowings from the SBA, which were $9.3
million as of March 31, 1997, and $4.2 million as of March 31, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $667,000 for the first nine months of 1997, a 44% increase over the
$464,000 during the comparable period in 1996. The increase was due primarily
to increases in staffing and employee compensation. General and administrative
expenses as a percentage of total assets were 2.5% and 2.1% for these respective
periods.
OTHER EXPENSES. These expenses include legal, audit and trade association
expense.
REALIZED GAINS (LOSSES) ON INVESTMENTS. The Company's net realized loss on
investments was ($95,000) for the nine months ended March 31, 1997, compared to
a net realized gain of $462,000 for the nine months ended March 31, 1996. The
losses in 1997 resulted from the realization of previously recorded unrealized
depreciation on investments in two portfolio companies. The gain in 1996
resulted primarily from the sale of the Company's equity position in one
portfolio company.
INCOME TAXES. The Company incurred federal and state income tax expense of
$893,000 in the first nine months of 1997 (an effective rate of 40%), and
$220,000 in the first nine months of 1996 (an effective rate of 17%). The
effective rate for 1996 resulted from reversal of valuation allowances relating
to deferred tax assets, which had been established in prior periods. As of June
30, 1996, all such valuation allowances had been eliminated.
18
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS. For the
nine months ended March 31, 1997 and 1996, the Company recorded net unrealized
appreciation of investments of $1.5 million and $336,000, respectively. These
changes are the result of the Company's revaluation of its portfolio in
accordance with its valuation policy to reflect the change in estimated fair
value of each of its portfolio assets. The unrealized gains in the 1996 and
1997 periods resulted from valuation changes in several investments. The
unrealized gains in 1996 were partially offset by the realized gain discussed
above. A description of all of the Company's debt investments is presented
under the caption "Business--The Company's Investment Portfolio" in Item 1 of
this Form 10.
FISCAL YEARS ENDED JUNE 30, 1996, 1995, AND 1994
INTEREST INCOME. During the fiscal year ended June 30, 1996, the Company
earned interest on debt investments of $1.3 million , a 6.6% increase over the
$1.2 million earned in 1995, which was a 15.7% increase over the $1.1 million
earned during 1994. These increases in interest income resulted primarily from
increases in the dollar amount of debt investments outstanding during the
applicable periods, as there were no material changes in the average interest
rate earned on outstanding debt investments. The Company's debt investments (at
cost) increased to $16.1 million at June 30, 1996, an increase of 47% from $10.9
million at June 30, 1995, which in turn was a 5.2% decrease from $11.5 million
at June 30, 1994. During 1996, the Company earned interest on funds available
for investment of $266,000, a 237% increase over the $79,000 earned in 1995,
which was a 58% increase over the $50,000 earned in 1994. The increased income
in 1995 and 1996 was the result of the sale of an investment during the fourth
quarter of 1995, which resulted in unusually high fund balances during a portion
of 1995 and most of 1996. A substantial portion of these funds were committed
for investments that had not yet closed.
INTEREST EXPENSE. The Company's interest expense, which related to the SBA
financing, increased to $250,600 in 1996, a 3.2% increase over the $243,000 in
1995, which in turn was a 12.7% decrease from the $278,000 of interest expense
in 1994. These changes in interest expense are directly related to the level of
borrowings from the SBA, which were $4.2 million, $2.6 million and $3.1 million
on June 30, 1996, 1995, 1994, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses totaled $630,000 in 1996, a 20.3% increase over the
$524,000 in 1995, which in turn was a .04% decrease from the $526,000 in 1994.
The increase from 1996 over 1995 was due primarily to increases in employee
compensation. Although the dollar amount of these expenses increased over the
three-year period, general and administrative expenses as a percentage of total
assets remained fairly constant at 2.7%, 2.5% and 2.8% for 1996, 1995 and 1994,
respectively.
OTHER EXPENSES. These expenses include legal, audit and trade association
expense. Other expenses in 1994 were unusually high because of bad debt expense
and legal fees.
19
REALIZED GAINS (LOSSES) ON INVESTMENTS. The Company's net realized gains
on investments in 1996, 1995 and 1994 were $508,000, $3.7 million and $1.3
million, respectively, as a result of sales of the Company's equity position in
one portfolio company in each of those years.
INCOME TAXES. The Company incurred federal and state income tax expense of
$372,000 in 1996 (an effective rate of 14%), $532,000 in 1995 (an effective rate
of 18%), and did not incur income tax expense in 1994. During 1994, the Company
incurred pretax losses, but did not record the benefit of the associated net
operating loss carry forwards in the statement of operations because realization
of that benefit was uncertain. The effective tax rates for 1996 and 1995 are
substantially lower than the statutory rate as a result of the reversal of
valuation allowances which had been established against deferred tax benefits
recorded in prior periods.
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS. For the
year ended June 30, 1996, the Company recorded net unrealized appreciation of
investments of $1.4 million, and net unrealized depreciation of ($1.2 million)
and ($2.3 million) for the years ended June 30, 1995 and 1994, respectively.
The unrealized gains in 1996 resulted from changes in the valuations of several
portfolio investments in accordance with the Company's valuation policies. The
unrealized losses in 1995 and 1994 reflected the realized gain from the sale by
the Company of its equity position in one portfolio company in each of those
years and the reduction in market value of two publicly traded equity securities
in the Company's portfolio. A description of all of the Company's investments
is included under the caption "Business--The Company's Investment Portfolio" in
Item 1 of this Form 10.
Financial Condition, Liquidity and Capital Resources
At March 31, 1997, the Company had $3.0 million in cash and cash
equivalents. The Company's principal sources of capital to fund its portfolio
growth have been borrowings through the SBA sponsored SBIC debenture program,
principal payments on debt investments, and sales of the Company's equity
positions in certain portfolio companies. Principal payments made to the
Company on its debt investments were $767,000 and $946,000 for the first nine
months of 1997 and 1996, respectively, $1.2 million in 1996, $2.2 million in
1995, and $260,000 in 1994. For fiscal 1998, the scheduled principal payments
owed to the Company on existing debt investments are $606,000. Cash proceeds
from the sale of equity positions were $120,000 and $3.9 million for the first
nine months of 1997 and 1996, respectively, $3.9 million for 1996, $3.8 million
for 1995 and $2.3 million for 1994.
The Company's operations have been limited by the availability of capital,
rather than investment opportunities. As a result, the Company's ability to
make new portfolio investments has been limited to the redeployment of proceeds
from the realization of existing investments.
The Company borrowed $5.5 million from the SBA in December 1996 and $2.0
million in March 1996. Each of these borrowings was evidenced by a debenture.
The proceeds were, in part, used to repurchase at par $3.0 million of the
Company's preferred stock which had previously been
20
issued to the SBA and to pay accrued dividends thereon. This brought total
indebtedness on SBA borrowings to $9.3 million at March 31, 1997. The two
debentures are non-amortizing, mature in 2006 and can be prepaid without penalty
after five years. The interest rate on these debentures is 7.08%, payable
quarterly. The remaining portion of the Company's SBA borrowings is evidenced
by a seven year, 8.375% interest, fully amortizing note that matures on April 1,
2000, and requires quarterly principal and interest payments of $169,872. The
balance on the note was $1.8 million as of March 31, 1997. The Company has
applied to receive an additional $3.0 million of SBA debt financing as part of
the SBA's third quarter debenture funding. There is no assurance that any
funding will be obtained. Based on the Company's current leverageable capital
(as defined by the SBA), it is eligible to borrow up to a total of $14.5 million
from the SBA.
The $3.0 million of debt investments made by the Company for the nine
months ended March 31, 1997 was a 31% decrease over the comparable period in
1996. The $6.5 million of debt investments made by the Company during 1996 was
a 600% increase over the $934,000 of investments made in 1995, which was a 27%
decrease from the $1.3 million invested in 1994.
As of March 31, 1997, the Company had outstanding commitments to provide
financing totaling $1.4 million. Although the Company continues to review new
investment requests, no additional commitments are anticipated until additional
capital is obtained or one or more existing investments are sold.
The Company does not currently have a line of credit or revolving credit
facility.
The Company expects to raise $20 million of additional capital through a
private placement of its common stock during the fiscal quarter ending September
30, 1997. If completed, the proceeds of the offering will be used to pay a
dividend, which is currently estimated to be approximately $3.0 to $5.0 million,
to current stockholders in order to meet one of the requirements for Subchapter
M tax treatment. The remaining net proceeds will be used for making investments
in current and new portfolio companies.
