<PAGE>
UNITED STATES
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 December 31, 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 Identification No.)
incorporation or organization)
7831 Glenroy Road, Suite 480, Minneapolis, MN 55439-3132
(Address of principal executive offices) (Zip Code)
(612) 831-2025
(Registrant's telephone number, including area code)
Two Appletree Square, Suite 335, Bloomington, MN 55425
(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
reports 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 December 31, 1997, the Company had outstanding 1,725,438 shares of
Common Stock, no par value per share.
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements (Unaudited): 3
Condensed Consolidated Statements of Operations
Three Months ended December 31, 1996 and 1997 and
Six Months ended December 31, 1996 and 1997 3
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows
Six months ended December 31, 1996 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
PART II. OTHER INFORMATION 10
</TABLE>
2
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PART I.-- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL DIMENSIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
------------------ ------------------
1996 1997 1996 1997
---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $529 $465 $1,022 $945
Operating expenses:
Interest expense 93 246 176 502
General and administrative expense 218 301 437 619
Offering costs - 253 - 253
Other operating expense 15 (13) 16 15
--------- --------- --------- ---------
Total operating expenses 326 787 629 1,389
--------- --------- --------- ---------
Net operating income (loss) 203 (322) 393 (444)
Gains on investments in
small business concerns:
Realized 119 87 119 87
Unrealized 18 (87) 18 124
--------- --------- --------- ---------
Income (loss) before income taxes 340 (322) 530 (233)
Income taxes 139 - 217 -
--------- --------- --------- ---------
Net income (loss) 201 (322) 313 (233)
Dividends on preferred stock to SBA 30 - 60 -
--------- --------- --------- ---------
Net income (loss) applicable to common
stock $ 171 $ (322) $ 253 $ (233)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings per common share $ .11 $ (.19) $ .16 $ (.14)
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings per common and common
equivalent share $ .10 $ (.19) $ .15 $ (.14)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares
outstanding 1,586,601 1,725,438 1,579,599 1,719,939
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding 1,732,619 1,725,438 1,732,234 1,719,939
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
3
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CAPITAL DIMENSIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
1997 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
ASSETS:
Investments in small business concerns at fair value
(note 3)
Stocks $ 7,621 $ 7,490
Debt securities 13,285 12,084
Loans 3,766 4,956
-------- --------
Total investments in small business concerns 24,672 24,530
Cash and cash equivalents 4,424 4,137
Other assets 1,192 1,182
-------- --------
Total assets $ 30,288 $ 29,849
-------- --------
-------- --------
LIABILITIES and STOCKHOLDERS' EQUITY:
SBA financing $ 12,154 $ 11,986
Other liabilities 712 519
-------- --------
Total liabilities 12,866 12,505
STOCKHOLDERS' EQUITY:
Liquidating interest under repurchase agreement 2,525 2,066
Common stock 1,446 1,502
Additional paid-in capital 8,572 9,129
Retained earnings 4,879 4,647
-------- --------
Total stockholders' equity 17,422 17,344
-------- --------
Total liabilities and stockholders' equity $ 30,288 $ 29,849
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
4
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CAPITAL DIMENSIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended December 31,
------------------
1996 1997
---- ----
<S> <C> <C>
(Dollars in thousands)
Net cash (used by) provided by operating activities $ (431) $ 388
Cash flow from investing activities:
Investments in small business concerns (2,180) (1,750)
Collections on debt securities and loans 756 1,292
-------- --------
Total cash used in investing activities (1,424) (458)
Cash flow from financing activities:
Proceeds from SBA note payable 5,301 -
Payments on note payable to SBA (252) (273)
Issuance of common stock 8 56
Dividends paid on SBA 4% redeemable preferred stock (66) -
Redemption of SBA 4% redeemable preferred stock (3,000) -
-------- --------
Total cash provided by (used in) financing activities 1,991 (217)
Net increase (decrease) in cash and cash equivalents 136 (287)
Cash and cash equivalents at beginning of period 3,878 4,424
-------- --------
Cash and cash equivalents at end of period $ 4,014 $ 4,137
-------- --------
-------- --------
</TABLE>
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 condensed consolidated 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 December 31, 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 six months ended
December 31, 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 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 $24,530 at December 31, 1997. The costs of those investments
were:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1997
<S> <C> <C>
Stocks $ 4,486 $ 4,357
Debt Securities 13,285 12,484
Loans 4,302 4,966
--------- ---------
$ 22,073 $ 21,807
--------- ---------
--------- ---------
</TABLE>
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. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
INTEREST INCOME. During the three months ended December 31, 1997, the
Company earned interest on debt investment of $465,000, an 11.9% decrease from
the $529,000 earned during the same period in 1996. This decrease in interest
income resulted primarily from decreases in the dollar amount of outstanding
debt investments and an increase in the dollar amount of debt investments on
non-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) decreased to $17.4 million at December 31, 1997, a decrease of 8% from
$18.9 million at December 31, 1996.
