-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UPsebhDm7k0R5eQMC+kq3lzbHys4f7JJcRDkTnSfSDfOgbDuk8lPPILUjDjdkuEq 5EqZSg7Ryvn95Pxrt7GfTQ== 0000912057-97-020741.txt : 19970620 0000912057-97-020741.hdr.sgml : 19970620 ACCESSION NUMBER: 0000912057-97-020741 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970619 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL DIMENSIONS INC CENTRAL INDEX KEY: 0000822874 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 521139951 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-12G SEC ACT: 1934 Act SEC FILE NUMBER: 000-22721 FILM NUMBER: 97626279 BUSINESS ADDRESS: STREET 1: TWO APPLETREE SQ STREET 2: STE 335 CITY: BLOOMINGTON STATE: MN ZIP: 55425 BUSINESS PHONE: 6128543007 MAIL ADDRESS: STREET 1: TWO APPLETREE SQUARE STREET 2: STE 335 CITY: BLOOMINGTON STATE: MN ZIP: 55425 10-12G 1 FORM 10 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 General Form For Registration of Securities Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 CAPITAL DIMENSIONS, INC. (Exact name of registrant as specified in its charter) Minnesota 52-1139951 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Two Appletree Square, Suite 335 Bloomington, Minnesota 55425 ---------------------------------------- -------- (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 1. BUSINESS GENERAL The Company is a specialty finance company that invests in minority-owned small businesses in a limited number of selected industries. The Company believes that this market is under served by traditional financing sources. The Company's investments are typically in the form of secured debt securities with fixed interest rates, accompanied by warrants to purchase equity interests for a nominal exercise price. The Company's objectives are to achieve both (i) a high level of interest income from secured debt securities, and (ii) long-term appreciation of its equity interests in the companies it finances. An important part of the Company's strategy for achieving its objectives is to focus its investments in selected industries where there are industry specific factors that limit the risk of the Company losing the principal amount invested in debt securities, and where there is growth potential in the value of the Company's equity interests. Based on this strategy, the Company has concentrated its investments in the radio broadcast industry, and to a lesser extent in the rural telephone industry and airport food and beverage service industry. Within these industries the Company seeks to invest in companies which it believes have significant potential for growth, adequate collateral coverage, experienced management teams, sophisticated outside equity investors and profitable operations. To date the Company has found that it has been constrained by lack of capital rather than lack of investment opportunities. The Company seeks to enhance its investment return by borrowing a portion of its investment capital at favorable rates from the U.S. Small Business Administration ("SBA"). The Company is eligible for SBA funding as a specialized small business investment company ("SSBIC") which is licensed by the SBA. Because the Company is an SSBIC, acquiring ownership or control of more than 10% of the Company's outstanding common stock requires prior SBA approval of the stockholder. The Company is based in Bloomington, Minnesota and invests throughout the United States. It is structured as a closed-end investment fund that is managed by a separate investment advisory firm, which is owned and operated by the Company's officers. The Company is a business development company ("BDC") for purposes of the Investment Company Act of 1940, as amended (the "1940 Act"). To date, the Company has been taxed as a business corporation under Subchapter C of the tax code. Effective for its fiscal year commencing July 1, 1997, the Company plans to seek to qualify for "pass through" tax treatment as a regulated investment company ("RIC") under Subchapter M of the tax code. The Company plans to raise $20 million of additional capital through a private placement of its common stock during the fiscal quarter ending September 30, 1997. If completed, the proceeds of the offering will be used to pay a dividend, which is currently estimated to be approximately $3.0 to $5.0 million, to current stockholders in order to meet one of the requirements for Subchapter M 2 tax treatment. The remaining net proceeds will be used for making investments in current and new portfolio companies. The Company is the successor to an SSBIC which was organized in 1978 by Control Data Corporation. Under Control Data's ownership, the Company principally made equity investments and did so in a wide variety of industries. Following the Company's acquisition in 1987 by current senior management and private investors, its strategy evolved over time to the current strategy of making secured debt investments with equity participations and focusing on a few selected industries. The Company's office is located at Two Appletree Square, Suite 335, Bloomington, Minnesota 55425 and its telephone number is (612) 854-3007. OPERATING STRATEGY FOCUS ON SELECTED INDUSTRIES. The Company's strategy has evolved since the early 1990s to focus on a limited number of industries where Company management can develop specific industry knowledge and where industry conditions provide: (i) collateral of a type that allows the Company the opportunity to recover its investment if the portfolio company fails; (ii) growth potential for significant appreciation of the Company's equity interests; (iii) a perceived shortage of investment capital on the general terms offered by the Company; (iv) barriers to entry, such as licenses or franchises, that limit competition; (v) active and sophisticated equity investors who will refer pre-screened investment opportunities; and (vi) other sources of complementary financing (equity capital, senior term debt, lines of credit, etc.). It is unlikely that all of these factors will be present in any industry in which the Company invests, and the Company may invest in industries where only a few of these factors are present. A substantial part of the Company's investments since the early 1990s have been in the radio broadcast industry, which comprised 70.1% of the Company's investment portfolio as of March 31, 1997. The Company has also invested in the rural telephone industry and the airport food and beverage service industry, which comprised 14.9% and 8.8%, respectively, of the Company's investment portfolio as of that date. The Company intends to continue investing in these three industries, and to identify and develop new investment opportunities in other selected industries where most of the industry criteria referred to above are satisfied. To develop new investment opportunities, the Company intends to expand its referral network of venture capitalists, minority entrepreneurs, investment bankers, attorneys, accountants, commercial bankers and business brokers. INVESTMENT STRUCTURE. The Company's goal is to obtain on average roughly half of its investment return from interest and fees and the other half from equity appreciation. The Company typically structures its investments as the purchase at face value of a debt security which is accompanied by a warrant to acquire a portion of the portfolio company's capital stock at a nominal exercise price. A typical investment by the Company has been in the range of $500,000 to $3 million per portfolio company, though the Company may make both smaller and larger investments. 3 If the Company is able in the future to increase its capital for investment, it is likely that the average investment size will increase. The promissory notes which the Company purchases typically have a five to seven year maturity, a fixed interest rate of approximately 12 to 14%, and generally require payment monthly of interest only, with all principal due at maturity. These notes are typically collateralized by a security interest in the assets of the portfolio company, and the indebtedness and security interest may be either senior or subordinated to indebtedness owed to other creditors. A personal guaranty by the major stockholder(s) of the portfolio company or other collateral may also be required. Generally there are no prepayment penalties and the notes may provide that, in the event of a default, the applicable interest rate will increase. The Company typically charges an origination and processing fee of up to 3% of the amount of the note, which is paid by the portfolio company from the proceeds invested by the Company. SBA LEVERAGE TO ENHANCE INVESTMENT RETURN. Part of the Company's strategy is to enhance the return on its investments by employing leverage in the form of debt capital that has been obtained at favorable interest rates from the SBA or in reliance on an SBA guaranty. As of March 31, 1997, the Company had outstanding a total of $9.3 million in debt instruments held or guaranteed by the SBA, consisting of (i) a promissory note with a principal balance of $1.8 million which bears interest at 8.375% and matures on April 1, 2000, and (ii) two debentures with an aggregate principal balance of $7.5 million which each bear interest at 7.08% and mature in 2006. Subsequent to March 31, 1997, the Company has applied to the SBA for an additional $3.0 million of debt financing, and the Company plans to apply for additional SBA financing in the future. There is no assurance that this or any future SBA financing will be available. Availability depends on annual Congressional appropriations, the general discretion of the SBA, the Company's ability to demonstrate its need for the financing, the demand for such financing from SSBICs and small business investment companies ("SBICs") and the Company's overall compliance with SBA regulations. DESIRED CHARACTERISTICS OF PORTFOLIO COMPANIES The Company's goal is to invest in companies in its selected industries which meet most of the following criteria, although all the criteria may not be met in every instance and their importance may vary depending on the circumstances. * GROWTH. In addition to generating sufficient cash flow to service the prospective investment, the potential portfolio company typically should have a projected annual growth rate for operating income (income before interest, taxes, depreciation and amortization) of at least 20%, or some other factor (such as the prospect of upgrading a radio station license) to increase its equity value. Since the Company's strategy anticipates that approximately half of the Company's total investment return will derive from the equity portion of the investment, anticipated growth is a key factor in the Company's assessment of an investment opportunity. 4 * LIQUIDATION VALUE OF ASSETS. The expected liquidation value of assets securing the debt to the Company is an important component in the Company's investment decision. Liquidation value includes both tangible assets, such as accounts receivable, inventory, property, plant and equipment, and intangible assets, such as customer lists, networks, databases, government licenses and recurring revenue streams. * SOPHISTICATED EQUITY INVESTORS. A potential portfolio company should have sophisticated equity investors whose equity position is subordinate to the Company's right of repayment. These equity investors enhance the due diligence process and the financial sophistication of the portfolio company and provide increased controls and a potential source of follow-on capital. The involvement of sophisticated equity investors tends to increase the Company's confidence in a potential portfolio company and its management team and the potential long-term value of the portfolio company. * EXPERIENCED MANAGEMENT TEAMS. The Company seeks potential portfolio companies with experienced management teams who have a significant ownership interest and the background necessary to carry out the portfolio company's business plan. * POSITIVE CASH FLOW. The Company generally focuses on potential portfolio companies that either already have positive cash flow from operations (income before interest, taxes, depreciation and amortization) or appear to have strong potential to achieve positive cash flow from operations within one year. The Company typically will not invest in start-up companies, except where the expected liquidation value of the assets is sufficient to provide security for the Company's debt investment and there are prospects for rapid growth. * EXIT STRATEGY. Prior to making an investment, the Company analyzes the capacity of the potential portfolio company to repay the Company's debt investment and to experience a liquidity event that would allow the Company to realize value for its equity position. Liquidity events include a public offering, a sale of the portfolio company or one or more of its key assets, or a purchase by the portfolio company or other equity holders of the Company's equity position. The Company's investments are made with the expectation that the debt investment will be repaid within five to seven years and the equity portion of the investment will be liquidated for cash within five to ten years. THE COMPANY'S INVESTMENT PORTFOLIO The Company's investment portfolio, as of March 31, 1997, consisted of the following 18 portfolio companies: 5
ESTIMATED FAIR INVESTMENT TYPE; VALUE AS OF PORTFOLIO COMPANY DATE OF INITIAL INVESTMENT COST MARCH 31, 1997 ----------------- -------------------------- ---- -------------- RADIO BROADCASTING: Citywide Communications, Inc. Secured Subordinated Debt $ 720,001 $ 720,001 650 Wooddale Boulevard with Warrants; 12/13/96 Baton Rouge, LA 70806 Davis Broadcasting, Inc. (1) Secured Senior Debt with 575,050 1,016,469 1115 Fourteenth Street Warrants; 6/29/92 Columbus, GA 31902 Davis Broadcasting of Charlotte, Inc.(1) Secured Senior Debt with 1,187,022 1,187,022 2303 West Morehead Street Warrants; 8/18/95 Charlotte, NC 28208 Eclectic Enterprises, Inc. Secured Senior Debt with 757,918 757,918 111 Marquette Avenue, Suite 100 Warrants; 7/18/95 Minneapolis, MN 55401 Progressive Media Group, Inc. Secured Senior Debt with 1,775,997 1,775,997 298 Commerce Circle Warrants; 2/10/94 Sacramento, CA 95815 Radio One, Inc. (2) Unsecured Senior Debt with 3,653,773 5,522,773 4001 Nebraska Avenue NW Warrants; 11/2/87 Washington, DC 20016 Seque Communications Corporation Secured Senior Debt with 1,969,740 1,969,740 32215 124th Street Warrants; 6/15/92 Princeton, MN 55371-3327 Z-Spanish Radio Network, Inc. Secured Subordinated Debt 3,200,458 3,200,458 4058 Flying C Road with Warrants; 9/5/96 Cameron Park, CA 95682 ------------ ------------ TOTAL RADIO BROADCASTING..... 13,839,959 16,150,378 RURAL TELEPHONE AND OTHER COMMUNICATIONS: First American Communications Secured Senior Debt with 2,261,698 2,661,698 Enterprise (1) Warrants; 10/24/95 2403 North Washington Avenue Durant, OK 74701 KTEN Television Limited Partnership Secured Subordinated Debt 481,010 776,463 101 E. Main, Suite 300 with limited partnership Box 1450 ("LP") Interest; 9/2/94 Denison, TX 75021 ------------ ------------ TOTAL RURAL TELEPHONE AND OTHER COMMUNICATIONS....... 2,742,708 3,438,161 6 AIRPORT FOOD AND BEVERAGE SERVICE: F. Howell, Ltd. (1) Secured Senior Debt with 330,032 330,032 6805 Landover Hills Lane LP Interest; 10/01/96 Arlington, TX 76017 MultiRestaurants Concepts, Ltd. (1) Secured Subordinated Debt 1,694,409 1,694,409 8008 Cedar Springs Road with LP Interest; 12/22/94 LB 19, Terminal Bldg. Dallas, TX 75235 ------------ ------------ TOTAL FOR AIRPORT FOOD AND BEVERAGE SERVICE ............ 2,024,441 2,024,441 OTHER INDUSTRIES: Applied Intelligent Systems, Inc. (3) Common Stock; 7/24/87 7,492 7,492 110 Parkland Plaza Ann Arbor, MI 48103-6201 (Computer vision systems) Cardinal Health Systems, Inc. (3) Secured Senior Debt with 741,447 445,738 4600 West 77th Street, Suite 150 Warrants and Common Edina, MN 55435-4923 Stock; 10/01/85 (PC based education for MDs) Micromedics, Inc. (3) Common Stock; 11/17/82 58,828 273,295 1285 Corporate Center Drive Suite 150 Eagan, MN 55121-1256 (Micro Surgical Med. Equip.) Quality Travel Services, Inc. Secured Senior Debt; 63,033 63,033 8891 Airport Road 2/02/96 Minneapolis, MN 55449 (Travel products) RioStar II Corporation Secured Subordinated Debt; 433,097 433,097 2800 Routh Street, Suite 210 12/31/93 Dallas, TX 75201 (Restaurants) Transportation Development LP Secured Senior Debt with 853,000 187,500 7000 57th Avenue North, Suite 123 LP Interest; 6/13/89 Crystal, MN 55428 (Taxi) ------------ ------------ TOTAL FOR OTHER INDUSTRIES.... 2,156,897 1,410,155 GRAND TOTAL.................... $20,764,005 $23,023,135 ------------ ------------ ------------ ------------
________________________________ (1) Portfolio companies where a Company officer is a member of the Board of Directors. (2) On May 19, 1997 Radio One, Inc. raised $75 million in a public debt offering and the Company converted its debt investment to preferred stock carrying a 15% cumulative dividend. 7 (3) Portfolio companies for which the Company's investment was made before 1987 by prior management. FOCUS ON SELECTED INDUSTRIES RADIO BROADCAST. The Company's portfolio currently is concentrated in the radio broadcast industry, where as of March 31, 1997 the Company held investments in eight companies that operate 48 radio stations in 20 geographic markets. These companies comprised 70.1% of the estimated fair value of the Company's portfolio as of March 31, 1997. The radio stations operated by these companies include both AM and FM stations, large and small size listener markets, and a wide variety of programming formats. The Company believes the radio broadcast industry has an attractive investment profile because: (i) there are multiple sources of equity financing for radio stations that develop and pre-qualify potential investments; (ii) commercial radio licenses and broadcast equipment have realizable value as collateral, even if the radio station is off the air or otherwise not a going concern; (iii) the acquisition market for radio stations is relatively well developed, with established brokers and potential buyers; (iv) there are recognized valuation methods that apply on a nationwide basis and a number of qualified companies that provide appraisals of radio station properties; and (v) in management's experience, there has been a shortage of investors who will provide $1 to $5 million of debt financing, which includes the range of debt investments sought by the Company. Recent liberalization of the laws governing ownership of multiple radio stations has resulted in substantial consolidation of the radio station market. This consolidation, together with record industry revenues, has driven values for radio stations to historic highs. While this has substantially increased the value of the Company's radio station equity investments, it has also made it more difficult for the Company to find new investment opportunities on attractive terms. RURAL TELEPHONE. As of March 31, 1997, the Company had invested in a business which owned one rural telephone company. Subsequent to March 31, 1997 the Company made an additional investment in this business in connection with its acquisition of two additional rural telephone companies. The Company considers the rural telephone industry to be attractive, and plans to seek additional investments in this area. Rural telephone companies enjoy limited competition, barriers to entry by potential competitors, a "franchise value," and the potential to increase profitability through the growth of related businesses, such as cellular telephone and cable services. AIRPORT FOOD AND BEVERAGE SERVICE. The Company has invested in two companies that operate 22 food and beverage outlets (with an additional three under construction ) and three retail outlets (with an additional two under construction) in the Dallas/Ft. Worth, Dallas Love Field and Corpus Christi airports. The Company considers this industry attractive, and is actively seeking additional investment opportunities in the industry, because typically: (i) there is limited and controlled competition within an airport; (ii) in the event of a liquidation, the right to the premises in the airport has a value beyond that normally associated with food service businesses; (iii) airports are actively recruiting minority-owned vendors; (iv) the businesses in which the Company invests 8 are often franchisees of well-known and proven food service systems (e.g. Burger King, Chili's, Pizza Hut and Taco Bell) that have national support organizations; and (v) airports generally study sales patterns before choosing a food service concept for a particular space, thus increasing the likelihood of success. OTHER INDUSTRIES. The Company intends to identify other industries for potential investments to the extent management deems it appropriate in order to maintain a large number of investment opportunities relative to the Company's investment capital. To date, the Company has been limited in its efforts to undertake new investments due to lack of investment capital, rather than a lack of investment opportunities. VALUATION OF INVESTMENTS The Company's Board of Directors values the debt and equity securities in the Company's portfolio at least semi-annually based on a variety of relevant factors specified by the SBA. The Company adjusts its valuation of an investment quarterly for material changes. Debt securities are generally valued at the amount of the outstanding principal, unless management believes that the prospect of collection is impaired. Equity securities are valued on the basis of quotations in public or private markets (where available), appraisals, the financial strength and profitability of the portfolio company, the level of confidence in management and the business prospects of the portfolio company. As an SSBIC, the Company is required by applicable SBA regulations to submit such valuations to the SBA semi-annually. For further discussion of the Company's valuation policies, see Note 1 to the Company's Financial Statements. REALIZATION ON INVESTMENTS The Company's investments in portfolio companies are made with the expectation that the debt investment will be repaid within five to seven years and that the equity portion of the investment will be liquidated for cash in five to ten years. Typically, the Company realizes its return and exits its investment in a portfolio company when the business is sold or refinanced by others, the securities held by the Company are redeemed, the business is liquidated or the portfolio company conducts a public offering. DELINQUENCIES AND NON-ACCRUALS ON INVESTMENTS From time to time, some of the Company's portfolio companies are delinquent in their payment obligations to the Company. When such delinquencies occur, the Company analyzes the reason it occurred, whether it can be cured, its likely effect on both the portfolio company and the Company's investment, and the value of any collateral securing the investment. From this assessment the Company determines whether it will seek to waive, amend or restructure the terms of the investment, attempt to cause a sale or liquidation of the portfolio company, or take legal action. A waiver, amendment or restructure of the delinquent obligation is often conditioned on the portfolio company agreeing to actions such as increasing the size or improving the terms of the 9 Company's equity interest, obtaining additional equity from other sources, making management changes or selling assets. A payment delinquency also causes management to reassess the valuation and future accounting treatment for the Company's investment in the portfolio company. If management believes that the value of the collateral securing the debt investment (or other circumstances, such as a third party guaranty) makes it likely that both principal and interest will be recovered, then the Company will continue to accrue interest on the debt security as it comes due, even though the interest is not actually paid at that time. However, if management believes that interest owed on the debt instrument will not be collected, then the debt investment is placed on non-accrual status, and any further interest income is recognized only when cash is received. If management believes that the prospect of recovering the principal of a debt investment is impaired, then it records unrealized depreciation to reflect the estimated fair value and thereafter payments of interest are treated as reductions in the principal amount of the indebtedness. As of March 31, 1997, two portfolio companies were materially delinquent in making principal and interest payments owed to the Company. The Company carries these investments at a fair value of approximately $2.2 million. In one of these cases, the Company has continued to accrue interest on its investment (a total of $576,000 of such interest accruals as of March 31, 1997) because, based on the value of the collateral securing the investment, the Company believes that it is probable that both principal and interest will be recovered, though there is no assurance of this. The Company has brought suit against this portfolio company and certain of its principals, as described in Item 8 below, to foreclose on the Company's security interest. In the other material delinquency case, the Company ceased accruals of interest in October 1996, and the portfolio company has agreed to sell real estate it owns to repay its indebtedness to the Company. The Company has not recorded any unrealized depreciation because management believes that the carrying value on this investment will be recovered. In addition to the investment on non-accrual status referred to immediately above, the Company has three other debt investments which have been restructured and on which the Company was not accruing interest as of March 31, 1997. Each of these three portfolio companies is in a work-out process, and under the restructured terms the Company has agreed with each of them that payments are due to the Company only when and as funds are received by the portfolio company. One of these investments (approximately $430,000) is about to be liquidated with full recovery of principal and all contractual interest, which will result in recognition of approximately $44,000 of interest income. For the second restructured investment (having a fair value of approximately $1.9 million), management expects to recover all principal and may recover some or all contractual interest. The third restructured investment has been depreciated to a fair value of approximately $187,500 as of March 31, 1997. The Company has experienced numerous defaults by portfolio companies that do not involve delinquent payments, and the Company expects such non-monetary defaults to occur from time to time in the future. Many of these defaults are not material. As in the case with payment delinquencies, the Company attempts to assess promptly the reason the default occurred, whether 10 it can be cured, and its likely affect on both the portfolio company and the Company's investment. The Company then determines what action is appropriate. TEMPORARY INVESTMENTS Pending investment in the types of securities described above, the Company typically invests its funds principally in repurchase agreements with federally insured financial institutions that are collateralized by securities issued or guaranteed by the federal government. The Company may also temporarily invest in securities issued or guaranteed by the federal government or a federal government agency that mature in 15 months or less, or deposits in or certificates of deposit issued by federally insured financial institutions having a net worth of $50 million or more which mature in one year or less. SBA REGULATION As an SSBIC, the Company is subject to SBA regulations which cover many aspects of its operations and ownership. These regulations generally apply equally to both SSBICs and SBICs. The SBA's regulations include, without limitation, the following requirements: (i) The businesses in which the Company invests must at the time of investment meet the SBA definition of "small" by having a net worth of $18 million or less or an average annual net income of $6 million or less, or by meeting certain other industry-based criteria. (ii) The businesses in which the Company invests must be at least 50% owned by persons who are either socially or economically disadvantaged, as defined by SBA regulations. These regulations define such a disadvantage to exist on the basis of either (i) membership in one or more specified minority groups (which includes Blacks, American Indians, Eskimos, and persons of Mexican, Puerto Rican, Cuban, Filipino or Asian extraction), or (ii) individual factors such as income, education, handicap, geographic location or service in the Armed Forces during the Vietnam War era. This requirement is applicable to SSBICs, but not to SBICs. (iii) The maximum annual interest or financing cost charged to a portfolio company (exclusive of an origination or processing fee of up to 3%) generally may not exceed the greater of 14% for debt investments with an equity participation, 19% for debt investments without an equity participation, or specified higher limitations if the average cost of the Company's financing provided by the SBA exceeds 8%. (iv) Total financing and commitments to any single portfolio company may not exceed 30% of an SSBICs, or 20% of an SBICs, regulatory capital. An SSBIC may not provide investment funds for certain purposes, such as investment outside of the United States and its territories. (v) The maturity of debt financing generally may not be less than four nor more than 20 years. 11 (vi) Prior approval by the SBA is required for any proposed transfer of control of an SSBIC or the acquisition of more than 10% of an SSBIC's outstanding capital stock. (vii) Prior approval by the SBA is required for an SSBIC to merge, consolidate, or engage in a corporate reorganization. (viii) Any management and advisory services provided by an SSBIC for a fee must be in accordance with a written contract and must satisfy certain record-keeping requirements. (ix) There are restrictions on the ability of an SSBIC to repurchase its capital stock, retire its debentures, or provide funding to its officers, directors, employees or their affiliates. (x) There are limitations on any officer, director or 10% or more stockholder becoming an officer, director or 10% or more stockholder of another SSBIC. SBA FUNDING As an SSBIC, the Company is eligible to receive a portion of its financing from the SBA (often referred to as "leverage") at favorable rates to supplement its investment capital obtained from non-governmental (i.e. "private") sources. The terms of the SBA's programs for funding SBICs and SSBICs have varied over the years. These programs were significantly modified, and the funding distinctions between SBICs and SSBICs generally eliminated, by federal legislation enacted on October 1, 1996. This legislation also terminated the SBA's authority to issue new SSBIC licenses. Existing SSBICs such as the Company have the right to remain as SSBICs or, with the approval of their stockholders, remove the restriction requiring that their investments be in minority-owned businesses. Under current law, the SBA provides funding to both SBICs and SSBICs by providing a government guarantee for fixed rate subordinated debentures or participating preferred securities which are issued by the SBIC or SSBIC and sold through the SBIC Funding Corp. The interest rate on these debentures is based on the prevailing market rate and they typically have a ten year term. There is a user fee of 3% of the principal amount of the debentures guaranteed by the SBA, plus an annual fee of 1% of the principal amount. The maximum amount of debenture financing which is available to an SSBIC is generally 300% of its paid-in capital and surplus, but other eligibility requirements and the availability of funds to the SBA can impose lower limitations in practice. The Company understands that the fiscal 1998 budget which President Clinton submitted to Congress proposes $376 million in SBA funding for debentures, a 25% increase over the amount for fiscal 1997. There is no assurance that these funds will actually be appropriated or, if appropriated, that any of these funds would be made available to the Company. As of March 31, 1997, the Company had outstanding a total of $9.3 million in debt instruments held by the SBA, consisting of (i) a promissory note with a principal balance of $1.8 million which bears interest at 8.375% and matures on April 1, 2000, and (ii) two debentures with an aggregate principal balance of $7.5 million which each bear interest at 7.08% and mature in 2006. 12 The Company plans to seek additional SBA debenture financing in the future as it is needed to make investments, but there is no assurance that it will be obtained. Availability depends not only on appropriations by the Congress, but also the general discretion of the SBA, the Company's ability to demonstrate its need for the financing, and the Company maintaining overall compliance with SBA regulations. The Company is subject to a Repurchase Agreement dated March 31, 1993 with the SBA (the "Repurchase Agreement") under which the Company redeemed at a substantial discount all of the Company's then outstanding 3% Preferred Stock, having a par value of $10.0 million, which had been issued to the SBA under a funding program that was subsequently discontinued. The redemption price was paid by the Company issuing to the SBA the promissory note referred to above, which had an original face amount of $3.6 million and a remaining principal balance of $1.8 million as of March 31, 1997. As a condition to the redemption of the 3% Preferred Stock, the Company granted the SBA a liquidating interest in a newly created restricted capital surplus account equal to the amount of the repurchase discount of $6.4 million. This liquidating interest is being amortized over an 84 month period on a straight line basis, and as of March 31, 1997 had been reduced to $2.8 million. Should the Company default under the Repurchase Agreement at any time (there have been no defaults to date), the liquidating interest will become fixed at the level immediately preceding the event of default and will not decline further until the default is cured or waived. The liquidating interest will expire on the later of (i) 60 months from the date of the Repurchase Agreement (i.e. March 31, 1998), (ii) the date the repurchase note is paid in full, or (iii) if an event of default has occurred and the default has been cured or waived, the later date on which the liquidating interest is fully amortized. Should the Company voluntarily or involuntarily liquidate prior to the expiration of the liquidating interest, any assets which are available, after the payment of all debts of the Company, shall be distributed first to the SBA until the amount of the then remaining liquidating interest has been distributed to the SBA. That payment, if any, would be prior in right to any payments of the Company's stockholders. For financial reporting purposes, the Company's balance sheet shows a restricted capital account equal to the value of the SBA's liquidating interest. As the liquidating interest declines, the restricted capital account is reduced and additional paid-in capital is increased. The Repurchase Agreement provides that the amount of the discount from the repurchase of the 3% Preferred Stock may not be used for obtaining SBA leverage. MARKETING FOR INVESTMENT OPPORTUNITIES Almost all of the Company's investment opportunities have developed from management's contacts with other investors in minority-owned businesses and with existing investors in the industries in which the Company focuses its investments. Management is continually seeking to broaden its contacts and increase its visibility among minority-owned business investors and participants in selected industries. This is done by attending industry trade shows, cultivating relationships with existing investors in target industries, identifying potential minority entrepreneurs, and studying target industry periodicals and literature. 