ITEM 3. PROPERTIES
The Company's operations are conducted from approximately 2,100 square feet
of leased office space in a suburb of Minneapolis, Minnesota. The lease expires
June 30, 1998. This facility is sufficient to meet the Company's current
requirements. As new employees are hired, the Company anticipates leasing
additional office space at or near the current location.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's Articles of Incorporation authorize 9,000,000 shares of
Common Stock and 1,000,000 shares of Preferred Stock. As of May 31, 1997, there
were 1,680,438 shares of Common Stock outstanding, which reflects a stock
dividend paid on May 31, 1997 of two shares for each share of Common Stock held
as of that date. All share information in this Form 10 gives effect to
21
that stock dividend. There are currently 70 record holders of Common Stock. No
shares of the Company's Preferred Stock are outstanding.
The following table sets forth certain ownership information as of May 31,
1997 with respect to the Common Stock for (i) those persons who directly or
indirectly own, control or hold with the power to vote 5% or more of the
outstanding Common Stock, (ii) each of the directors and named executive
officers of the Company, and (iii) all directors and officers as a group.
COMMON STOCK PERCENT OF
BENEFICIAL OWNER BENEFICIALLY OWNED (1) OUTSTANDING SHARES
- ----------------------- ---------------------- ------------------
Thomas F. Hunt, Jr. (2) 466,203 27.0%
555 East 215th
Jordan, MN 55352
Dean R. Pickerell 416,550 24.1
15120 Evelyn Lane
Minnetonka, MN 55345
Stephen A. Lewis 15,909 *
1550 E. 140th Street
Burnsville, MN 55337
Mervin Winston 0 *
2205 Holly Lane
Plymouth, MN 55447
Brenda L. Leonard 68,763 4.0
7277 Bren Lane
Eden Prairie, MN 55346
Martin J. Kanter 39,000 2.3
6624 Dovre Drive
Edina, MN 55436
Dale C. Showers (3) 33,000 1.9
6408 Parkwood Road
Edina, MN 55436
All Officers and Directors
as a Group (7) persons 1,039,425 56.8%
_______________
* Less than 1%.
(1) Includes the following number of shares of Common Stock which may be issued
pursuant to stock options that are exercisable within 60 days of the date
hereof: Mr. Hunt, 48,000; Mr. Pickerell, 48,000; Ms. Leonard, 24,000;
Mr. Showers, 21,000; Mr. Kanter, 9,000; and all directors and officers as a
group, 150,000 shares.
(2) Mr. Hunt disclaims beneficial ownership with respect to 8,000 shares of
Common Stock held in trust for Mrs. Hunt by her father.
(3) Mr. Showers disclaims beneficial ownership with respect to 1,000 shares of
Common Stock owned by his son Thomas Showers.
22
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Prior to March 31, 1997, the Company was a wholly owned subsidiary of
Capital Dimensions, Inc. ("CDI"). Effective March 31, 1997, CDI and the Company
were merged with the Company being the surviving entity (the "Merger"). Prior
to the Merger, management services were provided to the Company by CDI under a
Joint Investment Adviser Management Agreement (the "Management Agreement").
Under the terms of the Merger, CDI's interest in the Management Agreement was
assigned to Capital Dimensions Management Company, Inc. ("CDMC"). This
assignment was approved by CDI's stockholders. CDMC is owned and operated by
Messrs. Hunt, Pickerell, Lewis and Winston and Ms. Leonard; each of whom is also
employed by CDMC.
The monthly management fee paid to CDMC by the Company is one-fourth of one
percent (0.25%) of the Company's average monthly assets (the equivalent of 3%
per annum), less the amount of all payroll and payroll-related expenses paid by
the Company. Each of the employees of CDMC is also employed by the Company. It
is intended that all future employees of CDMC will also be employees of the
Company.
The executive officers and directors of the Company and their ages as of
June 13, 1997 are as follows:
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
Thomas F. Hunt, Jr.(1).... 48 President and Director
Dean R. Pickerell(1)...... 49 Executive Vice President and Director
Stephen A. Lewis.......... 49 Vice President
Mervin Winston............ 56 Vice President and Controller
Brenda L. Leonard......... 47 Vice President and Corporate Secretary
Martin J. Kanter(2)....... 51 Director
Dale C. Showers(3)........ 67 Director
________________________
(1) Term as director expires at the Annual Meeting of Stockholders in 1999.
(2) Term as director expires at the Annual Meeting of Stockholders in 1998.
(3) Term as director expires at the Annual Meeting of Stockholders in 1997.
The following is a brief summary of the business experience of each of the
executive officers and directors of the Company:
THOMAS F. HUNT, JR. Mr. Hunt is president of the Company, and was
president of Control Data Community Ventures Fund, Inc. ("CDCVFI"), the
Company's predecessor. He is also the president of CDMC. Mr. Hunt practiced
law at a law firm and was corporate counsel for two companies before joining the
legal staff at Control Data Corporation in January 1980. Mr. Hunt
23
became legal counsel for Control Data's venture capital group in February 1981.
In February 1984, he became president of CDCVFI and a full-time venture
capitalist, while continuing to perform legal duties for Control Data as an
Assistant General Counsel. Mr. Hunt has been involved in over 100 venture
capital investments and has served on the Board of Directors of numerous private
and public companies, and is currently on the board of Ancor Communications,
Inc., a high-speed data switching company and Davis Broadcasting, Inc. and Davis
Broadcasting of Charlotte, Inc., both of which are radio station portfolio
investments of the Company. Mr. Hunt has authored a handbook on venture capital
investing and has given numerous speeches on venture capital investing before
civic groups. Mr. Hunt is co-founder and the largest stockholder in the
Company. He has undergraduate and law degrees from the University of Tulsa.
DEAN PICKERELL. Mr. Pickerell is executive vice president of the Company,
and was vice president of CDCVFI, the Company's predecessor. He also serves as
executive vice president of CDMC. Mr. Pickerell joined Control Data Corporation
in 1976, where he served in various controller and financial management
positions. From 1969 to 1976 he was with Honeywell's Aerospace and Defense
group in various accounting and audit positions. Mr. Pickerell has served on
the boards of directors of numerous private and public companies, and is
currently on the board of MultiRestaurants Management, Inc., a general partner
of MultiRestaurants Concepts, Ltd., an airport food and beverage vendor which is
one of the Company's portfolio investments, and the National Association of
Investment Companies, a trade association that represents the minority-focused
investment industry. Mr. Pickerell is co-founder and the second largest
stockholder in the Company. He has an undergraduate degree from Iowa State
University and completed the course work for an MBA degree from Mankato State
University.
STEPHEN A. LEWIS. Mr. Lewis joined the Company and CDMC as a vice
president in April 1997. From 1988 until joining the Company, he was the
President of Triad Management Company, which manages medical transportation and
engine-driven gas air conditioning businesses. Prior to 1988, he was a general
manager of technology-related marketing at Control Data Corporation. Mr. Lewis
holds an undergraduate and masters degrees in engineering from Ohio University.
MERVIN WINSTON. Mr. Winston is a certified public accountant and joined
the Company and CDMC as a Vice President and Controller in May 1997. From 1989
until joining the Company, he was President and Chief Executive Officer of
Mervin Winston, Ltd., a company providing business consulting and tax services.
Prior to 1989, he held the position of Vice President, Audit & Examination
Division with First Bank System. Mr. Winston has an undergraduate and masters
degrees in accounting from Ohio State University.
BRENDA L. LEONARD. Ms. Leonard is vice president of the Company and CDMC.
Prior to employment by the Company in 1987, Ms. Leonard was with Control Data
Corporation's venture capital operations in an administrative position. At the
Company, Ms. Leonard is responsible for regulatory compliance, accounting,
database management, and financial reporting. Ms. Leonard has a BA degree in
Business Administration from Metropolitan State University.
24
MARTIN J. KANTER. Mr. Kanter is a CPA and has been a director of the
Company since July 1991. He has been a stockholder and Director of Tax Services
in the accounting firm of Schechter, Dokken, Kanter, Andrews & Selcer, Ltd.
since 1990. Prior to 1990, Mr. Kanter held a similar position with Laventhol &
Horwath. Mr. Kanter is a graduate of the University of Illinois and attended
DePaul University's Master of Science in Taxation program.
DALE C. SHOWERS. Mr. Showers has been a director of the Company since July
1991, and currently serves as Chairman of the Board of Ancor Communications,
Inc. Mr. Showers founded Ancor Communications, Inc. in 1986 and was its
President and Chief Executive Officer and continues to serve as Chairman of the
Board. Between 1980 and 1986, he was a Vice President at Control Data
Corporation. While at Control Data Corporation, Mr. Showers was Vice President
of OEM Marketing and President of the Small Business Equity Fund. Mr. Showers
is a graduate of Milton College with post graduate studies at the University of
Wisconsin.
