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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/ X / ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____ to _______
COMMISSION FILE NUMBER: 0-20102
CAPITOL MULTIMEDIA, INC.
(Name of small business issuer in its charter)
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DELAWARE 52-1283993
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7315 WISCONSIN AVE., 800-E
BETHESDA, MD 20814
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number: (301) 907-7000
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under section 12(g) of the Exchange Act:
COMMON STOCK $.10 PAR VALUE
(Title of Class)
REDEEMABLE SERIES A WARRANTS
(Title of Class)
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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
-----
ISSUER'S REVENUES FOR THE FISCAL YEAR ENDED MARCH 31,1996: $ 4,349,980
The aggregate market value of the voting stock held by non-affiliates, computed
using the sales price of such stock, as of May 31, 1996 was $18,902,221.
As of May 31, 1996, the number of shares of Common Stock outstanding were
4,832,065
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for its 1996 Annual
Meeting of Shareholders to be held August 22 1996 are incorporated by reference
into Part III hereof. The Definitive Proxy Statement will be filed with the
Commission within 120 days of the registrant's fiscal year ended March 31,
1996.
Transitional Small Business Disclosure Format Yes No X
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Exhibit Index located on page 28 Page 1 of 29
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CAPITOL MULTIMEDIA, INC.
MARCH 31, 1996
FORM 10-KSB
TABLE OF CONTENTS
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PART I
ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . 25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
INDEX OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Capitol Multimedia, Inc. (the "Company") creates, produces, and licenses
high-quality entertaining and educational software products for the consumer
market. The Company began focusing on the childrens market within the CD-ROM
interactive software industry with the acquisition of Animation Magic, Inc. in
February 1995. The Company's current CD-ROM products are targeted primarily at
children ranging from 3 to 14 years of age and capitalize heavily on the
Company's high-quality, low cost art and animation talent and its product
development strengths. The Company incorporates characters, themes, sound,
graphics, music, and speech into its easy, fun-to-use, and engaging products.
Its strategy for the childrens software market is to develop families of
software products which build strength in distribution channels and achieve
brand name recognition and loyalty.
HISTORY. The Company was incorporated in Delaware in 1982 and operated a
video post-production business. In 1988, it began developing software for the
CD-i platform. From 1988 to 1995, the Company developed approximately 35
consumer CD-i titles including best sellers Pinball, Battleship(R), and the
first ever full motion video CD-i title, Mad Dog McCree(TM). In 1991, the
Company purchased Philips Media, Inc.'s ("Philips") partnership interest in a
50/50 joint venture formed by the Company and Philips to sell CD-i software and
hardware to the professional market. And in 1993, the Company sold assets used
by its video post-production operations, thereby enabling the Company to focus
solely on the development of interactive software products.
ACQUISITION OF ANIMATION MAGIC, INC. In February 1995, the Company
acquired Animation Magic, Inc. ("AMI") and its wholly-owned subsidiary in St.
Petersburg, Russia through the issuance of 703,750 shares of common stock. The
transaction was accounted for as a pooling of interests. The acquisition more
than doubled the Company's capacity to develop high-end interactive software
for the consumer market. The Russian subsidiary currently has 135 employees
specializing in high-quality cel animation, computer graphics, and multimedia
software programming.
SALE OF PROFESSIONAL CD-i ASSETS. In August 1995, the Company sold assets
associated with its CD-i professional business to Philips in exchange for all
of Philips' 825,088 shares of Company common stock, a cash payment of $500,000,
and minimum royalty guarantees of $750,000. As a result of the sale, the
Company no longer provides CD-i services to the professional market.
INDUSTRY BACKGROUND
Sales of consumer software products are highly dependent on the size of the
installed base of home personal computers. The growth of mass market
distribution channels, including the advent of computer superstores and the
distribution of hardware and software by mass market and catalog retailers,
warehouse stores and office and electronic stores, has increased the
availability of personal computers and opened the software market to a broader
base of customers. According to PC Data and the Software Publishers
Association ("SPA"), the United States consumer software wholesale market is
estimated to generate annual revenues of $1 billion to $1.5 billion. Further,
the consumer software market grew between 25% and 30% during the past year
according to SPA data. The primary area of growth, as reflected in these
reports, has been in the sales of CD-ROM products for the Windows and Macintosh
software platforms.
