<PAGE>
UNITED STATED
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______________ to ___________________
Commission File Number: 000-22721
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, MN 55425
(Address of principal executive offices) (Zip Code)
(612) 854-3007
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and report required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 1997, the Company had outstanding 1,725,438 shares of
Common Stock, no par value per share.
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TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements: 3
Condensed Consolidated Statements of Operations
Three Months ended September 30, 1997 and 1996 (Unaudited) 3
Condensed Consolidated Balance Sheets
September 30, 1997 (Unaudited) and June 30, 1997 4
Condensed Consolidated Statements of Cash Flows
Three months ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II. OTHER INFORMATION
Item 2. Changes in Securities 10
2
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PART I.-- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL DIMENSIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months
Ended September 30,
---------------------
1996 1997
---- ----
(Dollars in thousands, except per share data)
Interest income $ 493 $ 480
Operating expenses:
Interest Expense 83 256
General and administrative expense 219 318
Other operating expense 1 28
--------- --------
Total operating expenses 303 598
--------- --------
Net operating income (loss) 190 (118)
Gains on investments in
small business concerns:
Realized - -
Unrealized - 211
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Income before income taxes 190 93
Income taxes 78 -
--------- --------
Net income 112 93
Dividends on preferred stock to SBA 30 -
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Net income applicable to common stock $ 82 $ 93
--------- --------
--------- --------
Earnings per common share $ .05 $ .05
--------- --------
--------- --------
Weighted average common and common
equivalent shares outstanding 1,731,849 1,869,657
---------- ---------
---------- ---------
See notes to condensed consolidated financial statements.
3
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CAPITAL DIMENSIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
-------- -------------
1997 1997
---- ----
(Unaudited)
(Dollars in thousands)
ASSETS:
-------
<S> <C> <C>
Investments in small concerns at fair value (note 3)
Stocks $ 7,621 $ 8,233
Debt securities 13,285 13,795
Loans 3,766 4,028
-------- --------
Total investments in small concerns 24,672 26,056
Cash and cash equivalents 4,424 3,038
Other assets 1,192 1,338
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Total assets $30,288 $30,432
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-------- --------
LIABILITIES AND SHAREHOLDER EQUITY:
-----------------------------------
SBA financing $12,154 $12,019
Other liabilities 712 744
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Total liabilities 12,866 12,763
STOCKHOLDERS' EQUITY:
Liquidating interest under repurchase agreement 2,525 2,296
Common stock 1,446 1,502
Additional paid-in capital 8,572 8,899
Retained earnings 4,879 4,972
-------- --------
Total stockholders' equity 17,422 17,669
-------- --------
Total liabilities and stockholders' equity $30,288 $30,432
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
4
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CAPITAL DIMENSIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months
Ended September 30,
1996 1997
---- ----
(Dollars in thousands)
Net cash used by operating activities $ (246) $ (146)
Cash flow from investing activities:
Investments in small business concerns (1,098) (1,130)
Collections on debt securities and loans 19 9
-------- -------
Total cash used in investing activities (1,079) (1,121)
Cash flow from financing activities:
Payments on note payable to SBA (124) (135)
Issuance of common stock - 56
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Total cash used in financing activities (124) (79)
Net decrease in cash and cash equivalents (1,449) (1,386)
Cash and cash equivalents at beginning of period 3,878 4,424
-------- -------
Cash and cash equivalents at end of period $2,429 $3,038
-------- -------
-------- -------
See notes to condensed consolidated financial statements.
5
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CAPITAL DIMENSIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting
principles and the rules and regulations of the Securities and Exchange
Commission for interim financial statements. Accordingly, the interim
statements do not include all of the information and disclosures required
for annual financial statements. In the opinion of the Company's
management, all adjustments (consisting solely of adjustments of a
normal, recurring nature) necessary for a fair presentation of these
interim results have been included. These financial statements and
related notes should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended June 30, 1997. The balance sheet at June
30, 1997 has been derived from the audited financial statements included
in the Annual Report on Form 10-K. The results for the interim period
ended September 30, 1997 are not necessarily indicative of the results to
be expected for the entire year.
2. INCOME TAXES AND POTENTIAL DIVIDEND
The Company anticipates that it will qualify, and will elect, to be taxed
as a regulated investment company ("RIC") under Subchapter M of the
Internal Revenue Code for the fiscal year ending June 30, 1998. Under
Subchapter M, the Company generally will be eligible to be taxed as a
pass through entity.
If the Company meets the qualifications of Subchapter M, it must make an
election to be taxed under subchapter M status and distribute a minimum
of 90% of its net income from dividends and interest. In addition, the
Company may chose to distribute up to 100% of its net income from
dividends and interest and up to 100% of its realized gains on
investment. If this occurs, and the distribution is made within the
allowed time frame following the end of its fiscal year ending June 30,
1998, the Company will not be subject to corporate income tax in fiscal
1998. Accordingly, the Company has not recorded any income tax provision
for the three months ended September 30, 1997. To the extent that less
than 98% of these amounts are distributed, the company will be taxed at
normal corporate tax rates plus a 4% excise tax on the undistributed
portion.
If the Company is unable to meet the requirements of Subchapter M, a tax
provision equal to approximately 41% of net income before tax would be
necessary. If at any time during the current fiscal year it becomes
apparent that the Company will not be able to meet the requirements of
Subchapter M, the Company will record, in the period during which it
becomes apparent, a provision for income taxes equal to approximately 41%
of year-to-date income before tax at that time. This could significantly
impact the reported net income amount in a future fiscal quarter.