One of the Company's independent directors died unexpectedly on May 29,
1997. The Company expects that its Board of Directors will appoint a
replacement within 30 days.
The Company's Articles of Incorporation divide the Board of Directors into
three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors are elected at each annual
meeting of stockholders. All directors hold office until their respective terms
expire and until their successors have been duly elected and qualified or until
such director's earlier resignation or removal. Officers serve at the
discretion of the Board of Directors.
ITEM 6. EXECUTIVE COMPENSATION.
COMPENSATION SUMMARY
The following table shows the compensation earned for services rendered in
all capacities to the Company by the President and the other most highly
compensated executive officer of the Company whose salary and bonuses exceeded
$100,000 for the year ended June 30, 1996 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1996
ANNUAL COMPENSATION
-------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION
------------------ ------ ----- ------------- ------------
Thomas F. Hunt, Jr. $122,750 $36,825 $7,724(1) $30,000(2)
President
Dean R. Pickerell 112,500 33,750 4,444(3) 30,000(2)
Vice President
__________________
25
(1) Consists of $6,000 for automobile use and $1,724 for other miscellaneous
taxable benefits.
(2) Consists of $15,000 contributions each to the Company's Employees Profit
Sharing Plus Plan and Money Purchase Plan.
(3) Consists of $3,500 for automobile use and $944 for other miscellaneous
taxable benefits.
OPTION GRANTS
The Company made no option grants to the Named Executive Officers during
the fiscal year ended June 30, 1996.
AGGREGATED OPTION EXERCISES
AND JUNE 30, 1996 OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN
UNDERLYING UNEXERCISED THE-MONEY OPTIONS
SHARES OPTIONS AT 6/30/96 AT 6/30/96(1)
ACQUIRED VALUE --------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Thomas F. Hunt, Jr. 0 0 97,719 0 $184,615 $0
Dean R. Pickerell 0 0 97,719 0 184,615 0
___________________________
(1) The amounts set forth represent the difference between the estimated fair
value of $3.33 per share and the exercise price of the options, multiplied by
the applicable number of shares underlying the options. The estimated fair
value of $3.33 per share was established by the Board of Directors and used for
the redemption of 275,562 shares between February 1996 and June 1996.
EMPLOYMENT AGREEMENTS
None of the executive officers and directors of the Company are parties to
any employment or severance agreements. Although Messrs. Hunt and Pickerell are
employees of the Company, their primary compensation is currently paid by CDMC
out of the management fee it receives from the Company.
COMPENSATION OF DIRECTORS
The Company pays members of its Board of Directors who are not employees of
the Company an annual fee of $3,000. An additional $2,000 is paid to Mr. Kanter
for his service on the Company's Audit and Compensation Committee. On July 12,
1994, the Board of Directors approved the grant to each of three non-employee
directors then in office (including Messrs. Kanter and Showers) of a stock
option covering 15,000 shares of the Company's Common Stock at an exercise price
of $1.83 per share, exercisable as to 3,000 shares each year beginning June 30,
1995.
26
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee, which met twice during the last fiscal year, is
currently composed of Messrs. Kanter and Hunt. Mr. Kanter is not an employee of
the Company. At present, and during the year ended June 30, 1996, Mr. Hunt
served as a member of the Board of Directors and the Compensation and Audit
Committees of Ancor Communications, Inc. Dale Showers, a director of the
Company, also serves as a director of Ancor Communications, Inc. Mr. Showers
does not serve on the Compensation Committee of any business entity. Other than
Messrs. Hunt and Showers, no director or executive officer of the Company and no
member of the Compensation Committee is, or was during the year ended June 30,
1996, a director or compensation committee member of any other business entity
which had a director that sits on the Company's Board of Directors or
Compensation Committee.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
For fiscal 1996, all decisions on compensation of the Company's executives
were made by the full board on the basis of the recommendation of the
Compensation Committee consisting of Messrs. Kanter (Chairman) and Hunt. There
was no formal Compensation Committee Report for fiscal 1996.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
As discussed in Item 5 of this Form 10, comprehensive management services
are, since April 1, 1997, being provided to the Company by CDMC. Thomas F.
Hunt, Dean R. Pickerell, Stephen A. Lewis, Mervin Winston and Brenda Leonard are
stockholders of CDMC and serve as its President and Vice Presidents,
respectively. Under the terms of the Management Agreement, CDMC assists the
Company in the evaluation of potential investments; monitors its existing
portfolio; assists with the disposal of its assets, as directed; and provides
accounting and administrative services and such other assistance as the
Company's Board of Directors may direct. After the Company is registered as a
reporting company under the Securities Exchange Act of 1934, as amended, CDMC
will perform all tasks related to the preparation and filing of the Company's
periodic reports under that Act. Beginning April 1, 1997, CDMC receives from
the Company for its services a monthly management fee equal to one-fourth of one
percent (0.25%) of the Company's average monthly assets valued at fair value
(equivalent to 3% per annum) less the amount of the Company's payroll and
payroll-related expenses paid directly by the Company. For the period beginning
April 1, 1997 through June 30, 1997, the Company expects to pay approximately
$189,000 for the management services provided by CDMC.
On April 1, 1997, the Company transferred certain assets, consisting of
company vehicles, prepaid balances on employee insurance policies and prepaid
rent, to CDMC in exchange for CDMC's promissory note in the amount of $143,856,
which represents the book value of the assets
27
on the date of transfer. The promissory note will be retired in accordance with
the useful life of these assets over a maximum of four years.
Currently, the Company is the only investment company or fund to which CDMC
provides services. In the future, however, CDMC may provide management and
consulting services to other investment funds. CDMC has agreed with the Company
that it would provide such services to others only with the prior approval of
the Company's Board of Directors.
ITEM 8. LEGAL PROCEEDINGS
On February 11, 1997, the Company brought suit in the Superior Court of
Sacramento County, California against Progressive Media Group, Inc.
("Progressive"), Ricky Tatum, Mary C. White, Lawrence D. Tanter, and Does 1
through 50, for the foreclosure of a security interest and enforcement of
certain personal guaranties with respect to a $1,200,000 promissory note
purchased from Progressive by the Company in February 1994. To date, the
Company has not received from Progressive or its guarantors any payment of
principal or interest. The Company is seeking damages in the sum of $1,910,850,
a late payment penalty on that sum at the rate of 18% per annum until the date
of judgment, an order directing public sale of the property, reasonable
attorney's fees and such other relief as the court may grant. On May 7, 1997,
Progressive filed an answer and counterclaim which alleges numerous grounds on
which Progressive asserts it has no liability to the Company and should be
awarded damages, punitive damages and exemplary damages against the Company in
unspecified amounts in excess of $350,000. These grounds alleged by Progressive
include estoppel, failure to mitigate damages, laches, unclean hands, setoff,
violations of the Federal communications law, failure to perfect the security
interest, violation of Federal and state securities laws, violation of the Small
Business Investment Act, breach of contract, accord and satisfaction, usury,
violation of the California Constitution and California statutes regulating
industrial loan companies and other legal theories. The Company believes that
Progressive's allegations are without merit.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
MARKET PRICE
There is no established public market for the Company's Common Stock.
Since February 20, 1996, the Company has redeemed an aggregate 275,562 shares of
its Common Stock at a purchase price established by the Board of Directors of
$3.33 per share.
HOLDERS
As of May 31, 1997, the Company had issued and outstanding 1,680,438 shares
of Common Stock held by 70 holders of record, which reflects a stock dividend of
two shares of Common Stock for each share held on May 31, 1997, the effective
date of the stock dividend. There are no shares of Preferred Stock outstanding.
28
All of the 1,680,438 shares of Common Stock currently outstanding are
tradeable without restriction under the Securities Act of 1933, as amended,
unless held by "affiliates" of the Company as that term is defined in Rule 144
promulgated under that Act.
So long as the Company is a licensee of the SBA, no stockholder or group of
stockholders acting in concert may acquire or exercise voting rights as to ten
percent (10%) or more of any class of the Company's capital stock without prior
written approval by the SBA of the stockholder.
DIVIDENDS
Historically, the Company has never declared or paid any cash dividends on
its Common Stock. The Company intends to qualify for tax treatment under
Subchapter M of the Internal Revenue Code. Eligibility for Subchapter M
treatment requires that the Company pay out as a dividend an amount at least
equal to its earnings and profits prior to its becoming a regulated investment
company. To meet this requirement, the Company's Board of Directors expects to
declare a dividend in an amount sufficient to meet the Subchapter M requirement.
The amount of this dividend is currently estimated to be approximately $3.0 to
$5.0 million. The dividend will be contingent on the Company obtaining net
proceeds of at least $15 million from the sale of newly issued shares of Common
Stock.