As the software market has grown, capacity in the computer software
development industry has increased and as a consequence, competition for retail
shelf space has also increased. As a result, smaller, lesser known software
publishers are finding it difficult to gain access to retail distribution
outlets. In addition, the expansion of the market has led to increased
competition for consumer sales, higher development and distribution costs,
lower margins, pricing pressures, and increased volatility in sales trends,
any or all of which could have a material adverse effect on the Company's
future operating results and financial condition and affect the Company's
ability to compete in the industry.
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PRODUCTS
Given the Company's animation and creative capabilities, it has focused on
the childrens market within the CD-ROM software industry, developing titles for
the following high-quality animated product families:
GRANDPA TALES is a series of CD-ROM based interactive storybooks designed
for children 3 to 9 years of age. Each title in the series is based on folk
tales from countries around the world. The stories come alive with colorful
animation, sound effects, and original music. On-screen narration enhances and
reinforces early reading skills. The first three titles in the series, Baba
Yaga and the Magic Geese, Imo and The King, and The Little Samurai, are based
on folk tales from Russia, Africa and Japan, respectively, and were released in
Fall 1995 on a combined Windows / Macintosh CD-ROM. These titles, which
accounted for 22% of the Company's consumer software operation's net revenues
for the year ended March 31, 1996, are currently available nationwide in most
major software retail outlets and mail order catalogs at prices ranging from
$20 to $35. Three additional titles in the series, Liam Finds a Story,
Sleeping Cub's Test of Courage, and The Princess and the Crab, are based on
folk tales from Ireland, Native America, and Italy and are scheduled for
release in Fall 1996. Pursuant to a licensing and distribution agreement,
Davidson & Associates, Inc. is distributing these titles under its Magic Tales
product line.
KIDVENTURES is a series of CD-ROM based interactive adventures designed for
children 4 to 8 years of age. The products feature friendly animal characters
and are designed to promote creativity, discovery, and exploration through
activities that encourage interaction and problem solving. The adventures
unfold with extensive original animation, graphics, sound, and music. The
first two titles in the series, Gregory and The Hot Air Balloon and Darby The
Dragon are scheduled for release in Summer 1996 and will be on a combined
Windows 3.1, Windows 95, and Macintosh CD-ROM. Pursuant to a licensing and
distribution agreement, Broderbund Software, Inc. will distribute these titles
under its StoryQuests product line.
PRODUCT DEVELOPMENT
The Company's internal product development process includes design,
animation, prototyping, software programming, computer graphic design, sound
recording and quality assurance. Product development personnel include
educators with advanced degrees and/or teaching credentials and expertise in
educational product design and curriculum. In addition, throughout the
development process, the Company solicits input from parents, teachers, and
children.
COMPANY PRODUCTS. The Company depends on the successful development of
products, including new titles and adaptations of existing titles. The length
of time required to develop the Company's products typically ranges from six to
twelve months. However, the timing and success of software product development
is unpredictable due primarily to changing technological developments and the
technological complexity of software products. If the Company's new products
are not completed and/or introduced when planned, operating results and the
ultimate success of products could be materially affected, particularly in view
of the seasonality of the Company's business (See "Quarterly Fluctuations and
Seasonality" below).
PRODUCTS DEVELOPED FOR OTHERS. The Company performs software development
services for others on a work-for-hire basis. Such services accounted for 59%
and 45% of the Company's consumer software operation's net sales for the years
ended March 1996 and 1995, respectively.
During the last quarter of fiscal year 1995, the Company discontinued CD-i
consumer publishing activities and began developing CD-i titles for Philips on
a work-for-hire basis. Such services represented 39% of consumer software
operation's revenues for the year ended March 1996. The Company does not
expect to perform any CD-i development services for Philips during fiscal year
1997.
