<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from to
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Commission file number: 0-20102
CAPITOL MULTIMEDIA, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
Delaware 52-1283993
- ------------------------------------------- -----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
</TABLE>
7315 WISCONSIN AVE., SUITE 800 E
BETHESDA, MD 20814
(Address of principal executive office)
(301) 907-7000
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
<TABLE>
<CAPTION>
Number Outstanding Shares
Title of Class as of August 9, 1996
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<S> <C>
Common Stock, $.10 Par Value 4,832,065
</TABLE>
Transitional Small Business Disclosure Format: Yes No X
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Page 1 of 11
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Capitol Multimedia, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
--------------------------------------
1996 1996
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,773,112 $ 1,961,393
Short-term investments 2,436,393 2,362,975
Accounts receivable, less allowance for doubtful
accounts of $12,500 at June 30, 1996 and
March 31, 1996 744,928 503,306
Notes and guaranteed royalties receivable 500,000 500,000
Prepaid expenses and other current assets 170,259 174,441
--------------------------------------
Total current assets 5,624,692 5,502,115
Property and equipment:
Technical equipment 1,098,651 1,070,337
Leasehold Improvements 23,291 -
Furniture and fixtures 44,163 44,163
Other equipment 110,501 94,176
--------------------------------------
1,276,606 1,208,676
Less: accumulated depreciation and amortization (885,487) (841,861)
--------------------------------------
391,119 366,815
Notes and guaranteed royalties receivable 1,262,830 1,244,074
Other long-term assets 32,481 32,481
--------------------------------------
Total assets $ 7,311,122 $ 7,145,485
======================================
</TABLE>
See accompanying notes
Page 2 of 11
<PAGE> 3
Capitol Multimedia, Inc.
Consolidated Balance Sheets
(continued)
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
1996 1996
----------------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 305,180 $ 173,019
Unearned revenue and deferred rent 21,343 66,160
----------------------------------------
Total current liabilities 326,523 239,179
Other long-term liabilities 93,668 97,115
----------------------------------------
Total liabilities 420,191 336,294
Commitments - -
Shareholders' equity:
Common stock, $.10 par value; 10,000,000
shares authorized, and 5,657,153 shares
issued and outstanding at June 30, 1996 and
March 31, 1996 565,715 565,715
Additional paid-in capital 15,817,202 15,817,202
Accumulated deficit (7,441,642) (7,523,382)
----------------------------------------
8,941,275 8,859,535
Less treasury stock, at cost, 825,088 shares at
June 30, 1996 and March 31, 1996 (2,050,344) (2,050,344)
----------------------------------------
Total shareholders' equity 6,890,931 6,809,191
----------------------------------------
Total liabilities and shareholders' equity $ 7,311,122 $ 7,145,485
========================================
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See accompanying notes
Page 3 of 11
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Capitol Multimedia, Inc.
Consolidated Statements of Operations
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<CAPTION>
THREE MONTHS ENDED
JUNE 30
1996 1995
------------------------------------------
- - - - - - - (Unaudited)- - - - - - - - -
<S> <C> <C>
Net sales $ 1,012,549 $ 1,396,181
Operating expenses:
Research and development 549,152 796,268
Depreciation and amortization 43,626 186,157
General and administrative 383,634 498,380
------------------------------------------
Total operating expenses 976,412 1,480,805
Operating income (loss) 36,137 (84,624)
Other income:
Interest and other income, net 60,003 62,332
Gain on sale of assets - 52,791
------------------------------------------
Income before income taxes 96,140 30,499
Provision for income taxes 14,400 -
------------------------------------------
Net income $ 81,740 $ 30,499
==========================================
Net income per share $ .02 $ .01
==========================================
Weighted average number of shares outstanding 4,832,065 5,640,042
==========================================
</TABLE>
See accompanying notes
Page 4 of 11
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Capitol Multimedia, Inc.