If the Board of Directors concludes with respect to a given fiscal year
that the Company can meet the requirements of Subchapter M and that it is in the
best interests of the Company and its stockholders to do so, then to the extent
funds are legally available to do so the Board of Directors expects to declare
and pay to the Company's stockholders dividends in an amount not less than 90%
of the Company's net investment income (net interest income plus net realized
short-term capital gains) so as to meet one of the eligibility requirements of
Subchapter M. However, there can be no assurance that the Company will pay any
cash dividends on the Common Stock. Under some circumstances, SBA approval may
be required for payment of dividends that would be required to satisfy
Subchapter M requirements. There is no assurance that the SBA's approval will
be given.
29
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
During the three years ended March 31, 1997, the Company's only sales of
the Company's securities has been the issuance of 133,038 shares upon the
exercise of stock options under the Company's Stock Option Plan, as follows:
NO. OF SHARES OF EXERCISE PRICE
DATE OPTIONEE COMMON STOCK PER SHARE
---- -------- ------------ ---------
12/30/96 Thomas F. Hunt, Jr. 18,000 $.18
06/28/96 Thomas F. Hunt, Jr. 18,000 .18
03/31/97 Thomas F. Hunt, Jr. 13,719 .18
12/30/96 Dean R. Pickerell 24,000 .18
03/31/97 Dean R. Pickerell 25,719 .18
03/14/97 Brenda L. Leonard 24,000 .17
01/02/94 Martin J. Kanter 2,400 .17
01/25/95 Martin J. Kanter 2,400 .17
02/09/96 Martin J. Kanter 2,400 .17
01/23/97 Martin J. Kanter 2,400 .17
Each of the above transactions involved the offering of such securities
to a limited number of persons who took the securities as an investment for
his or her own account and not with a view to a distribution thereof. Based
in part on the foregoing, the Company has been advised by counsel that the
transactions enumerated above were exempt under Section 3(b) or 4(2) of the
Securities Act of 1933, as amended, from the registration and prospectus
delivery requirements of that Act.
ITEM 11. DESCRIPTION OF COMPANY'S SECURITIES TO BE REGISTERED.
The Company is authorized to issue 9,000,000 shares of Common Stock, no
par value per share, and 1,000,000 shares of Preferred Stock having a par
value fixed by the Board of Directors. As of May 31,1997, 1,680,438 shares of
Common Stock are outstanding. There are no shares of Preferred Stock
outstanding.
So long as the Company is a licensee of the SBA, no stockholder or group
of stockholders acting in concert may acquire or exercise voting rights as to
ten percent (10%) or more of any class of the Company's capital stock without
the prior written approval by the SBA of the stockholder.
COMMON STOCK
Each share of Common Stock is entitled to one vote on all matters
submitted to a vote of stockholders. The Common stock does not have
cumulative voting rights, which means that the holders of a majority of the
outstanding shares of Common Stock may elect all of the directors of the
Company. The Common Stock does not have any pre-emptive rights.
Upon liquidation, dissolution or winding up of the affairs of the
Company, its assets remaining after provision for payment of creditors,
holders of Preferred Stock and the SBA's liquidating interest would be
distributed pro rata among holders of the Common Stock.
Dividends may be paid in cash or stock to the holders of the Common Stock
when and if declared by the Board of Directors out of funds legally available
therefor, but only after the Company has paid any cumulative dividends then
in arrears on its Preferred Stock. In order to meet one of the requirements
for Subchapter M income tax treatment, the Company is required to distribute
annually as dividends at least 90% of its investment company taxable income,
to the extent earned.
Prior to a redemption or liquidation in whole or in part of any capital
stock of the Company not issued to the SBA, or any distribution of assets to
stockholders of the Company other than the SBA, the SBA is entitled to full
payment of all accrued and unpaid dividends on any outstanding shares of
Preferred Stock held by the SBA. There are currently no shares of the
Preferred Stock outstanding.
ANTI-TAKEOVER PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT
In addition to the restrictions on changes of control of an SSBIC under
the Small Business Act of 1958, as amended, the Company is subject to the
Minnesota Business Corporation Act (the "Minnesota Act"). Section 302A.671
of the Minnesota Act provides that, unless the acquisition of certain new
percentages of voting control of the Company (in excess of 20%, 33-1/3% or
50%) by an existing stockholder or other person is approved by a majority of
the disinterested stockholders of the Company, the shares acquired above such
new percentage level of voting control will not be entitled to voting rights.
The Company is required to hold a special stockholders' meeting to vote on
any such acquisition within 55 days after the delivery to the Company by the
acquiror of an information statement describing, among other things, the
acquiror and any plans of the acquiror to liquidate or dissolve the Company
and copies of definitive financing agreements for any financing of the
acquisition not to be provided by funds of the acquiror. If any acquiror
does not submit an information statement to the Company within ten days after
acquiring shares representing a new threshold percentage of voting control of
the Company, or if the disinterested stockholders vote not to approve such an
acquisition, the Company may redeem the shares so acquired by the acquiror at
their market value. Section 302A.671 generally does not apply to a cash
offer to purchase all shares of voting stock of the issuing corporation if
such offer has been approved by a majority vote of disinterested board
members of the issuing corporation.
Upon registration as a public company, Section 302A.673 of the Minnesota
Act restricts certain transactions between the Company and a stockholder who
becomes the beneficial holder of 10% or more of the Company's outstanding
voting stock (an "interested stockholder") unless a majority of the
disinterested directors of the Company have approved, prior to the date on
which the stockholder acquired a 10% interest, either the business
combination transaction suggested by such a stockholder or the acquisition of
shares that made such a stockholder a statutory interested stockholder. If
such prior approval is not obtained, the statute imposes a four-year
prohibition from the statutory interested stockholder's share acquisition
date on mergers, sales of substantial assets, loans, substantial issuances of
stock and various other transactions involving the Company and the statutory
interested stockholder or its affiliates.
These statutory provisions could have the effect in certain circumstances
of delaying or preventing a change in the control of the Company.
ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Articles of Incorporation and Bylaws require the Company to
indemnify any director, officer, employee or agent of the Company, to the full
extent permitted by the law of the State of Minnesota, who was or is a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, against certain liabilities and
expenses incurred in connection with the action, suit or proceeding, except
where such persons have not acted in good faith or did not reasonably believe
that the conduct was in the best interests of the Company.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplemental data required by this Item 13
follow the index of financial statements appearing at Item 15 of this Form 10.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
30
The Company replaced its previous auditors, Lurie, Besikof, Lapidus &
Co., LLP, with Deloitte & Touche LLP in March 1997. The decision to change
accounting firms was approved by the Company's Board of Directors. During
the Company's three most recent fiscal years preceding the replacement of
Lurie, Besikof, Lapidus & Co., LLP, the reports of Lurie, Besikof, Lapidus &
Co. LLP on the financial statements of the Company contained no adverse
opinion or disclaimer of opinion and were not qualified or modified. There
were no disagreements between the Company and Lurie, Besikof, Lapidus & Co.,
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which, if not resolved to the
satisfaction of such accountants, would have caused them to make reference to
the subject matter of the disagreements in connection with their reports.
Before engaging Deloitte & Touche LLP as its new independent auditors, the
Company did not previously consult with them regarding any matters related to
the application of accounting principles, the type of audit opinion that
might be rendered on the Company's financial statements or any other such
matters.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
The following Financial Statements are filed as part of this Form 10:
Independent Auditors' Report of Deloitte & Touche LLP
Independent Auditor's Report of Lurie, Besikof, Lapidus & Co., LLP
Balance Sheets as of June 30, 1995 and 1996 and March 31, 1997
(unaudited)
Statements of Operations for the years ended June 30, 1994, 1995 and
1996 and the nine months ended March 31, 1996 and 1997 (unaudited)
Statements of Changes in Stockholders' Equity for the years ended June
30, 1994, 1995 and 1996 and the nine months ended March 31, 1997
(unaudited)
Statements of Cash Flows for the years ended June 30, 1994, 1995 and
1996 and the nine months ended March 31, 1996 and 1997 (unaudited)
Notes to Financial Statements for the years ended June 30, 1994, 1995
and 1996 and the nine months ended March 31, 1996 and 1997 (unaudited)
31
LISTING OF EXHIBITS
3.1 Amended and Restated Articles of Incorporation, as amended to
date
3.2 By-laws, as amended to date
3.3 1997 Stock Plan
4.1 Debenture of the Company dated March 14, 1996 issued to the U.S.
Small Business Administration in the principal amount of
$2,000,000
4.2 Debenture of the Company dated December 18, 1996 issued to the
U.S. Small Business Administration in the principal amount of
$5,500,000
4.3 Amortizing Note of the Company dated March 31, 1993 issued to the
U.S. Small Business Administration in the principal amount of
$3,571,578
10.1 Lease Agreement dated April 9, 1990 between the Company and
ATS II Associates Limited Partnership, as amended May 23, 1995
10.2 Joint Investment Advisor Management Contract dated February 10,
1997 between the Company and Capital Dimensions Management
Company, Inc.