In addition, the Company performed software development services,
representing 15% and 10% of consumer software operation's net sales for the
years ended March 1996 and 1995, for Simon & Schuster Interactive ("SSI"), a
subsidiary of Viacom, Inc. Fiscal year 1996 revenues related to the Company's
agreement to develop three 3D Learning Adventure titles for SSI. Under this
agreement, the Company retains the rights to the 3D gaming software technology
underlying these titles.
RESEARCH AND DEVELOPMENT. Investment in research and development has
allowed the Company to develop state-of-the-art technology for incorporation
into its products. Approximately, $2,031,000 and
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$2,362,000 was spent on consumer software research and development activities
during fiscal years 1996 and 1995, respectively. The Company believes that
continued significant investments in research and development are required to
remain competitive in the computer software market.
FUTURE PRODUCT DEVELOPMENT. The Company plans to increase its rate of new
product development for both itself and others during fiscal year 1997, and is
currently evaluating the feasibility of expansion into creation and development
of CD-ROM entertainment titles for the teenage and adult markets.
Although the Company does not plan to develop software for platforms other
than CD-ROM in the coming year, it will continue to evaluate the need to adapt
the Company's products to emerging hardware and software platforms and
technologies. Technological advances provide opportunities for improvement in
the sophistication, technical capabilities, and performance of software
products. As a result of the emergence of new platforms, environments, and
technologies, and increased competition, the Company expects continual
significant increases in the amount of time and resources devoted to
establishing technological and market feasibility of its products. There can
be no assurance that the Company will be able to anticipate, evaluate, and
adapt to changes in platforms and evolving technologies, or to do so in a
timely or cost-effective manner.
PRODUCTION FACILITIES
The Company's Russian subsidiary employs approximately 135 highly-skilled
animators, programmers, and graphic, background and sprite artists at its St.
Petersburg, Russia facility. Although the Company does not anticipate any
significant change at its St. Petersburg facility, the current political and
economic future of Russia is uncertain. In addition, 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 production 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.
Igor Razboff, former President and CEO of Animation Magic, Inc., is
employed at the Company's headquarters in Bethesda, Maryland. His
responsibilities include management of the St. Petersburg facility. Mr.
Razboff has entered into an employment agreement through March 1998 with the
Company as Vice President, Consumer Production. If for any reason Mr. Razboff
is unable to continue his employment with the Company, significant delays in
the completion of products could result, adversely affecting the Company's
operating results. The Company is in the process of obtaining a $1 million
keyman insurance policy on Mr. Razboff.
SALES, DISTRIBUTION, AND MARKETING
Distribution channels through which consumer software products are sold are
characterized by rapid change, including consolidations and financial
difficulties of certain distributors and retailers, and the emergence of new
retailers such as mass merchandisers. In addition, there are an increasing
number of companies and products competing for access to these channels. Due
to these factors and the Company's relatively small size and limited resources,
it does not currently view publishing and self-distribution of its products as
an appropriate alternative in achieving Company objectives. Accordingly, the
Company has chosen to license its titles to leading distributors of childrens
software products.
The Company entered into worldwide licensing and distribution agreements
for its Grandpa Tales and Kidventures series (See "Products" above) with
Davidson & Associates, Inc. ("Davidson") and Broderbund Software, Inc.
("Broderbund"), two leading distributors of childrens software products. Under
these agreements, the Company creates, develops, produces, and retains
ownership of the original interactive software titles and Davidson and
Broderbund test, replicate, manufacture, package, sell, market, distribute,
supply customer support, and maintain warranty obligations for the products.
After recovery of certain out-of-pocket expenses, the Company shares in product
net revenues with the distributors.
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Although the Company does not specifically grant stock balancing rights to
its distributors, distributors of the Company's products negotiate stock
balancing terms and arrangements which allow retailers and sub-distributors to
return products. Although the Company's distributors attempt to monitor and
manage the volume of sales to such retailers and sub-distributors in order to
avoid overstocking of products, it is difficult to exercise significant control
over product stocking. Further, it is difficult for the Company and / or its
distributors to accurately estimate allowances for new product sales or
products sold through new distribution channels where there is limited history
of past sales or little to no information regarding sales to end users. The
Company's distributors believe that the rate of product returns may increase as
mass merchandisers become an increasing percentage of product sales or other
changes in distribution channels occur. Product returns exceeding distributor
reserves for such, the loss of a distributor, and/or a distributor's loss of
significant sales to retailer or sub-distributor accounts could materially
adversely affect the Company's operating results and financial condition.