13 COMPETITION The Company's principal competitors include non-traditional lenders, venture capital firms and financial institutions. Many of these entities have greater financial and managerial resources than the Company. The Company believes that it competes primarily on the basis of its reputation as an investor in minority-owned businesses, its contacts among minority entrepreneurs and other minority-owned business investors, its flexibility in structuring the specific terms of investments, the reduced access to investment capital from traditional sources which is faced by many minority-owned businesses, and reduced competition from other financing sources for investments in the $1 to $3 million range. EMPLOYEES The Company currently has five full-time employees, all of whom are officers of the Company. These individuals are also employed by Capital Dimensions Management Corporation ("CDMC"), which since April 1, 1997 has provided management services under an agreement with the Company. See "Item 5. Directors and Executive Officers." TAXATION AS A REGULATED INVESTMENT COMPANY The Company's plan is to become eligible and elect to be taxed as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code for its fiscal year beginning July 1, 1997. Under Subchapter M, if the Company satisfies certain requirements as to the sources of its income, the diversification of its assets, and the distribution to stockholders of its pre-RIC earnings and profits (currently estimated to be approximately $3.0 to $5.0 million), the Company generally will be eligible to be taxed as a pass through entity which acts as a partial conduit of income to its stockholders. In order to continue to be eligible for Subchapter M treatment, in each fiscal year the Company must, in general, (i) derive at least 90% of its gross income from dividends, interest and gains from the sale or disposition of securities, (ii) derive less than 30% of its gross income from the sale or disposition of securities held for less than three months, (iii) meet certain investment diversification requirements, and (iv) distribute to stockholders at least 90% of its net income (other than long-term capital gains). There can be no assurance that the Company will be able to obtain and maintain eligibility for Subchapter M tax treatment. SBA regulations may limit the Company's ability to distribute to stockholders at least 90% of its net income. THE COMPANY'S OPERATIONS AS A BDC In order to meet one of the requirements for taxation under Subchapter M of the Internal Revenue Code, the Company anticipates that shortly after this Form 10 is filed it will also file an election to be regulated as a business development company ("BDC") under the 1940 Act. As a BDC, the Company may not acquire any asset other than "Qualifying Assets" unless, at the time the acquisition is made, Qualifying Assets represent at least 70% of the value of the Company's total assets. The principal categories of Qualifying Assets relevant to the Company's business are: 14 (i) securities purchased in private transactions from an "eligible portfolio company," which is any issuer that (a) is organized and has its principal place of business in the United States, (b) is not an investment company, other than a SBIC wholly-owned by the BDC, and (c) does not have any class of publicly-traded securities on which a broker may extend margin credit; (ii) securities received in exchange for or distributed with respect to securities described above, or pursuant to the exercise of options, warrants or rights relating to such securities; and (iii) cash, cash items, Government securities, or high quality debt securities maturing in one year or less from the time of investment. As a BDC the Company may not change the nature of its business so as to cease to be, or withdraw its election as, a BDC unless authorized by vote of a majority (as defined in the 1940 Act) of the Company's shares. ITEM 2. SELECTED HISTORICAL FINANCIAL AND OTHER DATA The following tables set forth selected financial data of the Company, which should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Company's Financial Statements and Notes thereto included elsewhere in this document. The selected statement of operations and balance sheet data as of and for the year ended June 30, 1996 have been derived from the financial statements of the Company which have been audited by Deloitte & Touche LLP, independent auditors, whose report is included elsewhere in this document. The selected statement of operations and balance sheet data set forth below as of June 30, 1995 and for the two years ended June 30, 1995 and 1994 have been derived from the financial statements of the Company which have been audited by Lurie, Besikof, Lapidus & Co., LLP, independent auditors, whose report is included elsewhere in this document. The selected statement of operations and balance sheet data set forth below as of June 30, 1994 and 1993, and December 31, 1992 and 1991 and for the six months ended June 30, 1993 and the years ended December 31, 1992 and 1991 have been derived from audited financial statements not included in this document. The selected statement of operations and balance sheet data set forth below as of March 31, 1997 and for the nine months ended March 31, 1997 and 1996 have been derived from the Company's unaudited financial statements, which reflect, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position and results of operations for those periods. The Company's operating results for the nine months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the entire fiscal year ending June 30, 1997. 15 SELECTED HISTORICAL FINANCIAL AND OTHER DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Year Ended Ended Nine Months December 31, June 30,(1) Year Ended June 30, Ended March 31, ---------------- ---------- -------------------------- ----------------- 1991 1992 1993 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Interest income (2) $ 1,042 $ 855 $ 460 $ 1,109 $ 1,304 $ 1,573 $ 1,151 $ 1,862 Operating expenses: Interest expense 287 209 130 278 242 251 166 345 General and administrative expense 570 472 263 526 523 630 464 667 Other (income) expense (5) 26 67 90 48 51 43 71 --------- --------- --------- --------- --------- --------- --------- --------- Total operating expenses 852 707 460 894 813 932 673 1,083 --------- --------- --------- --------- --------- --------- --------- --------- Net operating income 190 148 0 215 491 641 478 779 Gains (losses) on investments in small business concerns: Realized 244 414 (4) 1,278 3,663 508 462 (95) Unrealized (755) 782 647 (2,288) (1,153) 1,423 336 1,509 --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes and other charges (321) 1,344 643 (795) 3,001 2,571 1,276 2,192 Income (loss) before income taxes (3) 71 1,704 643 (795) 3,001 2,571 1,276 2,192 Income taxes 2 533 372 220 893 --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) 71 1,702 643 (795) 2,468 2,199 1,056 1,299 Dividends on preferred stock to SBA paid or restricted 300 300 30 120 120 120 90 56 --------- --------- --------- --------- --------- --------- --------- --------- Income (loss) applicable to common stock (229) 1,402 613 (915) 2,348 2,079 966 1,243 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Earnings (loss) per common share (4) ($.13) $.78 $.31 $(.47) $1.19 $1.09 $.49 $.73 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common and common equivalent shares outstanding(4) 1,800,000 1,801,914 1,963,362 1,962,948 1,980,102 1,912,227 1,964,301 1,761,681 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- December 31, June 30,(1) June 30, March 31, --------------- ----------- -------------------------- --------- 1991 1992 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- ---- ---- BALANCE SHEET DATA: Investments at cost $ 14,502 $ 15,474 $ 15,442 $ 16,083 $ 15,200 $ 17,513 $ 20,764 Unrealized appreciation (depreciation) on investments 1,338 2,121 2,769 480 (672) 750 2,259 --------- --------- --------- --------- --------- --------- -------- Investments at estimated fair value 15,840 17,594 18,211 16,563 14,528 18,263 23,023 Cash and cash equivalents 1,461 1,145 1,254 1,667 5,975 3,878 3,027 Total assets 17,750 19,090 19,727 18,544 21,090 23,360 27,009 Debentures and notes payable to SBA 3,000 3,000 3,476 3,070 2,632 4,168 9,286 Total liabilities 4,073 4,067 3,508 3,120 3,197 4,563 9,947 Redeemable preferred stock 3,030 3,150 3,270 3,010 Total stockholders' equity (4) $ 13,317 $ 15,023 $ 13,189 $ 12,274 $ 14,623 $ 15,787 $ 17,062 Six Months Year Ended Ended Nine Months December 31, June 30,(1) Year Ended June 30, Ended March 31, ---------------- ---------- -------------------------- ----------------- 1991 1992 1993 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- ---- ---- ---- OTHER SELECTED DATA: Number of portfolio companies at period end 28 29 27 22 18 17 18 18 Number of new portfolio companies 2 3 5 5 5 3 New advances to portfolio companies $ 1,257 $ 2,470 $ 286 $ 1,281 $ 1,000 $ 6,539 $ 5,121 $ 3,025 Proceeds from liquidation of investments 1,038 562 381 2,276 3,760 3,896 3,870 120 Estimated Fair value of investment portfolio at period end 15,840 17,594 18,211 16,563 14,528 18,263 15,942 23,023
_________________ (1) In 1993, the Company changed its fiscal year end from December 31 to June 30, resulting in a six-month transition period. (2) The year ended December 31, 1991 includes $69,000 of dividend income. (3) During each of the years ended December 31, 1991 and 1992, the Company had negative goodwill amortization of $392,268. This negative goodwill related to the management buy out in 1987 and was fully amortized by December 31, 1992. 16 (4) The Company's Board of Directors approved a 3-for-1 stock split issued in the form of a 200% dividend effective May 31, 1997 to shareholders of record on May 31, 1997. All share and per share amounts have been restated to reflect this stock split. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the preceding "Selected Historical Financial and Other Data," the Company's Financial Statements and Notes thereto and the other financial data included elsewhere in this document. The dollar amounts below have been rounded in order to simplify their presentation. However, the ratios and percentages are calculated using the detailed financial information contained in the Financial Statements and the Notes thereto and the financial data included elsewhere in this document. References to years are for the respective fiscal years ended June 30, unless otherwise noted. OVERVIEW The Company's principal investment objectives are to achieve a high level of income from both interest on loans and debt securities, generally referred to as "debt investments" and long-term appreciation in the value of equity interests in its portfolio companies. The Company's debt investments are typically secured, have relatively high fixed interest rates, and are accompanied by warrants to purchase equity securities of the borrower. In addition to interest on debt investments, the Company also typically collects an origination fee on each debt investment. The Company's financial performance is composed of four primary elements. The first is "income before gains (losses) in small business concerns," which is the difference between the Company's income from interest and fees and its total operating expenses, including interest expense. Interest income is earned on debt investments and the temporary investment of funds available for investment in portfolio companies, which are presented in the Company's balance sheets as cash equivalents. The second element is "realized gains (losses) on investments," which is the difference between the proceeds received from the disposition of portfolio assets in the aggregate during the period and the cost of such portfolio assets. The third element is the "change in unrealized appreciation (depreciation) of investments," which is the net change in the estimated fair values of the Company's portfolio assets at the end of the period as compared with their estimated fair values at the beginning of the period or the cost of the portfolio asset, if purchased during the period. Generally, "realized gains (losses) on investments" and "changes in unrealized appreciation (depreciation) of investments" are inversely related. When an appreciated asset is sold to realize a gain, a decrease in unrealized appreciation occurs when the gain associated with the asset is transferred from the "unrealized" category to the "realized" category. Conversely, when a loss is realized by the sale or other disposition of a depreciated portfolio asset, the reclassification of the loss from "unrealized" to "realized" causes an increase in unrealized appreciation and an increase in realized loss. The fourth element is "tax expense". The Company is currently taxed as a "C" corporation. Following the filing of this Form 10, the Company intends to qualify for taxation under 17 Subchapter M. For a discussion of Subchapter M, see "Business--Taxation as a Regulated Investment Company" in Item 1 of this Form 10. RESULTS OF OPERATIONS NINE MONTHS ENDED MARCH 31, 1997 AND 1996 INTEREST INCOME. During the nine months ended March 31, 1997, the Company earned interest on debt investments of $1.7 million, an 85% increase over the $941,000 earned in the nine-month period ended March 31, 1996. This increase in interest income resulted primarily from increases in the dollar amount of debt investments outstanding during the applicable periods, as there were no material changes in the average interest rate earned. The Company's debt investments (at cost) increased to $19.6 million at March 31, 1997, an increase of 35% from $14.5 million at March 31, 1996. During the nine months ended March 31, 1997, the Company earned interest on funds available for investment of $126,000, a 40% decrease from the $210,000 earned during the first nine months of 1996. This decrease was the result of portfolio investing and the resultant lower balances of funds available for investment during the nine months ended March 31, 1997. INTEREST EXPENSE. The Company's interest expense, which related to the SBA financing, was $345,000 for the first nine months of 1997, a 108% increase over the $166,000 for the comparable period in 1996. The change in interest expense is directly related to the level of borrowings from the SBA, which were $9.3 million as of March 31, 1997, and $4.2 million as of March 31, 1996. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled $667,000 for the first nine months of 1997, a 44% increase over the $464,000 during the comparable period in 1996. The increase was due primarily to increases in staffing and employee compensation. General and administrative expenses as a percentage of total assets were 2.5% and 2.1% for these respective periods. OTHER EXPENSES. These expenses include legal, audit and trade association expense. REALIZED GAINS (LOSSES) ON INVESTMENTS. The Company's net realized loss on investments was ($95,000) for the nine months ended March 31, 1997, compared to a net realized gain of $462,000 for the nine months ended March 31, 1996. The losses in 1997 resulted from the realization of previously recorded unrealized depreciation on investments in two portfolio companies. The gain in 1996 resulted primarily from the sale of the Company's equity position in one portfolio company. INCOME TAXES. The Company incurred federal and state income tax expense of $893,000 in the first nine months of 1997 (an effective rate of 40%), and $220,000 in the first nine months of 1996 (an effective rate of 17%). The effective rate for 1996 resulted from reversal of valuation allowances relating to deferred tax assets, which had been established in prior periods. As of June 30, 1996, all such valuation allowances had been eliminated. 18 CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS. For the nine months ended March 31, 1997 and 1996, the Company recorded net unrealized appreciation of investments of $1.5 million and $336,000, respectively. These changes are the result of the Company's revaluation of its portfolio in accordance with its valuation policy to reflect the change in estimated fair value of each of its portfolio assets. The unrealized gains in the 1996 and 1997 periods resulted from valuation changes in several investments. The unrealized gains in 1996 were partially offset by the realized gain discussed above. A description of all of the Company's debt investments is presented under the caption "Business--The Company's Investment Portfolio" in Item 1 of this Form 10. FISCAL YEARS ENDED JUNE 30, 1996, 1995, AND 1994 INTEREST INCOME. During the fiscal year ended June 30, 1996, the Company earned interest on debt investments of $1.3 million , a 6.6% increase over the $1.2 million earned in 1995, which was a 15.7% increase over the $1.1 million earned during 1994. These increases in interest income resulted primarily from increases in the dollar amount of debt investments outstanding during the applicable periods, as there were no material changes in the average interest rate earned on outstanding debt investments. The Company's debt investments (at cost) increased to $16.1 million at June 30, 1996, an increase of 47% from $10.9 million at June 30, 1995, which in turn was a 5.2% decrease from $11.5 million at June 30, 1994. During 1996, the Company earned interest on funds available for investment of $266,000, a 237% increase over the $79,000 earned in 1995, which was a 58% increase over the $50,000 earned in 1994. The increased income in 1995 and 1996 was the result of the sale of an investment during the fourth quarter of 1995, which resulted in unusually high fund balances during a portion of 1995 and most of 1996. A substantial portion of these funds were committed for investments that had not yet closed. INTEREST EXPENSE. The Company's interest expense, which related to the SBA financing, increased to $250,600 in 1996, a 3.2% increase over the $243,000 in 1995, which in turn was a 12.7% decrease from the $278,000 of interest expense in 1994. These changes in interest expense are directly related to the level of borrowings from the SBA, which were $4.2 million, $2.6 million and $3.1 million on June 30, 1996, 1995, 1994, respectively. GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and administrative expenses totaled $630,000 in 1996, a 20.3% increase over the $524,000 in 1995, which in turn was a .04% decrease from the $526,000 in 1994. The increase from 1996 over 1995 was due primarily to increases in employee compensation. Although the dollar amount of these expenses increased over the three-year period, general and administrative expenses as a percentage of total assets remained fairly constant at 2.7%, 2.5% and 2.8% for 1996, 1995 and 1994, respectively. OTHER EXPENSES. These expenses include legal, audit and trade association expense. Other expenses in 1994 were unusually high because of bad debt expense and legal fees. 19 REALIZED GAINS (LOSSES) ON INVESTMENTS. The Company's net realized gains on investments in 1996, 1995 and 1994 were $508,000, $3.7 million and $1.3 million, respectively, as a result of sales of the Company's equity position in one portfolio company in each of those years. INCOME TAXES. The Company incurred federal and state income tax expense of $372,000 in 1996 (an effective rate of 14%), $532,000 in 1995 (an effective rate of 18%), and did not incur income tax expense in 1994. During 1994, the Company incurred pretax losses, but did not record the benefit of the associated net operating loss carry forwards in the statement of operations because realization of that benefit was uncertain. The effective tax rates for 1996 and 1995 are substantially lower than the statutory rate as a result of the reversal of valuation allowances which had been established against deferred tax benefits recorded in prior periods. CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS. For the year ended June 30, 1996, the Company recorded net unrealized appreciation of investments of $1.4 million, and net unrealized depreciation of ($1.2 million) and ($2.3 million) for the years ended June 30, 1995 and 1994, respectively. The unrealized gains in 1996 resulted from changes in the valuations of several portfolio investments in accordance with the Company's valuation policies. The unrealized losses in 1995 and 1994 reflected the realized gain from the sale by the Company of its equity position in one portfolio company in each of those years and the reduction in market value of two publicly traded equity securities in the Company's portfolio. A description of all of the Company's investments is included under the caption "Business--The Company's Investment Portfolio" in Item 1 of this Form 10. Financial Condition, Liquidity and Capital Resources At March 31, 1997, the Company had $3.0 million in cash and cash equivalents. The Company's principal sources of capital to fund its portfolio growth have been borrowings through the SBA sponsored SBIC debenture program, principal payments on debt investments, and sales of the Company's equity positions in certain portfolio companies. Principal payments made to the Company on its debt investments were $767,000 and $946,000 for the first nine months of 1997 and 1996, respectively, $1.2 million in 1996, $2.2 million in 1995, and $260,000 in 1994. For fiscal 1998, the scheduled principal payments owed to the Company on existing debt investments are $606,000. Cash proceeds from the sale of equity positions were $120,000 and $3.9 million for the first nine months of 1997 and 1996, respectively, $3.9 million for 1996, $3.8 million for 1995 and $2.3 million for 1994. The Company's operations have been limited by the availability of capital, rather than investment opportunities. As a result, the Company's ability to make new portfolio investments has been limited to the redeployment of proceeds from the realization of existing investments. The Company borrowed $5.5 million from the SBA in December 1996 and $2.0 million in March 1996. Each of these borrowings was evidenced by a debenture. The proceeds were, in part, used to repurchase at par $3.0 million of the Company's preferred stock which had previously been 20 issued to the SBA and to pay accrued dividends thereon. This brought total indebtedness on SBA borrowings to $9.3 million at March 31, 1997. The two debentures are non-amortizing, mature in 2006 and can be prepaid without penalty after five years. The interest rate on these debentures is 7.08%, payable quarterly. The remaining portion of the Company's SBA borrowings is evidenced by a seven year, 8.375% interest, fully amortizing note that matures on April 1, 2000, and requires quarterly principal and interest payments of $169,872. The balance on the note was $1.8 million as of March 31, 1997. The Company has applied to receive an additional $3.0 million of SBA debt financing as part of the SBA's third quarter debenture funding. There is no assurance that any funding will be obtained. Based on the Company's current leverageable capital (as defined by the SBA), it is eligible to borrow up to a total of $14.5 million from the SBA. The $3.0 million of debt investments made by the Company for the nine months ended March 31, 1997 was a 31% decrease over the comparable period in 1996. The $6.5 million of debt investments made by the Company during 1996 was a 600% increase over the $934,000 of investments made in 1995, which was a 27% decrease from the $1.3 million invested in 1994. As of March 31, 1997, the Company had outstanding commitments to provide financing totaling $1.4 million. Although the Company continues to review new investment requests, no additional commitments are anticipated until additional capital is obtained or one or more existing investments are sold. The Company does not currently have a line of credit or revolving credit facility. The Company expects to raise $20 million of additional capital through a private placement of its common stock during the fiscal quarter ending September 30, 1997. If completed, the proceeds of the offering will be used to pay a dividend, which is currently estimated to be approximately $3.0 to $5.0 million, to current stockholders in order to meet one of the requirements for Subchapter M tax treatment. The remaining net proceeds will be used for making investments in current and new portfolio companies. ITEM 3. PROPERTIES The Company's operations are conducted from approximately 2,100 square feet of leased office space in a suburb of Minneapolis, Minnesota. The lease expires June 30, 1998. This facility is sufficient to meet the Company's current requirements. As new employees are hired, the Company anticipates leasing additional office space at or near the current location. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company's Articles of Incorporation authorize 9,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock. As of May 31, 1997, there were 1,680,438 shares of Common Stock outstanding, which reflects a stock dividend paid on May 31, 1997 of two shares for each share of Common Stock held as of that date. All share information in this Form 10 gives effect to 21 that stock dividend. There are currently 70 record holders of Common Stock. No shares of the Company's Preferred Stock are outstanding. The following table sets forth certain ownership information as of May 31, 1997 with respect to the Common Stock for (i) those persons who directly or indirectly own, control or hold with the power to vote 5% or more of the outstanding Common Stock, (ii) each of the directors and named executive officers of the Company, and (iii) all directors and officers as a group. COMMON STOCK PERCENT OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OUTSTANDING SHARES - ----------------------- ---------------------- ------------------ Thomas F. Hunt, Jr. (2) 466,203 27.0% 555 East 215th Jordan, MN 55352 Dean R. Pickerell 416,550 24.1 15120 Evelyn Lane Minnetonka, MN 55345 Stephen A. Lewis 15,909 * 1550 E. 140th Street Burnsville, MN 55337 Mervin Winston 0 * 2205 Holly Lane Plymouth, MN 55447 Brenda L. Leonard 68,763 4.0 7277 Bren Lane Eden Prairie, MN 55346 Martin J. Kanter 39,000 2.3 6624 Dovre Drive Edina, MN 55436 Dale C. Showers (3) 33,000 1.9 6408 Parkwood Road Edina, MN 55436 All Officers and Directors as a Group (7) persons 1,039,425 56.8% _______________ * Less than 1%. (1) Includes the following number of shares of Common Stock which may be issued pursuant to stock options that are exercisable within 60 days of the date hereof: Mr. Hunt, 48,000; Mr. Pickerell, 48,000; Ms. Leonard, 24,000; Mr. Showers, 21,000; Mr. Kanter, 9,000; and all directors and officers as a group, 150,000 shares. (2) Mr. Hunt disclaims beneficial ownership with respect to 8,000 shares of Common Stock held in trust for Mrs. Hunt by her father. (3) Mr. Showers disclaims beneficial ownership with respect to 1,000 shares of Common Stock owned by his son Thomas Showers. 22 ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS Prior to March 31, 1997, the Company was a wholly owned subsidiary of Capital Dimensions, Inc. ("CDI"). Effective March 31, 1997, CDI and the Company were merged with the Company being the surviving entity (the "Merger"). Prior to the Merger, management services were provided to the Company by CDI under a Joint Investment Adviser Management Agreement (the "Management Agreement"). Under the terms of the Merger, CDI's interest in the Management Agreement was assigned to Capital Dimensions Management Company, Inc. ("CDMC"). This assignment was approved by CDI's stockholders. CDMC is owned and operated by Messrs. Hunt, Pickerell, Lewis and Winston and Ms. Leonard; each of whom is also employed by CDMC. The monthly management fee paid to CDMC by the Company is one-fourth of one percent (0.25%) of the Company's average monthly assets (the equivalent of 3% per annum), less the amount of all payroll and payroll-related expenses paid by the Company. Each of the employees of CDMC is also employed by the Company. It is intended that all future employees of CDMC will also be employees of the Company. The executive officers and directors of the Company and their ages as of June 13, 1997 are as follows: NAME AGE POSITION WITH COMPANY ---- --- --------------------- Thomas F. Hunt, Jr.(1).... 48 President and Director Dean R. Pickerell(1)...... 49 Executive Vice President and Director Stephen A. Lewis.......... 49 Vice President Mervin Winston............ 56 Vice President and Controller Brenda L. Leonard......... 47 Vice President and Corporate Secretary Martin J. Kanter(2)....... 51 Director Dale C. Showers(3)........ 67 Director ________________________ (1) Term as director expires at the Annual Meeting of Stockholders in 1999. (2) Term as director expires at the Annual Meeting of Stockholders in 1998. (3) Term as director expires at the Annual Meeting of Stockholders in 1997. The following is a brief summary of the business experience of each of the executive officers and directors of the Company: THOMAS F. HUNT, JR. Mr. Hunt is president of the Company, and was president of Control Data Community Ventures Fund, Inc. ("CDCVFI"), the Company's predecessor. He is also the president of CDMC. Mr. Hunt practiced law at a law firm and was corporate counsel for two companies before joining the legal staff at Control Data Corporation in January 1980. Mr. Hunt 23 became legal counsel for Control Data's venture capital group in February 1981. In February 1984, he became president of CDCVFI and a full-time venture capitalist, while continuing to perform legal duties for Control Data as an Assistant General Counsel. Mr. Hunt has been involved in over 100 venture capital investments and has served on the Board of Directors of numerous private and public companies, and is currently on the board of Ancor Communications, Inc., a high-speed data switching company and Davis Broadcasting, Inc. and Davis Broadcasting of Charlotte, Inc., both of which are radio station portfolio investments of the Company. Mr. Hunt has authored a handbook on venture capital investing and has given numerous speeches on venture capital investing before civic groups. Mr. Hunt is co-founder and the largest stockholder in the Company. He has undergraduate and law degrees from the University of Tulsa. DEAN PICKERELL. Mr. Pickerell is executive vice president of the Company, and was vice president of CDCVFI, the Company's predecessor. He also serves as executive vice president of CDMC. Mr. Pickerell joined Control Data Corporation in 1976, where he served in various controller and financial management positions. From 1969 to 1976 he was with Honeywell's Aerospace and Defense group in various accounting and audit positions. Mr. Pickerell has served on the boards of directors of numerous private and public companies, and is currently on the board of MultiRestaurants Management, Inc., a general partner of MultiRestaurants Concepts, Ltd., an airport food and beverage vendor which is one of the Company's portfolio investments, and the National Association of Investment Companies, a trade association that represents the minority-focused investment industry. Mr. Pickerell is co-founder and the second largest stockholder in the Company. He has an undergraduate degree from Iowa State University and completed the course work for an MBA degree from Mankato State University. STEPHEN A. LEWIS. Mr. Lewis joined the Company and CDMC as a vice president in April 1997. From 1988 until joining the Company, he was the President of Triad Management Company, which manages medical transportation and engine-driven gas air conditioning businesses. Prior to 1988, he was a general manager of technology-related marketing at Control Data Corporation. Mr. Lewis holds an undergraduate and masters degrees in engineering from Ohio University. MERVIN WINSTON. Mr. Winston is a certified public accountant and joined the Company and CDMC as a Vice President and Controller in May 1997. From 1989 until joining the Company, he was President and Chief Executive Officer of Mervin Winston, Ltd., a company providing business consulting and tax services. Prior to 1989, he held the position of Vice President, Audit & Examination Division with First Bank System. Mr. Winston has an undergraduate and masters degrees in accounting from Ohio State University. BRENDA L. LEONARD. Ms. Leonard is vice president of the Company and CDMC. Prior to employment by the Company in 1987, Ms. Leonard was with Control Data Corporation's venture capital operations in an administrative position. At the Company, Ms. Leonard is responsible for regulatory compliance, accounting, database management, and financial reporting. Ms. Leonard has a BA degree in Business Administration from Metropolitan State University. 24 MARTIN J. KANTER. Mr. Kanter is a CPA and has been a director of the Company since July 1991. He has been a stockholder and Director of Tax Services in the accounting firm of Schechter, Dokken, Kanter, Andrews & Selcer, Ltd. since 1990. Prior to 1990, Mr. Kanter held a similar position with Laventhol & Horwath. Mr. Kanter is a graduate of the University of Illinois and attended DePaul University's Master of Science in Taxation program. DALE C. SHOWERS. Mr. Showers has been a director of the Company since July 1991, and currently serves as Chairman of the Board of Ancor Communications, Inc. Mr. Showers founded Ancor Communications, Inc. in 1986 and was its President and Chief Executive Officer and continues to serve as Chairman of the Board. Between 1980 and 1986, he was a Vice President at Control Data Corporation. While at Control Data Corporation, Mr. Showers was Vice President of OEM Marketing and President of the Small Business Equity Fund. Mr. Showers is a graduate of Milton College with post graduate studies at the University of Wisconsin. One of the Company's independent directors died unexpectedly on May 29, 1997. The Company expects that its Board of Directors will appoint a replacement within 30 days. The Company's Articles of Incorporation divide the Board of Directors into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors are elected at each annual meeting of stockholders. All directors hold office until their respective terms expire and until their successors have been duly elected and qualified or until such director's earlier resignation or removal. Officers serve at the discretion of the Board of Directors. ITEM 6. EXECUTIVE COMPENSATION. COMPENSATION SUMMARY The following table shows the compensation earned for services rendered in all capacities to the Company by the President and the other most highly compensated executive officer of the Company whose salary and bonuses exceeded $100,000 for the year ended June 30, 1996 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1996 ANNUAL COMPENSATION ------------------- NAME AND OTHER ANNUAL ALL OTHER PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION ------------------ ------ ----- ------------- ------------ Thomas F. Hunt, Jr. $122,750 $36,825 $7,724(1) $30,000(2) President Dean R. Pickerell 112,500 33,750 4,444(3) 30,000(2) Vice President __________________ 25 (1) Consists of $6,000 for automobile use and $1,724 for other miscellaneous taxable benefits. (2) Consists of $15,000 contributions each to the Company's Employees Profit Sharing Plus Plan and Money Purchase Plan. (3) Consists of $3,500 for automobile use and $944 for other miscellaneous taxable benefits. OPTION GRANTS The Company made no option grants to the Named Executive Officers during the fiscal year ended June 30, 1996. AGGREGATED OPTION EXERCISES AND JUNE 30, 1996 OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN UNDERLYING UNEXERCISED THE-MONEY OPTIONS SHARES OPTIONS AT 6/30/96 AT 6/30/96(1) ACQUIRED VALUE --------------------------- ---------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Thomas F. Hunt, Jr. 0 0 97,719 0 $184,615 $0 Dean R. Pickerell 0 0 97,719 0 184,615 0
___________________________ (1) The amounts set forth represent the difference between the estimated fair value of $3.33 per share and the exercise price of the options, multiplied by the applicable number of shares underlying the options. The estimated fair value of $3.33 per share was established by the Board of Directors and used for the redemption of 275,562 shares between February 1996 and June 1996. EMPLOYMENT AGREEMENTS None of the executive officers and directors of the Company are parties to any employment or severance agreements. Although Messrs. Hunt and Pickerell are employees of the Company, their primary compensation is currently paid by CDMC out of the management fee it receives from the Company. COMPENSATION OF DIRECTORS The Company pays members of its Board of Directors who are not employees of the Company an annual fee of $3,000. An additional $2,000 is paid to Mr. Kanter for his service on the Company's Audit and Compensation Committee. On July 12, 1994, the Board of Directors approved the grant to each of three non-employee directors then in office (including Messrs. Kanter and Showers) of a stock option covering 15,000 shares of the Company's Common Stock at an exercise price of $1.83 per share, exercisable as to 3,000 shares each year beginning June 30, 1995. 26 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee, which met twice during the last fiscal year, is currently composed of Messrs. Kanter and Hunt. Mr. Kanter is not an employee of the Company. At present, and during the year ended June 30, 1996, Mr. Hunt served as a member of the Board of Directors and the Compensation and Audit Committees of Ancor Communications, Inc. Dale Showers, a director of the Company, also serves as a director of Ancor Communications, Inc. Mr. Showers does not serve on the Compensation Committee of any business entity. Other than Messrs. Hunt and Showers, no director or executive officer of the Company and no member of the Compensation Committee is, or was during the year ended June 30, 1996, a director or compensation committee member of any other business entity which had a director that sits on the Company's Board of Directors or Compensation Committee. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION For fiscal 1996, all decisions on compensation of the Company's executives were made by the full board on the basis of the recommendation of the Compensation Committee consisting of Messrs. Kanter (Chairman) and Hunt. There was no formal Compensation Committee Report for fiscal 1996. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MANAGEMENT AND OTHERS As discussed in Item 5 of this Form 10, comprehensive management services are, since April 1, 1997, being provided to the Company by CDMC. Thomas F. Hunt, Dean R. Pickerell, Stephen A. Lewis, Mervin Winston and Brenda Leonard are stockholders of CDMC and serve as its President and Vice Presidents, respectively. Under the terms of the Management Agreement, CDMC assists the Company in the evaluation of potential investments; monitors its existing portfolio; assists with the disposal of its assets, as directed; and provides accounting and administrative services and such other assistance as the Company's Board of Directors may direct. After the Company is registered as a reporting company under the Securities Exchange Act of 1934, as amended, CDMC will perform all tasks related to the preparation and filing of the Company's periodic reports under that Act. Beginning April 1, 1997, CDMC receives from the Company for its services a monthly management fee equal to one-fourth of one percent (0.25%) of the Company's average monthly assets valued at fair value (equivalent to 3% per annum) less the amount of the Company's payroll and payroll-related expenses paid directly by the Company. For the period beginning April 1, 1997 through June 30, 1997, the Company expects to pay approximately $189,000 for the management services provided by CDMC. On April 1, 1997, the Company transferred certain assets, consisting of company vehicles, prepaid balances on employee insurance policies and prepaid rent, to CDMC in exchange for CDMC's promissory note in the amount of $143,856, which represents the book value of the assets 27 on the date of transfer. The promissory note will be retired in accordance with the useful life of these assets over a maximum of four years. Currently, the Company is the only investment company or fund to which CDMC provides services. In the future, however, CDMC may provide management and consulting services to other investment funds. CDMC has agreed with the Company that it would provide such services to others only with the prior approval of the Company's Board of Directors. ITEM 8. LEGAL PROCEEDINGS On February 11, 1997, the Company brought suit in the Superior Court of Sacramento County, California against Progressive Media Group, Inc. ("Progressive"), Ricky Tatum, Mary C. White, Lawrence D. Tanter, and Does 1 through 50, for the foreclosure of a security interest and enforcement of certain personal guaranties with respect to a $1,200,000 promissory note purchased from Progressive by the Company in February 1994. To date, the Company has not received from Progressive or its guarantors any payment of principal or interest. The Company is seeking damages in the sum of $1,910,850, a late payment penalty on that sum at the rate of 18% per annum until the date of judgment, an order directing public sale of the property, reasonable attorney's fees and such other relief as the court may grant. On May 7, 1997, Progressive filed an answer and counterclaim which alleges numerous grounds on which Progressive asserts it has no liability to the Company and should be awarded damages, punitive damages and exemplary damages against the Company in unspecified amounts in excess of $350,000. These grounds alleged by Progressive include estoppel, failure to mitigate damages, laches, unclean hands, setoff, violations of the Federal communications law, failure to perfect the security interest, violation of Federal and state securities laws, violation of the Small Business Investment Act, breach of contract, accord and satisfaction, usury, violation of the California Constitution and California statutes regulating industrial loan companies and other legal theories. The Company believes that Progressive's allegations are without merit. ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICE There is no established public market for the Company's Common Stock. Since February 20, 1996, the Company has redeemed an aggregate 275,562 shares of its Common Stock at a purchase price established by the Board of Directors of $3.33 per share. HOLDERS As of May 31, 1997, the Company had issued and outstanding 1,680,438 shares of Common Stock held by 70 holders of record, which reflects a stock dividend of two shares of Common Stock for each share held on May 31, 1997, the effective date of the stock dividend. There are no shares of Preferred Stock outstanding. 28 All of the 1,680,438 shares of Common Stock currently outstanding are tradeable without restriction under the Securities Act of 1933, as amended, unless held by "affiliates" of the Company as that term is defined in Rule 144 promulgated under that Act. So long as the Company is a licensee of the SBA, no stockholder or group of stockholders acting in concert may acquire or exercise voting rights as to ten percent (10%) or more of any class of the Company's capital stock without prior written approval by the SBA of the stockholder. DIVIDENDS Historically, the Company has never declared or paid any cash dividends on its Common Stock. The Company intends to qualify for tax treatment under Subchapter M of the Internal Revenue Code. Eligibility for Subchapter M treatment requires that the Company pay out as a dividend an amount at least equal to its earnings and profits prior to its becoming a regulated investment company. To meet this requirement, the Company's Board of Directors expects to declare a dividend in an amount sufficient to meet the Subchapter M requirement. The amount of this dividend is currently estimated to be approximately $3.0 to $5.0 million. The dividend will be contingent on the Company obtaining net proceeds of at least $15 million from the sale of newly issued shares of Common Stock. If the Board of Directors concludes with respect to a given fiscal year that the Company can meet the requirements of Subchapter M and that it is in the best interests of the Company and its stockholders to do so, then to the extent funds are legally available to do so the Board of Directors expects to declare and pay to the Company's stockholders dividends in an amount not less than 90% of the Company's net investment income (net interest income plus net realized short-term capital gains) so as to meet one of the eligibility requirements of Subchapter M. However, there can be no assurance that the Company will pay any cash dividends on the Common Stock. Under some circumstances, SBA approval may be required for payment of dividends that would be required to satisfy Subchapter M requirements. There is no assurance that the SBA's approval will be given. 29 ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES. During the three years ended March 31, 1997, the Company's only sales of the Company's securities has been the issuance of 133,038 shares upon the exercise of stock options under the Company's Stock Option Plan, as follows: NO. OF SHARES OF EXERCISE PRICE DATE OPTIONEE COMMON STOCK PER SHARE ---- -------- ------------ --------- 12/30/96 Thomas F. Hunt, Jr. 18,000 $.18 06/28/96 Thomas F. Hunt, Jr. 18,000 .18 03/31/97 Thomas F. Hunt, Jr. 13,719 .18 12/30/96 Dean R. Pickerell 24,000 .18 03/31/97 Dean R. Pickerell 25,719 .18 03/14/97 Brenda L. Leonard 24,000 .17 01/02/94 Martin J. Kanter 2,400 .17 01/25/95 Martin J. Kanter 2,400 .17 02/09/96 Martin J. Kanter 2,400 .17 01/23/97 Martin J. Kanter 2,400 .17 Each of the above transactions involved the offering of such securities to a limited number of persons who took the securities as an investment for his or her own account and not with a view to a distribution thereof. Based in part on the foregoing, the Company has been advised by counsel that the transactions enumerated above were exempt under Section 3(b) or 4(2) of the Securities Act of 1933, as amended, from the registration and prospectus delivery requirements of that Act. ITEM 11. DESCRIPTION OF COMPANY'S SECURITIES TO BE REGISTERED. The Company is authorized to issue 9,000,000 shares of Common Stock, no par value per share, and 1,000,000 shares of Preferred Stock having a par value fixed by the Board of Directors. As of May 31,1997, 1,680,438 shares of Common Stock are outstanding. There are no shares of Preferred Stock outstanding. So long as the Company is a licensee of the SBA, no stockholder or group of stockholders acting in concert may acquire or exercise voting rights as to ten percent (10%) or more of any class of the Company's capital stock without the prior written approval by the SBA of the stockholder. COMMON STOCK Each share of Common Stock is entitled to one vote on all matters submitted to a vote of stockholders. The Common stock does not have cumulative voting rights, which means that the holders of a majority of the outstanding shares of Common Stock may elect all of the directors of the Company. The Common Stock does not have any pre-emptive rights. Upon liquidation, dissolution or winding up of the affairs of the Company, its assets remaining after provision for payment of creditors, holders of Preferred Stock and the SBA's liquidating interest would be distributed pro rata among holders of the Common Stock. Dividends may be paid in cash or stock to the holders of the Common Stock when and if declared by the Board of Directors out of funds legally available therefor, but only after the Company has paid any cumulative dividends then in arrears on its Preferred Stock. In order to meet one of the requirements for Subchapter M income tax treatment, the Company is required to distribute annually as dividends at least 90% of its investment company taxable income, to the extent earned. Prior to a redemption or liquidation in whole or in part of any capital stock of the Company not issued to the SBA, or any distribution of assets to stockholders of the Company other than the SBA, the SBA is entitled to full payment of all accrued and unpaid dividends on any outstanding shares of Preferred Stock held by the SBA. There are currently no shares of the Preferred Stock outstanding. ANTI-TAKEOVER PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT In addition to the restrictions on changes of control of an SSBIC under the Small Business Act of 1958, as amended, the Company is subject to the Minnesota Business Corporation Act (the "Minnesota Act"). Section 302A.671 of the Minnesota Act provides that, unless the acquisition of certain new percentages of voting control of the Company (in excess of 20%, 33-1/3% or 50%) by an existing stockholder or other person is approved by a majority of the disinterested stockholders of the Company, the shares acquired above such new percentage level of voting control will not be entitled to voting rights. The Company is required to hold a special stockholders' meeting to vote on any such acquisition within 55 days after the delivery to the Company by the acquiror of an information statement describing, among other things, the acquiror and any plans of the acquiror to liquidate or dissolve the Company and copies of definitive financing agreements for any financing of the acquisition not to be provided by funds of the acquiror. If any acquiror does not submit an information statement to the Company within ten days after acquiring shares representing a new threshold percentage of voting control of the Company, or if the disinterested stockholders vote not to approve such an acquisition, the Company may redeem the shares so acquired by the acquiror at their market value. Section 302A.671 generally does not apply to a cash offer to purchase all shares of voting stock of the issuing corporation if such offer has been approved by a majority vote of disinterested board members of the issuing corporation. Upon registration as a public company, Section 302A.673 of the Minnesota Act restricts certain transactions between the Company and a stockholder who becomes the beneficial holder of 10% or more of the Company's outstanding voting stock (an "interested stockholder") unless a majority of the disinterested directors of the Company have approved, prior to the date on which the stockholder acquired a 10% interest, either the business combination transaction suggested by such a stockholder or the acquisition of shares that made such a stockholder a statutory interested stockholder. If such prior approval is not obtained, the statute imposes a four-year prohibition from the statutory interested stockholder's share acquisition date on mergers, sales of substantial assets, loans, substantial issuances of stock and various other transactions involving the Company and the statutory interested stockholder or its affiliates. These statutory provisions could have the effect in certain circumstances of delaying or preventing a change in the control of the Company. ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Company's Articles of Incorporation and Bylaws require the Company to indemnify any director, officer, employee or agent of the Company, to the full extent permitted by the law of the State of Minnesota, who was or is a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, against certain liabilities and expenses incurred in connection with the action, suit or proceeding, except where such persons have not acted in good faith or did not reasonably believe that the conduct was in the best interests of the Company. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplemental data required by this Item 13 follow the index of financial statements appearing at Item 15 of this Form 10. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 30 The Company replaced its previous auditors, Lurie, Besikof, Lapidus & Co., LLP, with Deloitte & Touche LLP in March 1997. The decision to change accounting firms was approved by the Company's Board of Directors. During the Company's three most recent fiscal years preceding the replacement of Lurie, Besikof, Lapidus & Co., LLP, the reports of Lurie, Besikof, Lapidus & Co. LLP on the financial statements of the Company contained no adverse opinion or disclaimer of opinion and were not qualified or modified. There were no disagreements between the Company and Lurie, Besikof, Lapidus & Co., LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of such accountants, would have caused them to make reference to the subject matter of the disagreements in connection with their reports. Before engaging Deloitte & Touche LLP as its new independent auditors, the Company did not previously consult with them regarding any matters related to the application of accounting principles, the type of audit opinion that might be rendered on the Company's financial statements or any other such matters. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS FINANCIAL STATEMENTS The following Financial Statements are filed as part of this Form 10: Independent Auditors' Report of Deloitte & Touche LLP Independent Auditor's Report of Lurie, Besikof, Lapidus & Co., LLP Balance Sheets as of June 30, 1995 and 1996 and March 31, 1997 (unaudited) Statements of Operations for the years ended June 30, 1994, 1995 and 1996 and the nine months ended March 31, 1996 and 1997 (unaudited) Statements of Changes in Stockholders' Equity for the years ended June 30, 1994, 1995 and 1996 and the nine months ended March 31, 1997 (unaudited) Statements of Cash Flows for the years ended June 30, 1994, 1995 and 1996 and the nine months ended March 31, 1996 and 1997 (unaudited) Notes to Financial Statements for the years ended June 30, 1994, 1995 and 1996 and the nine months ended March 31, 1996 and 1997 (unaudited) 31 LISTING OF EXHIBITS 3.1 Amended and Restated Articles of Incorporation, as amended to date 3.2 By-laws, as amended to date 3.3 1997 Stock Plan 4.1 Debenture of the Company dated March 14, 1996 issued to the U.S. Small Business Administration in the principal amount of $2,000,000 4.2 Debenture of the Company dated December 18, 1996 issued to the U.S. Small Business Administration in the principal amount of $5,500,000 4.3 Amortizing Note of the Company dated March 31, 1993 issued to the U.S. Small Business Administration in the principal amount of $3,571,578 10.1 Lease Agreement dated April 9, 1990 between the Company and ATS II Associates Limited Partnership, as amended May 23, 1995 10.2 Joint Investment Advisor Management Contract dated February 10, 1997 between the Company and Capital Dimensions Management Company, Inc. 10.3 Repurchase Agreement dated March 31, 1993 between the Company and the U.S. Small Business Administration Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. CAPITAL DIMENSIONS, INC. Dated: June 19, 1997 By /s/ Thomas F. Hunt, Jr. --------------------- ------------------------------------- Its President ---------------------------------- 32 CAPITAL DIMENSIONS, INC. TABLE OF CONTENTS
- --------------------------------------------------------------------------------------------------------------------------- PAGE ---- INDEPENDENT AUDITORS' REPORT OF DELOITTE & TOUCHE LLP F-2 INDEPENDENT AUDITOR'S REPORT OF LURIE, BESIKOF, LAPIDUS & CO., LLP F-3 FINANCIAL STATEMENTS: Balance Sheets as of June 30, 1995 and 1996 and March 31, 1997 (unaudited) F-4 Statements of Operations for the years ended June 30, 1994, 1995, and 1996 and the nine months ended March 31, 1996 and 1997 (unaudited) F-5 Statements of Changes in Stockholders' Equity for the years ended June 30, 1994, 1995, and 1996 and the nine months ended March 31, 1997 (unaudited) F-6 Statements of Cash Flows for the years ended June 30, 1994, 1995, and 1996 and the nine months ended March 31, 1996 and 1997 (unaudited) F-7 Notes to Financial Statements for the years ended June 30, 1994, 1995, and 1996 and the nine months ended March 31, 1996 and 1997 (unaudited) F-9
F-1 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Capital Dimensions, Inc. Minneapolis, Minnesota We have audited the accompanying balance sheet of Capital Dimensions, Inc. as of June 30, 1996 and the related statements of operations, changes in stockholders' equity, and cash flows for the year ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1996 financial statements referred to above present fairly, in all material respects, the financial position of Capital Dimensions, Inc. as of June 30, 1996, and the results of its operations and its cash flows for the year ended June 30, 1996 in conformity with generally accepted accounting principles. As explained in Note 2, the financial statements include investments securities valued by the Board of Directors totaling $18,262,890 at June 30, 1996, none of which have been valued based on public market quotations. We have reviewed the procedures used by the Board of Directors in arriving at its estimate of value of such investments and have inspected underlying documentation and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of the valuation of investment securities, those estimated values may differ significantly from the values that would have been used had a ready market for such investments existed, and the differences could be material. Minneapolis, Minnesota April 29, 1997 (May 31, 1997 as to the effects of the stock split described in Note 1) F-2 INDEPENDENT AUDITOR'S REPORT Board of Directors and Stockholders Capital Dimensions, Inc. Minneapolis, Minnesota We have audited the accompanying balance sheet of Capital Dimensions, Inc. as of June 30, 1995, and the related statements of operations, changes in stockholders' equity, and cash flows for the years ended June 30, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Dimensions, Inc. as of June 30, 1995, and the results of its operations and its cash flows for the years ended June 30, 1995 and 1994, in conformity with generally accepted accounting principles. As explained in Note 2, the financial statements include investments securities valued by the Board of Directors totaling $14,528,143 at June 30, 1995, of which $2,513,926 has been valued based on public market quotations. We have reviewed the procedures used by the Board of Directors in arriving at its estimate of value of such investments and have inspected underlying documentation and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of the valuation of investment securities, those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. Minneapolis, Minnesota August 7, 1995 (May 31, 1997 as to the effects of the stock split described in Note 1 and March 18, 1997 as to the effects of the merger described in Note 11) F-3 CAPITAL DIMENSIONS, INC. BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------- JUNE 30, MARCH 31, ------------------------- 1995 1996 1997 (UNAUDITED) ASSETS INVESTMENTS IN SMALL BUSINESS CONCERNS AT FAIR VALUE (Note 2): Stocks (cost of $3,180,225, $757,645, and $758,707 at June 30, 1995 and 1996, and March 31, 1997, respectively) $ 3,246,560 $ 2,373,003 $ 3,554,337 Debt securities (cost of $9,543,245, $14,033,704, and $15,703,156 at June 30, 1995 and 1996, and March 31, 1997, respectively) 9,028,984 13,892,384 15,703,156 Loans (cost of $1,395,032, $2,078,879, and $3,869,045 at June 30, 1995 and 1996, and March 31, 1997, respectively) 1,255,837 1,527,646 3,332,545 Other investments (cost of $1,081,762, $642,193, and $433,097 at June 30, 1995 and 1996, and March 31, 1997, respectively) 996,762 469,857 433,097 ----------- ----------- ----------- Total investments in small business concerns 14,528,143 18,262,890 23,023,135 Cash and cash equivalents 5,975,368 3,878,202 3,026,920 Restricted cash (Note 10) 300,000 410,000 410,000 Interest and dividends receivable 194,164 333,400 116,488 Other receivables 15,000 118,950 163,856 Equipment, net of accumulated depreciation of $48,063, $45,592, and $58,126 at June 30, 1995 and 1996, and March 31, 1997, respectively 30,568 64,828 Deferred tax assets (Note 4) 191,222 Other assets 46,785 100,572 268,810 ----------- ----------- ----------- Total assets $21,090,028 $23,360,064 $27,009,209 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable $ 33,085 $ 54,398 $ 123,977 Income taxes payable 532,474 341,522 150,009 Small Business Administration Financing (Note 3) 2,631,737 4,167,505 9,286,160 Deferred tax liability 386,778 ----------- ----------- ----------- 3,197,296 4,563,425 9,946,924 Nonvoting 4% redeemable cumulative preferred stock, par value $500, authorized 28,000 shares; issued and outstanding, 6,000, 6,000, and 0 shares at June 30, 1995 and 1996, and March 31, 1997, respectively (Note 3) 3,270,000 3,010,000 ----------- ----------- ----------- Total liabilities 6,467,296 7,573,425 9,946,924 COMMITMENTS AND CONTINGENCIES (Notes 5 and 7) STOCKHOLDERS' EQUITY (Notes 5, 8 and 11): Liquidating interest under repurchase agreement 4,362,150 3,443,802 2,755,041 Preferred Stock, Authorized 1,000,000 shares, none issued or outstanding Common stock, no par value. Authorized 9,000,000 shares; issued and outstanding, 1,827,762, 1,572,600, and 1,680,438 shares at June 30, 1995 and 1996, and March 31, 1997, respectively (Note 1) 1,869,641 1,414,071 1,433,401 Additional paid-in capital 3,461,063 5,320,141 6,021,902 Retained earnings 4,929,878 5,608,625 6,851,941 ----------- ----------- ----------- Total stockholders' equity 14,622,732 15,786,639 17,062,285 ----------- ----------- ----------- Total liabilities and stockholders' equity $21,090,028 $23,360,064 $27,009,209 ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. F-4 CAPITAL DIMENSIONS, INC. STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ----------------------------------------- ----------------------- 1994 1995 1996 1996 1997 (UNAUDITED) INCOME: Interest on investments in small business concerns $ 1,059,225 $ 1,225,290 $1,306,484 $ 941,358 $1,736,904 Interest on short-term investments 50,016 79,071 266,126 209,639 125,512 Management and consulting fees 24,579 ---------- ---------- ---------- --------- --------- 1,133,820 1,304,361 1,572,610 1,150,997 1,862,416 EXPENSES: Interest 278,140 242,734 250,618 166,015 345,408 General and administrative 525,758 523,825 630,159 463,584 666,733 Other 114,127 48,061 51,289 43,039 71,351 --------- ---------- ---------- --------- --------- 918,025 814,620 932,066 672,638 1,083,492 --------- ---------- ---------- --------- --------- INCOME BEFORE GAINS (LOSSES) ON INVESTMENTS IN SMALL BUSINESS CONCERNS 215,795 489,741 640,544 478,359 778,924 GAINS (LOSSES) ON INVESTMENTS IN SMALL BUSINESS CONCERNS: Realized 1,277,412 3,663,410 507,937 461,816 (95,132) Unrealized (2,288,233) (1,152,528) 1,422,592 336,302 1,508,661 ---------- ---------- ---------- --------- --------- (1,010,821) 2,510,882 1,930,529 798,118 1,413,529 ---------- ---------- ---------- --------- --------- (LOSS) INCOME BEFORE INCOME TAXES (795,026) 3,000,623 2,571,073 1,276,477 2,192,453 INCOME TAX EXPENSE 532,474 372,326 220,026 893,000 ---------- ---------- ---------- --------- --------- NET (LOSS) INCOME (795,026) 2,468,149 2,198,747 1,056,451 1,299,453 DIVIDENDS ON PREFERRED STOCK 120,000 120,000 120,000 90,000 56,137 ---------- ---------- ---------- --------- --------- NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHARES $ (915,026) $2,348,149$ 2,078,747 $ 966,451 $1,243,316 ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- --------- NET (LOSS) INCOME PER COMMON SHARE (Note 1) $ (0.47) $ 1.19 $ 1.09 $ 0.49 $ 0.71 ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- --------- WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 1) 1,824,162 1,983,852 1,912,227 1,964,301 1,761,681 ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- ---------
See notes to financial statements. F-5 CAPITAL DIMENSIONS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------- LIQUIDATING INTEREST UNDER ADDITIONAL TOTAL REPURCHASE COMMON STOCK PAID-IN RETAINED STOCKHOLDERS' -------------------------- AGREEMENT SHARES AMOUNT CAPITAL EARNINGS EQUITY BALANCE AT JUNE 30, 1993 $6,198,846 1,822,962 $1,868,841 $1,324,367 $3,796,755 $13,188,809 Options exercised 2,400 400 400 Dividends on nonvoting 4% redeemable preferred stock (120,000) (120,000) Amortization of liquidating interest (918,348) 918,348 Net loss for the year ended June 30, 1994 (795,026) (795,026) ---------- ---------- ---------- ----------- ----------- ----------- BALANCE AT JUNE 30, 1994 5,280,498 1,825,362 1,869,241 2,242,715 2,881,729 12,274,183 Options exercised 2,400 400 400 Dividends on nonvoting 4% redeemable preferred stock (120,000) (120,000) Transfer 300,000 (300,000) Amortization of liquidating interest (918,348) 918,348 Net income for the year ended June 30, 1995 2,468,149 2,468,149 ---------- ---------- ---------- ----------- ----------- ----------- BALANCE AT JUNE 30, 1995 4,362,150 1,827,762 1,869,641 3,461,063 4,929,878 14,622,732 Common stock repurchased (275,562) (459,270) (459,270) (918,540) Options exercised 20,400 3,700 3,700 Dividends on nonvoting 4% redeemable preferred stock (120,000) (120,000) Transfer 1,400,000 (1,400,000) Amortization of liquidating interest (918,348) 918,348 Net income for the year ended June 30, 1996 2,198,747 2,198,747 ---------- ---------- ---------- ----------- ----------- ----------- BALANCE AT JUNE 30, 1996 3,443,802 1,572,600 1,414,071 5,320,141 5,608,625 15,786,639 Options exercised (Unaudited) 107,838 19,330 19,330 Dividends on nonvoting 4% redeemable preferred stock (Unaudited) (56,137) (56,137) Stock compensation (Unaudited) 13,000 13,000 Amortization of liquidating interest (unaudited) (688,761) 688,761 Net income for the nine months ended March 31, 1997 (Unaudited) 1,299,453 1,299,453 ---------- ---------- ---------- ----------- ----------- ----------- BALANCE AT MARCH 31, 1997 (Unaudited) $2,755,041 1,680,438 $1,433,401 $6,021,902 $6,851,941 $17,062,285 ---------- ---------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- ----------- ----------- -----------
See notes to financial statements. F-6 CAPITAL DIMENSIONS, INC. STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ----------------------------------------- ---------------------- 1994 1995 1996 1996 1997 (UNAUDITED) CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES: Net (loss) income $ (795,026) $ 2,468,149 $ 2,198,747 $ 1,056,451 $ 1,299,453 Adjustments to reconcile net (loss) income to cash (used in) provided by operations: Provision for bad debts 44,373 89,108 Depreciation and amortization 12,555 12,401 16,738 11,231 21,456 Deferred taxes (191,222) 578,000 Realized (gains) losses on investments (1,277,412) (3,663,410) (507,937) (461,816) 95,132 Unrealized losses (gains) on investments 2,288,233 1,152,528 (1,422,592) (336,302) (1,508,661) Interest receivable added to loans/notes (308,944) (437,729) (484,005) (306,413) (1,208,796) Stock compensation 13,000 Changes in operating assets and liabilities: Interest and dividends receivable (411,613) 46,240 (228,343) (60,010) 216,912 Other receivables 783 (15,000) 13,550 15,000 7,388 Other assets 1,479 (10,612) (3,037) (33,296) 22,215 Accounts payable 18,158 (16,317) 21,313 49,435 69,579 Income taxes payable 532,474 (190,952) (532,472) (191,513) ---------- ---------- ---------- ---------- ---------- Total cash (used in) provided by operating activities (427,414) 68,724 (688,632) (598,192) (585,835) CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES: Proceeds from sales of investment 2,275,998 3,759,667 3,896,366 3,870,108 119,601 Investments in small business concerns (1,280,793) (933,969) (6,539,397) (5,121,158) (3,024,562) Collections on debt securities and loans 259,765 2,157,874 1,205,318 946,490 767,041 Investment of restricted cash (110,000) Proceeds from sale of equipment 10,109 10,109 Purchases of equipment (8,275) (5,899) (59,358) (59,358) ---------- ---------- ---------- ---------- ---------- Total cash provided by (used in) investing activities 1,246,695 4,977,673 (1,596,962) (353,809) (2,137,920) CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES: Proceeds from SBA note payable 1,947,500 1,947,500 5,300,625 Payments on note payable to SBA (406,282) (438,467) (464,232) (417,830) (381,345) Issuance of common stock 400 400 3,700 400 19,330 Redemption of stock (918,540) (816,000) Dividends paid on SBA 4% redeemable preferred stock (380,000) (310,000) (56,137) Redemption of SBA 4% redeemable preferred stock (3,010,000) ---------- ---------- ---------- ---------- ---------- Total cash (used in) provided by financing activities (405,882) (438,067) 188,428 404,070 1,872,473 ---------- ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 413,399 4,608,330 (2,097,166) (547,931) (851,282) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 953,639 1,367,038 5,975,368 5,975,368 3,878,202 ---------- ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,367,038 $ 5,975,368 $ 3,878,202 $ 5,427,437 $ 3,026,920 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
F-7 CAPITAL DIMENSIONS, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ----------------------------------------- ---------------------- 1994 1995 1996 1996 1997 (UNAUDITED) SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: Debt securities converted to loans $456,782 Interest receivable converted to debt or loans 308,944 $437,729 $484,005 $306,413 $1,208,796 Note received on sale of investments 1,600,000 Dividends accrued on 4% preferred stock 120,000 120,000 10,000 10,000 Investment sold recorded as a receivable 117,500 Debt issuance cost, deducted from $2,000,000 SBA note 52,500 52,500 199,375 Realized gain on the exchange of investments 387,912 Property converted to receivable 52,294 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid during the period for: Interest 273,209 241,023 215,259 130,655 264,830 Income taxes 754,500 410,978 1,084,513
See notes to financial statements. F-8 CAPITAL DIMENSIONS, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1994, 1995, AND 1996 AND NINE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED) - -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Capital Dimensions, Inc. (the Company) is a Specialized Small Business Investment Company (SSBIC) licensed under the Small Business Investment Act of 1958. The Company provides equity capital, long-term loans, and management assistance to small business concerns which are at least 50% owned by persons who are socially or economically disadvantaged as defined under SBA guidelines. The following is a summary of significant accounting policies applied in the preparation of the financial statements. PRESENTATION OF FINANCIAL STATEMENTS - Prior to March 31, 1997, Capital Dimensions Venture Fund, Inc. (CDVFI) was a wholly owned subsidiary of Capital Dimensions, Inc. (CDI). Effective March 31, 1997, CDI and CDVFI were merged with CDVFI as the surviving entity. Under the plan of merger; (i) all of the previously outstanding shares of CDVFI were canceled, (ii) each one share of previously outstanding CDI common stock was converted into one share of the Company's common stock, and (iii) each one share of previously outstanding CDI Series A preferred stock was converted into one share of the Company's common stock. Subsequent to the merger, CDVFI changed its name to Capital Dimensions, Inc. Also, effective with the merger, all cumulated but unpaid and undeclared dividends related to the Series A preferred stock lapsed. The merger of CDI and CDVFI has been reflected in these financial statements as a reorganization of entities under common control. Accordingly, these financial statements have been restated to reflect the merger as if it had occurred at the beginning of the earliest period presented. RECAPITIZATION - Effective May 31, 1997, the Company's Board of Directors amended its Articles of Incorporation to effect a 3-for-1 stock split, issued in the form of a 200% stock dividend effective May 31, 1997 to stockholders of record on May 31, 1997; to increase the authorized number of common stock to 9,000,000; and to authorize the issuance of up to 1,000,000 shares of preferred stock, the terms of which may be fixed by the Company's Board of Directors without further shareholder approval. All share and per share amounts included in these financial statements and related notes have been restated to reflect this stock split. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. NEW ACCOUNTING STANDARDS - In October 1995, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company has elected to continue following the guidance of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, for measurement and recognition of stock-based transactions with F-9 employees. The Company will adopt the disclosure provisions, which are not expected to be material, of SFAS No. 123 in fiscal year 1997. In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE. SFAS No. 128 supersedes APB No. 15 and replaces the presentation of primary earnings per share with a presentation of basic earnings per share. The Company will adopt the provisions of SFAS No. 128 in fiscal year 1998. On a pro forma basis, had the Company adopted the provisions of SFAS No. 128, basic earnings per share of $(.50), $1.29, $1.20, $.54, and $.78 for the periods ended June 30, 1994, 1995, 1996, and March 31, 1996 and 1997, respectively, would have been presented in the statement of operations. In addition, diluted earnings per share amounts substantially equivalent to the earnings per share amounts currently presented in the statement of operations would have been shown. EARNINGS PER COMMON SHARE - Earnings per common share are computed on earnings reduced by dividend requirements on preferred stock and based upon the weighted average number of common shares and common equivalent shares, consisting of the dilutive effect of stock options outstanding during each period. Earnings per common share assuming full dilution are substantially the same. VALUATION OF INVESTMENTS - The Company records its investments at estimated fair value as determined by the Board of Directors. Realization of the carrying value of investments is subject to future developments relating to investee companies. Among the factors considered by the Board of Directors in determining the fair value of investments are the cost of the investment to the Company, developments since the acquisition of the investment, the financial condition and operating results of the investee, the long-term potential of the business of the investee, the value of the underlying collateral, and other factors generally pertinent to the valuation of investments. There is no public market for the majority of the investments. The Board, in making its evaluation, has relied on financial data of investees and, in many instances, on estimates by the management of the Company and of the investee companies as to the potential effect of future developments. Due to the nature of the Company's investments, the valuations could differ materially in the near term. CASH EQUIVALENTS - The Company considers all highly liquid debt instruments with a maturity at time of purchase of three months or less to be cash equivalents. EQUIPMENT - Equipment is stated at cost. Depreciation on equipment is calculated on the straight-line method over the estimated useful lives of the assets, generally five years. INTEREST INCOME - Interest earned on investments in small business concerns is recorded on the accrual basis. Loans and debt securities are reviewed regularly by management and placed on nonaccrual status when the collection of interest or principal is uncertain. Thereafter, no interest is recognized as income unless received in cash or until such time the borrower demonstrates the ability to pay interest and principal. LOAN ORIGINATION FEES - Loan origination fees, net of direct costs, are deferred and amortized to interest income, using the effective interest method, over the term of the original promissory notes. REALIZED GAINS (LOSSES) ON INVESTMENTS - Cost of investments sold is reported on the basis of identified cost. Amounts reported as realized gains (losses) are measured by the difference between the proceeds of sale, if any, and the cost basis of the investment. F-10 Investments are also recorded as realized losses when, in the opinion of the Board of Directors, there is little likelihood of recovery of the investment cost. The determination is based on past performance, business plans, and representations by management of the investee company. INDUSTRY CONCENTRATION - The Company's portfolio is concentrated in the radio broadcast industry, where the Company currently holds investments in eight businesses that operate in California, the District of Columbia, Georgia, Louisiana, Minnesota, and North Carolina. These investments comprise 70.1% of the estimated fair market value of the Company's portfolio at March 31, 1997. The radio stations operated by these businesses include both large and small listener markets, both AM and FM stations, and a variety of programming formats. The Company has also invested in the rural telephone industry and the airport food and beverage service industry which comprise 14.9% and 8.8%, respectively, of the Company's investment portfolio as of March 31, 1997. INTERIM FINANCIAL STATEMENTS - The information set forth in the financial statements as of March 31, 1997 and for the nine months ended March 31, 1996 and 1997 is unaudited. The information reflects all adjustments, consisting only of normal recurring entries, that in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods indicated. Results of operations for an interim period are not necessarily indicative of the results of operations for the full fiscal year. RECLASSIFICATIONS - Certain prior-year amounts have been reclassified to conform to the 1996 presentation. Such reclassifications had no impact on net income and stockholders' equity as previously reported. 