10.3 Repurchase Agreement dated March 31, 1993 between the Company and
the U.S. Small Business Administration
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITAL DIMENSIONS, INC.
Dated: June 19, 1997 By /s/ Thomas F. Hunt, Jr.
--------------------- -------------------------------------
Its President
----------------------------------
32
CAPITAL DIMENSIONS, INC.
TABLE OF CONTENTS
- ---------------------------------------------------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT OF DELOITTE & TOUCHE LLP F-2
INDEPENDENT AUDITOR'S REPORT OF LURIE, BESIKOF, LAPIDUS & CO., LLP F-3
FINANCIAL STATEMENTS:
Balance Sheets as of June 30, 1995 and 1996 and March 31, 1997 (unaudited) F-4
Statements of Operations for the years ended June 30, 1994, 1995, and 1996 and
the nine months ended March 31, 1996 and 1997 (unaudited) F-5
Statements of Changes in Stockholders' Equity for the years ended June 30, 1994,
1995, and 1996 and the nine months ended March 31, 1997 (unaudited) F-6
Statements of Cash Flows for the years ended June 30, 1994, 1995, and 1996 and
the nine months ended March 31, 1996 and 1997 (unaudited) F-7
Notes to Financial Statements for the years ended June 30, 1994, 1995, and 1996 and
the nine months ended March 31, 1996 and 1997 (unaudited) F-9
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Capital Dimensions, Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheet of Capital Dimensions, Inc. as of
June 30, 1996 and the related statements of operations, changes in stockholders'
equity, and cash flows for the year ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the financial position of Capital Dimensions, Inc. as
of June 30, 1996, and the results of its operations and its cash flows for the
year ended June 30, 1996 in conformity with generally accepted accounting
principles.
As explained in Note 2, the financial statements include investments securities
valued by the Board of Directors totaling $18,262,890 at June 30, 1996, none of
which have been valued based on public market quotations. We have reviewed the
procedures used by the Board of Directors in arriving at its estimate of value
of such investments and have inspected underlying documentation and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of the valuation of
investment securities, those estimated values may differ significantly from the
values that would have been used had a ready market for such investments
existed, and the differences could be material.
Minneapolis, Minnesota
April 29, 1997
(May 31, 1997 as to the effects of the
stock split described in Note 1)
F-2
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Capital Dimensions, Inc.
Minneapolis, Minnesota
We have audited the accompanying balance sheet of Capital Dimensions, Inc. as of
June 30, 1995, and the related statements of operations, changes in
stockholders' equity, and cash flows for the years ended June 30, 1995 and 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements 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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Capital Dimensions, Inc. as
of June 30, 1995, and the results of its operations and its cash flows for
the years ended June 30, 1995 and 1994, in conformity with generally accepted
accounting principles.
As explained in Note 2, the financial statements include investments securities
valued by the Board of Directors totaling $14,528,143 at June 30, 1995, of which
$2,513,926 has been valued based on public market quotations. We have reviewed
the procedures used by the Board of Directors in arriving at its estimate of
value of such investments and have inspected underlying documentation and, in
the circumstances, we believe the procedures are reasonable and the
documentation appropriate. However, because of the inherent uncertainty of the
valuation of investment securities, those estimated values may differ
significantly from the values that would have been used had a ready market for
the investments existed, and the differences could be material.
Minneapolis, Minnesota
August 7, 1995
(May 31, 1997 as to the effects of the
stock split described in Note 1 and
March 18, 1997 as to the effects of the merger
described in Note 11)
F-3
CAPITAL DIMENSIONS, INC.
BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------
JUNE 30, MARCH 31,
-------------------------
1995 1996 1997
(UNAUDITED)
ASSETS
INVESTMENTS IN SMALL BUSINESS
CONCERNS AT FAIR VALUE (Note 2):
Stocks (cost of $3,180,225, $757,645, and $758,707 at June 30, 1995 and 1996,
and March 31, 1997, respectively) $ 3,246,560 $ 2,373,003 $ 3,554,337
Debt securities (cost of $9,543,245, $14,033,704, and $15,703,156 at June 30, 1995
and 1996, and March 31, 1997, respectively) 9,028,984 13,892,384 15,703,156
Loans (cost of $1,395,032, $2,078,879, and $3,869,045 at June 30, 1995 and 1996,
and March 31, 1997, respectively) 1,255,837 1,527,646 3,332,545
Other investments (cost of $1,081,762, $642,193, and $433,097 at June 30, 1995
and 1996, and March 31, 1997, respectively) 996,762 469,857 433,097
----------- ----------- -----------
Total investments in small business concerns 14,528,143 18,262,890 23,023,135
Cash and cash equivalents 5,975,368 3,878,202 3,026,920
Restricted cash (Note 10) 300,000 410,000 410,000
Interest and dividends receivable 194,164 333,400 116,488
Other receivables 15,000 118,950 163,856
Equipment, net of accumulated depreciation of $48,063, $45,592, and
$58,126 at June 30, 1995 and 1996, and March 31, 1997, respectively 30,568 64,828
Deferred tax assets (Note 4) 191,222
Other assets 46,785 100,572 268,810
----------- ----------- -----------
Total assets $21,090,028 $23,360,064 $27,009,209
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 33,085 $ 54,398 $ 123,977
Income taxes payable 532,474 341,522 150,009
Small Business Administration Financing (Note 3) 2,631,737 4,167,505 9,286,160
Deferred tax liability 386,778
----------- ----------- -----------
3,197,296 4,563,425 9,946,924
Nonvoting 4% redeemable cumulative preferred stock, par value $500,
authorized 28,000 shares; issued and outstanding, 6,000, 6,000, and 0
shares at June 30, 1995 and 1996, and March 31, 1997, respectively (Note 3) 3,270,000 3,010,000
----------- ----------- -----------
Total liabilities 6,467,296 7,573,425 9,946,924
COMMITMENTS AND CONTINGENCIES (Notes 5 and 7)
STOCKHOLDERS' EQUITY (Notes 5, 8 and 11):
Liquidating interest under repurchase agreement 4,362,150 3,443,802 2,755,041
Preferred Stock, Authorized 1,000,000 shares, none
issued or outstanding
Common stock, no par value. Authorized 9,000,000 shares; issued and
outstanding, 1,827,762, 1,572,600, and 1,680,438 shares at June 30, 1995
and 1996, and March 31, 1997, respectively (Note 1) 1,869,641 1,414,071 1,433,401
Additional paid-in capital 3,461,063 5,320,141 6,021,902
Retained earnings 4,929,878 5,608,625 6,851,941
----------- ----------- -----------
Total stockholders' equity 14,622,732 15,786,639 17,062,285
----------- ----------- -----------
Total liabilities and stockholders' equity $21,090,028 $23,360,064 $27,009,209
----------- ----------- -----------
----------- ----------- -----------
See notes to financial statements.
F-4
CAPITAL DIMENSIONS, INC.
STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------- -----------------------
1994 1995 1996 1996 1997
(UNAUDITED)
INCOME:
Interest on investments in small business concerns $ 1,059,225 $ 1,225,290 $1,306,484 $ 941,358 $1,736,904
Interest on short-term investments 50,016 79,071 266,126 209,639 125,512
Management and consulting fees 24,579
---------- ---------- ---------- --------- ---------
1,133,820 1,304,361 1,572,610 1,150,997 1,862,416
EXPENSES:
Interest 278,140 242,734 250,618 166,015 345,408
General and administrative 525,758 523,825 630,159 463,584 666,733
Other 114,127 48,061 51,289 43,039 71,351
--------- ---------- ---------- --------- ---------
918,025 814,620 932,066 672,638 1,083,492
--------- ---------- ---------- --------- ---------
INCOME BEFORE GAINS (LOSSES) ON
INVESTMENTS IN SMALL BUSINESS
CONCERNS 215,795 489,741 640,544 478,359 778,924
GAINS (LOSSES) ON INVESTMENTS IN
SMALL BUSINESS CONCERNS:
Realized 1,277,412 3,663,410 507,937 461,816 (95,132)
Unrealized (2,288,233) (1,152,528) 1,422,592 336,302 1,508,661
---------- ---------- ---------- --------- ---------
(1,010,821) 2,510,882 1,930,529 798,118 1,413,529
---------- ---------- ---------- --------- ---------
(LOSS) INCOME BEFORE INCOME TAXES (795,026) 3,000,623 2,571,073 1,276,477 2,192,453
INCOME TAX EXPENSE 532,474 372,326 220,026 893,000
---------- ---------- ---------- --------- ---------
NET (LOSS) INCOME (795,026) 2,468,149 2,198,747 1,056,451 1,299,453
DIVIDENDS ON PREFERRED STOCK 120,000 120,000 120,000 90,000 56,137
---------- ---------- ---------- --------- ---------
NET (LOSS) INCOME ATTRIBUTABLE TO
COMMON SHARES $ (915,026) $2,348,149$ 2,078,747 $ 966,451 $1,243,316
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
NET (LOSS) INCOME PER COMMON
SHARE (Note 1) $ (0.47) $ 1.19 $ 1.09 $ 0.49 $ 0.71
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note 1) 1,824,162 1,983,852 1,912,227 1,964,301 1,761,681
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
See notes to financial statements.
