<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 March 31, 1998
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.)
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 March 31, 1998, 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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<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements (Unaudited): 3
Condensed Consolidated Statements of Income
Three Months ended March 31, 1997 and 1998 and
Nine Months ended March 31, 1997 and 1998 3
Condensed Consolidated Balance Sheets
June 30, 1997 and March 31, 1998 4
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 1997 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II. OTHER INFORMATION 11
</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 Nine Months
Ended March 31, Ended March 31,
---------------------------- ------------------------------
1997 1998 1997 1998
--------- ---------- ---------- ----------
(Dollars in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Interest income $ 840 $ 704 $ 1,862 $ 1,650
Operating expenses:
Interest expense 194 227 370 729
General and administrative expense 230 285 667 904
Offering costs - - - 253
Other operating expense 30 18 46 33
--------- --------- --------- ---------
Total operating expenses 454 531 1,083 1,920
--------- --------- --------- ---------
Net operating income (loss) 386 173 779 (270)
Gains on investments in small business
concerns:
Realized (214) 27 (95) 114
Unrealized 1,491 173 1,509 297
--------- --------- --------- ---------
Income (loss) before income taxes 1,662 373 2,192 141
Income/excise taxes 676 19 893 19
--------- --------- --------- ---------
Net income (loss) 986 354 1,299 122
Dividends on preferred stock to SBA (4) - 56 -
--------- --------- --------- ---------
Net income (loss) applicable to common stock $ 990 $ 354 $ 1,243 $ 122
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings per common share $ .60 $ .21 $ .78 $ .07
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings per common share $ .54 $ .19 $ .71 $ .07
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding
(basic) 1,638,147 1,725,438 1,599,114 1,721,771
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding
(assuming dilution) 1,849,908 1,898,083 1,761,681 1,897,649
--------- --------- --------- ---------
--------- --------- --------- ---------
</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, March 31,
1997 1998
--------- ---------
(Dollars in thousands)
<S> <C> <C>
ASSETS:
Investments in small business concerns at
fair value (note 3)
Stocks $ 7,621 $ 7,661
Debt securities 13,285 6,876
Loans 3,766 9,462
--------- ---------
Total investments in small business concerns 24,672 23,999
Cash and cash equivalents 4,424 3,907
Other assets 1,192 1,151
--------- ---------
Total assets $ 30,288 $ 29,057
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
SBA financing $ 12,154 $ 10,840
Other liabilities 712 519
--------- ---------
Total liabilities 12,866 11,359
STOCKHOLDERS' EQUITY:
Liquidating interest under repurchase agreement 2,525 -
Common stock 1,446 1,502
Additional paid-in capital 8,572 11,195
Retained earnings 4,879 5,001
--------- ---------
Total stockholders' equity 17,422 17,698
--------- ---------
Total liabilities and stockholders' equity $ 30,288 $ 29,057
--------- ---------
--------- ---------
</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>
Nine Months
Ended March 31,
------------------------------
1997 1998
-------- --------
(Dollars in thousands)
<S> <C> <C>
Net cash (used by) provided by operating activities $ (455) $ 813
Cash flow from investing activities:
Investments in small business concerns (3,025) (1,943)
Collections on debt securities and loans 767 2,211
------- -------
Total cash (used by) provided by investing activities (2,258) 268
Cash flow from financing activities:
Proceeds from SBA note payable 5,301 -
Payments on note payable to SBA (381) (1,654)
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 by) financing activities 1,862 (1,598)
Net decrease in cash and cash equivalents (851) (517)
Cash and cash equivalents at beginning of period 3,878 4,424
------- -------
Cash and cash equivalents at end of period $ 3,027 $ 3,907
------- -------
------- -------
</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 March 31, 1998 are
not necessarily indicative of the results to be expected for the entire
year.
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all periods have been presented, where appropriate, restated to conform
to the Statement 128 requirements.
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 an income tax provision for the three or nine
months ended March 31, 1998. 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. The Company
recorded $19,000 in excise tax due to undistributed earnings.
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.
6
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3. INVESTMENTS IN SMALL CONCERNS
Investments were valued at estimated fair value of $24,672 at June 30,
1997, and $23,999 at March 31, 1998. The costs of those investments were:
<TABLE>
<CAPTION>
June 30, 1997 March 31, 1998
------------- --------------
<S> <C> <C>
Stocks $ 4,486 $ 4,355
Debt Securities 13,285 7,276
Loans 4,302 9,472
-------- --------
$ 22,073 $ 21,103
-------- --------
-------- --------
</TABLE>
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.
5. MERGER AGREEMENT WITH MEDALLION FINANCIAL CORPORATION
On March 6, 1998, the Company entered into a merger agreement with
Medallion Financial Corporation. The Merger Agreement provides that the
Merger will be consummated if the approval of the CDI shareholders required
therefor is obtained and all other conditions to the Merger are satisfied
or waived. Upon consummation of the Merger, CDI will become a wholly owned
subsidiary of Medallion.
Upon consummation of the Merger, each outstanding share of CDI Common Stock
will be automatically converted into and represent that number of shares of
Medallion Common Stock equal to the quotient obtained by dividing (x)
$15.50 by (y) the average closing sale prices per share of Medallion Common
Stock on the NASDAQ National Market for the 20 trading days which
immediately precede the business day immediately preceding the Closing
Date, provided, however, that if such average exceeds $26.00, the divisor
shall be $26.00, and if such average is less than $23.50, the divisor shall
be $23.50. Cash will be paid in lieu of fractional shares.
6. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) NO. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION, which will be effective for the
Company beginning July 1, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The Company
does not anticipate the adoption of SFAS No. 131 will have a significant
effect on its disclosures.