2. INVESTMENTS IN SMALL BUSINESS CONCERNS Investments were valued at estimated fair value determined by the Board of Directors at $14,528,143 at June 30, 1995, of which $2,513,926 was valued based on public quotations, and $18,262,890 and $23,023,135 at June 30, 1996 and March 31, 1997, respectively, none of which was valued based on public quotations. The Company acquired the investments by direct purchases from the investees and the Board of Directors valued the securities on the premise that in most instances they may not be publicly re-sold without registration under the Securities Act of 1933. The prices of securities purchased were determined by direct negotiations between the Company and the investees. Net unrealized appreciation (depreciation) is as follows: June 30, March 31, --------------------------- 1995 1996 1997 Total unrealized appreciation $ 875,447 $ 2,040,067 $3,220,339 Total unrealized depreciation (1,547,568) (1,289,598) (961,209) ----------- ----------- --------- Net unrealized (depreciation) appreciation $ (672,121) $ 750,469 $2,259,130 ----------- ----------- --------- ----------- ----------- --------- Loans and debt securities with recorded fair values of $2,300,278, $3,496,747, and $3,489,254 were in nonaccrual of interest status at June 30, 1995 and 1996 and March 31, 1997, respectively. F-11 3. SMALL BUSINESS ADMINISTRATION FINANCING NOTES AND DEBENTURES PAYABLE - Notes payable to the Small Business Administration (SBA) and debentures payable, guaranteed by the SBA, consist of the following: June 30, March 31, --------------------------- 1995 1996 1997 8.375% note payable, due in quarterly principal and interest installments of $169,872 through April 1, 2000 $2,631,737 $2,167,505 $1,786,160 7.08% debenture payable, interest only due semiannually, principal due March 1, 2006 2,000,000 2,000,000 7.08% debenture payable, interest only due semiannually, principal due December 1, 2006 5,500,000 ----------- ----------- --------- $2,631,737 $4,167,505 $9,286,160 ----------- ----------- --------- ----------- ----------- --------- The note payable to the SBA is collateralized by substantially all the Company's assets. The note and debentures are subject to the terms and conditions of agreements with the SBA which, among other things, restrict stock redemptions, disposition of assets, new indebtedness, dividends or distributions, and changes in management, ownership, investment policy, or operations. Annual maturities of the notes at June 30, 1996 are as follows: Years ending June 30: 1997 $381,345 1998 546,775 1999 594,025 2000 645,360 2006 2,000,000 ---------- $4,167,505 ---------- ---------- 4% REDEEMABLE CUMULATIVE PREFERRED STOCK - The Company has 28,000 shares authorized of 4% nonvoting redeemable cumulative preferred stock with a par value and liquidation value of $500 per share. At June 30, 1995 and 1996, 6,000 shares of the preferred stock had been issued. The stock was redeemed according to its terms during the nine months ended March 31, 1997. Dividends accrued at June 30, 1995 and 1996 were $270,000 and $10,000, respectively. 4. INCOME TAXES The provision for income taxes consists of the following components: Nine Months Ended Year Ended June 30, March 31, ----------------------------- ------------------ 1994 1995 1996 1996 1997 Current: Federal $268,012 $427,240 $166,126 $1,110,658 State 264,462 136,308 53,900 360,342 -------- -------- -------- ---------- 532,474 563,548 220,026 1,471,000 Deferred $ 143,000 324,407 257,471 290,000 (578,000) Decrease in valuation allowance (143,000) (324,407) (448,693) (290,000) --------- -------- -------- -------- ---------- $- $532,474 $372,326 $220,026 $893,000 --------- -------- -------- -------- ---------- --------- -------- -------- -------- ---------- F-12 A reconciliation between the U.S. federal statutory tax rate and the effective tax rate is as follows: Nine Months Ended Year Ended June 30, March 31, ----------------------------- ------------------ 1994 1995 1996 1996 1997 Statutory tax rate (34.0%) 35.0% 35.0% 35.0% 35.0% State taxes, net of federal effect (6.0) 6.0 6.0 6.0 5.7 Change in valuation allowance 40.0 (23.3) (26.5) (23.8) ------- ------ ------ ------ ------ Effective tax rate - % 17.7% 14.5% 17.2% 40.7% ------- ------ ------ ------ ------ ------- ------ ------ ------ ------ The significant components of deferred tax assets (liabilities) are as follows: June 30, -------------- March 31, 1995 1996 1997 Unrealized loss (gain) on investments in small business concerns $ 448,693 $191,222 $(386,778) Valuation allowance (448,693) --------- -------- ---------- Net deferred tax asset (liability) $ - $191,222 $(386,778) --------- -------- ---------- --------- -------- ---------- 5. STOCKHOLDERS' EQUITY The Company is subject to a Repurchase Agreement dated March 31, 1993 with the SBA (the Repurchase Agreement) under which the Company redeemed at a substantial discount all of the Company's then outstanding 3% preferred stock, having a par value of $10,000,000, which had been issued to the SBA under a funding program that was subsequently discontinued. The redemption price was paid by the Company issuing to the SBA a seven-year amortizing note for $3,571,578. As a condition to the redemption of the 3% preferred stock, the Company granted the SBA a liquidating interest in a newly created restricted capital surplus account equal to the amount of the repurchase discount of $6,428,422. This liquidating interest is being amortized over an 84-month period on a straight-line basis, and as of June 30, 1995 and 1996 and March 31, 1997 had been reduced to $4,362,150, $3,443,802, and $2,755,041, respectively. Should the Company default under the Repurchase Agreement at any time, the liquidating interest will become fixed at the level immediately preceding the event of default and will not decline further until the default is cured or waived. The liquidating interest will expire on the later of (i) 60 months from the date of the Repurchase Agreement (i.e. March 31, 1998); (ii) the date the repurchase note is paid in full; or (iii) if an event of default has occurred and the default has been cured or waived, the later date on which the liquidating interest is fully amortized. Should the Company voluntarily or involuntarily liquidate prior to the expiration of the liquidating interest, any assets which are available, after the payment of all debts of the Company, shall be distributed first to the SBA until the amount of the then remaining liquidating interest has been distributed to the SBA. That payment, if any, would be prior in right to any payments of the Company's stockholders. As the liquidating interest declines, the restricted capital account is reduced and additional paid-in capital is increased. 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. F-14 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 F-15 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. F-16 EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF CAPITAL DIMENSIONS VENTURE FUND, INC. The undersigned incorporator, a natural person of full age, in order to form a corporate entity under Minnesota Statutes, Chapter 302A, adopts the following Articles of Incorporation: ARTICLE I The name of this corporation shall be Capital Dimensions Venture Fund, Inc. (the "Corporation"). ARTICLE II The registered office of the Corporation shall be Two Appletree Square, Suite 335, Bloomington, Minnesota 55425-1637. ARTICLE III This Corporation is organized and chartered solely for the purpose of performing the functions and conducting the activities contemplated under the Small Business Investment Act of 1958, as amended from time to time. ARTICLE IV This Corporation is authorized to issue two classes of shares to be designated respectively Preferred Stock ("Preferred Stock") and Common Stock ("Common Stock"). The total number of shares of capital stock that the Corporation is authorized to issue is six million (6,000,000), consisting of one million (1,000,000) shares of Preferred Stock, having a par value fixed by the Board, and five million (5,000,000) shares of no par value Common Stock. So long as the Corporation is a licensee of the U.S. Small Business Administration ("SBA"), no stockholder or group of stockholders acting in concert may own or exercise voting rights with respect to ten percent (10%) or more of any class of the Corporation's capital stock without prior written approval by the SBA. The Preferred Stock shall be divided into series. The first series shall consist of 28,000 shares of Non-Voting Redeemable Cumulative Preferred Stock, par value $500 each (the "Non-Voting Redeemable Cumulative Preferred Stock"). As to the remaining 972,000 shares of Preferred Stock, the Board of Directors shall have the power to designate the rights and preferences of these shares of Preferred Stock, PROVIDED, HOWEVER, that any additional series of Preferred Stock shall not have rights senior to the Non-Voting Redeemable Cumulative Preferred Stock so long as the Corporation is a licensee under Section 301 of the Small Business Investment Act of 1958, as amended from time to time. NON-VOTING REDEEMABLE CUMULATIVE PREFERRED STOCK ("NON-VOTING REDEEMABLE CUMULATIVE PREFERRED STOCK") The rights, powers, preferences, and qualifications, limitations and restrictions thereof, for shares of Non-Voting Redeemable Cumulative Preferred Stock are as follows: A. The Corporation shall issue shares of Non-Voting Redeemable Cumulative Preferred Stock only to the SBA. B. The rights attaching to shares of Non-Voting Redeemable Cumulative Preferred Stock shall take precedence over the rights attaching to shares of any other class of stock. C. Subject to the sound discretion of the board of directors, the SBA shall be paid from the retained earnings of the Corporation an annual dividend of 4 percent of the par value of its shares of Non-Voting Redeemable Cumulative Preferred Stock, payable from the date of issuance. Such dividends shall be payable on a preferred and cumulative basis so that no amount shall be set aside or paid to any other class of stock not held by SBA until the 4 percent dividend for that year has been paid or, in the event SBA has received less than 4 percent in any fiscal year, until the full amount of 4 percent per annum, which has cumulated up to that time upon all of SBA's shares of Non-Voting Redeemable Cumulative Preferred Stock has been paid to SBA. Accumulation of dividend shall not bear interest. D. Before any redemption of stock not purchased by SBA or liquidation in whole or in part, or any distribution of assets to other stockholders, SBA shall be entitled to the preferred payment in full of the amounts stated in paragraph C and the par value of its preferred stock. Such par value need not be paid to SBA before the distribution of ordinary dividends from retained earnings to other shareholders. E. The Corporation may, at its option, redeem the whole or any part of SBA's outstanding preferred stock on any dividend payment date where at least thirty days prior written notice has been given to SBA. The Corporation shall pay to SBA the par value of the shares to be redeemed ($50,000 minimum per transaction). 2 F. The Non-Voting Redeemable Cumulative Preferred Stock plus accumulated dividends held by the SBA will be redeemed fifteen (15) years after the date of issue where at least thirty (30) days prior written notice has been given to the Corporation. The Corporation shall pay SBA the par value of the shares to be redeemed. Paragraphs relating to Non-Voting Redeemable Cumulative Preferred Stock of this Article IV shall not be amended without the prior written approval of SBA so long as the Corporation is a licensee under Section 301 of the Small Business Investment Act of 1958. Non-Voting Redeemable Cumulative Preferred Stock shall, for all other purposes, be non-voting stock. ARTICLE V The name and mailing address of the incorporator is as follows: NAME MAILING ADDRESS Thomas F. Hunt, Jr. Two Appletree Square Suite 335 Bloomington, Minnesota 55425-1637 ARTICLE VI The Corporation is to have perpetual existence. ARTICLE VII In furtherance and not in limitation of the powers conferred by Statute, the Board of Directors is expressly authorized: To make, alter or repeal the Bylaws of the Corporation. To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation. To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose, to abolish any such reserve in the manner in which it was created. By a majority of the whole Board, to designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, and may replace any absent or disqualified member at any meeting of the committee. The Bylaws may provide that in 3 the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in the Bylaws of the Corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. When and as authorized by the stockholders in accordance with the statute, to sell, lease or exchange all or substantially all of the property and assets of the Corporation, including its goodwill and its corporate franchises upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property including shares of stock in and/or other securities of, any other corporation or corporations, as its Board of Directors shall deem expedient or for the best interests of the Corporation. ARTICLE VIII Meetings of the stockholders may be held within or without the State of Minnesota, as the Bylaws may provide. The books of the Corporation may be kept, subject to any provision contained in the statutes, outside the State of Minnesota at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. ARTICLE IX To the full extent permitted by the Minnesota Business Corporation Act, Minnesota Statutes, Chapter 302A, as it exists on the date hereof or may hereafter be amended, a director of this Corporation shall not be liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. No amendment to or repeal of this Article shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. The provisions of this Article shall not be deemed to limit or preclude indemnification of a director by the Corporation for any liability of a director which has not been eliminated by the provisions of this Article. ARTICLE X The Corporation carries on its balance sheet a capital account designated Restricted Contributed Capital Surplus. The Corporation has granted to the SBA a Liquidating Interest in the Restricted Contributed Capital Surplus account pursuant to the Preferred Stock Repurchase 4 Agreement (the "Agreement"), dated March 31, 1993, between the SBA and Capital Dimension Venture Fund, Inc. ("CDVFI"), a Delaware corporation, and a predecessor to this Corporation. The initial value of the Liquidating Interest shall be equal to $6,428,422 and shall decline on a straight-line basis at the end of each quarter by an amount equal to 1/28th (3.571426%) of its original amount beginning June 30, 1993. Upon the occurrence of any Event of Default (as defined in the Agreement) the value of the Liquidating Interest shall become fixed at the level immediately preceding the Event of Default and shall not decline further until such time as the default is cured or waived. The Liquidating Interest shall expire on the later to occur of: A. The date sixty (60) months from the date of this Agreement; or B. The date that the Note shall be paid and satisfied in full; or C. If an Event of Default has occurred and such default has been cured or waived, such later date on which the Liquidating Interest is fully amortized. If, prior to the expiration of the Liquidating Interest as set forth above, the Corporation's Board of Directors or its shareholders authorizes the liquidation of the Corporation, or a judicial order is issued directing the voluntary or involuntary liquidation of the Corporation, or SBA liquidates the Corporation pursuant to the Small Business Investment Act of 1958 and the regulations adopted thereunder, any assets which are available, after the payment or the provision for the payment of all debts of the Corporation, shall be distributed first to SBA, until the fair market value of such assets is equal to the amount of the Liquidating Interest or all remaining assets have been distributed to SBA. The provisions of this Article shall not be amended or repealed without the prior written approval of the SBA. ARTICLE XI Except where it is stated that SBA approval is required, the Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE XII No shareholder of the Corporation shall be entitled to any cumulative voting rights or any statutory preemptive rights to subscribe for or acquire any shares of the Corporation of any class or any obligations or other securities convertible into or exchangeable for any such shares. 5 ARTICLE XIII Section 1. NUMBER AND TERM. The business and affairs of this Corporation shall be managed by or under the direction of a Board of three or more directors, as may be designated by the Board of Directors from time to time. The directors shall be divided into three (3) classes, as nearly equal in number as the then total number of directors constituting the whole Board permits, with the term of office of one class expiring each year at the annual meeting of shareholders. Except as otherwise provided in this Article XV, each director shall be elected by the shareholders to hold office for a term of three consecutive years. Each director shall serve until a successor shall have been duly elected and qualified, or until the earlier death, resignation, removal, or disqualification of the director. Section 2. TRANSITIONAL BOARD. Upon the adoption of these Amended and Restated Articles of Incorporation, one class of directors shall hold office for a term expiring at the annual meeting of shareholders to be held after the end of the Corporation's 1997 fiscal year, another class shall hold office for a term expiring at the annual meeting of shareholders to be held after the end of the Corporation's 1998 fiscal year and another class shall hold office for a term expiring at the annual meeting of shareholders to be held after the end of the Corporation's 1999 fiscal year. After the expiration of each term, the provisions of Section 1 of this Article XIII shall control. Section 3. VACANCIES. Any vacancies occurring in the Board of Directors for any reason, and any newly created directorships resulting from an increase in the number of directors, may be filled by a majority of the directors then in office. Any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified subject, however, to prior retirement, resignation, death or removal from office. Any newly created directorships resulting from an increase in the authorized number of directors shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal in number as possible. Section 4. QUORUM. A majority of the members of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such a majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. The directors present at a duly organized meeting may continue to transact business until adjournment notwithstanding that the withdrawal of enough directors originally present leaves less than the number otherwise required for a quorum. Section 5. NOMINATION. Advance notice of nominations for the election of directors, other than by the Board of Directors or a committee thereof, shall be given within the time and in the manner provided in the Bylaws. Section 6. WRITTEN ACTION BY DIRECTORS. Any action required or permitted to be taken at a meeting of the Board of Directors, or a committee thereof, may be taken by written action 6 signed by all of the directors or, in cases where the action need not be approved by the shareholders, by written action signed by the number of directors that would be required to take the same action at a meeting of the Board or a committee thereof at which all directors were present. ARTICLE XIV The provisions of 13 CFR section 107.1810(i) are hereby incorporated by reference in these Amended and Restated Articles of Incorporation as if fully set forth herein. This Corporation hereby consents to the exercise by the SBA of all of the rights of SBA under 13 CFR section 107.1810(i), and agrees to take all actions which SBA may require in accordance with such provisions. --------------------------------------------- Thomas F. Hunt, Jr. 7 EX-3.2 3 EXHIBIT 3.2 EXHIBIT 3.2 ----------- BYLAWS OF CAPITAL DIMENSIONS VENTURE FUND, INC. SHAREHOLDERS SECTION 1.01 PLACE OF MEETINGS. Each meeting of the shareholders shall be held at the principal executive office of the Corporation in the State of Minnesota or at such other place within or without the State of Minnesota as may be designated by the Board of Directors or the President; provided, however, that any meeting called by or at the demand of a shareholder or shareholders shall be held in the county where the principal executive office of the Corporation is located. SECTION 1.02 ANNUAL MEETINGS. Any regular meeting of the shareholders shall be held at such time and on such date each year as may be designated by the Board of Directors. At each regular meeting the shareholders shall elect qualified successors for directors whose terms have expired or are due to expire within six months after the date of the meeting and may transact any other business; provided, however, that no business with respect to which special notice is required by law shall be transacted unless such notice shall have been given. SECTION 1.03 SPECIAL MEETINGS. A special meeting of the shareholders may be called for any purpose or purposes at any time by the President; by the Treasurer; by the Board of Directors or any two or more members thereof; or by one or more shareholders holding not less than three percent of the voting shares of the Corporation, who shall demand the special meeting by written notice given to the President or the Treasurer of the Corporation specifying the purposes of such meeting. Within 30 days after receipt of a demand by the President or the Treasurer from any shareholder(s) entitled to call a meeting of the shareholders, it shall be the duty of the Board of Directors of the Corporation to cause a special meeting of shareholders to be duly called and held no later than 90 days after receipt of the demand. If the Board of Directors fails to cause a special meeting to be called and held as required by this Section, the shareholder(s) making the demand may call the meeting by giving notice as provided in Section 1.05 at the expense of the Corporation. SECTION 1.04 ADJOURNMENTS. Any meeting of the shareholders may be adjourned to another date, time and place. If any meeting of the shareholders is adjourned, no notice as to the adjourned meeting need be given other than by announcement at the meeting at which the adjournment is taken of the date, time and place at which the meeting will be reconvened. SECTION 1.05 NOTICE OF MEETINGS. Except as otherwise specified in Section 1.04, written notice of each meeting of the shareholders, stating the date, time and place and, in the case of a special meeting, the purpose or purposes, shall be mailed at least ten days and not more than 60 days prior to the meeting to every holder of voting shares to the shareholder's address appearing on the books of the Corporation. The business transacted at a special meeting of shareholders is limited to the purposes stated in the notice of the meeting. SECTION 1.06 WAIVER OF NOTICE. A shareholder may waive notice of the time, place and purpose(s) of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at, or after the meeting, and whether given in writing, orally or by attendance. Attendance by a shareholder at a meeting is a waiver of notice of that meeting, unless the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. SECTION 1.07 QUORUM; ACTS OF SHAREHOLDERS. The holders of a majority of the voting power of the shares entitled to vote at a shareholders' meeting present in person or by proxy are a quorum for the transaction of business. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though the withdrawal of a number of the shareholders originally present leaves less than the proportion or number otherwise required for a quorum. Except as otherwise required by law or specified in the Articles of Incorporation of this Corporation, the shareholders shall take action by the affirmative vote of the holders of a majority of the voting power of the shares present at a duly held meeting of shareholders. SECTION 1.08 VOTING RIGHTS. SUBDIVISION 1. A shareholder shall have one vote for each voting share held. Except as provided in Section 1.09, a holder of voting shares may vote any portion of the shares in any way the shareholder chooses. If a shareholder votes without designating the proportion or number of shares voted in a particular way, the shareholder is deemed to have voted all of the shares in that way. SUBDIVISION 2. The Board may fix a date no more than 60 days before the date of a meeting of shareholders as the date for the determination of the holders of voting shares entitled to notice of and to vote at the meeting. When a date is fixed, only shareholders on that date are entitled to notice of and permitted to vote at that meeting of shareholders. SUBDIVISION 3. A resolution approved by the affirmative vote of a majority of the directors present at a duly held Board meeting may establish a procedure whereby a shareholder may certify in writing to the Corporation that all or a portion of the shares registered in the name of the shareholder are held for the account of one or more beneficial owners. Upon receipt by the Corporation of the writing, the persons specified as beneficial owners, rather than the actual shareholders, are deemed the shareholders for the purposes specified in the writing. -2- SECTION 1.09 VOTING BY JOINT OWNERS, ORGANIZATIONS AND LEGAL REPRESENTATIVES. SUBDIVISION 1. Shares owned by two or more shareholders may be voted by any one of them unless the Corporation receives written notice from any one of them denying the authority of that person to vote those shares. A shareholder whose shares are pledged may vote those shares until the shares are registered in the name of the pledgee. SUBDIVISION 2. Shares of the Corporation registered in the name of another domestic or foreign corporation may be voted by the chief executive officer or another legal representative of that corporation. Shares of the Corporation in the name of or under the control of the Corporation or a subsidiary in a fiduciary capacity are not entitled to vote on any matter, except to the extent that the settlor or beneficial owner of the shares possesses and exercises a right to vote or gives the Corporation binding instructions on how to vote the shares. Except as provided in the preceding sentence, shares of the Corporation registered in the name of a subsidiary are not entitled to vote on any matter. SUBDIVISION 3. Shares of the Corporation under the control of a person in a capacity as a personal representative, administrator, executor, guardian, conservator or attorney-in-fact may be voted by the person, either in person or by proxy, without registration of those shares in the name of the person. Shares registered in the name of a trustee of a trust or in the name of a custodian may be voted by the trustee or custodian, either in person or by proxy, but a trustee of a trust or a custodian shall not vote shares unless they are registered in the name of the trustee or custodian. SUBDIVISION 4. Shares registered in the name of a trustee in bankruptcy or a receiver may be voted by the trustee or receiver either in person or by proxy. Shares under the control of a trustee in bankruptcy or a receiver may be voted by the trustee or receiver without registering the shares in the name of the trustee or receiver, if authority to do so is contained in an appropriate order of the court by which the trustee or receiver was appointed. SUBDIVISION 5. Shares registered in the name of an organization not described above may be voted either in person or by proxy by the legal representative of that organization. SECTION 1.10 PROXIES. SUBDIVISION 1. A shareholder may cast or authorize the casting of a vote by filing a written appointment of a proxy with an officer of the Corporation at or before the meeting at which the appointment is to be effective. An appointment of a proxy for shares held jointly by two or more shareholders is valid if signed by any one of them, unless the Corporation receives from any one of those shareholders written notice either denying the authority of that person to appoint a proxy or appointing a different proxy. SUBDIVISION 2. An appointment of a proxy may be terminated at will, unless the appointment is coupled with an interest, in which case it shall not be terminated except in -3- accordance with the terms of an agreement, if any, between the parties to the appointment. Termination shall be made by filing written notice of the termination of the appointment with an officer of the Corporation, or by filing a new written appointment of a proxy with an officer of the Corporation. Termination in either manner revokes all prior proxy appointments and is effective when filed with an officer of the Corporation. SUBDIVISION 3. The death or incapacity of a person appointing a proxy does not revoke the authority of the proxy, unless written notice of the death or incapacity is received by an officer of the Corporation before the proxy exercises the authority under that appointment. SUBDIVISION 4. Unless the appointment specifically provides otherwise, if two or more persons are appointed as proxies for a shareholder: (a) any one of them may vote the shares on each item of business in accordance with specific instructions contained in the appointment; and (b) if no specific instructions are contained in the appointment with respect to voting the shares on a particular item of business, the shares shall be voted as a majority of the proxies determines. If the proxies are equally divided, the shares shall not be voted. SUBDIVISION 5. Unless the appointment of a proxy contains a restriction, limitation or specific reservation of authority, the Corporation may accept a vote or action taken by a person named in the appointment. The vote of a proxy is final, binding and not subject to challenge. SECTION 1.11 ACTION WITHOUT A MEETING. Any action required or permitted to be taken at a meeting of the shareholders of the Corporation may be taken without a meeting by written action signed by all of the shareholders entitled to vote on that action. The written action is effective when it has been signed by all of those shareholders, unless a different effective time is provided in the written action. DIRECTORS SECTION 2.01 NUMBER; QUALIFICATIONS. The business and affairs of the Corporation shall be managed by or under the direction of a Board of three or more directors. Directors shall be natural persons. The shareholders at a regular meeting shall determine the number of directors to constitute the Board until the next regular meeting, provided that thereafter the authorized number of directors may be increased by the shareholders or the Board and decreased by the shareholders. Directors need not be shareholders. SECTION 2.02 TERM. Directors shall be elected at each regular meeting of the shareholders, and each director shall be elected to hold office until the next regular meeting and until his or her successor is elected and has qualified or until his or her earlier death, resignation, removal or disqualification. -4- SECTION 2.03 VACANCIES. Vacancies on the Board of Directors may be filled by the affirmative vote of a majority of the remaining members of the Board, though less than a quorum. Vacancies on the Board resulting from newly created directorships may be filled by the affirmative vote of a majority of the directors serving at the time the directorships are created. Each person so elected shall be a director until a successor is elected by the shareholders (who may make such election at their next regular meeting or at any special meeting duly called for that purpose) and has qualified. SECTION 2.04 PLACE OF MEETINGS. Each meeting of the Board of Directors shall be held at the principal executive office of the Corporation in the State of Minnesota or at any other place within or without the State of Minnesota as may be designated by a majority of the members of the Board. SECTION 2.05 ANNUAL MEETINGS. A regular meeting of the Board of Directors for the election of officers and the transaction of any other business shall be held in each year without notice at the place of and immediately after any regular meeting of the shareholders. SECTION 2.06 SPECIAL MEETINGS. A special meeting of the Board of Directors may be called for any purpose or purposes at any time by the President or by any member of the Board by giving not less than two nor more than ten days' notice to all directors of the date, time and place of the meeting. The notice need not state the purpose of the meeting. SECTION 2.07 WAIVER OF NOTICE; PREVIOUSLY SCHEDULED MEETINGS. SUBDIVISION 1. A director of the Corporation may waive notice of the date, time and place of a meeting of the Board. A waiver of notice by a director entitled to notice is effective whether given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a director at a meeting is a waiver of notice of that meeting, unless the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and thereafter does not participate in the meeting. SUBDIVISION 2. If the day or date, time and place of a Board meeting have been provided herein or announced at a previous meeting of the Board, no notice is required. Notice of an adjourned meeting need not be given other than by announcement at the meeting at which adjournment is taken of the date, time and place at which the meeting will be reconvened. SECTION 2.08 QUORUM; ACTS OF BOARD. The presence in person of a majority of the Board of Directors currently holding office shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the directors present may adjourn a meeting from time to time without further notice until a quorum is present. Unless otherwise specified in the Articles of Incorporation, the acts of a majority of the directors present at a meeting at which a quorum is present shall be the acts of the Board. If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact -5- business until adjournment, even though the withdrawal of a number of the directors originally present leaves less than the proportion or number otherwise required for a quorum. SECTION 2.09 ELECTRONIC COMMUNICATIONS. A conference among directors by any means of communication through which the directors may simultaneously hear each other during the conference constitutes a Board meeting, if the same notice is given of the conference as would be required for a meeting, and if the number of directors participating in the conference would be sufficient to constitute a quorum at a meeting. Participation in a meeting by that means constitutes presence in person at the meeting. A director may participate in a Board meeting not described above by any means of communication through which the director, other directors so participating and all directors physically present at the meeting may simultaneously hear each other during the meeting. Participation in a meeting by that means also constitutes presence in person at the meeting. SECTION 2.10 ABSENT DIRECTORS. A director of the Corporation may give advance written consent or opposition to a proposal to be acted on at a Board meeting. If the director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. SECTION 2.11 ACTION WITHOUT A MEETING. An action required or permitted to be taken at a Board meeting may be taken by written action signed by all of the directors unless the action need not be approved by the shareholders, in which case the action may be taken by written action signed by the number of directors that would be required to take the same action at a meeting of the Board at which all directors were present. The written action is effective when signed by the required number of directors, unless a different effective time is provided in the written action. When written action is permitted to be taken by less than all directors, all directors shall be notified immediately of its text and effective date. SECTION 2.12 COMMITTEES. SUBDIVISION 1. A resolution approved by the affirmative vote of a majority of the Board may establish committees having the authority of the Board in the management of the business of the Corporation to the extent provided in the resolution. Committees shall be subject at all times to the direction and control of the Board, except as provided in Section 2.13. SUBDIVISION 2. A committee shall consist of one or more natural persons, who need not be directors, appointed by affirmative vote of a majority of the directors present at a duly called and held Board meeting. -6- SUBDIVISION 3. A majority of the members of a committee appointed by the Board is a quorum for the transaction of business, unless a larger or smaller proportion or number is provided in a resolution approved by the affirmative vote of a majority of the directors present at a duly called and held Board meeting. SUBDIVISION 4. Minutes, if any, of committee meetings shall be made available upon request to members of the committee and to any director. SECTION 2.1 COMMITTEE OF DISINTERESTED PERSONS. Pursuant to the procedure set forth in Section 2.12, the Board may establish a committee composed of two or more disinterested directors or other disinterested persons to determine whether it is in the best interests of the Corporation to pursue a particular legal right or remedy of the Corporation and whether to cause the dismissal or discontinuance of a particular proceeding that seeks to assert a right or remedy on behalf of the Corporation. The committee, once established, is not subject to the direction or control of, or termination by, the Board. A vacancy on the committee may be filled by a majority vote of the remaining committee members. The good faith determinations of the committee are binding upon the Corporation and its directors, officers and shareholders. The committee terminates when it issues a written report of its determinations. SECTION 2.14 COMPENSATION. Directors as such shall not receive a stated salary for their services, but by resolution of the Board of Directors a fixed sum and expenses of attendance, if any, may be allowed for attendance at each meeting of the Board, provided, however, that nothing herein shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. OFFICERS SECTION 3.01 ELECTION; QUALIFICATIONS. The officers of the Corporation shall be a President, a Secretary and a Treasurer, who shall be elected annually by the Board of Directors at the annual meeting of the Board, and such other officers as may be designated from time to time by the Board. No officer need be a director. All offices may be held by the same person except the President and Secretary shall be two separate persons. SECTION 3.02 PRESIDENT. The President shall be the chief executive officer of the Corporation, shall have general and active management of the business of the Corporation and supervision of the other officers of the Corporation, shall see that all orders and resolutions of the Board of Directors are carried