The Company believes its licensing and distribution strategy allows it to
concentrate on the timely creation and development of high-quality interactive
software products while leaving the highly competitive and difficult task of
obtaining shelf space to the larger well-established players in the industry.
Although this strategy may result in lower revenues than could potentially be
derived from self-distribution of its products, the Company feels that such a
strategy carries lower risk than self-distribution, best positions the
Company's products to obtain brand name recognition and loyalty, and should be
continued given the existing retail environment.
Consumer preferences for software products are difficult to predict and few
consumer software products achieve sustained market acceptance. There can be
no assurance that products introduced by the Company will achieve distribution,
sales, or market acceptance or that such acceptance will be sustained for any
significant period of time, any of which could have a material adverse affect
on the Company's operating results and financial condition.
COMPETITION
The consumer software industry is intensely competitive. The Company's
consumer software products compete with products from small companies with
limited resources to large companies with vast financial, technical,
distribution and marketing resources. Competitors include, but are not limited
to, Softkey Inc., Broderbund Software Inc., Davidson & Associates, Edmark, The
Learning Company, The Walt Disney Company, Sierra OnLine, Inc., Electronic
Arts, and Microsoft.
The Company believes that existing competitors are likely to broaden their
product lines and that new competitors, including large hardware and software
companies, media companies, and educational publishers, may enter the consumer
software market, resulting in increased competition.
An increasing number of high-quality competitive products are being offered
by a growing number of companies -- all of which are battling for limited
retail shelf space. The ever-increasing number of childrens software titles
may limit the Company's ability to sell or distribute products, increase
marketing and distribution costs, and create additional pricing pressures, any
of which could have a material adverse effect on the Company's operating
results and financial condition.
Only a small percentage of products introduced to the consumer market ever
achieve any degree of market acceptance. Competitive factors in the software
industry include access to distribution, brand name recognition, quality,
features, ease-of-use and pricing of products. The Company believes its
products compete favorably with respect to quality, features, and ease-of-use
and it plans to continue to pursue its business strategy of building strength
in distribution channels and creating brand name recognition and loyalty for
its software products during the coming year.
PROPRIETARY RIGHTS
The Company regards the software it develops and owns as proprietary and
relies primarily on a combination of copyrights, trademarks, trade secret laws,
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights. The Company has registered trademarks in the United
States for certain of its product names and has pending trademark applications
for certain additional product names. The Company believes that trademarks and
copyrights are important, but less
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significant to the Company's success than factors such as the knowledge,
ability, and experience of the Company's personnel, research and development,
brand name recognition, and product loyalty.
Most of the Company's products do not include any mechanisms to prevent or
inhibit unauthorized copying, nor does the Company rely on shrink-wrap licenses
which restrict copying and use of the products. The Company is aware that
unauthorized copying occurs within the software industry; however, policing
unauthorized use of the Company's products is difficult. While the Company is
unable to determine the extent to which software piracy of its products exists,
software piracy, is expected to be a persistent problem.
The Company believes that its products, trademarks, and other proprietary
rights do not infringe on the proprietary rights of third parties. As the
number of software products increases and the functionality of these products
further overlaps, software developers may become increasingly subject to
infringement claims. There can be no assurances that third parties will not
assert infringement claims against the Company with respect to current or
future products, or that any such assertion may not require the Company to
enter into royalty arrangements or result in costly litigation.
QUARTERLY FLUCTUATIONS AND SEASONALITY
The level of net sales realized by the Company in any quarter is
principally dependent on the percentage of completion for work-for-hire
projects and the number of titles shipped for published titles. Quarterly
results may fluctuate as a result of product mix, product development
expenditures, the number and timing of new product completions, and product
shipments and returns. 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. As a result of these and other factors, the Company's results of
operations and financial condition for any period are inherently difficult to
predict. Any significant change from levels expected by securities analysts or
shareholders could result in substantial volatility in the trading price of the
Company's common stock.