7
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INTEREST EXPENSE. The Company's interest expense, which related to SBA
financing, was $246,000 for the three months ended December 31, 1997, a 165%
increase over the $93,000 for the comparable period in 1996. The change in
interest expense is directly related to the level of debt leverage from the SBA,
which was $11.9 million as of December 31, 1997, and $9.5 million as of December
31, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $301,000 for the quarter ended December 31, 1997, a 38% increase over
the $218,000 for the comparable quarter in 1996. The increase was due to
additional staff and public company expenses. General and administrative
expenses as a percentage of total assets was 4.0% and 3.3% (annualized) for the
respective periods.
OFFERING COSTS. Offering costs of $253,000, related to an unsuccessful
equity offering, were expensed during the quarter ended December 31, 1997.
REALIZED GAINS. The Company's net realized gains on investment were
$119,000 and $87,000 for the three months ended December 31, 1996 and 1997,
respectively. These gains in each period were the result of the sale of equity
investments.
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS. For the
three months ended December 31, 1996 and 1997, the Company recorded net
unrealized appreciation of investments of $18,000 and net unrealized
depreciation of investments of $87,000, 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.
INCOME TAXES. The Company did not record a federal or state income tax
benefit during the three months ended December 31, 1997 due to its expected
Subchapter M election (see Financial Statements note 2). During the comparable
period in 1996 the Company incurred $139,000 of income tax expense (an effective
rate of 41%).
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
INTEREST INCOME. During the six months ended December 31, 1997, the
Company earned interest on debt investment of $945,000, a 7% decrease from the
$1,022,000 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) decreased to $17.4 million at December 31, 1997, a
decrease of 8% from $ 18.9 million at December 31, 1996.
INTEREST EXPENSE. The Company's interest expense, which related to SBA
financing, was $502,000 for the six months ended December 31, 1997, a 185%
increase over the $176,000 for the comparable period in 1996. The change in
interest expense is directly related to the level of debt leverage from the SBA,
which was $11.9 million as of December 31, 1997, and $9.5 million as of December
31, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $619,000 for six months ended December 31, 1997, a 42% increase over the
$437,000 for the comparable period in 1996. The increase was due to a charge
related to the acceleration of two directors' stock option vesting dates,
additional staff, and public company expenses. General and administrative
expenses as a percentage of total assets was 4.1% and 3.4% (annualized) for the
respective periods.
8
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OFFERING COSTS. Offering costs of $253,000, related to an unsuccessful
equity offering, were expensed during the quarter ended December 31, 1997.
REALIZED GAINS. The Company's net realized gains on investment were
$119,000 and $87,000 for the six months ended December 31, 1996 and 1997,
respectively. These gains in each period were the result of the sale of equity
investments.
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS. For the
six months ended December 31, 1996 and 1997, the Company recorded net unrealized
appreciation of investments of $18,000 and $124,000, 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.
INCOME TAXES. The Company did not record a federal or state income tax
benefit during the six months ended December 31, 1997 due to its expected
Subchapter M election (see Financial Statements note 2). During the comparable
period in 1996 the Company incurred $217,000 (an effective rate of 41%).
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $4.1 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 $756,000 and $1,292,000 during the six
months ended December 31, 1996 and 1997, respectively. For the third quarter of
fiscal 1998, the expected principal payments owed to the Company on existing
debt investments are $1,244,000. Cash proceeds from the sale of investments
were $115,000 and $940,000 for the six months ended December 1996 and 1997,
respectively. Cash proceeds from the sale of investments during the third
quarter of fiscal 1998 are expected to exceed $914,000.
The Company borrowed $2.0 million from the SBA in March 1996, $5.5 million
in December 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 semi-annually, 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 $1.4 million as of December 31, 1997.
Total indebtedness of the Company to the SBA as of December 31, 1997 was $11.9
million. Based on the Company's leverageable capital (as defined by the SBA),
at December 31,1997, the Company was eligible to borrow from the SBA up to a
total of $16.4 million.
The Company made debt investments of $1.8 million and $2.2 million during
the six months ended December 31, 1996 and 1997, respectively.
The Company does not currently have a line of credit or revolving credit
facility. As of December 31, 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 third
and fourth quarters of fiscal 1998.
9
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PART II -- OTHER INFORMATION
Item 1. Not Applicable
ITEM 2. Not Applicable
ITEM 3. NOT APPLICABLE
ITEM 4. NOT APPLICABLE
ITEM 5. NOT APPLICABLE
ITEM 6. NOT APPLICABLE
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)
February , 1998
---- --------------------------------------
Thomas F. Hunt, Jr.
President and Chief Executive Officer
February , 1998
---- --------------------------------------
Dean R. Pickerell
Executive Vice President and
Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,137
<SECURITIES> 0
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0
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