into effect, and shall preside at all meetings of the shareholders and all meetings of the Board of Directors. SECTION 3.03 VICE PRESIDENTS. Any one or more Vice Presidents, if any, may be designated by the Board of Directors as Executive Vice Presidents or Senior Vice Presidents. During the absence or disability of the President, it shall be the duty of the highest ranking -7- Executive Vice President, and, in the absence of any such Vice President, it shall be the duty of the highest ranking Senior Vice President or other Vice President, who shall be present at the time and able to act, to perform the duties of the President. The determination of who is the highest ranking of two or more persons holding the same office shall, in the absence of specific designation of order of rank by the Board of Directors, be made on the basis of the earliest date of appointment or election, or, in the event of simultaneous appointment or election, on the basis of the longest continuous employment by the Corporation. SECTION 3.04 SECRETARY. The Secretary shall attend all meetings of the shareholders and all meetings of the Board of Directors and shall record or cause to be recorded all proceedings thereof in a book to be kept for that purpose. Except as otherwise required or permitted by law or by these Bylaws, the Secretary shall give or cause to be given notice of all meetings of the shareholders and all meetings of the Board of Directors. SECTION 3.05 TREASURER. The Treasurer shall be the chief financial officer of the Corporation and shall have the care and custody of the funds and securities of the Corporation. The Treasurer shall keep or cause to be kept full and accurate financial records of the Corporation and shall cause all monies of the Corporation to be deposited in the name and to the credit of the Corporation in such depositories as may be designated from time to time by the Board of Directors. The Treasurer shall render to the President and to the Board, when requested, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. If required by the Board, the Treasurer shall execute and deliver to the Corporation a bond in such amount, with such sureties and upon such conditions as shall be approved by the Board provided, however, that the Corporation shall pay the cost of such bond. SECTION 3.06 AUTHORITY AND DUTIES. In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the Board of Directors. Unless prohibited by a resolution approved by the affirmative vote of a majority of the directors present, an officer elected or appointed by the Board may, without the approval of the Board, delegate some or all of the duties and powers of an office to other persons. SECTION 3.07 TERM. SUBDIVISION 1. All officers of the Corporation shall hold office until their respective successors are chosen and have qualified or until their earlier death, resignation, or removal. SUBDIVISION 2. An officer may resign at any time by giving written notice to the Corporation. The resignation is effective without acceptance when the notice is given to the Corporation, unless a later effective date is specified in the notice. -8- SUBDIVISION 3. An officer may be removed at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the directors present at a duly held Board meeting. SUBDIVISION 4. A vacancy in an office because of death, resignation, removal, disqualification or other cause may, or in the case of a vacancy in the offices of President or Treasurer shall, be filled for the unexpired portion of the term by the Board at the first Board meeting following the inception of such vacancy. SECTION 3.08 SALARIES. The salaries of all officers of the Corporation shall be fixed by the Board of Directors or by the President if authorized by the Board. INDEMNIFICATION SECTION 4.01 INDEMNIFICATION. To the full extent permitted by Minnesota Statutes, but as limited in the Corporation's Articles of Incorporation, each person who was or is a party or is threatened to be made a party to any threatened, pending or completed civil, criminal, administrative, arbitration or investigative action, suit or proceeding, including a proceeding by or in the right of the Corporation, wherever brought, by reason of the fact that (1) the person is or was a director of the Corporation, (2) the person is or was a member of a committee of the Board of Directors, officer, employee or agent of the Corporation, or (3) the person is or was serving at the request of the Corporation, or the person's duties as a director, committee member, officer, employee or agent of the Corporation involve or involved service, as a director, officer, partner, trustee, employee or agent of another corporation, employee benefit plan or other organization or enterprise, shall be indemnified by the Corporation against judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements and reasonable expenses, including attorneys' fees and disbursements, incurred by the person in connection with the action, suit or proceeding, if, with respect to the acts or omissions of the person complained of in the action, suit or proceeding, the person: (a) has not been indemnified by another corporation, employee benefit plan or other organization or enterprise for the same expenses with respect to the same acts or omissions; (b) acted in good faith; (c) received no improper personal benefit and Minnesota Statues, Section 302A.255 has been satisfied; (d) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and -9- (e) with respect to a person acting in any capacity described in clauses (1) and (2) above, reasonably believed the person's conduct was in the best interests of the Corporation, or with respect to any person serving in a capacity described in clause (3) above, reasonably believed the person's conduct was not opposed to the best interests of the Corporation. The termination of an action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent does not, of itself, establish that the person did not meet the criteria set forth above. A director of the Corporation, including a person deemed to be a director under applicable law, shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except to the extent provided by applicable law for: (a) liability based on a breach of the director's duty of loyalty to the Corporation or its shareholders, (b) liability for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (c) liability under Sections 302A.559 or 80A.23 of the Minnesota Statutes, (d) liability for any transaction from which the director derived an improper personal benefit, or (e) liability for any act or omission occurring prior to the date when this Article IV becomes effective. Except as limited in the Corporation's Articles of Incorporation, if the Minnesota Business Corporation Act hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation and elimination on personal liability provided herein, shall be eliminated or limited to the fullest extent permitted by the Minnesota Business Corporation Act, as so amended. SECTION 4.02 ADVANCES. If a person described in clause (1), (2) or (3) of Section 4.01 is made or threatened to be made a party to any proceeding, the person shall be entitled, upon written request to the Corporation, to payment or reimbursement by the Corporation of reasonable expenses, including attorneys' fees and disbursements, incurred by the person in advance of the final disposition of the proceeding: (a) upon receipt by the Corporation of a written affirmation by the person of a good faith belief that the criteria for indemnification set forth in Section 4.01 have been satisfied and a written undertaking by the person to repay all amounts so paid or -10- reimbursed by the Corporation, if it is ultimately determined that the criteria for indemnification have not been satisfied, and (b) after a determination that the facts then known to those making the determination under Section 4.03 would not preclude indemnification under Section 4.01. The written undertaking required by clause (a) shall be an unlimited general obligation of the person making it, but, in the discretion of those making the determination under Section 4.03, may, but need not, be secured and may, but need not, be accepted without reference to the financial ability of the person to make the repayment. SECTION 4.03 DETERMINATION OF ELIGIBILITY. All determinations whether indemnification of a person is required because the criteria set forth in Section 4.01 have been satisfied and whether a person is entitled to payment or reimbursement of expenses in advance of the final disposition of a proceeding as provided in Section 4.02 shall be made: (a) by the Board of Directors by a majority of a quorum. Directors who are at the time parties to the proceeding shall not be counted for determining either a majority or the presence of a quorum; (b) if a quorum under clause (a) cannot be obtained, by a majority of a committee of the Board, consisting solely of two or more directors not at the time parties to the proceeding, duly designated to act in the matter by a majority of the full Board, including directors who are parties; (c) if a determination is not made under clause (a) or (b), by special legal counsel who has not represented the Corporation, any related corporation, or any director, officer, employee or agent whose indemnification is in issue; such special legal counsel shall be selected either by a majority of the Board or a committee by vote pursuant to clause (a) or (b) or, if the requisite of the full Board cannot be obtained and the committee cannot be established, by a majority of the full Board including directors who are parties; (d) if a determination is not made under clauses (a) through (c), by the shareholders, excluding the votes of shares held by parties to the proceeding; or (e) if an adverse determination is made under clauses (a) through (d), or if no determination is made under clauses (a) through (d) within 60 days after the termination of an action, suit or proceeding or after a request for an advance of expenses, as the case may be, by a court in the State of Minnesota, which may be the same court in which the proceeding involving the person's liability took place, upon application of the person and any notice the court requires. -11- SECTION 4.04 REIMBURSEMENT TO WITNESSES. The Corporation may reimburse any person for any expenses, including attorneys' fees and disbursements, incurred by the person in connection with an appearance by such person as a witness in any action, suit or proceeding concerning the Corporation at a time when the person has not been made or threatened to be made a party to such action, suit or proceeding. SECTION 4.05 REPORT TO SHAREHOLDERS. If the Corporation indemnifies or advances expenses to a person in accordance with Section 4.01 through 4.04 in connection with an action, suit or proceeding by or on behalf of the Corporation, the amount of the indemnification or advance and to whom and on whose behalf it was paid shall be reported as part of the annual financial statements furnished to shareholders covering the period when the indemnification or advance was paid or accrued under the accounting method of the Corporation reflected in the financial statements. SECTION 4.06 INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person described in clause (1), (2) or (3) of Section 4.01 in the person's official capacity as described therein against any liability asserted against and incurred by the person in or arising from that capacity, whether or not the Corporation would otherwise be required to indemnify the person against the liability. SHARES SECTION 5.01 CERTIFICATED AND UNCERTIFICATED SHARES. SUBDIVISION 1. The shares of the Corporation shall be either certificated shares or uncertificated shares. Each holder of duly issued certificated shares is entitled to a certificate of shares. SUBDIVISION 2. Each certificate of shares of the Corporation shall bear the corporate seal, if any, and shall be signed by the President or Vice President and the Secretary or Assistant Secretary, but when a certificate is signed by a transfer agent or a registrar, the signature of any such officer and the corporate seal upon the certificate may be facsimiles, engraved or printed. If a person signs or has a facsimile signature placed upon a certificate while an officer, transfer agent or registrar of the Corporation, the certificate may be issued by the Corporation, even if the person has ceased to serve in that capacity before the certificate is issued, with the same effect as if the person had that capacity at the date of its issue. SUBDIVISION 3. A certificate representing shares issued by the Corporation shall set forth upon the face or back of the certificate, or shall state that the Corporation will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations and relative rights of the shares of each class or series authorized to be issued, so far as -12- they have been determined, and the authority of the Board to determine the relative rights and preferences of subsequent classes or series. SUBDIVISION 4. A resolution approved by the affirmative vote of a majority of the directors present at a duly called and held meeting of the Board may provide that some or all of any or all classes and series of the shares of the Corporation will be uncertificated shares. Any resolution shall not apply to shares represented by a certificate until the certificate is surrendered to the Corporation. SECTION 5.02 DECLARATION OF DIVIDENDS. The Board of Directors shall have the authority to declare dividends upon the shares of the Corporation to the extent permitted by law, the Articles of Incorporation and any agreements with the Small Business Administration. SECTION 5.03 TRANSFER OF SHARES. Shares of the Corporation may be transferred only on the books of the Corporation by the holder thereof, in person or by his attorney. In the case of certificated shares, shares shall be transferred only upon surrender and cancellation of certificates for a like number of shares. The Board of Directors, however, may appoint one or more transfer agents and registrars to maintain the share records of the Corporation and to effect transfers of shares. SECTION 5.04 RECORD DATE. The Board of Directors may fix a time, not exceeding forty days preceding the date fixed for the payment of any dividend or other distribution, as a record date for the determination of the shareholders entitled to receive payment of such dividend or other distribution, and in such case only shareholders of record on the date so fixed shall be entitled to receive payment of dividend or other distribution, notwithstanding any transfer of any shares on the books of the Corporation after any record date. MISCELLANEOUS SECTION 6.01 EXECUTION OF INSTRUMENTS. All deeds, mortgages, notes, checks, contracts and other instruments pertaining to the business and affairs of the Corporation shall be signed on behalf of the Corporation by the President, a Vice President, if any, or by any other person(s) as may be designated by the Board of Directors. If a document must be executed by persons holding different offices or functions and one person holds the offices or exercises the functions, that person may execute the document in more than one capacity if the document indicates each capacity. SECTION 6.02 ADVANCES. The Corporation may, without a vote of the directors, advance money to its directors, officers or employees to cover expenses that can reasonably be anticipated to be incurred by them in the performance of their duties and for which they would be entitled to reimbursement in the absence of an advance. -13- SECTION 6.03 CORPORATE SEAL. The seal of the Corporation, if any, shall be a circular embossed seal having inscribed thereon the name of the Corporation and the following words: "Corporate Seal Minnesota" SECTION 6.04 FISCAL YEAR. The fiscal year of the Corporation shall be determined by the Board of Directors. SECTION 6.05 AMENDMENTS. The Board of Directors shall have authority to make or alter the Bylaws of the Corporation, subject to the power of the shareholders to change or repeal the same, provided, however, that the Board shall not adopt, amend or repeal any Bylaw fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies in the Board, or fixing the number of directors or their classifications, qualifications or terms of office, but may adopt or amend a Bylaw that increases the number of directors. SECTION 6.06 MINNESOTA BUSINESS COMBINATION ACT. The Corporation elects not to be subject to the provisions of the Minnesota Business Combination Act, Minnesota Statutes 302A.673. Adopted: March 31, 1993 /s/ Thomas F. Hunt, Jr. ----------------------------------- Thomas F. Hunt, Jr. Secretary -14- EX-3.3 4 EXHIBIT 3.3 EXHIBIT 3.3 CAPITAL DIMENSIONS VENTURE FUND, INC. 1997 STOCK PLAN SECTION CONTENTS PAGE - ------- -------- ---- 1. General Purpose of Plan; Definitions.................................1 2. Administration.......................................................3 3. Stock Subject to Plan................................................4 4. Eligibility..........................................................5 5. Stock Options........................................................5 6. Stock Appreciation Rights............................................8 7. Restricted Stock....................................................10 8. Deferred Stock Awards...............................................11 9. Transfer, Leave of Absence, etc.....................................12 10. Amendments and Termination..........................................13 11. Unfunded Status of Plan.............................................13 12. General Provisions..................................................13 CAPITAL DIMENSIONS VENTURE FUND, INC. 1997 STOCK PLAN SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS. The name of this plan is the Capital Dimensions Venture Fund, Inc. 1997 Stock Plan (the "Plan"). The purpose of the Plan is to enable Capital Dimensions Venture Fund, Inc. (the "Company") to retain and attract executives and other employees, non-employee directors and consultants who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "BOARD" means the Board of Directors of the Company as it may be comprised from time to time. b. "CAUSE" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, willful misconduct, dishonesty or intentional violation of a statute, rule or regulation, any of which, in the judgment of the Company, is harmful to the business or reputation of the Company. c. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. d. "COMMITTEE" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board, unless the Plan specifically states otherwise. e. "CONSULTANT" means any person, including an advisor, engaged by the Company or a Parent of the Subsidiary of the Company to render services and who is compensated for such services and who is not an employee of the Company or any Parent Corporation or Subsidiary of the Company. A Non-Employee Director may serve as a Consultant. f. "COMPANY" means Capital Dimensions Venture Fund, Inc., a corporation organized under the laws of the State of Minnesota (or any successor corporation). g. "DEFERRED STOCK" means an award made pursuant to Section 8 below of the right to receive stock at the end of a specified deferral period. h. "DISABILITY" means permanent and total disability as determined by the Committee. i. "EARLY RETIREMENT" means retirement, with consent of the Committee at the time of retirement, from active employment with the Company and any Subsidiary or Parent Corporation of the Company. j. "FAIR MARKET VALUE" of Stock on any given date shall be determined by the Committee as follows: (a) if the Stock is listed for trading on one of more national securities exchanges, or is traded on the Nasdaq Stock Market, the last reported sales price on the principal such exchange or the Nasdaq Stock Market on the trading date immediately prior to the date in question, or if such Stock shall not have been traded on such principal exchange on such date, the last reported sales price on such principal exchange or the Nasdaq Stock Market on the first day prior thereto on which such Stock was so traded; or (b) if the Stock is not listed for trading on a national securities exchange or the Nasdaq Stock Market, but is traded in the over-the-counter market, including the Nasdaq Small Cap Market, the closing bid price for such Stock on the trading date immediately prior to the date in question, or if there is no such bid price for such Stock on such date, the closing bid price on the first day prior thereto on which such price existed; or (c) if neither (a) or (b) is applicable, by any means fair and reasonable by the Committee, which determination shall be final and binding on all parties. k. "INCENTIVE STOCK OPTION" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. l. "NON-EMPLOYEE DIRECTOR" means a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934. m. "NON-QUALIFIED STOCK OPTION" means any Stock Option that is not an Incentive Stock Option, and is intended to be and is designated as a "Non-Qualified Stock Option." n. "NORMAL RETIREMENT" means retirement from active employment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 65. o. "PARENT CORPORATION" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. p. "RESTRICTED STOCK" means an award of shares of Stock that are subject to restrictions under Section 7 below. q. "RETIREMENT" means Normal Retirement or Early Retirement. 2 r. "STOCK" means the Common Stock of the Company. s. "STOCK APPRECIATION RIGHT" means the right pursuant to an award granted under Section 6 below to surrender to the Company all or a portion of a Stock Option in exchange for an amount equal to the difference between (i) Fair Market Value, as of the date such Stock Option or such portion thereof is surrendered, of the shares of Stock covered by such Stock Option or such portion thereof, and (ii) the aggregate exercise price of such Stock Option or such portion thereof. t. "STOCK OPTION" means any option to purchase shares of Stock granted pursuant to Section 5 below. u. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. ADMINISTRATION. The Plan shall be administered by the Board of Directors or by a Committee of not less than two Non-Employee Directors, who shall be appointed by the Board of Directors of the Company and who shall serve at the pleasure of the Board. Any or all of the functions of the Committee specified in the Plan may be exercised by the Board, unless the Plan specifically states otherwise. The Committee shall have the power and authority to grant to eligible employees or Consultants, pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, or (iv) Deferred Stock awards. In particular, the Committee shall have the authority: (i) to select the officers and other employees of the Company and its Subsidiaries and other eligible persons to whom Stock Options, Stock Appreciation Rights, Restricted Stock and Deferred Stock awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock and Deferred Stock awards, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto), which authority 3 shall be exclusively vested in the Committee (and not the Board) for purposes of establishing performance criteria used with Restricted Stock and Deferred Stock awards; provided, however, that in the event of a merger or asset sale, the applicable provisions of Sections 5(c) and 7(c) of the Plan shall govern the acceleration of the vesting of any Stock Option or awards; (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate to executive officers of the Company the authority to exercise the powers specified in (i), (ii), (iii), (iv) and (v) above with respect to persons who are not executive officers of the Company. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. STOCK SUBJECT TO PLAN. The total number of shares of Stock reserved and available for distribution under the Plan shall be 200,000. Such shares may consist, in whole or in part, of authorized and unissued shares. Subject to paragraph (b)(iv) of Section 6 below, if any shares that have been optioned cease to be subject to Stock Options, or if any shares subject to any Restricted Stock or Deferred Stock award granted hereunder are forfeited or such award otherwise terminates without a payment being made to the participant, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding options granted under the Plan, and in the number of shares subject to Restricted Stock or Deferred Stock awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Option. 4 SECTION 4. ELIGIBILITY. Officers, other employees of the Company and Subsidiaries, members of the Board of Directors, and Consultants who are responsible for or contribute to the management, growth and profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock awards under the Plan. The optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award. SECTION 5. STOCK OPTIONS. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options shall be granted under the Plan after more than ten years after the date the Plan is adopted by the Board of Directors. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of options (in each case with or without Stock Appreciation Rights). To the extent that any option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. The preceding sentence shall not preclude any modification or amendment to an outstanding Incentive Stock Option, whether or not such modification or amendment results in disqualification of such Stock Option as an Incentive Stock Option, provided the optionee consents in writing to the modification or amendment. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) OPTION PRICE. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant. In no event shall the option price per share of Stock purchasable under an Incentive Stock Option be less than 100% of Fair Market Value on the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an 5 Incentive Stock Option is granted to such employee, the option price shall be no less than 110% of the Fair Market Value of the Stock on the date the option is granted. (b) OPTION TERM. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (c) EXERCISABILITY. Stock Options shall be exercisable at such time or times as determined by the Committee at or after grant, subject to the restrictions stated in Section 5(b) above. If the Committee provides, in its discretion, that any option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time. Notwithstanding anything contained in the Plan to the contrary, the Committee may, in its discretion, extend or vary the term of any Stock Option or any installment thereof, whether or not the optionee is then employed by the Company, if such action is deemed to be in the best interests of the Company; provided, however, that in the event of a merger or sale of assets, the provisions of this Section 5(c) shall govern vesting acceleration. Notwithstanding the foregoing, unless the Stock Option provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise provisions, for a period specified by the Committee, but not to exceed sixty (60) days, prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 75% or more of the outstanding Stock of the Company. The grant of an option pursuant to the Plan shall not limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, exchange or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. (d) METHOD OF EXERCISE. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee at the time of grant or exercise, in its sole discretion, payment in full or in part may also be made in the form of Stock already owned by the optionee (which in the case of Stock acquired upon exercise of an option have been owned for more than six months on the date of surrender) or, in the case of the exercise of a Non-Qualified Stock 6 Option, Restricted Stock or Deferred Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee), provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares may be authorized only at the time the option is granted, and provided further that in the event payment is made in the form of shares of Restricted Stock or a Deferred Stock award, the optionee will receive a portion of the option shares in the form of, and in an amount equal to, the Restricted Stock or Deferred Stock award tendered as payment by the optionee. If the terms of an option so permit, an optionee may elect to pay all or part of the option exercise price by having the Company withhold from the shares of Stock that would otherwise be issued upon exercise that number of shares of Stock having a Fair Market Value equal to the aggregate option exercise price for the shares with respect to which such election is made. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 12. (e) NON-TRANSFERABILITY OF OPTIONS. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) TERMINATION BY DEATH. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, any Incentive Stock Option may thereafter be immediately exercised, to the extent then exercisable, by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of twelve months from the date of such death or until the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of death, if any Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (g) TERMINATION BY REASON OF DISABILITY. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Incentive Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability, but may not be exercised after twelve months from the date of such termination of employment or the expiration of the stated term of the option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if any Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (h) TERMINATION BY REASON OF RETIREMENT. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Retirement and the terms of the Stock Option so provide, any Incentive Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such Retirement, but may not be exercised after twelve months from the date of such termination of employment or the expiration of the stated 7 term of the option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if any Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (i) OTHER TERMINATION. In the event an optionee's continuous status as an employee or Consultant terminates (other than upon the optionee's death, Disability or Retirement), the optionee may exercise his or her Stock Option, but only within such period of time as is determined by the Committee, and only to the extent that the optionee was entitled to exercise it at the date of termination (but in no event later than the stated term of the Stock Option). In the case of an Incentive Stock Option, the Committee shall determine such period of time (in no event to exceed ninety (90) days from the date of termination) when the Stock Option is granted. In the event an optionee's employment with the Company is terminated for Cause, or under such other circumstances as the Committee shall define in the option grant, all Stock Options granted to such optionee shall immediately terminate. (j) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. The aggregate Fair Market Value (determined as of the time the Stock Option is granted) of the Common Stock with respect to which an Incentive Stock Option under this Plan or any other plan of the Company and any Subsidiary or Parent Corporation is exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. (k) AUTOMATIC GRANT TO NON-EMPLOYEE DIRECTORS. Each individual who is serving as a member of the Board and who is not an employee of the Company, any Parent Corporation or any Subsidiary (a "Non-Employee Director") shall be automatically awarded, on the date this Plan is approved by the Company's stockholders, a Non-Qualified Stock Option, which shall be fully vested, to purchase 1,000 shares of the Company's Common Stock at an exercise price equal to 100% of the Fair Market Value of the Common Stock on such date and which expires five years after the date of grant. An individual who is first elected or appointed or who is re-elected as a Non-Employee Director at any time hereafter shall receive a similar automatic grant, at the time of election or appointment or re-election to the Board, of a Non-Qualified Stock Option, which shall be fully vested, to purchase 1,000 shares of the Company's Common Stock at an exercise price equal to 100% of the Fair Market Value of the Common Stock on such date and which expires five years after the date of grant. The maximum number of shares as to which Options may be granted to any individual director under this Section 5(k) shall be 5,000 shares. The maximum aggregate number of shares as to which Options may be granted under this Section 5(k) shall be 15,000 shares. SECTION 6. STOCK APPRECIATION RIGHTS. (a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of the option. 8 A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall not be reduced until the exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. A Stock Appreciation Right may be exercised by an optionee, in accordance with paragraph (b) of this Section 6, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in paragraph (b) of this Section 6. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive up to, but not more than, an amount in cash or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5 of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan, but only to the extent of the number of shares issued or issuable under the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. (v) A Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only if and when the market price of the Stock subject to the Incentive Stock Option exceeds the exercise price of such Option. 9 SECTION 7. RESTRICTED STOCK. (a) ADMINISTRATION. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers, key employees and Consultants of the Company and Subsidiaries to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant of Restricted Stock upon the attainment of specified performance goals. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) AWARDS AND CERTIFICATES. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. (i) Each participant shall be issued a stock certificate in respect of shares of Restricted Stock awarded under the Plan. Such certificate shall be registered in the name of the participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Capital Dimensions Venture Fund, Inc. 1997 Stock Plan and an Agreement entered into between the registered owner and Capital Dimensions Venture Fund, Inc. Copies of such Plan and Agreement are on file in the offices of Capital Dimensions Venture Fund, Inc., Two Appletree Square, Suite 335, Bloomington, Minnesota 55425." (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) RESTRICTIONS AND CONDITIONS. The shares of Restricted Stock awarded pursuant to the Plan shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Committee may provide for the lapse of such restrictions in installments where deemed appropriate. (ii) Except as provided in paragraph (c)(i) of this Section 7, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the 10 Company, including the right to vote the shares and the right to receive any cash dividends. The Committee, in its sole discretion, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional shares of Restricted Stock (to the extent shares are available under Section 3 and subject to paragraph (f) of Section 12). Certificates for shares of unrestricted Stock shall be delivered to the grantee promptly after, and only after, the period of forfeiture shall have expired without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the award agreement and paragraph (c)(iv) of this Section 7, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. (iv) In the event of special hardship circumstances of a participant whose employment is terminated (other than for Cause), including death, Disability or Retirement, or in the event of an unforeseeable emergency of a participant still in service, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. (v) Notwithstanding the foregoing, all restrictions with respect to any participant's shares of Restricted Stock shall lapse, on the date determined by the Committee, prior to, but in no event more than sixty (60) days prior to, the occurrence of any of the following events: (i) dissolution or liquidation of the Company, other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 75% or more of the outstanding Stock of the Company. SECTION 8. DEFERRED STOCK AWARDS. (a) ADMINISTRATION. Deferred Stock may be awarded either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers, key employees and Consultants of the Company and Subsidiaries to whom and the time or times at which Deferred Stock shall be awarded, the number of Shares of Deferred Stock to be awarded to any participant or group of participants, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and the terms and conditions of the award in addition to those contained in paragraph (b) of this Section 8. The Committee may also condition the grant of Deferred Stock upon the attainment of specified performance goals. The provisions of Deferred Stock awards need not be the same with respect to each recipient. 11 (b) TERMS AND CONDITIONS. (i) Subject to the provisions of this Plan and the award agreement, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or Elective Deferral Period, where applicable), share certificates shall be delivered to the participant, or his legal representative, in a number equal to the shares covered by the Deferred Stock award. (ii) Amounts equal to any dividends declared during the Deferral Period with respect to the number of shares covered by a Deferred Stock award will be paid to the participant currently or deferred and deemed to be reinvested in additional Deferred Stock or otherwise reinvested, all as determined at the time of the award by the Committee, in its sole discretion. (iii) Subject to the provisions of the award agreement and paragraph (b)(iv) of this Section 8, upon termination of employment for any reason during the Deferral Period for a given award, the Deferred Stock in question shall be forfeited by the participant. (iv) In the event of special hardship circumstances of a participant whose employment is terminated (other than for Cause) including death, Disability or Retirement, or in the event of an unforeseeable emergency of a participant still in service, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all of the remaining deferral limitations imposed hereunder with respect to any or all of the participant's Deferred Stock. (v) A participant may elect to further defer receipt of the award for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions adopted by the Committee, such election must generally be made prior to completion of one half of the Deferral Period for a Deferred Stock award (or for an installment of such an award). (vi) Each award shall be confirmed by, and subject to the terms of, a Deferred Stock agreement executed by the Company and the participant. SECTION 9. TRANSFER, LEAVE OF ABSENCE, ETC. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; 12 (b) a leave of absence, approved in writing by the Committee, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Committee may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Committee, but only if the employee's right to reemployment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 10. AMENDMENTS AND TERMINATION. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) which would impair the rights of an optionee or participant under a Stock Option, Restricted Stock or other Stock-based award theretofore granted, without the optionee's or participant's consent, or (ii) which without the approval of the shareholders of the Company would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code or any other regulatory requirements. The Committee may amend the terms of any award or option theretofore granted, prospectively or retroactively to the extent such amendment is consistent with the terms of this Plan, but no such amendment shall impair the rights of any holder without his or her consent except to the extent authorized under the Plan. The Committee may also substitute new Stock Options for previously granted options, including previously granted options having higher option prices. SECTION 11. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 12. GENERAL PROVISIONS. (a) The Committee may require each person purchasing shares pursuant to a Stock Option under the Plan to represent to and agree with the Company in writing that the optionee is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. 13 All certificates for shares of Stock delivered under the Plan pursuant to any Restricted Stock, Deferred Stock or other Stock-based awards shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Subject to paragraph (d) below, recipients of Restricted Stock, Deferred Stock and other Stock-based awards under the Plan (other than Stock Options) are not required to make any payment or provide consideration other than the rendering of services. (c) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (d) Each participant shall, no later than the date as of which any part of the value of an award first becomes includible as compensation in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. With respect to any award under the Plan, if the terms of such award so permit, a participant may elect by written notice to the Company to satisfy part or all of the withholding tax requirements associated with the award by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the participant, or (ii) delivering to the Company from shares of Stock already owned by the participant, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the participant under this Section 12(d). Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. (e) At the time of grant, the Committee may provide in connection with any grant made under this Plan that the shares of Stock received as a result of such grant shall be subject to a repurchase right in favor of the Company, pursuant to which the participant shall be required to offer to the Company upon termination of employment for any reason any shares that the participant acquired under the Plan, with the price being the then Fair Market Value of the Stock or, in the case of a termination for Cause, an amount equal to the cash consideration paid for the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. The Committee 14 may, at the time of the grant of an award under the Plan, provide the Company with the right to repurchase, or require the forfeiture of, shares of Stock acquired pursuant to the Plan by any participant who, at any time within two years after termination of employment with the Company, directly or indirectly competes with, or is employed by a competitor of, the Company. (f) The reinvestment of dividends in additional Restricted Stock (or in Deferred Stock or other types of Plan awards) at the time of any dividend payment shall only be permissible if the Committee (or the Company's chief financial officer) certifies in writing that under Section 3 sufficient shares are available for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). (g) The Plan is expressly made subject to the approval by shareholders of the Company. If the Plan is not so approved by the shareholders on or before one year after this Plan's adoption by the Board of Directors, this Plan shall not come into effect. The offering of the shares hereunder shall be also subject to the effecting by the Company of any registration or qualification of the shares under any federal or state law or the obtaining of the consent or approval of any governmental regulatory body which the Company shall determine, in its sole discretion, is necessary or desirable as a condition to or in connection with, the offering or the issue or purchase of the shares covered thereby. 15 EX-4.2 5 EXHIBIT 4.2 Page 1 of 3 EXHIBIT 4.2 ----------- SBIC License No. 05/05-5134 Loan No. 04645051-06 DEBENTURE ********* $5,500,000 Date of Issuance: December 18, 1996 Capital Dimensions Venture Fund, Inc. (The "Company"), Two Appletree Square, Suite 335, Minneapolis, MN 55425-1637. For value received, the Company hereby promises to pay to the order of Chase Manhattan Bank, as Trustee (the "Trustee") under that certain Amended and Restated Trust Agreement dated as of February 1, 1995, as same may be amended from time to time, by and among the Trustee, the U.S. Small Business Administration ("SBA") and SBIC Funding Corporation, and as the Holder hereof the principal sum of FIVE MILLION FIVE HUNDRED THOUSAND dollars ($5,500,000) (the "Original Principal Amount") on December 1, 2006 (the "Maturity Date") at such location as SBA, as guarantor of this debenture, may direct and to pay interest semiannually on June 1st and December 1st (the "Payment Dates") of each year, as herein provided, at the rate of 7.08% per annum (the "Stated Interest Rate"), and to pay a 1% per annum fee to SBA on the above dates, on the basis of a year of 365 days, for the actual number of days (including the first day but excluding the last day) elapsed, on said principal sum from the date of the issuance hereof until payment of such principal sum has been made or duly provided for. The company shall deposit all payments with respect to this debenture not later than 12:00 noon (Washington, D.C. time) on the applicable Payment Date or the next business day if the Payment Date in not a business day, all as directed by SBA. This debenture is issued by the Company and guaranteed by SBA, pursuant and subject to Section 303 of the Small Business Investment Act of 1958, as amended (the "Act") (15 U.S.C. Section 683). This debenture is subject to all of the regulations promulgated under the Act, as amended from time to time, provided, however, that 13 C.F.R. Sections 107.1810 and 107.1830 through 107.1850 as in effect on the date of this debenture are incorporated herein as if fully set forth. The Company may elect to prepay this debenture, as a whole and not in part, on any Payment Date, in the manner and at the price as next described. The prepayment price (the "Prepayment Price") shall be an amount equal to the outstanding principal balance of this debenture, plus interest accrued and unpaid thereon to the Payment Date selected for prepayment, plus a prepayment premium (the "Prepayment Premium") . The Prepayment Premium amount is calculated as a declining percentage (the "Applicable Percentage") multiplied by the Original Principal Amount of this debenture in accordance with the following table: Page 2 of 3 EXHIBIT 4.2 ----------- CONSECUTIVE PAYMENT DATES APPLICABLE PERCENTAGE 1ST OR 2ND 5% 3RD OR 4TH 4% 5TH OR 6TH 3% 7TH OR 8TH 2% 9TH OR (10TH - IF NOT ALSO MATURITY DATE) 1% No Prepayment Premium is required to repay this debenture on its Maturity Date. No Prepayment Premium is required when the prepayment occurs on a Payment Date that is on or after the 11th consecutive Payment Date of this debenture, if this debenture has a 20 consecutive Payment Date term. The amount of the Prepayment Price shall be sent to SBA or such agent as SBA shall direct, by wire payment in immediately available funds, not less than three business days prior to the regular payment date. Until the Company is notified otherwise in writing by SBA, any Prepayment Price shall be paid to the account maintained by the Trustee, entitled the SBA Prepayment Subaccount and shall include an identification of the Company by name and SBA-assigned license number, the loan number appearing on the face hereof, and such other information as SBA or its agent may specify. This debenture shall be deemed issued in the District of Columbia as of the day, month, and year first stated above. The terms and conditions of this debenture shall be construed In accordance with, and its validity and enforcement governed by, federal law. The warranties, representations, or certifications made to SBA on the SBA Form 1022 or the Company's application letter for an SBA commitment related to this debenture are incorporated herein as if fully set forth. Should any provision of this debenture or any of the documents incorporated by reference herein be declared illegal or unenforceable by a court of competent jurisdiction, the remaining provisions shall remain in full force and effect and this debenture shall be construed as if said provisions were not contained herein. All notices to Company which are required or may be given under this debenture shall be sufficient in all respects if sent to the above-noted address of the Company. For the purposes of this debenture, the Company may change this address only upon written approval of SBA. Page 3 of 3 EXHIBIT 4.2 ----------- COMPANY ORGANIZED AS CORPORATION IN WITNESS WHEREOF, the Company has caused this debenture to be signed by its duly authorized officer and its corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary as of the date of issuance stated above. CORPORATE SEAL NONE CAPITAL DIMENSIONS VENTURE FUND, INC. By: /s/ Dean Pickerell -------------------------------------- Dean R. Pickerell, President ATTEST: /s/ Brenda L. Leonard - ------------------------------- Brenda L. Leonard, Secretary EX-4.3 6 EXHIBIT 4.3 EXHIBIT 4.3 ----------- Amortizing Note Page 1 of 3 SBIC License No. 05 / 05-5134 Loan No. #1 ------------ NOTE **************** $3,571,578 Date of Issuance: March 31, 1993 Maturity Date: April 1, 2000 Capital Dimensions Venture Fund, Inc. (the "SSBIC"), Two Appletree Square, Suite 335, Minneapolis, MN 55425-1637. For value received, the SSBIC hereby promises to pay to the order of the U.S. Small Business Administration ("SBA") the principal sum of Three Million Five Hundred Seventy One Thousand Five Hundred Seventy Eight dollars ($3,571,578) (the "Original Principal Amount") at such location as SBA may direct and to pay principal and interest in the aggregate amount of $169,872.52 quarterly on July 1, 1993, October 1, 1993, January 1, 1994, April 1, 1994 and on each quarterly date thereafter through and including April 1, 2000 (the "Payment Dates"), as herein provided, at the rate of 8.375% per annum (the "Stated Interest Rate"). These payments constitute a direct reduction or level payment loan for 28 calendar quarters at an annual interest rate of 8.375%. To the extent that any portion of the unpaid principal hereof shall not be paid when due (whether by acceleration, in accordance with Section 5.6 of the Repurchase Agreement, or otherwise), such overdue amount shall bear interest at a penalty interest rate equal to the Stated Interest Rate plus 6% per annum, and such interest shall be payable on demand. The SSBIC shall deposit all payments with respect to this Note not later than 12:00 noon (Washington, D.C. time) on the applicable Payment Date or the next business day if the Payment Date is not a business day, all as directed by SBA. This Note is issued by the SSBIC pursuant to the Specialized Small Business Investment Company 3% Preferred Stock Repurchase Agreement (the "Repurchase Agreement"), dated March 31, 1993, between the SSBIC and SBA and is subject to the regulations, as amended from time to time (the "Regulations"), under the Small Business Investment Act of 1958, as amended (15 U.S.C. Sections 661 ET. SEQ.), provided, however, that any events of default or conditions provided in the Regulations are incorporated herein as if fully set forth. Upon the occurrence of an Event of Default under the Repurchase Agreement, the entire outstanding principal balance of this Note plus accrued interest may be declared immediately due and payable as provided in the Repurchase Agreement. Page 2 of 3 The SSBIC may elect to prepay this Note in whole or in part, without penalty, on any July 1, October 1, January 1, or April 1 in the manner and at the price as next described. For any prepayment in whole, the prepayment price shall be an amount equal to the outstanding principal balance of this Note as of such scheduled payment date. For any prepayment in part, the prepayment price may be any amount. Partial prepayments shall be applied to the outstanding principal balance of the loan as of the date of prepayment. In the event of a partial prepayment, a new quarterly level payment amount will be determined, based on the Stated Interest Rate, the number of quarterly payments remaining to the original maturity date, and the balance of the loan following the partial prepayment. All prepayments shall be sent to SBA or such agent as SBA shall direct, in immediately available funds. No portion of the principal sum of this Note or the interest thereon, or any prepayment if the SSBIC elects to prepay this Note, may be derived, directly or indirectly, from the issuance of preferred stock to SBA or from funds acquired or borrowed from SBA after November 21, 1989. Payments made within 90 days of such issuance of preferred stock or receipt of subsidized funds shall be presumed to have been derived therefrom. It is explicitly recognized by SBA and the SSBIC that the refinancing of $3,000,000 of the SBIC's Debentures by way of the purchase by SBA of $3,000,000 of 4% Preferred Stock will not be deemed to be funds acquired or borrowed from SBA with respect to the conditions and limitations of this paragraph. The outstanding principal amount of this Note shall be included in the aggregate amount of debentures outstanding for purposes of determining the amount of Leverage (as defined in 13 C.F.R. Section 107.3) available to the SSBIC. The terms and conditions of this Note shall be construed in accordance with, and its validity and enforcement governed by, applicable Federal law. Should any provision of this Note or any of the Repurchase Documents (as defined in the Repurchase Agreement) be declared illegal or unenforceable by a court of competent jurisdiction, the remaining provisions shall remain in full force and effect and this Note shall be construed as if said provisions were not contained herein. All notices to the SSBIC which are required or may be given under this Note shall be sufficient in all respects if sent to the above-noted address of the SSBIC. For the purposes of this Note, the SSBIC may change this address only upon written approval of SBA. Page 3 of 3 IN WITNESS WHEREOF, the SSBIC has caused this Note to be signed by its duly authorized officer and its corporate seal to be hereunto affixed and attested by its Secretary or Assistant Secretary as of the date of issuance stated above. CORPORATE SEAL CAPITAL DIMENSIONS VENTURE FUND, INC. By: /s/ Dean Pickerell ------------------------------------------------- ATTEST: Dean Pickerell, President /s/ Thomas F. Hunt, Jr. - --------------------------------- Secretary EX-10.1 7 EXHIBIT 10.1 EXHIBIT 10.1 LEASE AGREEMENT THIS IS A LEASE AGREEMENT made and entered into on April 19, 1990 by and between ATS II Associates Limited Partnership, a Minnesota Limited Partnership, having its principal offices in One Appletree Square, Bloomington, Minnesota, hereinafter referred to as the "Landlord," and Capital Dimensions, Inc. whose current principal offices are maintained at Two Appletree Square, Suite 244, Bloomington, Minnesota 55425. W I T N E S S E T H: 1. LEASED PREMISES. In consideration of the mutual covenants and agreements set forth herein, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, for the rental and on the terms and conditions hereinafter set forth, those certain premises outlined on the floor plan attached hereto as "Exhibit A" and made a part hereof (the "Premises") and containing 2,116 square feet of Rentable Area, as defined in paragraph 7, on the third floor in the building known as Two Appletree Square (the "Building") located on land in Bloomington, Minnesota, and legally described as Lots 4 and 6, Block 1, Appletree Square Second Addition, according to the plat thereof on file and of record in Hennepin County Recorder's Office and in the office of the Registrar of Titles (the "Land"). 2. TERM. Subject to and upon the terms and conditions set forth herein, this Lease shall be in force for a Term of 60 months, beginning the 1st day of July, 1990 ("Commencement Date") and expiring on the 30th day of June, 1995. In the event that the Premises should not be ready for occupancy by the Commencement Date for any reason, Landlord shall not be liable or responsible for any claims, damages, or liabilities in connection therewith. 3. BASE RENTAL. Subject to the provisions for adjustment hereinafter set forth, Tenant hereby agrees to pay, without deduction or offset, a base annual rental ("Base Rental") in the amount of Thirty-Four Thousand Nine Hundred Twenty and 00/100 Dollars ($34,920.00). Such base rental shall be due and payable in twelve (12) equal monthly installments of Two Thousand Nine Hundred Ten and 00/100 ($2,910.00*)* each, in advance on the first day of each calendar month during each year of the Term hereof. All payments of Rent shall be paid to the Landlord in lawful money of the United States of America at the address of Landlord shown herein, or to such other party or at such other place as Landlord may designate from time to time in a written notice to Tenant. If the Lease Term commences or terminates on any day other than the first or last day of a calendar month, the Base Rental and any other sums due hereunder shall be prorated for such fractional calendar month. All past due installments of Base Rental and Additional Rental shall - ---------------------- *except that no Annual Base Rent is due or payable for the first seven (7) months of this Lease (July 1, 1990 through January 31, 1991). bear interest at the rate of interest equal to the lesser of: (i) three (3) percentage points in excess of the prime rate of interest as established and publicly announced by First National Bank of Saint Paul as such rate may change from time to time, or (ii) the highest legal rate permitted by law, and shall constitute Additional Rent hereunder due and payable with the next monthly installment of Base Rent. 4. ADDITIONAL RENTAL. The Base Rental payable by Tenant during each lease year shall be adjusted in accordance with this paragraph. A. DEFINITIONS 1. The term "Taxes" shall mean all taxes, impositions, assessments, and all other governmental charges, if any, which are levied, assessed, or imposed upon or become due and payable in connection with, or a lien upon, the Land, the Building, parking facility, or other facilities used in connection therewith, or the operation thereof (excepting federal and state taxes on income), including taxes levied by present or future taxing authorities and all taxes of whatsoever nature in this definition of Taxes. For the purpose herein, the term "Base Taxes" shall be deemed to be $3.10 per square foot of the total Rentable Area of the Building. 2. The term "Operating Cost" shall mean all operating expenses of the Land and Building which shall be computed on the cash basis and which shall include all expenses, costs and disbursements of every kind and nature which Landlord shall pay or become obligated to pay because of or in connection with the ownership, operation or use of the Land and Building (which for purposes of this Lease shall include by definition any costs incurred by the Landlord for the use of additional parking facilities as required by the City of Bloomington), including, but not limited to, the following: a) Wages and salaries of all employees engaged in the operation and maintenance of the Land and Building, including taxes, insurance, and benefits relating thereto; b) All supplies and materials used in the operation and maintenance of the Building; c) Cost of water, sewage, power, heating, lighting, air conditioning, ventilating, and other utilities furnished in connection with the operation of the Building (excluding any such cost billed to specific tenants); d) Costs of all maintenance and service agreements on equipment, including, but not limited to, security services, alarm services, window cleaning, janitorial service, and elevator and maintenance; -2- e) Costs of casualty, rentals and liability insurance applicable to the Building and Landlord's personal property used in connection therewith; f) Costs of repair and general maintenance of the interior, parking areas, and landscaping of the Land and Building, excluding repairs and general maintenance paid by proceeds of insurance or by any tenant or other third parties, and alterations attributable solely to tenants of the Building other than Tenant; g) Management fees; and, h) A reasonable amortization charge on account of any capital expenditures incurred to effect a reduction in operating expenses of the Building. Expressly excluded from the definition of the term Operating Costs are: i) Replacement of capital investment items; ii) Leasing commissions and leasing advertising costs; iii) Specific costs billed to and paid by specific tenants; iv) Depreciation; and v) Principal, interest, and other costs directly related to financing. For the purpose herein, the term "Base Operating Cost" shall be deemed to be $3.54 per square foot of total Rentable Area of the Building. 3. The term "Tenant's Share" shall mean the increased cost per square foot of Base Taxes and Base Operating Costs, multiplied by the number of square feet of Rentable Area occupied by Tenant. 4. The term "Operating Year" shall mean any calendar year ending December 31st after the commencement of the Lease Term including the calendar year in which the term of this Lease commences. 5. The term "Land" shall mean the real property where the Building, and parking facilities, and any other improvements are constructed by the Landlord in conjunction with the foregoing. B. Within 120 days from the end of each Operating Year, Landlord shall deliver to Tenant a statement setting forth Taxes and Operating Cost for such year and comparing such cost with the Base Taxes and Base Operating Cost defined herein. In the event Taxes and Operating Cost for any Operating Year as reflected on the statement exceed the Base Taxes and Base Operating Cost, Tenant shall pay to Landlord as Additional Rental ("Additional Rental") over and above the Base Rental, Tenant's share of excess; payable as follows: -3- 1) Upon receipt of the statement, Tenant shall pay Landlord a lump sum rent adjustment for the preceding Operating Year equal to one-twelfth (1/12) of such Additional Rental for each month that this Lease was in effect during said preceding Operating Year, less any amount pais as Additional Rent during such year under subparagraph (2) hereof; and 2) Tenant shall also pay Landlord, beginning on the first day of January of the then current Operating Year, and on the first day of each month thereafter during the Term, one-twelfth (1/12) of such Additional Rental due for the preceding Operating Year; and 3) Tenant shall pay to Landlord the Additional Rental due, as disclosed by the statement furnished after the expiration or earlier termination of this Lease, within 30 days of Tenant's's receipt of such operating statement. C. Anything herein to the contrary notwithstanding, in no event shall Base Rental provided herein ever be reduced. 6. Except as hereinafter provided, Landlord shall deliver possession of the Premises in the condition required by this Lease on or before the Commencement Date, but delivery of possession prior to such Commencement Date shall not affect the expiration date of this Lease. Failure of Landlord, due to a holding over by a prior tenant or time required for construction delays due to strikes, Acts of God, or any other causes beyond Landlord's control, to deliver possession of the Premises by the date hereinabove provided, shall automatically postpone the Commencement Date of the Term of this Lease and shall extend the Termination Date hereinabove specified for commencement of the Term hereof and the date on which possession of the Premises is delivered to the Tenant. The Rent herein reserved shall commence on the first day of the Term, provided, however, in the event of any occupancy by Tenant prior to the beginning of the Term, such occupancy shall in all respects be the same as that of a Tenant under this Lease Agreement, and the rent shall commence as of the date that Tenant enters into such occupancy of the Premises. Neither Landlord nor any agent or employee of Landlord has made any representations or promises with respect to the Premises or the Building except as herein expressly set forth, and no rights, privileges, easements or licenses are acquired by Tenant except as herein expressly set forth. The Tenant, by taking possession of the Premises, shall accept the same "as is", and such taking of possession shall be conclusive evidence that the Premises and the Building are in good and satisfactory condition at the time of the taking of possession. 7. METHOD OF MEASUREMENT. the term "Rentable Area," as used herein, shall refer to the area or areas of space within the Building determined as follows: -4- A Rental Area on a single-tenancy floor is determined by measuring from the extended plane of the inside surface of the outer glass to the extended plane of the inside surface of the opposite outer glass bounded by the intersections of such planes, and shall include all areas within such planes excluding vertical penetrations such as building stairs, fire towers, elevator shafts, flues, vents, stacks, pipe shafts, and vertical ducts. Vertical penetrations which are for the specific use of Tenant, such a special stairs or elevators, shall be included as Rentable Area; and B. Rental Area for a partial floor shall include all space within the demising walls (measured from the mid-point of demising walls, and, in the case of exterior walls, measured as defined in 7.A above), plus 13.31%, which is Tenant's proportionate share of the Common Areas, such as elevator lobbies, corridors, toilet and mechanical rooms, telephone and electrical closets and service areas within the Building. No deductions from Rentable Area shall be made for columns or projections necessary to the Building. The Rentable Area in the Premises has been calculated on the basis of the foregoing definition and is hereby stipulated for all purposes hereof to be 2,116 square feet, whether the same should be more or less as a result of minor variations resulting from actual construction and completion of the Premises for occupancy, so long as such work is done in accordance with the terms and provisions hereof. 8. Tenant shall use the Premises for the purpose of General Offices and for no other purpose whatsoever. Tenant shall not overload, damage, or deface the Premises or do any act which may make void or voidable any insurance on the Premises or the Building or which may render an increased or extra premium payable for insurance. 9. IMPROVEMENTS. A. Landlord and Tenant have both reviewed and approved the attached plan layout ("Exhibit A-1"), together with the attached schedule of Building Standards ("Exhibit B"). B. All work involved in completing the Premises in accordance with Tenant's Plans (including the purchase of the required materials and equipment) shall be carried out by Landlord's contractor under the sole direction of Landlord. Tenant shall cooperate with Landlord and its contractor upon request to promote the efficient and expeditious completion of such work. Tenant shall be responsible and pay for any work in the Premises which is in excess of the limits as outlined in Exhibit B. C. In the event the Premises are not ready for occupancy within five (5) days after the Commencement Date of this Lease due to (i) a delay caused by Tenant's failure to timely deliver Tenant's Plans, (ii) Tenant's request for work in excess of Building Standards, or (iii) any changes in Tenant's Plans requested by Tenant; then the term of this -5- Lease shall be deemed to have commenced from the Commencement Date stipulated herein. 10. ALTERATIONS. No alterations, additions, or improvements to the Premises shall be made without first having the consent in writing of the Landlord; nor shall such alterations, additions, or improvements interfere with or damage the mechanical or electrical systems or the structure of the Building. Any improvements, additions, or alterations made by Tenant after such consent shall have been given, including any and all fixtures installed, excepting trade fixtures, shall at the Landlord's option, unless otherwise agreed in writing, remain on the Premises as the property of the Landlord, without compensation to the Tenant, or shall be removed therefrom and the Premises restored to their original condition at the sole expense of the Tenant at the expiration or sooner termination of the Lease. Tenant agrees to save harmless Landlord on account of claim for mechanic's, materialmen's or other liens in connection with any alterations, additions, or improvements to which Landlord may give its consent. 11. MAINTENANCE AND REPAIRS. A. Landlord shall provide for the cleaning and maintenance of the Building, including painting and landscaping surrounding the Building, in keeping with the usual standard for first class office buildings. Landlord shall not be required to maintain or repair any non-building standard or special tenant improvements in or about the Premises; and there will be an additional charge to Tenant for the cleaning of such items as carpet, blinds, drapes, wall coverings, etc. by Landlord. B. The first installation of building standard electric light lamps will be made by the Landlord. Thereafter, the Tenant shall pay promptly to Landlord the installed cost of all electric lamps, starters, and ballasts used on the Premises. C. Tenant shall keep and maintain the Premises in good repair and condition, reasonable wear and tear excepted. Tenant shall not commit or allow any waste or damage to be committed on any portion of the Premises or the Building. Tenant shall pay to landlord the full cost to repair or replace any damage or injury done to the Building or any part thereof caused by Tenant, its agent, employees, invitees, or visitors. 12. SERVICES TO BE PROVIDED BY LANDLORD. Landlord agrees to furnish Tenant with electricity for general office uses only (not to include duplicating and data processing machines, and air conditioning costs therefore, large business machines, special lighting in excess of Building Standard, and any other equipment requiring high electrical consumption), elevator service, security service, and janitorial service on a five day week basis. An additional charge for cleaning special tenant improvements will be billed separately to Tenant as Additional Rent. During normal business hours (8:00 a.m. to 6:00 p.m. Monday through Friday; Saturdays, Sundays, and holidays not included), Landlord agrees to furnish Tenant with hot, cold, and refrigerated water at those points of supply provided for general use of other tenants in the Building; heated and -6- refrigerated air conditioning in season, at temperatures considered standard for first class office buildings or as determined by governmental edict. Such services beyond the normal periods and hours will be provided upon written request from Tenant at an hourly rate to be billed to Tenant. Landlord shall not be liable in damages or otherwise for failure, stoppage, or interruption of any such service, nor shall the same be construed as an eviction of Tenant, work an abatement of rent, or relieve Tenant from any covenant herein. In the event of any failure, stoppage, or interruption thereof, Landlord shall use reasonable diligence to resume services promptly. B. Design capabilities of the heating, cooling and electrical systems are based upon and limited to the following: 1. The Tenant's occupancy does not exceed one (1) person for each 150 square feet of Rentable Area. 2. The total connected electrical load does not exceed four (4) watts per square foot of area within the Premises for all purposes including lighting and power. 3. The proper use of blinds to control sunload. C. Landlord shall have sole control over the parking of automobiles and other vehicles and shall designate parking areas and building service areas. 13. RULES AND REGULATIONS OF BUILDING. Tenant shall comply with the Rules and Regulations of the Building with respect to safety, care, cleanliness, parking, and preservation of good order in the Building that Landlord may establish from time to time for tenants of the Building. Landlord shall not be liable to Tenant for any failure of any other tenants of the Building to comply with such Rules and Regulations, attached hereto as "Exhibit C". 14. LAWFUL USE. Tenant shall comply with all federal, state and municipal laws and ordinances relating to the use, condition, or occupancy of the Premises. Tenant shall not occupy or use the Premises for any business or purpose which is unlawful, disreputable, or deemed to be hazardous on account of fire, or permit anything to be done which will in any way increase the rate of fire insurance coverage on the Building and/or its contents. 15. EXTRAORDINARY EQUIPMENT. Without the prior written consent of Landlord and Tenant's written agreement to pay additional costs, Tenant shall not install or maintain any apparatus or devices which will increase the usage of electrical power, water, or gas for the Premises to an amount grater than would be required for normal general office use for space of comparable size. 16. LANDLORD'S ACCESS. Landlord and Landlord's mortgages(s) shall have the right at all reasonable times during the Term to enter the Premises to inspect the condition thereof, to -7- show the Premises to prospective new tenants, to determine if Tenant is performing its obligations under this Lease, and to perform the services or to make the repairs and restoration that Landlord is obligated or elects to perform or furnish under this Lease, to make repairs to adjoining space, to cure any defaults of Tenant hereunder that Landlord elects to cure, and to remove from the Premises any improvements thereto or property placed therein in violation of this Lease. 17. INSURANCE. Landlord shall maintain during the Term of this Lease fire and extended coverage insurance insuring the Building and Premises against damage or loss from fire or other casualty normally insured against under the terms of standard policies of fire and extended coverage insurance. Landlord may, at its option, preserve and maintain such other insurance coverages as it may require in its discretion. Tenant shall be responsible for providing, at Tenant's own expense: A. Liability insurance with companies and in form satisfactory to Landlord naming Landlord and Landlord's mortgagee(s) as additional insured thereunder as their interest may appear and providing coverage of at least $1,000,000.00 single limit coverage and $1,000,000.00 aggregate coverage for any single incident; and B. Contents insurance for fire, water damage, or other casualty and theft covering all of the Tenant's stock in trade, fixtures, furnishings, floor coverings, or any improvements in excess of the limits as outlined in Exhibit B, equipment and the like in an amount equal to replacement value. Tenant will furnish Landlord evidence of coverage and payment of premium at all times. 18. FIRE OR OTHER CASUALTY. If the Building is damaged or destroyed by fire or other casualty, the Landlord shall have the right to terminate this Lease, provided it gives written notice thereof to the Tenant within ninety (90) days after such damage or destruction. If a portion of the Premises is damaged by fire or other casualty, and this Lease is not thereby terminated, the Landlord shall, at its expense, restore the Premises, exclusive of any improvements or other changes made to the Premises by the Tenant, to as near the condition which existed immediately prior to such damage or destruction, as reasonably possible, and rent shall abate during such period of time as the Premises are untenantable, in the proportion that the untenantable portion of the Premises bears to the entire Premises. The Landlord shall not be responsible to the Tenant for damage to, or destruction of, any furniture, equipment, improvements, or other changes made by the Tenant in, on, or about the Premises regardless of the cause of the damage or destruction. 