Consolidated Statements of Cash Flows
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<CAPTION>
THREE MONTHS ENDED
JUNE 30
1996 1995
------------------------------------------
- - - - - - - (Unaudited)- - - - - - - - -
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 81,740 $ 30,499
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization of property and
equipment and goodwill 43,626 186,157
Changes in assets and liabilities (net of effect from
disposition):
Accounts receivable (241,622) (70,503)
Prepaid expenses and other current assets 4,182 (27,535)
Long-term notes, royalties, and other assets (18,756) (17,562)
Accounts payable and accrued liabilities 132,161 (244,191)
Unearned revenue and deferred (48,264) (299,445)
-----------------------------------------
Net cash used in operating activities (46,933) (442,580)
INVESTING ACTIVITIES
Purchases of short-term investments (399,628) (1,422,738)
Proceeds from sales of short-term investments 326,210 1,189,410
Capital expenditures (67,930) (24,961)
-----------------------------------------
Net cash used in investing activities (141,348) (258,289)
FINANCING ACTIVITIES
Proceeds from sale of common stock - 23,214
-----------------------------------------
Net cash provided by financing activities - 23,214
-----------------------------------------
Net decrease in cash and cash equivalents (188,281) (677,655)
Cash and cash equivalents at beginning of period 1,961,393 1,685,540
-----------------------------------------
Cash and cash equivalents at end of period $ 1,773,112 1,007,885
=========================================
</TABLE>
See accompanying notes.
Page 5 of 11
<PAGE> 6
CAPITOL MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. STATEMENT OF INFORMATION PROVIDED
The accompanying unaudited financial statements have been prepared in
accordance with Form 10-QSB instructions and in the opinion of management
contain all adjustments (consisting of only normal recurring entries) necessary
to present fairly the financial position as of June 30, 1996, the results of
operations for the three months ended June 30, 1996 and 1995, and the cash
flows for the three months ended June 30, 1996 and 1995. These results have
been determined on the basis of generally accepted accounting principles and
practices applied consistently with those used in the preparation of the
Company's March 31, 1996 Annual Report on Form 10-KSB.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which are not required for interim reporting purposes, have
been condensed or omitted. The results of operations for the three months
ended June 30, 1996 are not necessarily indicative of results to be expected
for the full fiscal year. It is suggested that the accompanying financial
statements be read in conjunction with the financial statements and related
notes in the Company's March 31, 1996 Annual Report on Form 10-KSB.
2. RECLASSIFICATIONS
Certain amounts in the June 30, 1995 Statement of Operations and Statement of
Cash Flows have been reclassified to conform to the June 30, 1996 presentation.
3. SALE OF ASSETS
In August 1995, the Company entered into an Asset Purchase Agreement ("the
Agreement") with Philips Media, Inc. ("Philips") to sell certain assets used by
its professional CD-i operations. The terms of the sale provided for the
return of all of Philips' 825,088 shares of Capitol Multimedia, Inc. Common
Stock, a $500,000 cash payment at closing, and the payment of certain royalties
to the Company for a four year period, including minimum royalty guarantees of
$500,000 in year one and $250,000 in year two. In connection with the sale,
the Company recognized a gain of approximately $2,500,000.
Page 6 of 11
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CAPITOL MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Pro forma statements of operations for the three months ended June 30, 1996 and
1995, assuming the sale of assets was consummated on April 1, 1994, are
presented below:
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<CAPTION>
THREE MONTHS ENDED
JUNE 30 JUNE 30
1996 1995
------------------------------------------
- - - - (Unaudited)- - - -
<S> <C> <C>
Net sales $ 1,012,549 $ 1,044,131
Operating expenses:
Research and development 549,152 511,982
Depreciation and amortization 43,626 34,014
General and administrative 383,634 408,670
------------------------------------------
Total operating expenses 976,412 954,666
Operating income 36,137 89,465
Other income:
Interest and other income, net 60,003 65,124
Income before income taxes 96,140 154,589
Provision for income taxes 14,400 3,092
------------------------------------------
Net income $ 81,740 $ 151,497
==========================================
Net income per share $ .02 $ .03
==========================================
Weighted average number of shares outstanding 4,832,065 4,814,954
==========================================
</TABLE>
Common share equivalents have been excluded from the computation of net income
per share for the periods ended June 30, 1996 and 1995 because their effect is
anti-dilutive.
4. SIGNIFICANT CUSTOMERS
At June 30, 1996, the Company had sales of $583,500 to two customers which
represented 58% of net sales. At June 30, 1995 the Company had sales of
approximately $1,065,000 to two customers which represented 76% of net sales.