In addition, net 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 for the calendar year-end holiday selling season. There can be no
assurance, however, that any quarterly fluctuations based on seasonality will
continue.
EMPLOYEES
As of May 31, 1996, the Company employed 160 people on a full-time basis,
including 154 in product development and 6 in finance and administration.
Approximately 135 employees are located at the Company's Russian subsidiary.
None of the Company's employees are represented by a labor union or bound by a
collective bargaining agreement. The Company has never suffered a work
stoppage.
The Company believes its future success will depend, in part, on its
continued ability to recruit and retain highly-skilled management, technical,
and creative personnel. Competition for such employees is intense and the loss
of services of key personnel could have a material adverse effect on the
Company's operating results and financial condition. The Company is in the
process of obtaining $1 million keyman insurance policies on Mr. Bogin
(President and Chief Executive Officer), Mr. Razboff (Vice President - Consumer
Production), and Mr. DeSharone (Executive Producer and Director - New
Products).
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 15,000 square feet of office space at
its headquarters in Bethesda, Maryland, pursuant to a noncancelable lease
expiring in April 2004 with an option to renew for one additional five year
term. The Company's subsidiary located in St. Petersburg, Russia leases
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approximately 7,000 square feet of office space pursuant to a lease expiring in
March 1998. The Company believes its existing facilities are adequate to meet
its current needs and that, if necessary, suitable additional or alternative
space will likely be available on reasonably acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to, nor is it aware of, any threatened
litigation of a material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended March 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Series A Warrants are traded on the
NASDAQ Small-Cap Market System under the symbols CDIM and CDIMW, respectively.
The following table sets forth, for the periods indicated, the high and low
sales prices for the Company's Common Stock as reported by NASDAQ:
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HIGH LOW
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Fiscal Year Ended March 31, 1996
First Quarter $4.25 $2.50
Second Quarter 4.75 2.75
Third Quarter 6.00 3.69
Fourth Quarter 4.75 3.13
Fiscal Year Ended March 31, 1995
First Quarter $9.38 $5.75
Second Quarter 9.00 6.38
Third Quarter 7.13 3.75
Fourth Quarter 6.00 3.50
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The above over-the-counter market quotations reflect inter-dealer
prices, without retail mark-ups, mark-downs, or commissions and may not
represent actual transactions.
The Company has not paid cash dividends on its common stock since its
organization and does not intend to pay any cash dividends in the foreseeable
future. As of May 31, 1996, the Company had approximately 115 shareholders of
record excluding shareholders whose stock is held in nominee or street name by
brokers.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS DEVELOPMENTS
In July 1995, the Company entered into a worldwide licensing and
distribution agreement (the "Agreement") for six of its childrens edutainment
titles for the Windows and Macintosh CD-ROM platforms with Davidson &
Associates, Inc. ("Davidson"), a leading distributor of multimedia educational
and entertainment software for both the home and school markets. Under the
Agreement, the Company is developing six interactive storybooks based on folk
tales from countries around the world. The titles are part of a Davidson line
of products known as Magic Tales. Davidson is responsible for product testing,
replication, manufacturing, packaging, sales, marketing, distribution, customer
support, and warranty
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obligations. After recovery of certain out-of-pocket expenses, the Company and
Davidson share in product net revenues. The first three titles, Baba Yaga and
the Magic Geese, Imo and the King, and The Little Samurai, were released in
Fall 1995. The three additional titles in the series, Liam Finds a Story,
Sleeping Cub's Test of Courage, and The Princess and the Crab, are scheduled
for release in Fall 1996.
On August 11, 1995, the Company sold certain assets, including the
Company's interest in its InfoTravel and ShowMaster / ShowBuilder products, of
its CD-i professional business to Philips Media, Inc. ("Philips") in
consideration for all of Philips' 825,088 shares of Capitol Multimedia, Inc.
Common Stock, a cash payment of $500,000, and minimum royalty guarantees of
$750,000. As a result of the sale, the Company no longer provides CD-i
services to the professional market.