19. WAIVER OF SUBROGATION. Notwithstanding any other provision in this Lease to the contrary, each of Landlord and Tenant hereby releases the other from any and all liability or responsibility (to the other or anyone claiming through or under them by way of subrogation or otherwise) for any loss or damage to property caused by fire or any of the extended coverage casualties, to the extent of insurance proceeds realized by the Landlord as a result of such loss or damage, even if such fire or other casualty shall have been caused by the fault or negligence of the -8- other party, or anyone for whom such party may be responsible. Each of Landlord and Tenant agrees that its policies will include such a clause or endorsement. In no event shall any such release be applicable if doing so would work in contravention of any requirement in an applicable policy of insurance to the effect that if the insured waives subrogation, coverage is or may be void. 20. EMINENT DOMAIN. If the entire Building is taken by eminent domain, this Lease shall automatically terminate as of the date of taking. If a portion of the Building is taken by eminent domain, Landlord shall have the right to terminate this Lease by giving written notice thereof to Tenant within ninety (90) days after the date of taking. If a portion of the Premises is taken by eminent domain, and the Landlord does not terminate this Lease, the Landlord shall restore Premises, exclusive of any improvements or other changes to the Premises by Tenant, to as near the condition which existed immediately prior to the date of taking as reasonably possible, and rent shall abate during such period of time as the Premises are untenantable, in the proportion that the untenantable portion of the Premises bears to the entire Premises. Landlord shall, in any event, be entitled to receive and to retain as its own, any award resulting from such taking of all or any part of the Land, Building, Parking Facility, or appurtenant areas. Tenant disclaims any right to participate in such award or to make a claim against the condemning authority for loss of its trade fixtures and moving expenses if such claim will reduce the award payable to the Landlord. 21. LIGHT AND AIR. Tenant has no right to light or air over any premises adjoining the Building. 22. LIENS. Tenant shall not permit any mechanic's, materialmen's, or other liens fixed against the Premises, the Building, or the Land and agrees immediately to discharge (either by payment or by filing of the necessary bond, or otherwise) any mechanic's, materialmen's, or other lien which is allegedly fixed or placed against any of the foregoing. 23. INDEMNITY. Tenant shall indemnify and hold harmless Landlord and Landlord's agents, directors, officers, employees, invitees, and contractors, from all claims, losses, costs, damages, or expenses (including, but not limited to, attorney's fees) resulting from or arising from any and all injuries or death of any person or damage to any property caused by any act, omission, or neglect of Tenant or Tenant's directors, officers, employees, agents, invitees, or guests, or any parties contracting with Tenant relating to the Premises. Landlord shall not be liable for any damage of any kind or for any damage to property, death, or injury to persons from any cause whatsoever by reason of the use and occupancy of the Premises by Tenant. 24. WAIVER OF COVENANTS. Failure of Landlord to insist, in any one or more instances, upon strict performance of any term, covenant, or condition of the Lease, or to exercise any option herein obtained, shall not be construed as a waiver, or a relinquishment for the future, or such term, covenant, condition, or option, but the same shall continue and remain in full force and effect. The receipt by Landlord of rents with knowledge of a breach in any of the terms, -9- covenants, or conditions of this Lease to be kept or performed by Tenant shall not be deemed a waiver of such breach, and Landlord shall not be deemed to have waived any provision of this Lease unless expressed in writing and signed by Landlord. 25. RELOCATION. Landlord shall have the right to relocate Tenant to comparable quarters within the Building with at least thirty (30) days prior written notice to Tenant. Any reasonable costs incurred by Tenant in the event of such relocation, and which have been agreed to in writing prior to the move, shall be paid by the Landlord. 26. LEASE TO SUBORDINATE. Landlord may cause this Lease to be made subject and subordinate to all ground or underlying leases, mortgages, deeds of trust, and restrictions which may now or hereafter affect the Building, and to all renewals, modifications, consolidations and extensions thereof. For confirmation of such subordination, Tenant shall execute promptly any subordination agreement requested by Landlord. Tenant hereby irrevocably constitutes and appoints Landlord as Tenant's agent to execute any such subordination agreement or agreements for and on behalf of Tenant. This authority is hereby declared to be coupled with an interest and irrevocable. So long as Tenant shall faithfully discharge the obligations on its part to be kept, this Lease shall not be affected by any default under such mortgage, deed of trust, or underlying lease, and in the event of foreclosure or enforcement thereof, the rights of Tenant hereunder shall survive, and if requested to do so by such mortgagee, ground lessor, or trustor, Tenant shall attorn to such prior holder, its successors and assigns, and this Lease shall in all respects continue in full force and effect; provided, however, that Tenant fully performs all of its obligations hereunder, and provided further that Tenant shall not have prepaid any rent, except as the same becomes due under the terms of this Lease. 27. TENANT TO SURRENDER PREMISES IN GOOD CONDITION. Upon the expiration or termination of the Lease Term, Tenant shall, at its expense: A. Remove Tenant's goods and effects and those of all persons claiming under Tenant; B. Quit and deliver the Premises to Landlord, peaceably and quietly, in as good order and condition as the same were in on the date the Lease Term commenced or were thereafter placed in by Landlord, reasonable wear and tear excepted; and C. At Landlord's request, restore the Premises to general building standards adopted by Landlord for general application throughout the Building. Any property left in the Premises after the expiration or termination of the Lease Term shall be deemed to have been abandoned and the property of Landlord to dispose of as Landlord deems expedient. Tenant shall pay to Landlord on demand all costs incurred in disposing of Tenant's abandoned property. -10- 28. HOLDING OVER. If with Landlord's written consent Tenant remains in possession of the Premises after the expiration or other termination of the Term, Tenant shall be deemed to be occupying the Premises on a month-to-month tenancy at a rental rate as stated in the written consent. Such month-to-month tenancy may be terminated by Landlord or Tenant on the last day of any calendar month by delivery of at least thirty (30) days advance notice of termination to the other. If without Landlord's written consent Tenant remains in possession of the Premises after the expiration or other termination of the Term, Tenant shall be deemed to be occupying the Premises upon a tenancy at sufferance at monthly rental equal to three (3) times the Rent determined in accordance with Paragraphs 3, 4, and 5. 29. DEFAULT. If Tenant shall default in the payment of any installment of Base Rental or Additional Rental, or in the observance or performance of any of Tenant's other covenants, agreements, or obligations hereunder, or if any proceeding is commenced by or against Tenant for the purpose of subjecting the assets of Tenant to any law relating to bankruptcy or insolvency or for any appointment of a receiver of Tenant or of any of Tenant's assets, or if Tenant makes a general assignment of Tenant's assets for the benefit of creditors, then, in any such event, Landlord may, without process, re-enter immediately into Premises and remove all persons and property therefrom, and at its option, annul and cancel this Lease as to all future rights of Tenant and have, regain, repossess, and enjoy the Premises after re-entry or after judgment for possession thereof. If Landlord elects to terminate this Lease, all obligations herein contained on the part of Landlord to be done and performed shall cease, but without prejudice to the right of Landlord to recover from Tenant all past or future rentals and damages. Should this Lease be terminated before the expiration of the term of this Lease by reason of Tenant's default as hereinabove provided, or if Tenant shall abandon or vacate the Premises before the expiration or termination of the term of this Lease, Landlord may accelerate Tenant's entire rental obligation hereunder, including Base Rent and Additional Rent, and upon notice thereof the entire rent due for the balance of the term hereof shall immediately become due and payable. The Premises may be relet by Landlord for such rent and upon such terms as Landlord in its sole discretion may determine and Tenant shall be liable for all damages sustained by Landlord, including, without limitation, deficiency in rent, reasonable attorney's fees, and expenses of placing the Premises in first class rentable condition and expenses of renting same including, but not limited to, the payment of brokerage fees, tenant allowances or by any other tenant inducement. The provisions contained in this Paragraph shall be in addition to and shall not prevent the enforcement of any claim Landlord may have against Tenant for anticipatory breach of the unexpired term of this Lease. Any and all attorneys' fees and costs of collection incurred by Landlord in the enforcement of the terms or provisions of this Lease shall be payable by Tenant in the event of any default, and the amount of such costs shall be deemed Additional Rental and shall, upon notice by Landlord given at any time prior to and including the service of notice of any legal action, be immediately due hereunder. In the event Landlord shall commence legal action, or any unlawful detainer proceeding or other summary proceeding for collection of rent due hereunder, said Additional Rent shall be deemed a past due obligation to pay rent in connection with said proceeding. Tenant hereby waives any right of offset, counter-claim or any other claim in any such proceeding. Landlord shall have a right to commence one or more actions to enforce the terms of this Paragraph and the -11- commencement and prosecution of one action shall not be deemed a waiver of an estoppel from commencing one or more actions from time to time in the future. All rights and remedies of Landlord under this Lease shall be cumulative and shall not be exclusive of any other rights and remedies provided to Landlord under applicable law. 30. LANDLORD'S RIGHT TO CURE DEFAULTS. If Tenant default in the observance or performance of any of Tenant's covenants, agreements, or obligations hereunder wherein the default can be cured by the expenditure of money, Landlord may, but without obligation, and without limiting any other remedies which it may have by reason of such default, cure the default, charge the cost thereof to Tenant, and Tenant shall pay the same forthwith upon demand, as Additional Rent, together with interest thereon at the rate set forth in the last sentence of Paragraph 3 of this Lease. In case the Landlord or Tenant prevails in any suit or defend or prosecute under the terms of this Lease, there shall be allowed by the prevailing party, to be included in any judgment recovered, reasonable attorney's fees and other costs to be fixed by the court. 31. NOTICES. Each notice required or permitted to be given hereunder by one party to the other shall be in writing with a statement therein to the effect that notice is given pursuant to this Lease and the same shall be given and shall be deemed to have been delivered, served, and given if delivered in person or placed in the United States Mail, postage prepaid, by United States registered or certified mail, addressed to such party at the address provided for such party herein. Any notices to Landlord shall be addressed and given to Landlord as follows: APPLETREE PROPERTIES, INC. One Appletree Square Bloomington, MN 55425 Prior to the Commencement Date, the address for notices to Tenant shall be the address set forth for Tenant on the signature page of this Lease; after the Commencement Date, the address for Tenant shall be the Premises. The addresses stated above shall be effective for all notices to the respective parties until written notice of a change in address is given. 32. NOTICE TO MORTGAGEE. Tenant agrees to give any Mortgagee and/or Trust Deed Holders by registered mail, a copy of any Notice to Default served upon the Landlord, provided that prior to such notice, Tenant has been notified, in writing (by way of Notice of Assignment of Rents and Leases, or otherwise), of the address of such Mortgagees and/or Trust Deed Holders. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Mortgagees and/or Trust Deed Holders shall have an additional thirty (30) days within which to cure such default; or if such default cannot be cured within that time, then such additional time as may be necessary to cure such default shall be granted if within such thirty (30) days, any Mortgagee and/or Trust Deed Holder has commenced and is diligently pursuing the remedies necessary to cure such default (including, but not limited -12- to, commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. 33. MISCELLANEOUS. There are no understandings or agreements not incorporated in this Lease. This is a Minnesota contact and shall be construed according to the laws of Minnesota. The captions in the Lease are for convenience only and are not a part of this Lease. The covenants and agreements hereof shall as fully and completely bind the heirs, executors, administrators, legal representatives, successors, and assigns of the parties hereof as if they had been specifically mentioned in each of said covenants and agreements. Any rider or exhibit attached to this Lease shall become a part of this Lease with the same force and effect and in the same manner as if all the provisions therein mentioned were actually included herein. 34. ASSIGNMENT AND SUBLETTING. Tenant shall not have the right to assign this Lease or sublet all or any part of the Premises without the express written consent of the Landlord.* No assignment or subletting permitted by the Landlord shall relieve the Tenant of liability hereunder. 35. COMMISSIONS. Tenant represents and warrants that there are no claims for brokerage commission or finder's fees in connection with the execution of this Lease, and Tenant agrees to indemnify the Landlord against and hold it harmless from all liabilities. 36. QUIET POSSESSION. Landlord agrees that the Tenant, upon payment of the Base Rental and Additional Rental and observing and keeping the covenants of this Lease on its part to be kept, shall lawfully, peaceably, and quietly hold, convey and enjoy said Premises, during said Term, without hindrance or molestation by said Landlord or any person or persons lawfully claiming under said Landlord. 37. ESTOPPEL CERTIFICATES. Tenant agrees, at anytime and from time to time, upon not less than five days prior written notice by Landlord, to execute, acknowledge and deliver to Landlord or a party designated by Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect or if there have been modifications, that the Lease is in full force and effect as modified and stating modifications, (ii) stating the dates to which the rent and other charges hereunder have been paid by Tenant, (iii) stating whether or not Landlord is in default in the performance of any covenant, agreement or condition contained in this Lease, and if so, specifying each such default of which Tenant may have knowledge, and (iv) stating the address to which notices to Tenant should be sent, (v) agreeing that Tenant shall not encumber or assign or sublease any portion of the Premises without the written consent of any mortgagee, and (vi) agreeing that Tenant and Landlord will not thereafter modify the Lease without the approval of any mortgagee, and (vii) agreeing that Tenant shall not prepay any rent more than thirty (30) days in advance. Any such statement delivered pursuant hereto may be relied upon by any owner - --------------------- *Which consent shall not be unreasonably witheld or delayed, but shall be subject to Landlord's normal leasing criteria. -13- of the Building, any prospective purchaser of the Building or of Landlord's interest, or any prospective assignee of any such mortgagee. IN WITNESS WHEREOF, the undersigned Landlord and Tenant have executed this instrument this 25th day of April, 1990. LANDLORD ATS II Associates Limited Partnership, a Minnesota Limited Partnership AGENT APPLETREE PROPERTIES, INC. /s/ Daryl G. D. ------------------------- /S/ Shelley L. Unruk President - ------------------------- --------------------------- TENANT CAPITAL DIMENSIONS, INC. /S/ THOMAS F. HUNT, JR. ---------------------------- /s/ BrendA L. Leonard By President - ------------------------ ---------------------------- ---------------------------- ---------------------------- Tenant's Address Prior to Occupancy -14- [Drawing Depicting 3rd Floor] EXHIBIT A To be attached to and form a part of Lease dated April 19, 1990 by and between ATS II Associates Limited Partnership and Capital Dimensions, Inc. [Drawing Depicting Office Space] EXHIBIT A-1 To be attached to and form a part of Lease dated April 19, 1990 by and between ATS II Associates Limited Partnership and Capital Dimensions, Inc. Landlord to provide the following leasehold improvements: 1. Building Standard carpeting and base throughout. 2. Building Standard paint and wallcovering throughout. 3. Building Standard electrical throughout. 4. Sink, plastic laminate countertop and 4' lower cabinet in storage room. EXHIBIT B RULES AND REGULATIONS 1. Security Landlord may from time to time adopt appropriate systems and procedures for the security or safety of the Building, any persons occupying, using, or entering the same, or any equipment, finishings, or contents thereof and Tenant shall comply with Landlord's reasonable requirements relative thereto. 2. Locks Tenant shall not add to or change existing locking mechanisms on any door in or to the Premises without Landlord's prior written consent. No locks incompatible with Building's master locking system shall be installed without prior written consent of the Landlord. If, with Landlord's consent, Tenant installs lock(s) incompatible with the Building's master locking system: a. Landlord, without abatement or Rent, shall be relieved of any obligation under the Lease to provide any service to the affected areas which require access thereto; and b. Tenant shall indemnify Landlord against any expense as a result of forced entry thereto which may be required in an emergency; and c. Tenant shall at the end of the Lease Term and at Landlord's request, remove such lock(s) at Tenant's expense. 3. Return of Keys At the end of the Lease Term, Tenant shall promptly return to Landlord all keys for the Building and Premises which are in possession of Tenant. 4 Windows Tenant shall observe Landlord's rules with respect to maintaining uniform window coverings at all windows in the Premises so that the Building presents a uniform exterior appearance, and shall not install any window shades, screens, drapes, covers, or other materials on or at any window in the Premises without Landlord's prior written consent. 5. Repair, Maintenance, Alterations, and Improvements No person or contractor not employed by Landlord shall be used to perform window washing, cleaning, decorating, construction, repair or other work in the Premises. 6. Water Fixtures Tenant shall not use water fixtures for any purpose for which they are not intended, nor shall water be wasted by tampering with such fixtures. Any cost or damage resulting from such misuse by Tenant shall be paid by Tenant. 7. Personal Use of Premises The Premises shall not be used or permitted to be used for residential, lodging, or sleeping purposes, or for the storage of personal effects or property, not required for business purposes. 8. Heavy Articles All safes, merchandise, furniture, equipment and other bulky articles shall be carried up to or into the Premises at such times and in such manner as shall be specified by Landlord. Tenant shall not place in or move about the Premises without Landlord's prior written consent any such article which in the Landlord's reasonable opinion may damage the Building, and Landlord may designate the location of any heavy articles in the Premises. 9. Chair Mats In those portions of the Premises where carpet has been installed, Tenant shall at its own expense install and maintain chair mats to protect the carpet under all furniture having casters. 10. Bicycles, Animals Tenant shall not bring any animals or birds into the Building, and shall not permit bicycles or other vehicles inside or on the sidewalks outside the Building, except in areas designated from time to time by Landlord for such purposes. 11. Deliveries Tenant shall ensure that deliveries of materials and supplies to the Premises are made through such entrances, elevators, and corridors and at such times as may from time to time be designated by Landlord, and shall promptly pay or cause to be paid by Landlord the cost of repairing any damage in the Building caused by any person making such deliveries. All deliveries must use the freight elevator, which must be locked off by Landlord for Tenant's use. All deliveries must be accompanied by a person. All parcels must be removed from the loading dock within 24 hours after delivery. 12. Moving of Furniture and Equipment Tenant shall ensure that furniture and equipment being moved into or out of the Premises is moved through such entrances, elevators, and corridors and at such times as may from time to time be designated by Landlord, and by movers or a moving company approved by Landlord, and shall promptly pay or cause to be paid to Landlord the cost of repairing any damage in the Building caused thereby. Moving shall be conducted only in the freight elevator and only between the hours of 9:00 a.m. and 11:15 a.m., and 1:00 p.m. and 4:15 p.m., Monday through Friday, or at another time as approved by Landlord. 13. Solicitations Landlord reserves the right to restrict or prohibit canvassing, soliciting or peddling in the Building. 14. Food and Beverage Only persons approved from time to time by Landlord may prepare, solicit orders for, sell, serve, or distribute foods or beverages in the Building, or use the elevators, corridors, or common areas for any such purposes. Except with Landlord's prior written consent and in accordance with arrangement approved by Landlord, Tenant shall not permit on the Premises the use of equipment for dispensing food or beverages or for the preparation, solicitation or orders for sale, serving, or distribution of food or beverages. Tenant shall not cook in the Building. 15. Refuse Tenant shall place all refuse in proper receptacles provided by Tenant at its expense in the Premises or in receptacles (if any) provided by Landlord for the Building, and shall keep sidewalks and driveways outside the Building, and lobbies, corridors, stairwells, ducts and shafts of the Building, free of all refuse. 16. Obstructions Tenant shall not obstruct or place anything in or on the sidewalks or driveways outside the Building, or in the lobbies, corridors, stairwells, or other common areas of the Building, or use such locations for any purpose except access to and exit from the Premises without Landlord's prior written consent. Landlord may remove at Tenant's expense any such obstruction or thing (unauthorized by Landlord) without notice or obligation to Tenant. 17. Dangerous or Illegal Activities Tenant shall not make any use of the Premises which involves the danger of injury to any person, nor shall the same be used for any illegal purpose. 18. Proper Conduct Tenant shall not conduct itself in any manner which is inconsistent with the character of the Building as a first-quality building, or which will impair the comfort and convenience of other tenants in the Building. 19. Firearms Absolutely no loaded firearms or armed personnel, including armed security personnel, will be permitted in any of the common areas at any time. 20. Parking Tenant shall park in the designated areas only and shall not park in the fire lanes or in any reserved parking stall reserved for any other tenant. Parking in the loading dock areas is for pick-up and delivery only. Parking in the temporary parking areas shall be limited to fifteen (15) minutes. 21. Electrical System Tenant shall not overload the existing electrical system within the Premises or cause to overload the electrical system of the Building. Should Tenant require power in excess of the standard 100V 20 Amps per circuit provided, new wiring and other necessary electrical equipment shall be installed at Tenant's expense, and Tenant shall be assessed an additional monthly charge to cover the cost of the excess electrical demand and usage. 22. Advertising In advertising or other publicity, without Landlord's prior written consent, Tenant shall use neither the name of the Building, except as the address of its business, nor use pictures or photographs of the Building. 23. Quiet Enjoyment Tenant shall not make noises, cause disturbances or vibrations, or use or operate any electrical or mechanical devices or other devices that omit sound or other waves or disturbances, or create odors, any of which may be offensive to other tenants and occupants of the Building, or that would interfere with the operation of any device or equipment or radio or television broadcasting or reception from or within the Building or elsewhere, and shall not place or install any projections, antennae, aerials, or similar devices inside or outside of the Premises. 24. Dangerous Commodities In no event shall any person bring into the Building flammables such as gasoline, kerosene, naptha, and benzine, or explosives or any other article of intrinsically dangerous nature. If by reason of the failure of Tenant to comply with the provision of this paragraph, any insurance premiums payable to Landlord for all or any part of the Building shall at any time be increased above normal insurance premiums for insurance not covering the items aforesaid, Landlord shall have the option to either terminate this Lease or to require to make immediate payment for the whole of the increased insurance problems. 25. Signs Landlord will provide and maintain a directory for all tenants of the Building. No signs, advertisements, or notices visible to the general public or to other tenants shall be permitted within the Building unless first approved in writing by Landlord. EXHIBIT C BUILDING STANDARDS OFFICE SPACE A. GENERAL CONDITIONS 1. Standard Allowances The standard allowances as outlined below are maximum limits to be provided at no cost to Tenant. All references to square footage allowances contained herein are based on the rentable area. B. STANDARD WORK PROVIDED BY LANDLORD AT LANDLORD'S COST 1. Partitions Office partitions will be constructed of 5/8" gypsum wallboard, taped and spackled with no visible joints, over 3-5/8" steel studs from floor slab to underside of finished ceiling. Standard allowance is one linear foot of partition for each 7 square feet of rentable area as measured through door openings. Interior partitions, corridor partitions, and of demising partitions will be charged against partition allowance. 2. Floor Load Floors are designed for normal office loading. Landlord must be notified of Tenant's requirement of heavy load concentration for such items as library shelving, vaults, computers, heavy files, etc. 3. Doors and Hardware One single solid core "stain grade" 3'0" x 8'0" entrance door with hollow metal frame and wire glass side light, in accordance with prevailing Fire Code, will be provided at each suite. Double entry door will be installed at Tenant's expense. Building Standard lockset and closer on entrance door. Interior doors will be flush solid core "stain grade" 3'0" x 8'0" doors, installed in hollow metal door frames, on the basis of one door for each 250 square feet of rentable area. If more than this allowance is used, the Tenant will be charged for the additional doors, hardware and closers, it closers are required. Building Standard latchset for all interior doors. 4. Ceiling Ceilings will be exposed "T" bar lay-in acoustical ceiling panels on a 30" x 60" grid, installed to building standard ceiling height of 8'0". 5. Lighting and Switches Landlord will provide one recess-mounted fluorescent 4-tube "energy miser" fixture per 75 square feet of rentable area. If Tenant's space plan extensively subdivides Leased Premises, Tenant will be responsible for additional lighting to maintain the above standards. Landlord will provide one light switch for each 200 square feet of rentable area. 6. Heating, Ventilating, Air Conditioning (HVAC) System Landlord will provide Tenant HVAC so that the temperature in the Leased Premises does not exceed 78 degrees F with 55% relative humidity in the summer and is not lower than 65 degrees F in the winter during normal business hours. If Tenant's space plan extensively subdivides Leased Premises or if special Tenant equipment requires modification of HVAC capacities, Tenant will be responsible for additional HVAC to maintain the above standards. Landlord will provide a minimum of one thermostat for each 500 square feet of rentable area. 7. Power and Telephone Outlets. Landlord will provide one 110-volt electric duplex outlet located in interior partitioning for each 75 square feet of rentable area. The Building shall contain wires, risers, conduits, feeders and switchboards necessary to furnish any area with electrical energy. Any special outlet or special circuit which Tenant requires shall be located in drywall partition and installed at Tenant's expense. If the prevailing Building Code requires that telephone lines be run in conduit, Landlord will provide one telephone outlet located in interior partitioning for each 200 square feet of rentable area. No plumbing in Tenant suite will be provided by the Landlord. 8. Wall Finishes Landlord will provide paint and vinyl wall covering for such walls, partitions, columns, doors, door frames and metal trim as are building standard. Such painting shall consist of necessary preparation, one prime and one finish coat from color selections provided by Landlord. Standard allowance is one color per suite. Vinyl wall surfaces shall consist of the necessary preparation and vinyl application from a color and quality selection provided by Landlord. Twenty-five percent of the Tenant's office wall area shall be vinyl covered. All interior building perimeter wall surfaces and storage utility rooms shall be painted. All hollow metal door frames shall be painted to match building standard. 9. Floor Finishes Landlord will furnish and install broadloom carpeting of a commercial quality. Colors will be selected by Tenant from Landlord's sample display and limited to one color per suite. Four-inch base will be provided in building standard color. 10. Window Covering Narrow slat venetian blinds will be permitted at Tenant's expense. Blinds will be a Building Standard color. 11. Suite Signage Entrances will be signed by Landlord with Building Standard typeface and mounting height. Entrance sign and building directory shall contain name as shown on Lease. C. TENANT WORK ABOVE BUILDING STANDARDS If the drawing approved by Tenant includes items of work above the building standard allowances as outlined above, such drawings will be submitted by Landlord to the General Contractor for the determination of cost of such items of work. After the approval by Tenant of such above building standard costs, Tenant will pay as follows: 1/3 at time of approval of cost 1/3 when work is 50% completed 1/3 upon occupancy If there are any changes requested by Tenant, after completion of Tenant's plan, Tenant will be responsible for all architectural and engineering costs and related design expenses resulting from such changes. No such changes will be made without prior written approval of Landlord. Landlord will respond within 15 days. Landlord will not be responsible for delay in occupancy by Tenant because of changes to plans after approval and sign-off by Tenant. D. DESIGN SERVICES Tenant has the option of engaging his own designer, or Tenant may utilize the services of Landlord's designer for the preparation of the necessary Tenant layout and working drawings. If Tenant engages his own designer, Tenant is required to coordinate layout and working drawings with Landlord within 30 days of Lease execution. AMENDMENT TO LEASE May 23, 1995 The terms of a certain Lease dated April 19, 1990 by and between ATS II Associates Limited Partnership and Capital Dimensions, Inc. for offices at Suite 335, Two Appletree Square, Bloomington, Minnesota, is hereby amended by mutual consent upon the same terms and conditions except that effective July 1, 1995: * The Term of the Lease shall be extended through and including June 30, 1998. * The Base Rental shall be Thirty-One Thousand Seven Hundred Forty and 00/100 Dollars ($31,740.00) payable in equal monthly installments of Two Thousand Six Hundred Forty Five and 00/100 Dollars ($2,645.00). * Landlord, at its cost, shall install new building standard carpet in four (4) private offices. Witness our hands and seals this 24th day of May, 1995. In presence of: ATS II ASSOCIATES LIMITED PARTNERSHIP APPLETREE PROPERTIES, INC., Agent /S/ Beth A. Barci By: /S/ Daryl G. D. ------------------------ -------------------------- Its: President -------------------------- TENANT CAPITAL DIMENSIONS, INC. /S/ Brenda L. Leonard By: /S/ Dean Pickerell ------------------------- --------------------------- Its: Vice President --------------------------- By: /S/ Thomas F. Hunt, Jr. ---------------------------- Its: President --------------------------- EX-10.2 8 EXHIBIT 10.2 EXHIBIT 10.2 JOINT INVESTMENT ADVISOR MANAGEMENT AGREEMENT THIS AGREEMENT is made between CAPITAL DIMENSIONS MANAGEMENT COMPANY, INC. ("CDMC"), a Minnesota corporation, and CAPITAL DIMENSIONS VENTURE FUND, INC. ("CDVFI"), a licensee under the Small Business Investment Act of 1958. RECITALS A. CDMC has substantial ongoing experience in the management of investments and is staffed by highly experienced managers. B. CDVFI wishes to enter into a joint agreement with CDMC to provide investment advice and management services. THE PARTIES AGREE AS FOLLOWS: ARTICLE ONE SERVICES 1.1 SERVICES CDMC agrees to provide the following services to CDVFI (the "Licensee") as directed by Licensee's management and the Licensee's Board of Directors: a) Assist the Licensee in the evaluation of potential investments; b) Monitor the Licensee's existing portfolio of investments; c) Assist with disposal of the Licensee's assets as directed from time to time by the Licensee; d) Provide accounting and administrative services to the Licensee; and e) Such other actions and duties as the Licensee's Board of Directors may direct from time to time. ARTICLE TWO COMPENSATION 2.1 COMPENSATION Compensation to CDMC will be 3% of CDVFI's average assets. 2.2 PAYMENT Compensation will be paid by the Licensee to CDMC on a monthly basis upon receipt of an appropriate invoice from CDMC. ARTICLE THREE TERM 3.1 EFFECTIVE DATE The Effective Date of this Agreement shall be deemed to be April 1, 1997. 3.2 TERM, RENEWAL The term of this Agreement shall be one year, commencing on the Approval Date. This Agreement shall be renewable for additional one-year terms only with the approval of the Licensee's Board of Directors and the Small Business Administration (the "SBA"). 3.3 TERMINATION The Licensee may terminate this Agreement, without penalty, upon 30 days' written notice. ARTICLE FOUR SBA REPORTING 4.1 FINANCIALS CDMC shall assist the Licensee in preparing and filing with the SBA annual audited financial statements of the Licensee's operations. 4.2 OFFICERS AND MANAGERS Each officer of CDMC who performs services for the Licensee shall file a Statement of Personal History (SBA Form 415A) with the SBA. 4.3 SBA COMPLIANCE CDMC shall fully comply with all applicable laws and SBA regulations. ARTICLE FIVE MISCELLANEOUS 5.1 SEVERABILITY Each provision of this Agreement is intended to be severable. In the event that any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable, the same shall not affect any other provision of this Agreement. 5.2 ASSIGNMENT This Agreement will terminate automatically upon assignment by CDMC to any other entity, unless such assignment is approved in advance by the Licensee's Board of Directors and the SBA. 2 5.3 FULL DISCLOSURE Full disclosure, pursuant to the SBA's regulations, will be provided by CDMC if it performs services directly for any portfolio companies of the Licensee. 5.4 SEPARATE RECORDS Separate books, records, and financials shall be maintained by CDMC and CDVFI. Funds, portfolio securities, or other securities of the Licensee shall not be commingled. 5.5 BUSINESS ADDRESS The principal places of business of the parties are: Capital Dimensions Management Company Inc. Suite 335 Two Appletree Square Minneapolis, Minnesota 55425-1637 Capital Dimensions Venture Fund, Inc. Suite 335 Two Appletree Square Minneapolis, Minnesota 55425-1637 5.6 AMENDMENT No amendment to any material term of this Agreement shall be effective unless it is reduced to writing, signed by all parties and approved in advance by the SBA and the Licensee's Board of Directors. Any question as to the materiality of an amendment shall be submitted to the SBA for determination of materiality. The parties have duly executed this Agreement. CAPITAL DIMENSIONS MANAGEMENT COMPANY, INC. By /s/ Thomas F. Hunt, JR. -------------------------------------------------- Title: President Date 2/10/97 ----------------------- CAPITAL DIMENSIONS VENTURE FUND, INC. By /s/ Dean Pickerell -------------------------------------------------- Title: President Date 2/10/97 ----------------------- 3 EX-10.3 9 EXHIBIT 10.3 EXHIBIT 10.3 ------------ SPECIALIZED SMALL BUSINESS INVESTMENT COMPANY 3% PREFERRED STOCK REPURCHASE AGREEMENT BETWEEN Capital Dimensions Venture Fund, Inc. (the "SSBIC"), BUYER, and U.S. Small Business Administration, ("SBA"), SELLER Dated March 31, 1993 2 TABLE OF CONTENTS Article 1 Definitions . . . . . . . . . . . . . . . . . . . Article 2 Repurchase and Sale of Shares . . . . . . . . . . Article 3 Preferential Liquidating Interest . . . . . . . . Article 4 Conditions Precedent. . . . . . . . . . . . . . . Article 5 Covenants, Representations and Warranties of the SSBIC. . . . . . . . . . . . . . . . . . . Article 6 Expenses. . . . . . . . . . . . . . . . . . . . . Article 7 Events of Default and Remedies. . . . . . . . . . Article 8 Termination . . . . . . . . . . . . . . . . . . . Article 9 Miscellaneous . . . . . . . . . . . . . . . . . . 