F-5
CAPITAL DIMENSIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
LIQUIDATING
INTEREST
UNDER ADDITIONAL TOTAL
REPURCHASE COMMON STOCK PAID-IN RETAINED STOCKHOLDERS'
--------------------------
AGREEMENT SHARES AMOUNT CAPITAL EARNINGS EQUITY
BALANCE AT JUNE 30, 1993 $6,198,846 1,822,962 $1,868,841 $1,324,367 $3,796,755 $13,188,809
Options exercised 2,400 400 400
Dividends on nonvoting 4% redeemable
preferred stock (120,000) (120,000)
Amortization of liquidating interest (918,348) 918,348
Net loss for the year ended
June 30, 1994 (795,026) (795,026)
---------- ---------- ---------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1994 5,280,498 1,825,362 1,869,241 2,242,715 2,881,729 12,274,183
Options exercised 2,400 400 400
Dividends on nonvoting 4% redeemable
preferred stock (120,000) (120,000)
Transfer 300,000 (300,000)
Amortization of liquidating interest (918,348) 918,348
Net income for the year ended
June 30, 1995 2,468,149 2,468,149
---------- ---------- ---------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1995 4,362,150 1,827,762 1,869,641 3,461,063 4,929,878 14,622,732
Common stock repurchased (275,562) (459,270) (459,270) (918,540)
Options exercised 20,400 3,700 3,700
Dividends on nonvoting 4%
redeemable preferred stock (120,000) (120,000)
Transfer 1,400,000 (1,400,000)
Amortization of liquidating interest (918,348) 918,348
Net income for the year ended
June 30, 1996 2,198,747 2,198,747
---------- ---------- ---------- ----------- ----------- -----------
BALANCE AT JUNE 30, 1996 3,443,802 1,572,600 1,414,071 5,320,141 5,608,625 15,786,639
Options exercised (Unaudited) 107,838 19,330 19,330
Dividends on nonvoting 4%
redeemable preferred stock (Unaudited) (56,137) (56,137)
Stock compensation (Unaudited) 13,000 13,000
Amortization of liquidating interest
(unaudited) (688,761) 688,761
Net income for the nine months ended
March 31, 1997 (Unaudited) 1,299,453 1,299,453
---------- ---------- ---------- ----------- ----------- -----------
BALANCE AT MARCH 31, 1997
(Unaudited) $2,755,041 1,680,438 $1,433,401 $6,021,902 $6,851,941 $17,062,285
---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ----------- ----------- -----------
See notes to financial statements.
F-6
CAPITAL DIMENSIONS, INC.
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------- ----------------------
1994 1995 1996 1996 1997
(UNAUDITED)
CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Net (loss) income $ (795,026) $ 2,468,149 $ 2,198,747 $ 1,056,451 $ 1,299,453
Adjustments to reconcile net (loss) income to cash
(used in) provided by operations:
Provision for bad debts 44,373 89,108
Depreciation and amortization 12,555 12,401 16,738 11,231 21,456
Deferred taxes (191,222) 578,000
Realized (gains) losses on investments (1,277,412) (3,663,410) (507,937) (461,816) 95,132
Unrealized losses (gains) on investments 2,288,233 1,152,528 (1,422,592) (336,302) (1,508,661)
Interest receivable added to loans/notes (308,944) (437,729) (484,005) (306,413) (1,208,796)
Stock compensation 13,000
Changes in operating assets and liabilities:
Interest and dividends receivable (411,613) 46,240 (228,343) (60,010) 216,912
Other receivables 783 (15,000) 13,550 15,000 7,388
Other assets 1,479 (10,612) (3,037) (33,296) 22,215
Accounts payable 18,158 (16,317) 21,313 49,435 69,579
Income taxes payable 532,474 (190,952) (532,472) (191,513)
---------- ---------- ---------- ---------- ----------
Total cash (used in) provided by
operating activities (427,414) 68,724 (688,632) (598,192) (585,835)
CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES:
Proceeds from sales of investment 2,275,998 3,759,667 3,896,366 3,870,108 119,601
Investments in small business concerns (1,280,793) (933,969) (6,539,397) (5,121,158) (3,024,562)
Collections on debt securities and loans 259,765 2,157,874 1,205,318 946,490 767,041
Investment of restricted cash (110,000)
Proceeds from sale of equipment 10,109 10,109
Purchases of equipment (8,275) (5,899) (59,358) (59,358)
---------- ---------- ---------- ---------- ----------
Total cash provided by (used in) investing
activities 1,246,695 4,977,673 (1,596,962) (353,809) (2,137,920)
CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES:
Proceeds from SBA note payable 1,947,500 1,947,500 5,300,625
Payments on note payable to SBA (406,282) (438,467) (464,232) (417,830) (381,345)
Issuance of common stock 400 400 3,700 400 19,330
Redemption of stock (918,540) (816,000)
Dividends paid on SBA 4% redeemable
preferred stock (380,000) (310,000) (56,137)
Redemption of SBA 4% redeemable
preferred stock (3,010,000)
---------- ---------- ---------- ---------- ----------
Total cash (used in) provided by
financing activities (405,882) (438,067) 188,428 404,070 1,872,473
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 413,399 4,608,330 (2,097,166) (547,931) (851,282)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 953,639 1,367,038 5,975,368 5,975,368 3,878,202
---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 1,367,038 $ 5,975,368 $ 3,878,202 $ 5,427,437 $ 3,026,920
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
F-7
CAPITAL DIMENSIONS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------- ----------------------
1994 1995 1996 1996 1997
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES:
Debt securities converted to loans $456,782
Interest receivable converted to debt or loans 308,944 $437,729 $484,005 $306,413 $1,208,796
Note received on sale of investments 1,600,000
Dividends accrued on 4% preferred stock 120,000 120,000 10,000 10,000
Investment sold recorded as a receivable 117,500
Debt issuance cost, deducted from $2,000,000
SBA note 52,500 52,500 199,375
Realized gain on the exchange of investments 387,912
Property converted to receivable 52,294
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Cash paid during the period for:
Interest 273,209 241,023 215,259 130,655 264,830
Income taxes 754,500 410,978 1,084,513
See notes to financial statements.
F-8
CAPITAL DIMENSIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995, AND 1996 AND
NINE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Capital Dimensions, Inc. (the Company) is a Specialized Small Business
Investment Company (SSBIC) licensed under the Small Business Investment Act
of 1958. The Company provides equity capital, long-term loans, and
management assistance to small business concerns which are at least 50%
owned by persons who are socially or economically disadvantaged as defined
under SBA guidelines.
The following is a summary of significant accounting policies applied in
the preparation of the financial statements.
PRESENTATION OF FINANCIAL STATEMENTS - Prior to March 31, 1997, Capital
Dimensions Venture Fund, Inc. (CDVFI) was a wholly owned subsidiary of
Capital Dimensions, Inc. (CDI). Effective March 31, 1997, CDI and CDVFI
were merged with CDVFI as the surviving entity. Under the plan of merger;
(i) all of the previously outstanding shares of CDVFI were canceled, (ii)
each one share of previously outstanding CDI common stock was converted
into one share of the Company's common stock, and (iii) each one share of
previously outstanding CDI Series A preferred stock was converted into one
share of the Company's common stock. Subsequent to the merger, CDVFI
changed its name to Capital Dimensions, Inc. Also, effective with the
merger, all cumulated but unpaid and undeclared dividends related to the
Series A preferred stock lapsed.
The merger of CDI and CDVFI has been reflected in these financial
statements as a reorganization of entities under common control.
Accordingly, these financial statements have been restated to reflect the
merger as if it had occurred at the beginning of the earliest period
presented.