7
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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 ending June
30, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
INTEREST INCOME. During the three months ended March 31, 1998, the
Company earned interest on debt investments of $704,000, a 16% decrease from
the $840,000 earned during the same period in 1997. This decrease in
interest income resulted primarily from decreases in the average dollar
amount of outstanding debt investments and an increase in the dollar amount
of debt investments on non-accrual status during the three months ended March
31, 1998, as compared to the three months ended March 31, 1997. There were
no material changes in the average interest rate earned. The Company's debt
investments (at cost) decreased 16% to $16.8 million at March 31, 1998 from
$20 million at March 31, 1997.
INTEREST EXPENSE. The Company's interest expense, which related to SBA
financing, was $227,000 for the three months ended March 31, 1998, a 17%
increase over the $194,000 for the comparable period in 1997. The change in
interest expense is directly related to the level of debt leverage from the
SBA, which was $10.8 million as of March 31, 1998, and $9.3 million as of
March 31, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses totaled $285,000 for the quarter ended March 31, 1998, a 24%
increase from $230,000 for the comparable quarter in 1997. 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.
8
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REALIZED GAINS (LOSSES). The Company's net realized gains (losses) on
investment were $27,000 and ($214,000) for the three months ended March 31,
1998 and 1997, respectively. The gain was the result of the sale of equity
investments. The loss was the result of recognizing losses on investments.
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS. For
the three months ended March 31, 1998 and 1997, the Company recorded net
unrealized appreciation of investments of $173,000 and $1.5 million,
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/EXCISE TAXES. The Company did not record a federal or state
income tax provision during the three months ended March 31, 1998 due to its
expected Subchapter M election (see Financial Statements note 2). The
Company did record $19,000 of excise tax related to delayed earnings
distribution. During the comparable period in 1997 the Company incurred
$676,000 of income tax expense (an effective rate of 41%).
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
INTEREST INCOME. During the nine months ended March 31, 1998, the
Company earned interest on debt investments of $1.7 million, a 10% decrease
from the $1.9 million earned during the same period in 1997. This decrease
in interest income resulted primarily from decreases in the total investments
and in the dollar amount of outstanding investments on accrual status during
the applicable periods. There were no material changes in the average
interest rate earned. The Company's debt investments (at cost) decreased 16%
to $16.8 million at March 31, 1998 from $ 20 million at March 31, 1997.
INTEREST EXPENSE. The Company's interest expense, which related to SBA
financing, was $729,000 for the nine months ended March 31, 1998, a 97%
increase over the $370,000 for the comparable period in 1997. The change in
interest expense is directly related to the timing of the receipt of debt
leverage and the level of debt leverage from the SBA, which was $10.8 million
as of March 31, 1998, and $9.3 million as of March 31, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses totaled $904,000 for nine months ended March 31, 1998, a 35.5%
increase over the $667,000 for the comparable period in 1997. 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.
OFFERING COSTS. Offering costs of $253,000, related to an unsuccessful
equity offering, were expensed during the nine months ended March 31, 1998.
REALIZED GAINS (LOSSES). The Company's net realized gains (losses) on
investment were $114,000 and ($95,000) for the nine months ended March 31,
1998 and 1997, respectively. The gain was the result of the sale of equity
investments. The loss was the result of recognizing losses on investments.
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS. For
the nine months ended March 31, 1998 and 1997, the Company recorded net
unrealized appreciation of investments of $297,000 and $1.5 million,
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/EXCISE TAXES. The Company did not record a federal or state
income tax provision during the nine months ended March 31, 1998 due to its
expected Subchapter M election (see Financial Statements note 2). The
Company did record $19,000 of excise tax related to delayed earnings
distribution. During the comparable period in 1997 the Company incurred
$893,000 (an effective rate of 41%).
9
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $3.9 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 $2,211,000 and
$767,000 during the nine months ended March 31, 1998 and 1997, respectively.
For the fourth quarter of fiscal 1998, the expected principal payments owed
to the Company on existing debt investments are $19,000. Cash proceeds from
the sale of investments were $940,000 and $115,000 for the nine months ended
March 31, 1998 and 1997, respectively. Cash proceeds from the sale of
investments during the fourth 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 Company repaid $1.4 million to the SBA on
February 6, 1998, which was the outstanding balance of an 8.375 % interest,
fully amortizing loan that was to mature on April 1, 2,000. Repayment of the
loan terminated a 3% preferred stock buyback agreement with the SBA. Total
indebtedness of the Company to the SBA as of March 31, 1998 was $10.8
million. Based on the Company's leverageable capital (as defined by the
SBA), at March 31, 1998, the Company was eligible to borrow from the SBA up
to a total of $16.4 million.
The Company made debt investments of $1.9 million and $3 million during
the nine months ended March 31, 1998 and 1997, respectively.
The Company does not currently have a line of credit or revolving credit
facility. As of March 31, 1998, 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
fourth quarter of fiscal 1998.
10
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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)
May __, 1998
---------------------------------------
Thomas F. Hunt, Jr.
President and Chief Executive Officer
May __, 1998
---------------------------------------
Dean R. Pickerell
Executive Vice President and
Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,907
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,057
<CURRENT-LIABILITIES> 0
<BONDS> 10,840
0
0
<COMMON> 1,502
<OTHER-SE> 16,196
<TOTAL-LIABILITY-AND-EQUITY> 29,057
<SALES> 0
<TOTAL-REVENUES> 1,650
<CGS> 0
<TOTAL-COSTS> 1,920
<OTHER-EXPENSES> (297)
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 141
<INCOME-TAX> 19
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<NET-INCOME> 122
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</TABLE>