3 SPECIALIZED SMALL BUSINESS INVESTMENT COMPANY 3% PREFERRED STOCK REPURCHASE AGREEMENT This Repurchase Agreement ("Agreement") , dated March 31, 1993, by and between Capital Dimensions Venture Fund, Inc. (the "SSBIC"), a small business investment company licensed under Section 301(d) of the Small Business Investment Act of 1958, as amended (15 U.S.C. Sections 661 ET. SEQ.) (the "Act"), having an office at Two Appletree Square, Suite 335, Bloomington, MN 55425-1637 and the U.S. Small Business Administration ("SBA"), an agency of the United States and its successors and assigns, having an office at 409 Third Street, S.W., Washington, D.C. 20416. W I T N E S S E T H: WHEREAS, pursuant to Public Law 101-162 (November 21, 1989), SBA is authorized to allow the issuer of any 3% preferred stock sold to SBA to redeem or repurchase such stock upon the payment to SBA of an amount less than the par value of the stock; WHEREAS, SBA is the owner of 20,000 shares of $500.00 par value per share three percent (3%) preferred stock (the "Preferred Stock"), of which the SSBIC is the issuer, of which 20,000 shares (the "Shares") are being repurchased by the SSBIC from SBA pursuant to this Agreement; WHEREAS, the SSBIC has completed an "Application for Repurchase of 3% Preferred Stock held by the Small Business Administration pursuant to Public Law 101-162, November 21, 1989," dated August 25, 1992 (the "Application"), which is hereby incorporated herein by reference, pursuant to which the SSBIC has applied to SBA for the repurchase of the Shares; and 4 WHEREAS, the SSBIC desires to repurchase from SBA, and SBA desires to sell to the SSBIC, the Shares upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the value received and the covenants contained herein, the parties hereto hereby represent and agree as follows: ARTICLE 1. DEFINITIONS For the purposes of the Repurchase Documents (as defined below), the following terms shall have the meanings assigned to them in this Article 1; all other capitalized terms shall have the meanings assigned to them in Part 107 of Title 13 of the Code of Federal Regulations: "APPLICATION" shall mean the Application dated August 25, 1992 for the Repurchase of 3% Preferred Stock Held By the U.S. Small Business Administration Pursuant to Public Law 101-162, November 21, 1989. "ASSETS" shall mean all of the SSBIC's real or personal property (tangible or intangible) of whatever nature and wherever located, whether now owned or hereafter acquired, including but not limited to, all fixed assets, fixtures, cash, inventory, notes receivable, accounts receivable, contract rights, choses in action, causes of action, instruments, documents, electronic business records, licenses, warranties, rights to indemnification, leasehold and subleasehold interests in real or personal property, security interests held by or granted to the SSBIC, tax refunds, tax refund claims, partnership and joint venture interests, goodwill, general intangibles, all securities including common stock, preferred stock, stock options, warrants, rights to purchase securities, 5 and debentures, and all rights to payment of money, together with all additions and accessions thereto, all replacements and substitutions thereof, all proceeds thereof, and all assets created therefrom. "COLLATERAL" shall have the meaning set forth in the Security Agreement as defined below. "CORPORATE OFFICIAL" shall mean those officer(s) of the corporation authorized in the name and on the behalf of the SSBIC to prepare, file, and execute all documentation and instruments required by SBA in connection with the Application. "DISCOUNT" shall mean the amount by which the aggregate par value of the 3% preferred stock being repurchased exceeds the Purchase Price. "ESCROW AGENT" shall mean Legal and Security Services, Inc., or any successor thereto, as agent of SBA, which agency is created pursuant to the Escrow Agreement. "ESCROW AGREEMENT" shall mean the Escrow Agreement, dated the date hereof, among SBA, the SSBIC and the Escrow Agent, in the form set forth in Exhibit 1 hereto. "INDEBTEDNESS" shall mean (a) all indebtedness for borrowed money, and (b) all obligations evidenced by bonds, debentures, notes or other similar instruments, other than indebtedness held or guaranteed by SBA. "LIQUIDATING INTEREST" shall mean a preferential limited ownership interest in the Restricted Contributed Capital surplus account granted to SBA by the SSBIC as of the date of this Agreement. The initial value of the Liquidating Interest shall equal the amount of the Discount. "NOTE" shall have the meaning set forth in Section 2.2 hereof. "PURCHASE PRICE" shall have the meaning set forth in Section 2.2 hereof. 6 "REPURCHASE DOCUMENTS" shall mean this Agreement, the Note, the Security Agreement, the Application, the Escrow Agreement, and any and all ancillary documents and statements executed, delivered or filed in connection therewith, as they may be amended from time to time. "RESTRICTED CONTRIBUTED CAPITAL SURPLUS" shall have the meaning set forth in Section 3.1 hereof. "SBA REGULATIONS" shall mean Title 13 of the Code of Federal Regulations Part 107, as amended. "SECURITY AGREEMENT" shall mean the Security Agreement, dated of even date herewith, by the SSBIC in favor of SBA, in the form set forth in Exhibit 2 hereto. "SHARES" shall mean the aggregate number of shares of 3% preferred stock being repurchased, as set forth in the recitals hereto. ARTICLE 2. REPURCHASE AND SALE OF SHARES 2.1 REPURCHASE AND SALE. On the terms and subject to the conditions hereinafter set forth, the SSBIC hereby agrees to repurchase from SBA, and SBA agrees to sell, convey, transfer and assign to the SSBIC the Shares, including the right to any unpaid dividends accrued thereon. 2.2 PRICE TO BE PAID. The purchase price to be paid by the SSBIC to SBA for the Shares is $178.5789 per share, or $3,571,578 (the "Purchase Price"), to be paid as follows: $3,571,578 by promissory note of the SSBIC payable to SBA, in the form set forth in Exhibit 3 hereto (the "Note"). 7 ARTICLE 3. PREFERENTIAL LIQUIDATING INTEREST AND SECURITY INTEREST 3.1 GRANT OF LIQUIDATING INTEREST. In consideration for the approval and sale of the Shares at the Purchase Price, (a) the SSBIC has established a new capital account designated RESTRICTED CONTRIBUTED CAPITAL SURPLUS which, pursuant to Section 5.17 hereof, the SSBIC agrees to credit in an amount equal to the Discount, and (b) the SSBIC hereby grants to SBA the Liquidating Interest in the Restricted Contributed Capital Surplus Account. The initial value of the Liquidating Interest shall be equal to the amount of the Discount and shall decline on a straight-line basis at the end of each quarter by an amount equal to 1/28th (3.571426%) of its original amount. In the event the Note is paid in full subsequent to the date sixty (60) months from the date of this Agreement, the Liquidating Interest shall be extinguished. In the event the Note is paid in full prior to sixty (60) months from the date of this Agreement, then the balance of the Liquidating Interest as of such date shall thereafter decline at the end of each month by an amount equal to the remaining amount of the Liquidating Interest divided by the difference between sixty (60) months and the number of months expired since the date of this Agreement. Upon written notification by SBA of the occurrence of any Event of Default (as hereinafter defined), the value of the Liquidating Interest shall become fixed at the level immediately preceding the Event of Default and shall not decline further until such time as the default is 8 cured or waived. Subsequent to the cure or waiver of the default, the Liquidating Interest shall continue to decline at the rate set forth in this Section 3.1. 3.2 EXPIRATION OF THE LIQUIDATING INTEREST. The Liquidating Interest shall expire on the latest to occur of (i) the date sixty (60) months from the date of this Agreement, (ii) the date that the Note shall be paid and satisfied in full, or (iii) if an Event of Default has occurred and such default has been cured or waived, such later date on which the Liquidating Interest is fully amortized. 3.3 EFFECT OF LIQUIDATION. The SSBIC agrees that if, prior to the expiration of the Liquidating Interest as set forth above, its Board of Directors or its shareholders authorizes the liquidation of the SSBIC, or a judicial order is issued directing the voluntary or involuntary liquidation of the SSBIC, or SBA initiates receivership or liquidation proceedings, any assets which are available after the payment or the provision for the payment of all debts of the SSBIC shall be distributed first to SBA, until the fair market value of such assets is equal to the amount of the Liquidating Interest or all remaining assets have been distributed to SBA. 3.4 SECURITY INTEREST. The SSBIC will grant SBA a security interest in the Collateral. The nature and terms of this security interest are contained in the Security Agreement of even date herewith. With respect to any securities which are now or hereafter become publicly traded, the SSBIC will allow SBA to perfect such security interest by conveying all such securities to the Escrow Agent in accordance with the Escrow Agreement, also of even date herewith. 9 ARTICLE 4. CONDITIONS PRECEDENT The agreement of SBA to sell the Shares to the SSBIC on the terms set forth herein is subject to the satisfaction of the following conditions precedent: 4.1 EXECUTION OF THIS AGREEMENT. SBA shall have received one or more originals of this Agreement, executed and delivered by the Corporate Official of the SSBIC. 4.2 NOTE. SBA shall have received the Note, conforming to the requirements hereof and executed and delivered by the Corporate Official of the SSBIC. 4.3 CORPORATE PROCEEDINGS. SBA shall have received a copy of the resolutions, in form and substance satisfactory to SBA, of the Board of Directors of the SSBIC authorizing: (i) the execution, delivery and performance of the Repurchase Documents, (ii) the grant of the Liquidating Interest to SBA; and (iii) the grant of a security interest in the Collateral pursuant to the Security Agreement. in each case certified by the Secretary of the SSBIC as of the date hereof, with such certificate stating that the resolutions have not been amended, modified, revoked or rescinded as of the date of such certificate. 4.4 CHARTER AMENDMENT AND NEW CAPITAL ACCOUNT. SBA shall have received evidence satisfactory to it that the SSBIC has amended its charter or Articles of Incorporation to provide for the Liquidating Interest and has established the Restricted Contributed Capital Surplus Account in its system of accounts. 10 4.5 REVISED CAPITAL ACCOUNTS. SBA shall have received revised financial statements on SBA Form 468 which reflect adjustments to the SSBIC's capital accounts as required by Section 5.18 of this Agreement. 4.6 SECURITY AGREEMENT. SBA shall have received the Security Agreement, conforming to the requirements hereof and duly executed and delivered by the SSBIC. 4.7 SECURITIES AND NEGOTIABLE INSTRUMENTS. SBA, or the Escrow Agent, shall have received the securities and instruments in which SBA is perfecting a security interest under the Security Agreement, accompanied by an undated blank stock power or assignment for each such item as is appropriate for such item, duly executed with the signature guaranteed and delivered by the Corporate Official of the SSBIC. 4.8 PERFECTION OF SBA SECURITY INTEREST. SBA shall have received evidence satisfactory to it that the SSBIC has signed all documentation, taken all actions, made all arrangements, and paid all fees necessary to perfect the security interest granted by the Security Agreement. 4.9 OPINION OF COUNSEL. SBA shall have received an opinion of counsel, in the form attached hereto as Exhibit 4, from independent counsel satisfactory to SBA. 4.10 ESCROW AGREEMENT.. SBA shall have received the Escrow Agreement, conforming to the requirements hereof and duly executed and delivered by the SSBIC and the Escrow Agent. 11 4.11 ADDITIONAL MATTERS. All proceedings and all documents, instruments and other legal matters in connection with the repurchase and sale contemplated herein shall be satisfactory in form and substance to SBA. ARTICLE 5. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE SSBIC In order to induce SBA to enter into this Agreement and to allow the SSBIC to repurchase its 3% preferred stock at the Purchase Price, the SSBIC hereby represents and warrants to and agrees with SBA that: 5.1 ORGANIZATION AND GOOD STANDING. The SSBIC is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. The SSBIC is duly licensed as a small business investment company under Section 301(d) of the Act. 5.2 AUTHORITY. The SSBIC has the power, authority and legal right to execute, deliver and perform the Repurchase Documents and the SSBIC has taken all necessary action to authorize the execution, delivery and performance of the Repurchase Documents. No consent of any other person or entity is required in connection with the execution, delivery, performance, validity or enforceability of the Repurchase Documents by or against the SSBIC. The Repurchase Documents have been executed and delivered by the Corporate Official of the SSBIC and the Repurchase Documents constitute the legal, valid and binding obligations of the SSBIC enforceable against the SSBIC in accordance with their respective terms 12 except as enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally and except as enforceability may be limited by general principles of equity. 5.3 NO VIOLATIONS. The SSBIC is not in violation of its charter or by-laws, or its small business investment company license, or any material provision of the Act or the SBA Regulations except as previously disclosed to SBA in writing. The execution, delivery and performance of the Repurchase Documents will not violate any provision of any existing law and will not result in any violation of the charter or by-laws of the SSBIC and will not constitute a default under or a violation of any agreement to which the SSBIC is a party, and will not result in the imposition of any lien (other than under the Security Agreement) on any of the SSBIC's assets. 5.4 MANAGEMENT AND OWNERSHIP. There has been no change in the officers, directors, beneficial owners of 10 percent or more of the securities of SSBIC, or the control (as defined in SBA Regulations) of the SSBIC, since the issuance of its small business investment company license, except as indicated by post-licensing amendment(s) heretofore filed with and approved by SBA. The SSBIC will not change any of its officers, directors, managers or investment advisers, and will not allow any change in the beneficial owners of 10 percent or more of its securities, without the prior written approval of SBA granted subsequent to the date hereof. 13 5.5 INVESTMENT POLICY, OPERATIONS AND CAPITAL. There has been no change in the investment policy or operations, and no decrease in the capital, of the SSBIC since the issuance of its small business investment company license, except as indicated by post-licensing amendment(s) and financial reports heretofore filed with and approved by SBA. The SSBIC will not change its investment policy or operations and will not decrease capital without the prior written approval of SBA granted subsequent to the date hereto. 5.6 PROCEEDS FROM INELIGIBLE INVESTMENTS. The SSBIC agrees to liquidate its holdings of publicly traded ineligible investments (as defined in Section 5.19 hereof) within two years of the date of this Agreement. With respect to non-publicly traded ineligible investments, the SSBIC will submit a plan within 3 months of the date hereof, acceptable to SBA, for the orderly liquidation of these investments. Upon the sale of any ineligible investment, the SSBIC shall, at its option, use the proceeds for any of the following four purposes: (i) for investment in eligible small concerns, (ii) to prepay principal installments of the Note, in inverse order of maturity, (iii) to pay operating expenses of the SSBIC incurred in the normal course of business, or (iv) to be held in an escrow account for the benefit of SBA. 5.7 MATERIAL ADVERSE CHANGE. There has been no material adverse change in the financial condition of the SSBIC since the filing of its last fiscal year-end audited 14 Financial Report (SBA Form 468), dated December 31, 1991 (the "Audited Financial Report"), except as indicated by the unaudited interim Financial Report, dated June 30, 1992 filed with the Application (the "Application Financial Report"). 5.8 FINANCIAL CONDITION. The Audited Financial Report and the Application Financial Report present fairly the financial condition of the SSBIC as of their respective dates, and were prepared in accordance with SBA Regulations. The SSBIC has no contingent assets in the form of claims or contingent liabilities not provided for or disclosed in the Audited Financial Report or the Application Financial Report. 5.9 NO LITIGATION. There is no claim, action, suit or proceeding pending or, to the knowledge of the SSBIC, threatened against or relating to the SSBIC or any of its affiliates before any court or governmental authority (including without limitation any proceeding or action for the assessment or collection of additional taxes) which might have a material adverse effect on the business, assets or financial condition of the SSBIC. 5.10 NO LIENS, ETC. The SSBIC has good and marketable title to all its Assets, subject to no liens except the lien created under the Security Agreement and other liens as set forth in Schedule I hereto. The SSBIC has not contracted with any person or entity the result of which is the attachment or perfection of any security interest in any of the SSBIC's Assets or contingent claims, nor has the SSBIC pledged, 15 hypothecated, or assigned any of its Assets or contingent claims, except as reported in the Application. 5.11 INSIDER FINANCING. The SSBIC has no outstanding loans, investments in, or advances to or from any officer, director, stockholder, or other Associate (as defined in 13 CFR Section 107.3) of the SSBIC rot heretofore disclosed to SBA and, if required, approved in writing by SBA; nor has the SSBIC made or received any loan, investment, or advance to or from any of its Associates or, knowingly, to or from any Associate of another licensed specialized or regular small business investment company, without disclosure to SBA or, if required, SBA's prior written approval. 5.12 NO REDEMPTION. Notwithstanding the provisions of Section 107.802 of SBA Regulations, as long as this Agreement is in effect, the SSBIC will not purchase, redeem, retire or otherwise acquire directly or indirectly any shareholder's interest in the SSBIC now or hereafter outstanding, or set aside any sum for such purpose, without the prior written consent of SBA granted subsequent to the date hereof. 5.13 NO DISPOSITION OF ASSETS. Without the prior written consent of SBA granted subsequent to the date hereof, the SSBIC will not, other than in the ordinary course of business, sell, contract to sell, lease, assign, mortgage, dispose of or otherwise transfer any of its Assets, or any part thereof or interest therein, whether now owned or hereafter acquired, either permanently, temporarily, finally or contingently. The SSBIC will notify SBA of each proposed disposal of an asset in 16 which SBA has a security interest except those disposed of in the ordinary course of business. 5.14 INDEBTEDNESS. As long as this Agreement is in effect, the SSBIC will not, without the prior written consent of SBA granted subsequent to the date hereof, create, incur, assume or suffer to exist any Indebtedness, except for: (a) Indebtedness in respect of the Note; and (b) Indebtedness existing on the date hereof set forth on Schedule II hereof, and any Indebtedness resulting from the refinancing of any such Indebtedness, PROVIDED that the principal amount of any such refinancing Indebtedness (as determined as of the date of the incurrence of such refinancing Indebtedness) does not exceed the principal amount of the Indebtedness refinanced thereby. 5.15 NO SUBSIDIZED FUNDS. No portion of the Purchase Price, including any and all payments made under the Note, shall be derived, either directly or indirectly, from the issuance of preferred stock to SBA or from funds acquired or borrowed from SBA after November 21, 1989. Payments made within 90 days of such issuance of preferred stock or receipt of subsidized funds shall be presumed to have been derived therefrom. It is explicitly recognized by SBA and the SSBIC that the refinancing of $3,000,000 of the SSBIC's Debentures by way of the purchase by SBA of $3,000,000 of 4% Preferred Stock will not be deemed to be funds 17 acquired or borrowed from SBA with respect to the conditions and limitations of this paragraph. 5.16 CANCELLATION OF STOCK. The SSBIC will take any and all action necessary to cancel the Shares immediately upon the repurchase and receipt thereof from SBA. 5.17 RESTRICTED CONTRIBUTED CAPITAL SURPLUS ACCOUNT. The SSBIC hereby agrees that the Restricted Contributed Capital Surplus Account will be used solely for the purpose of recording the Discount on the accounts of the SSBIC. The SSBIC further agrees that, within 30 days of the consummation of the purchase of the Shares, the appropriate series of accounting entries will be made, in accordance with generally accepted accounting principles, to reflect the purchase transaction and to credit the Restricted Contributed Capital Surplus Account in a dollar amount equal to the Discount. 5.18 REGULATORY TREATMENT. Notwithstanding anything contained in SBA Regulations to the contrary, the balance in the Restricted Contributed Capital Surplus Account shall: (a) be included in the definition of Private Capital set forth in 13 CFR 107.3, DEFINITIONS, (i) for the purpose of calculating the OVERLINE LIMITATION pursuant to 13 CFR 107.303; and (ii) for the purpose of calculating CAPITAL IMPAIRMENT pursuant to SBA Regulations; 18 (b) not be included in the definition of Private Capital set forth in 13 CFR 107.3, DEFINITIONS, (i) for the purpose of reaching the MINIMUM CAPITAL requirement pursuant o 13 CFR 107.101(d); (ii) as the base for calculating leverage eligibility pursuant to SBA Regulations; and (iii)for any other purpose not set forth above; and (c) not be considered assets, income or gain for any purpose whatsoever, including the determination of compensation for any officer or employee of the SSBIC; and (d) not be used for any other purpose not set forth above. 5.19 ADJUSTED REGULATORY CAPITAL. Contemporaneously with the adjustments required in Section 5.17, the SSBIC will restate its capital accounts as follows (all capitalized terms used in this Section 5.19 refer to line items on SBA Form 468 and the conventions and requirements with respect thereto): (a) Any Unrealized Depreciation will be eliminated by writing down the value of securities which have unrealized depreciation. Valuations shall be as of March 31, 1993 in the case of publicly traded and marketable securities, and December 31, 1992 in the case of all other securities. The effect of 19 this will be to increase the cumulative Net Realized Loss through the date of the adjustment. (b) Unrealized Appreciation will be eliminated by writing up the value of securities to which the appreciation pertains, but only for publicly traded and marketable securities. Valuations shall be as of March 31, 1993. Where appropriate, values shall be reduced for lack of liquidity, restrictions on sale, and other conditions which would limit the ability to realize the current market price. (c) Following the adjustments in (a) and (b) above, the SSBIC will eliminate the Undistributed Realized Deficit by simultaneously reducing Paid-In Surplus. (d) In addition, the SSBIC acknowledges that it has held and, as of the date of this Agreement, continues to hold investments which do not qualify as eligible investments for an SSBIC ("ineligible investments"). A list of all such investments is set forth on Schedule III hereto. In the determination of Private Capital for leverage purposes, the SSBIC's capital accounts have been and will continue to be reduced by the cost basis of these ineligible investments. Conversion of ineligible investments into cash will result in a dollar for dollar increase in Private Capital for all SBIC program purposes, including leverage. 20 (e) Paid-In Capital Stock and Surplus, as revised pursuant to Paragraph (c) of this Section 5.19 and as set forth on Schedule IV hereto, shall be the amount of the SSBIC'S Private Capital for all purposes, including leverage eligibility and regulatory compliance; PROVIDED, HOWEVER, that any adjustments required by this Section 5.19 shall not give rise to an Event of Default for failure to maintain minimum regulatory capital or for violation of the OVERLINE LIMITATION pursuant to 13 CFR 107.303. (f) All adjustments required by Section 5.19 will be reflected in the financial statements immediately following the completion of the repurchase transaction, and will form the basis of continuing financial reporting to SBA. These adjustments will also be subject to subsequent annual external audit for SBA purposes and examination by the Office of SBIC Examinations. 5.20 ADDITIONAL PRIVATE CAPITAL. The SSBIC is currently exploring the feasibility of issuing additional equity securities. In keeping with one of the stated purposes of the repurchase program, the SSBIC will use its best efforts to increase its Private Capital by $10,000,000 during the next five years. 5.21 LEVERAGE. (a) The outstanding principal amount of the Note shall be included in the aggregate amount of debentures outstanding for purposes of determining the amount of leverage (as defined in 13 CFR 107.3) available to the 21 SSBIC. The balance in the Restricted Contributed Capital Surplus Account shall not be considered leverage outstanding for purposes of SBA Regulations. (b) Contemporaneously with the consummation of this repurchase transaction, SBA will refinance $3,000,000 of the SSBIC's debentures currently on demand via the purchase by SBA of $3,000,000 par value of the SSBIC's 4% Preferred Stock. Following the conversion of the $3 million of demand debentures and the execution and delivery of the Note, the SSBIC will be ineligible for additional leverage until the SSBIC increases its Private Capital by $3,600,000. For this purpose, Private Capital can be increased by any one or combination of the following: (i) the sale of new shares of common stock for cash, (ii) capitalization of retained earnings available for capitalization in accordance with SBA accounting guidelines, or (iii) conversion of ineligible investments into cash. The SSBIC will be prohibited from paying or accruing dividends or other similar distributions to non-SBA stockholders until Private Capital has been increased by $3,600,000. 5.22 MISREPRESENTATION. None of the Repurchase Documents, or any statement, financial statement, or certification furnished to SBA by or on behalf of the SSBIC in connection therewith, contains an untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained therein not 22 misleading or, insofar as the SSBIC can now foresee, may in the future materially adversely affect the Collateral or the financial condition of the SSBIC. All statements, representations and warranties made in this Agreement and the other Repurchase Documents are true and complete and are made for the purpose of inducing SBA to enter into this Agreement and the other Repurchase Documents and consummate the transactions contemplated hereunder and thereunder, and are made with the full knowledge of the provisions of 15 U.S.C. 645, 15 U.S.C. 1001, and 18 U.S.C. 1006, which provide certain criminal penalties for making false statements or representations. ARTICLE 6. EXPENSES The SSBIC agrees to pay all fees of the Escrow Agent and all reasonable expenses incurred by the SSBIC and SBA which are directly related to the negotiation and preparation of this Agreement and the other Repurchase Documents or to the consummation of the transactions provided for herein and therein. Such expenses include but are not limited to legal fees, accounting fees, consultant fees, filing and documentary fees, administrative fees, and any user fee SBA may deem appropriate to recover the costs and provide for the administration of the transactions contemplated herein and in the other Repurchase Documents. SBA represents that the $5,000 paid in conjunction with the Repurchase Application and related transactions will cover the SBA expenses incurred with respect to this transaction. 23 ARTICLE 7. EVENTS OF DEFAULT AND REMEDIES 7.1 EVENTS OF DEFAULT. The occurrence of one or more of the events listed below ("Events of Default") shall constitute an Event of Default: (a) PAYMENT. The SSBIC shall fail to pay any principal of, or interest on, the Note within five days of the date on which any payment of principal or interest is due; or fail to pay any of the expenses referred to in Article 6 hereof within 15 days of their due date; or (b) COVENANTS AND AGREEMENTS. The SSBIC shall default in the observance or performance of any covenant or agreement contained in this Agreement or the other Repurchase Documents and such default shall be material and shall continue un-remedied for a period of 30 days after the SSBIC knew or should have known of its existence, or such longer period as may be agreed to by SBA; or (c) REPRESENTATIONS AND WARRANTIES. The SSBIC shall have knowingly made a false or materially incorrect representation or warranty in any of the Repurchase Documents on or as of the date when made or deemed to have been made, or any of the Repurchase Documents shall prove to have been incomplete, incorrect, false or misleading in any material respect on or as of the date thereof; or (d) SECURITY AGREEMENT EFFECTIVENESS. On or after the date of execution and delivery thereof, if for any reason (other than any act on the part of the 24 Escrow Agent or SBA and other than by mutual agreement between the SSBIC, the Escrow Agent and SBA) the Security Agreement ceases to be in full force and effect, or any of the security interests intended to be created by the Security Agreement ceases to be or is not a valid security interest having the priority contemplated thereby, or any of the perfected security interests intended to be created by the Security Agreement and the Escrow Agreement ceases to be or is not a perfected security interest having the priority contemplated thereby; or (e) BANKRUPTCY OR REORGANIZATION. (i) The SSBIC shall commence any case, proceeding or other action: (a) under any existing or future law of any jurisdiction relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (b) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the SSBIC shall make a general assignment for the benefit of creditors, 25 (ii) there shall be commenced against the SSBIC any case, proceeding or other action of a nature referred to in clause (i) above which results in the entry of an order for relief or any such adjudication or appointment or remains undismissed, undischarged or unbonded for a period of 90 days, (iii)there shall be commenced against the SSBIC any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its Assets which results in the entry of an order for such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 90 days from the entry thereof, (iv) the SSBIC shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescent in, any of the acts set forth in this Section 7.1, or (v) the SSBIC shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (f) PRESERVATION OF SBA LIQUIDATING INTEREST. The SSBIC or any of its Associates, without SBA's prior written approval granted subsequent to the date hereof, enters into any transaction, or permits any transaction the financial, legal, or economic effect of which creates a significant 26 deterioration in the value of SBA s Liquidating Interest prior to the expiration date thereof as set forth in this Agreement; or (g) ENCUMBRANCE OR RESTRICTION ON ASSETS. The SSBIC or any of its Associates, without SBA's prior written approval granted subsequent to the date hereof, creates, incurs, assumes or suffers to exist any mortgage, deed of trust, security interest, pledge, hypothecation, assignment, deposit arrangement, set-off right, purchase option, encumbrance, lien (statutory or other) or other security agreement or preferential arrangement of any kind or nature whatsoever upon any of the SSBIC's property or Assets, whether now owned or hereafter acquired, except for: (i) liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the SSBIC in accordance with generally accepted accounting principles; and (ii) liens in favor of SBA; or (h) DIVIDENDS, DISTRIBUTIONS, BENEFITS, PAYMENTS. Until the SSBIC has complied with Section 5.21(b) hereof, the SSBIC, without the prior written consent of SBA granted subsequent to the date hereof, declares, grants, contracts for, or pays any benefit, dividend or distribution in cash or in kind (including any stock dividend or transfer to surplus or retained earnings) to or for the benefit of any of its Associates, directly or indirectly; or makes 27 any payment, whether due or in advance of any due date, on any obligation or debt due to any Associate (except for payments to the SSBIC's parent company or the SSBIC's directors in the ordinary course of business), or to any other regular or specialized small business investment company or any Associate thereof; or (i) REMUNERATION, FEES, SALARIES, BENEFITS, EMOLUMENTS. The SSBIC, without SBA's prior written approval granted subsequent to the date hereof, increases the remuneration, fees salaries, benefits or emoluments of any Associate; or (j) JUDGMENTS AND DECREES. One or more judgments or decrees shall be entered against the SSBIC involving in the aggregate a liability (not paid or not fully covered by insurance as to which the insurer has not disclaimed liability) of $500,000 or more and all such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (k) VIOLATION OF GOVERNMENT REGULATIONS; CROSS-DEFAULT. The SSBIC violates, knowingly or intentionally, any of the provisions of the Act or SBA Regulations; or violates any provision of any agreement with SBA; or is in default on any obligation to SBA including the provisions of any Debenture or Preferred Stock issued to SBA in connection with leverage (as defined in 13 CFR 107.3). 28 7.2 REMEDIES. Upon the occurrence of any Event of Default, SBA, directly or through its duly appointed representative, shall be entitled to any and all remedies available to it under the Repurchase Documents, the Act, SBA Regulations, other applicable law and regulation and any other agreement or instrument arising out of the repurchase of the Shares, including but not limited to, declaring the Note to be immediately due and payable, whereupon all unpaid principal of and interest on the Note and other amounts declared or that automatically become due and payable shall be and become immediately due and payable without presentment, demand, protest or notice of any kind. ARTICLE 8. TERMINATION This Agreement shall be in all respects a continuing agreement and shall remain in full force and affect until such time as the Note and all other obligations under this Agreement and the other Repurchase Documents shall be paid and satisfied in full and the Liquidating Interest shall have expired. ARTICLE 9. MISCELLANEOUS 9.1 NOTICES. All notices, consents, requests and demands to or upon the respective parties hereto to be effective shall be in writing, and shall be deemed to have been duly given or made when delivered by hand or when deposited in the mail, certified mail, return receipt requested, postage or delivery prepaid, to the address 29 appearing on the first page hereof or to such other address as may be hereafter designated by any of the parties hereto. 9.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith, including without limitation, the other Repurchase Documents and the Application, shall survive the execution and delivery of this Agreement. 9.3 NO WAIVER. SBA shall not by any act, delay, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or in any breach of any of the terms and conditions hereof. The rights and remedies herein provided are not exclusive of any rights or remedies provided by law. 9.4 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.5 PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 30 9.6 COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts and each such counterpart shall be deemed to be an original, and all such counterparts taken together shall be deemed to constitute one and the same instrument. 9.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the SSBIC and SBA and their respective successors and assigns, except that the SSBIC may not assign or transfer any of its respective rights or obligations under this Agreement without the prior written consent of SBA. 9.8 GOVERNING LAW. This Agreement and the other Repurchase Documents and the rights and obligations of the parties under this Agreement and the other Repurchase Documents, shall be governed by, and construed and interpreted in accordance with, applicable Federal law. 31 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. Capital Dimensions Venture Fund, Inc. By: /s/ Dean Pickerell ---------------------------------------------- Dean R. Pickerell President U. S. Small Business Administration By: /s/ Wayne S. Foren ---------------------------------------------- Wayne S. Foren Associate Administrator for Investment 32 Schedule I Liens None 33 Schedule II Indebtedness None 34 Schedule III Non Qualified SSBIC Investments Post Reorganization as of March 31, 1993 Cost ---- American Star Software $75,776 BI, Inc. 1,362,233 Cardinal Health Systems, Inc 741,446 Concourse Corporation 8,397 Micromedics 50,000 ------ Total $2,237,852 -----END PRIVACY-ENHANCED MESSAGE-----