RECAPITIZATION - Effective May 31, 1997, the Company's Board of Directors
amended its Articles of Incorporation to effect a 3-for-1 stock split,
issued in the form of a 200% stock dividend effective May 31, 1997 to
stockholders of record on May 31, 1997; to increase the authorized number
of common stock to 9,000,000; and to authorize the issuance of up to
1,000,000 shares of preferred stock, the terms of which may be fixed by the
Company's Board of Directors without further shareholder approval. All
share and per share amounts included in these financial statements and
related notes have been restated to reflect this stock split.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates and assumptions.
NEW ACCOUNTING STANDARDS - In October 1995, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. The Company has elected to continue following the guidance
of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, for measurement and recognition of stock-based transactions
with
F-9
employees. The Company will adopt the disclosure provisions, which are not
expected to be material, of SFAS No. 123 in fiscal year 1997.
In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE. SFAS
No. 128 supersedes APB No. 15 and replaces the presentation of primary
earnings per share with a presentation of basic earnings per share. The
Company will adopt the provisions of SFAS No. 128 in fiscal year 1998. On
a pro forma basis, had the Company adopted the provisions of SFAS No. 128,
basic earnings per share of $(.50), $1.29, $1.20, $.54, and $.78 for the
periods ended June 30, 1994, 1995, 1996, and March 31, 1996 and 1997,
respectively, would have been presented in the statement of operations. In
addition, diluted earnings per share amounts substantially equivalent to
the earnings per share amounts currently presented in the statement of
operations would have been shown.
EARNINGS PER COMMON SHARE - Earnings per common share are computed on
earnings reduced by dividend requirements on preferred stock and based upon
the weighted average number of common shares and common equivalent shares,
consisting of the dilutive effect of stock options outstanding during each
period. Earnings per common share assuming full dilution are substantially
the same.
VALUATION OF INVESTMENTS - The Company records its investments at estimated
fair value as determined by the Board of Directors. Realization of the
carrying value of investments is subject to future developments relating to
investee companies.
Among the factors considered by the Board of Directors in determining the
fair value of investments are the cost of the investment to the Company,
developments since the acquisition of the investment, the financial
condition and operating results of the investee, the long-term potential of
the business of the investee, the value of the underlying collateral, and
other factors generally pertinent to the valuation of investments. There
is no public market for the majority of the investments. The Board, in
making its evaluation, has relied on financial data of investees and, in
many instances, on estimates by the management of the Company and of the
investee companies as to the potential effect of future developments. Due
to the nature of the Company's investments, the valuations could differ
materially in the near term.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
with a maturity at time of purchase of three months or less to be cash
equivalents.
EQUIPMENT - Equipment is stated at cost. Depreciation on equipment is
calculated on the straight-line method over the estimated useful lives of
the assets, generally five years.
INTEREST INCOME - Interest earned on investments in small business concerns
is recorded on the accrual basis. Loans and debt securities are reviewed
regularly by management and placed on nonaccrual status when the collection
of interest or principal is uncertain. Thereafter, no interest is
recognized as income unless received in cash or until such time the
borrower demonstrates the ability to pay interest and principal.
LOAN ORIGINATION FEES - Loan origination fees, net of direct costs, are
deferred and amortized to interest income, using the effective interest
method, over the term of the original promissory notes.
REALIZED GAINS (LOSSES) ON INVESTMENTS - Cost of investments sold is
reported on the basis of identified cost. Amounts reported as realized
gains (losses) are measured by the difference between the proceeds of sale,
if any, and the cost basis of the investment.
F-10
Investments are also recorded as realized losses when, in the opinion of
the Board of Directors, there is little likelihood of recovery of the
investment cost. The determination is based on past performance, business
plans, and representations by management of the investee company.
INDUSTRY CONCENTRATION - The Company's portfolio is concentrated in the
radio broadcast industry, where the Company currently holds investments in
eight businesses that operate in California, the District of Columbia,
Georgia, Louisiana, Minnesota, and North Carolina. These investments
comprise 70.1% of the estimated fair market value of the Company's
portfolio at March 31, 1997. The radio stations operated by these
businesses include both large and small listener markets, both AM and FM
stations, and a variety of programming formats. The Company has also
invested in the rural telephone industry and the airport food and beverage
service industry which comprise 14.9% and 8.8%, respectively, of the
Company's investment portfolio as of March 31, 1997.
INTERIM FINANCIAL STATEMENTS - The information set forth in the financial
statements as of March 31, 1997 and for the nine months ended March 31,
1996 and 1997 is unaudited. The information reflects all adjustments,
consisting only of normal recurring entries, that in the opinion of
management, are necessary to present fairly the financial position, results
of operations and cash flows of the Company for the periods indicated.
Results of operations for an interim period are not necessarily indicative
of the results of operations for the full fiscal year.
RECLASSIFICATIONS - Certain prior-year amounts have been reclassified to
conform to the 1996 presentation. Such reclassifications had no impact on
net income and stockholders' equity as previously reported.
2. INVESTMENTS IN SMALL BUSINESS CONCERNS
Investments were valued at estimated fair value determined by the Board of
Directors at $14,528,143 at June 30, 1995, of which $2,513,926 was valued
based on public quotations, and $18,262,890 and $23,023,135 at June 30,
1996 and March 31, 1997, respectively, none of which was valued based on
public quotations.
The Company acquired the investments by direct purchases from the investees
and the Board of Directors valued the securities on the premise that in
most instances they may not be publicly re-sold without registration under
the Securities Act of 1933. The prices of securities purchased were
determined by direct negotiations between the Company and the investees.
Net unrealized appreciation (depreciation) is as follows:
June 30, March 31,
---------------------------
1995 1996 1997
Total unrealized appreciation $ 875,447 $ 2,040,067 $3,220,339
Total unrealized depreciation (1,547,568) (1,289,598) (961,209)
----------- ----------- ---------
Net unrealized (depreciation)
appreciation $ (672,121) $ 750,469 $2,259,130
----------- ----------- ---------
----------- ----------- ---------
Loans and debt securities with recorded fair values of $2,300,278,
$3,496,747, and $3,489,254 were in nonaccrual of interest status at June
30, 1995 and 1996 and March 31, 1997, respectively.
F-11
3. SMALL BUSINESS ADMINISTRATION FINANCING
NOTES AND DEBENTURES PAYABLE - Notes payable to the Small Business
Administration (SBA) and debentures payable, guaranteed by the SBA, consist
of the following:
June 30, March 31,
---------------------------
1995 1996 1997
8.375% note payable, due in
quarterly principal and interest
installments of $169,872 through
April 1, 2000 $2,631,737 $2,167,505 $1,786,160
7.08% debenture payable, interest
only due semiannually, principal
due March 1, 2006 2,000,000 2,000,000
7.08% debenture payable, interest
only due semiannually, principal
due December 1, 2006 5,500,000
----------- ----------- ---------
$2,631,737 $4,167,505 $9,286,160
----------- ----------- ---------
----------- ----------- ---------
The note payable to the SBA is collateralized by substantially all the
Company's assets. The note and debentures are subject to the terms and
conditions of agreements with the SBA which, among other things, restrict
stock redemptions, disposition of assets, new indebtedness, dividends or
distributions, and changes in management, ownership, investment policy, or
operations. Annual maturities of the notes at June 30, 1996 are as
follows:
Years ending June 30:
1997 $381,345
1998 546,775
1999 594,025
2000 645,360
2006 2,000,000
----------
$4,167,505
----------
----------
4% REDEEMABLE CUMULATIVE PREFERRED STOCK - The Company has 28,000 shares
authorized of 4% nonvoting redeemable cumulative preferred stock with a par
value and liquidation value of $500 per share. At June 30, 1995 and 1996,
6,000 shares of the preferred stock had been issued. The stock was
redeemed according to its terms during the nine months ended March 31,
1997. Dividends accrued at June 30, 1995 and 1996 were $270,000 and
$10,000, respectively.
