SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A
Amendment No. 1
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
------------------------------- ------------------
(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
------------------------------------
(Title of class)
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.
2
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 $(.50) $1.18 $1.09 $.49 $.71
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted average common and
common equivalent shares outstanding(4) 1,800,000 1,801,914 1,963,362 1,824,162 1,983,852 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.
3
(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
4
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.
5
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.
6
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
7
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.
8
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.
9
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)
10
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 1 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL DIMENSIONS, INC.
Dated: June 26, 1997 By /s/ Thomas F. Hunt, Jr.
--------------------- -------------------------------------
Its President
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11
CAPITAL DIMENSIONS, INC.
TABLE OF CONTENTS
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PAGE
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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.
/s/ Deloitte & Touche LLP
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.
/s/ Lurie, Besikof, Lapidus & Co., LLP
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) $ (0.50) $ 1.18 $ 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.
F-13
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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