3. INVESTMENT IN SMALL CONCERNS
Investments were valued at estimated fair value of $24,672 at June 30,
1997 and $26,056 at September 30, 1997. The costs of those investments
were:
June 30, 1997 September 30, 1997
Stocks $ 4,486 $ 4,486
Debt Securities 13,285 14,195
Loans 4,302 4,565
6
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4. 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 any of the investments at September 30,
1996 and 1997. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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) on investments," 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 investment," which is
the net change in the estimated fair values at the beginning of the period or
the cost of such portfolio assets, if purchased during the period.
Generally, "realized gains (losses) on investment" 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 net unrealized appreciation and an increase
in realized loss. The fourth element is "tax expense." The Company intends
to qualify for taxation under Subchapter M for its fiscal year beginning July
1, 1997.
7
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INTEREST INCOME. During the quarter ended September 30, 1997, the
Company earned interest on debt investment of $480,000, a 3% decrease from
the $493,000 earned during the same period in 1996. This decrease in
interest income resulted primarily from decreases in the dollar amount of
outstanding investments on accrual status 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 $18.8 million at September
30, 1997, an increase of 5.6% from $17.8 million at September 30, 1996.
INTEREST EXPENSE. The Company's interest expense, which related to SBA
financing, was $256,000 for quarter ended September 30, 1997, a 208% increase
over the $83,000 for comparable quarter in 1996. The change in interest
expense is directly related to the level of debt leverage from the SBA, which
was $12.2 million as of September 30, 1997, and $4.0 million as of September
30, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $318,000 for quarter ended September 30, 1997, a 45% increase over
the $219,000 for the comparable quarter in 1996. The increase was due to a
charge related to the acceleration of two directors' stock option vesting
dates. General and administrative expenses as a percentage of total assets
was 4.2% and 2.9% (annualized) for the respective periods.
INCOME TAXES. The Company did not incur federal or state income tax
expense during the first quarter of 1997 due to its expected Subchapter M
election (see Financial Statements note 2). During the comparable period in
1996 the Company incurred $78,000 (an effective rate of 41%).
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS. For the
first quarter of 1996 and 1997, the Company recorded net unrealized
appreciation of investments of $0 and $211,000, 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 1997 period
resulted from valuation changes in several investments.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 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 $9,000 and $19,000
during the first quarters of 1998 and 1997, respectively. For the second
quarter of 1998, the scheduled principal payments owed to the Company on
existing debt investments are $29,000. Cash proceeds from the sale of equity
positions were zero for the first quarters of 1998 and 1997. Cash proceeds
from the sale of investments during the second quarter of 1998 are expected
to exceed $2.2 million.
The Company borrowed $5.5 million from the SBA in December 1996, $2.0
million in March 1996 and $3.0 million in June 1997. These borrowings are
evidenced by three debentures which bear interest at 7.08%, 7.08%, and 7.07%,
respectively. Interest only is payable quarterly, with maturities of $7.5
million in 2006 and $3.0 million in 2007, and can be prepaid without penalty
after five years. 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 this note was
8
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$1.5 million as of September 30, 1997. Total principal indebtedness of the
Company to the SBA as of September 30, 1997 was $12.2 million. Based on the
Company's leverageable capital (as defined by the SBA), at September 30,
1997, the Company was eligible to borrow from the SBA up to a total of $14.5
million.
The Company made debt investments of $1.1 million and $1.1 million
during the first quarters of 1998 and 1997, respectively.
The Company does not currently have a line of credit or revolving credit
facility. As of September 30, 1997, the Company did not have any outstanding
commitments to provide financing. The Company continues to review new
investment requests, and expects to make additional commitments during the
second and third quarters of 1998.
The Company is seeking $20 million of additional capital through a
private placement of its Common Stock during November and December 1997.
There is no assurance that any additional capital will be obtained. If
completed, the proceeds of the Offering will be used to pay a $3.5 million cash
dividend 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.
9
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PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On July 3, August 1, and September 25, 1997 the Company issued a total 27,000
shares of common stock to directors, officers or employees of the Company who
were exercising stock options. The Company received a total of $56,000 in
payment for these shares. There were no underwriters or placement agents
involved in the issuance of these shares and no commissions were paid. The
acquirers of these shares obtained the shares for investment in their own
accounts and not with a view to a distribution. Based on these facts, the
Company relied upon the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended, in issuing the shares.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL DIMENSIONS, INC.
(Registrant)
November ____, 1997
------------------------------------
Thomas F. Hunt, Jr.
President and Chief Executive Officer
November ____, 1997
------------------------------------
Dean R. Pickerell
Executive Vice President and
Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,038
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,432
<CURRENT-LIABILITIES> 0
<BONDS> 12,019
0
0
<COMMON> 1,502
<OTHER-SE> 16,167
<TOTAL-LIABILITY-AND-EQUITY> 30,432
<SALES> 0
<TOTAL-REVENUES> 480
<CGS> 0
<TOTAL-COSTS> 598
<OTHER-EXPENSES> (211)
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 93
<INCOME-TAX> 0
<INCOME-CONTINUING> 93
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93
<EPS-PRIMARY> .05
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</TABLE>