4. INCOME TAXES
The provision for income taxes consists of the following components:
Nine Months
Ended
Year Ended June 30, March 31,
----------------------------- ------------------
1994 1995 1996 1996 1997
Current:
Federal $268,012 $427,240 $166,126 $1,110,658
State 264,462 136,308 53,900 360,342
-------- -------- -------- ----------
532,474 563,548 220,026 1,471,000
Deferred $ 143,000 324,407 257,471 290,000 (578,000)
Decrease in
valuation allowance (143,000) (324,407) (448,693) (290,000)
--------- -------- -------- -------- ----------
$- $532,474 $372,326 $220,026 $893,000
--------- -------- -------- -------- ----------
--------- -------- -------- -------- ----------
F-12
A reconciliation between the U.S. federal statutory tax rate and the
effective tax rate is as follows:
Nine Months
Ended
Year Ended June 30, March 31,
----------------------------- ------------------
1994 1995 1996 1996 1997
Statutory tax rate (34.0%) 35.0% 35.0% 35.0% 35.0%
State taxes, net of
federal effect (6.0) 6.0 6.0 6.0 5.7
Change in valuation
allowance 40.0 (23.3) (26.5) (23.8)
------- ------ ------ ------ ------
Effective tax rate - % 17.7% 14.5% 17.2% 40.7%
------- ------ ------ ------ ------
------- ------ ------ ------ ------
The significant components of deferred tax assets (liabilities) are as
follows:
June 30,
-------------- March 31,
1995 1996 1997
Unrealized loss (gain) on
investments in small
business concerns $ 448,693 $191,222 $(386,778)
Valuation allowance (448,693)
--------- -------- ----------
Net deferred tax asset (liability) $ - $191,222 $(386,778)
--------- -------- ----------
--------- -------- ----------
5. STOCKHOLDERS' EQUITY
The Company is subject to a Repurchase Agreement dated March 31, 1993 with
the SBA (the Repurchase Agreement) under which the Company redeemed at a
substantial discount all of the Company's then outstanding 3% preferred
stock, having a par value of $10,000,000, which had been issued to the SBA
under a funding program that was subsequently discontinued. The redemption
price was paid by the Company issuing to the SBA a seven-year amortizing
note for $3,571,578. As a condition to the redemption of the 3% preferred
stock, the Company granted the SBA a liquidating interest in a newly
created restricted capital surplus account equal to the amount of the
repurchase discount of $6,428,422. This liquidating interest is being
amortized over an 84-month period on a straight-line basis, and as of
June 30, 1995 and 1996 and March 31, 1997 had been reduced to $4,362,150,
$3,443,802, and $2,755,041, respectively. Should the Company default under
the Repurchase Agreement at any time, the liquidating interest will become
fixed at the level immediately preceding the event of default and will not
decline further until the default is cured or waived. The liquidating
interest will expire on the later of (i) 60 months from the date of the
Repurchase Agreement (i.e. March 31, 1998); (ii) the date the repurchase
note is paid in full; or (iii) if an event of default has occurred and the
default has been cured or waived, the later date on which the liquidating
interest is fully amortized.
Should the Company voluntarily or involuntarily liquidate prior to the
expiration of the liquidating interest, any assets which are available,
after the payment of all debts of the Company, shall be distributed first
to the SBA until the amount of the then remaining liquidating interest has
been distributed to the SBA. That payment, if any, would be prior in right
to any payments of the Company's stockholders. As the liquidating interest
declines, the restricted capital account is reduced and additional paid-in
capital is increased.
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The Company transferred $300,000 and $1,400,000 of retained earnings to
paid-in capital in 1995 and 1996, respectively, to increase its "private
capital" for SBA regulatory purposes. "Private capital" for SBA regulatory
purposes was $10,971,311, $12,064,163, $12,008,026 at June 30, 1995, 1996,
and March 31, 1997, respectively.
6. RETIREMENT PLANS
Effective December 1, 1988, the Company adopted a retirement plan
covering substantially all of its employees. Contributions to the plan
are discretionary and are determined by the Board of Directors. The
Company's contributions to this plan for the years ended June 30, 1994,
1995 and 1996 and for the nine months ended March 31, 1996 and 1997 were
$25,150, $49,637, $40,320, $23,760, and $29,813, respectively.
During 1996, the Company adopted an additional retirement plan covering
substantially all of its employees. Contributions to the plan are
mandatory at 10% of compensation. The Company's contribution to this plan
for the year ended June 30, 1996 was $36,880 and for the nine months ended
March 31, 1996 and 1997 was $21,240 and $27,375, respectively.
On April 1, 1997, in conjunction with the asset management agreement
discussed in Note 11, these retirement plans were assumed by the management
company.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities in Minnesota under a noncancelable
operating lease which expires on June 30, 1998. Under this operating
lease, future minimum lease payments of $31,740, $31,740 and $63,480 are
payable in the years ending June 30, 1997 and 1998 and in aggregate,
respectively.
Total rent expense was $32,872, $32,872, $33,914, $26,606, and $26,281 for
each of the years ended June 30, 1994, 1995, and 1996 and the nine months
ended March 31, 1996 and 1997, respectively.
The Company is involved in various lawsuits and claims arising out of the
normal course of business. In the opinion of the Company's management, the
resolution of these matters will not have a material adverse effect on the
financial position or operations of the Company.
8. STOCK OPTION PLAN
The Company adopted a Stock Option Plan on February 15, 1990. The Company
has reserved 480,000 shares of common stock for options which may be
granted under the stock option plan. Under the Plan, option exercise prices
are 100% of the market value, as determined by the Board of Directors, of
the common stock at the time of the grant. Options become exercisable over
a five-year period from the date of grant and expire five years from the
date of the grant.
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A summary of options granted under this plan is as follows:
OPTION PRICE
------------
Number of Per
Shares Share Total
Outstanding at June 30, 1993 157,038 $.17 - 2.75 $27,830
Granted 120,000 2.75 330,000
Exercised (2,400) .17 (400)
--------- ---------
Outstanding at June 30, 1994 274,638 .17 - 2.75 357,430
Granted 45,000 1.83 82,500
Exercised (2,400) .17 (400)
--------- ---------
Outstanding at June 30, 1995 317,238 .17 - 2.75 439,530
Exercised (20,400) .17 - .18 (3,700)
--------- ---------
Outstanding at June 30, 1996 296,838 .17 - 2.75 435,830
Granted 54,000 4.00 216,000
Exercised (107,838) .17 - .18 (19,330)
--------- ---------
Outstanding at March 31, 1997 243,000 .17 - 4.00 $632,500
--------- ---------
--------- ---------
At June 30, 1995 and 1996 and March 31, 1997, options for the purchase of
301,038, 262,638, and 216,000 shares, respectively, were exercisable.
Outstanding options expire November 2001 (179,838 shares), January 2004
(72,000 shares), and July 2004 (45,000 shares). The 27,000 shares which
are not exercisable as of March 31, 1997 vest at 3,000 shares each year
until July 1999.
9. CREDIT RISK
The Company maintains cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company does not believe it is exposed to any
significant risk on cash. In addition, the Company's idle funds are
invested in repurchase agreements which are backed by U.S. government
securities.
10. LETTERS OF CREDIT
The Company is the guarantor of two letters of credit aggregating $410,000
issued by a bank, on the behalf of two of the Company's portfolio
companies. Under the letters of credit the third-party beneficiaries may
draw on the letters of credit upon the occurrence of specified events.
Amounts drawn upon, if any, under these letters of credit will be added to
the loan amounts due from the portfolio companies to secure these letters
of credit. The Company has contractually restricted $410,000 of its cash.
11. SUBSEQUENT EVENTS
As discussed in Note 1, effective March 31, 1997, CDI and CDVFI were merged
to form the Company. In connection with that merger, a separate company
(the Management Company), owned by the officers of the Company, was formed
to manage the Company's assets. The Company has entered into a one-year
agreement with the Management Company whereby the
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Management Company will manage the Company's portfolio in exchange for
a monthly fee equal to .25% of the average balance of assets under
management during the month. In addition, the Company transferred certain
assets to the Management Company in exchange for a promissory note in the
amount of $143,856, representing the book value of the assets on the date
of transfer. The promissory note will be retired in accordance with the
useful life of these assets over a maximum of four years.
In connection with the merger, the Company adopted the Capital Dimensions
Venture Fund, Inc. 1997 Stock Plan (the Plan), all stock options
outstanding at the time of the merger were exchanged for identical shares
under the new plan, and all previous stock option plans were terminated.
The Company has reserved 450,000 shares of common stock for options which
may be granted under the Plan. Under the Plan, option exercise prices are
100% of market value of the common stock at the time of the grant. Options
become exercisable as determined by a committee of not less than two
nonemployee directors and expire no more than ten years from the date of
the grant.
12. POTENTIAL DIVIDEND
The Company intends to qualify for tax treatment under Subchapter M of the
Internal Revenue Code. Eligibility for Subchapter M treatment requires
that the Company pay out, as a dividend, an amount at least equal to its
cumulative earnings and profits from all prior periods. The Company's
Board of Directors expects to declare a dividend, to stockholders of record
on June 30, 1997, in an amount sufficient to meet this requirement. The
declaration of this dividend will be made contingent upon the Company
obtaining net proceeds of at least $15 million from the sale of newly
issued shares of common stock.
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