Page 7 of 11
<PAGE> 8
CAPITOL MULTIMEDIA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS DEVELOPMENTS
During the quarter ended June 1996, the Company entered into an
agreement with Davidson & Associates, Inc. ("Davidson") to develop an animated
CD-ROM game for the adult market. The title is based upon Blizzard
Entertainment's (a division of Davidson) WarCraft software series. Under the
agreement, the Company retains ownership of the underlying software engine and
receives a residual royalty interest in the product after a certain level of
sales is achieved.
PRESENTATION
Since the Company's August 1995 sale of assets relating to its CD-i
professional business, it has focused solely on the creation and development of
consumer multimedia software products. Accordingly, the discussion and
analysis of the Company's results of operations compares pro forma results for
the three months ended June 30, 1996 to pro forma results for the three months
ended June 30, 1995. The Company believes such comparison provides a more
meaningful analysis of current and prior fiscal year results.
NET SALES
The composition of net sales for the three months ended June 30, 1996
and 1995 are as follows:
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<CAPTION>
JUNE 30 JUNE 30 % $
1996 1995 CHANGE CHANGE
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<S> <C> <C> <C> <C>
Software development revenues $623,500 $ 781,150 (20%) $ (157,650)
Consumer software sales & royalties 389,049 186,040 109% 203,009
CD-i licensing & distribution fees - 76,941 (100%) (76,941)
---------------------------------------------------
Total net sales $ 1,012,549 $ 1,044,131 3% $ (31,582)
===================================================
</TABLE>
Software development revenue decreased $157,650 or 20% due to a
decrease of $699,000 in software development revenue from Philips Media, Inc.
(OPhilipsO) offset by increases in work-for-hire revenues from other customers,
including Simon & Schuster Interactive and Davidson & Associates, Inc. During
fiscal year 1996, the Company developed titles for Philips on a work-for-hire
basis. Although the Company does not expect to perform any development
services for Philips during fiscal year 1997, the Company does expect current
year increases in work-for-hire revenues from other customers to be greater
than the decrease in software development revenue from Philips.
Consumer software sales and royalties increased $203,009 or 109%
primarily as a result of $250,000 in revenue related to shipment of Darby The
Dragon to Broderbund Software, Inc., the product's distributor, offset by a
$59,000 decrease in royalties relating to the Company's CD-i titles. The
Company expects consumer software sales and royalties to increase substantially
during fiscal year 1997 as a result of the commercial release of Gregory and
the Hot Air Balloon and Darby The Dragon in summer 1996 and Liam Finds a Story,
Sleeping Cub's Test of Courage, and The Princess and the Crab in fall of 1996.
Page 8 of 11
<PAGE> 9
CAPITOL MULTIMEDIA, INC.
Historically, the Company received licensing and distribution fees
from Philips as consideration for the exclusive right to distribute the
Company's consumer CD-i titles. As a result of the Company's earlier decision
to discontinue CD-i consumer publishing activities, it does not expect to
receive any material licensing and distribution fees in future periods.
The level of net sales in any quarter realized by the Company is
principally dependent on the percentage of completion of work-for-hire projects
and the number of titles shipped for published products. Sales derived from
the Company's published products are typically highest in the Company's second
and third quarters ending in September and December each year due primarily to
the increased demand for products during the calendar year-end holiday selling
season. Quarterly results may also fluctuate as a result of product mix, the
number and timing of new product completions, and product returns.
RESEARCH AND DEVELOPMENT
The Company expects research and development to increase during fiscal
year 1997 as a result of an expansion of its development and production
capabilities; however, the Company does not expect research and development as
a percentage of net sales to materially change.
Although the Company does not anticipate any significant change at its
St. Petersburg, Russia facility, the current political and economic future of
Russia is uncertain. Economic conditions in Russia, including lower wage rates
and lower standards of living, allow the Company to transact business in St.
Petersburg at a relatively low cost structure. Changes in the political,
social, or economic stability, or significant changes in the exchange rate of
the Russian Ruble, could result in increased research and development costs and
significant delays in the completion of new products. Any such changes could
have a material adverse affect on the Company's operating results and/or
financial condition.
DEPRECIATION AND AMORTIZATION
The Company expects depreciation and amortization to increase during
fiscal year 1997 as a result of expansion of its development and production
capabilities; however, the Company does not expect depreciation and
amortization as a percentage of net sales to materially change during fiscal
year 1997.
GENERAL AND ADMINISTRATIVE
A significant portion of the Company's operating expenses are fixed,
and planned expenditures in any given quarter are based on sales and revenue
forecasts. Accordingly, if products are not completed and/or shipped on
schedule and net sales do not meet the Company's expectations in any given
quarter, operating results and financial condition could be adversely affected.
PROVISION FOR INCOME TAXES
The provision for income taxes represents alternative minimum tax
liabilities on income earned. The Company expects an effective tax rate of
approximately 2% for fiscal year 1997. This rate differs from the statutory
rate due to anticipated partial recognition of $3,508,000 in deferred tax
assets which were fully reserved at March 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash, cash
equivalents, and short-term investments. During the quarter ended June 1996,
cash, cash equivalents, and investments decreased $115,000 or 3% to $4,210,000.
This decrease relates to $67,000 in capital expenditures and $47,000 used to
fund operating activities.
Page 9 of 11
<PAGE> 10
CAPITOL MULTIMEDIA, INC.
Accounts receivable increased $242,000 or 48% to $745,000 at June 1996
due primarily to the recognition of revenue relating to several of the
Company's software development contracts.
Accounts payable and accrued liabilities increased $132,000 or 76% to
$305,000 primarily as a result of timing differences in salary and related
payroll tax accruals at June 30, 1996.
The Company will use its working capital to finance ongoing operations
and fund the continued expansion of its development and production
capabilities. Management expects its existing cash and short-term investments,
cash generated from operations, and the collection of a $500,000 minimum
royalty guarantee in November 1996 will be sufficient to meet the Company's
expected liquidity and capital needs for the coming year.
At June 30, 1996, the Company had outstanding Series A Warrants to
purchase 408,200 shares of Common Stock at $5.72 per share. These warrants
expire March 31, 1997, subject to extension by the Company. Pursuant to the
redemption provision in the Warrant Agreement, the Company has the option of
redeeming the warrants on an "all or nothing basis," and, given favorable
market conditions, may do so. Exercise of these warrants would generate
approximately $2,335,000 in cash.
The Company continues to consider investments in or acquisitions of
compatible businesses. However, there can be no assurance that the Company
will make investments in or enter into business combinations with other
entities. In the event that the Company engages in such transactions, it may
require additional financial resources.
FORWARD LOOKING INFORMATION
Except for the historical information contained in this Form 10-QSB,
the information set forth herein includes forward looking statements that are
dependent on certain risks and uncertainties. Important factors that could
cause the actual results to differ materially from the anticipated results
include, but are not limited to, the anticipated growth of certain market
segments; the positioning, release dates, and consumer acceptance of Company
products; quarterly fluctuations and seasonality; political, social and
economic stability in Russia; the competitive environment and technological
change in the software industry; and dependence on distribution channels and
key personnel, all of which are difficult to predict and many of which are
beyond the control of the Company. Additional information on these and other
factors which could affect the Company's financial condition and/or results of
operations are included in the Company's March 31, 1996 Form 10-KSB and
Registration Statements on Form S-3 (Registration Nos. 33-45725-A and 333-2476)
filed with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
Page 10 of 11
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CAPITOL MULTIMEDIA, INC.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CAPITOL MULTIMEDIA, INC.
------------------------
(Registrant)
Date: August 13, 1996 /s/ Catherine K. Hoopes
-----------------------
Catherine K. Hoopes
Chief Financial Officer &
Secretary / Treasurer
Page 11 of 11
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<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at June 30, 1996 (unaudited) and the Consolidated
Statement of Income for the three months ended June 30, 1996 (unaudited) and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,773,112
<SECURITIES> 2,436,393
<RECEIVABLES> 757,428
<ALLOWANCES> 12,500
<INVENTORY> 0
<CURRENT-ASSETS> 5,624,692
<PP&E> 1,276,606
<DEPRECIATION> (885,487)
<TOTAL-ASSETS> 7,311,122
<CURRENT-LIABILITIES> 326,523
<BONDS> 0
0
0
<COMMON> 565,715
<OTHER-SE> 6,325,216
<TOTAL-LIABILITY-AND-EQUITY> 7,311,122
<SALES> 1,012,549
<TOTAL-REVENUES> 1,072,552
<CGS> 0
<TOTAL-COSTS> 976,412
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 96,140
<INCOME-TAX> 14,400
<INCOME-CONTINUING> 81,740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,740
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