In February 1996, the Company entered into a worldwide licensing and
distribution agreement (the "Agreement") for two of its childrens edutainment
titles for the Windows and Macintosh CD-ROM platforms with Broderbund Software,
Inc. ("Broderbund"), a leading distributor of childrens software products.
Under the Broderbund Agreement, the Company developed Gregory and the Hot Air
Balloon and Darby the Dragon, two interactive adventure titles featuring
feature friendly animal characters appealing to children ages 4-8. These
titles are part of a Broderbund line of products known as StoryQuests and are
scheduled for release in Summer 1996. Pursuant to the Agreement, Broderbund is
responsible for product testing, replication, manufacturing, packaging, sales,
marketing, distribution, customer support, and warranty obligations. After
recovery of certain out-of-pocket expenses, the Company and Broderbund share in
product net revenues.
PRESENTATION
Since the Company's August 11, 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 year ended March 31, 1996 to pro forma results for the
year ended March 31, 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 years ended March 31, 1996 and
1995 are as follows:
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MARCH 31 MARCH 31 % $
1996 1995 CHANGE CHANGE
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Software development revenues $2,332,463 $1,179,313 98% $1,153,150
Consumer software sales & royalties 1,403,156 382,852 267% 1,020,304
CD-i licensing & distribution fees 232,616 1,085,760 (79%) (853,144)
-------------------------------------------------------
Total net sales $3,968,235 $2,647,925 50% $1,320,310
=======================================================
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During the last quarter of fiscal 1995, the Company discontinued CD-i
consumer publishing activities and began developing titles for Philips on a
work-for-hire basis. This strategy resulted in the increase in software
development revenues during the year ended March 1996. The Company does not
expect to perform any CD-i development services for Philips during fiscal year
1997. The Company does, however, expect increases in work-for-hire revenues
from other customers including, Simon & Schuster Interactive, to be greater
than the decrease in software development revenue from Philips.
Consumer software sales and royalties increased during the year due
primarily to the Fall 1995 release of Baba Yaga and the Magic Geese, Imo and
the King, and The Little Samurai, three of the Company's interactive CD-ROM
storybooks. The Company expects consumer software sales and royalties to
increase substantially during fiscal year 1997 as a result of the 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.
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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. The decrease in these fees relates to a shift in
strategy to developing titles for Philips on a work-for-hire basis rather than
under licensing and distribution agreements. As a result of the Company's
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 for 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
Research and development decreased $331,000 or 14% to $2,031,000 for
the year ended March 1996. This decrease relates to the March 1995 write-off
of $747,000 in assets resulting from the Company's decision to discontinue
publishing consumer titles for the CD-i and Sega-CD platforms, offset by a
$382,000 increase relating to the elimination of capitalizing software
development costs. 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.
AMORTIZATION OF CAPITALIZED SOFTWARE
Since April 1995, the Company has not capitalized any software
development costs as a result of the uncertainty regarding the realizability of
such costs. Accordingly, amortization of capitalized software costs decreased
$2,616,000 or 100% for the year ended March 1996. The Company does not expect
to capitalize any software development costs in the foreseeable future.
DEPRECIATION
The Company did not capitalize any portion of its depreciation
relating to software development costs during fiscal year 1996. This change,
offset by certain assets reaching full depreciable values, resulted in an
increase of $17,000 or 15% to $132,000 for the year ended March 1996. The
Company expects depreciation to increase during fiscal year 1997 as a result of
an expansion of its development and production capabilities; however, the
Company does not expect depreciation as a percentage of net sales to materially
change.
GENERAL AND ADMINISTRATIVE
General and administrative decreased $710,000 or 34% to $1,394,000 for
the year ended March 1996 due to decreases of $217,000 relating to the
expiration of consulting contracts, $293,000 resulting from a decrease in
product advertising associated with the Company's fiscal year 1995 CD-ROM and
Sega CD title releases, and $200,000 in efficiencies associated with the
acquisition of Animation Magic, Inc. in February 1995.
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.
Page 10
<PAGE> 11
INTEREST AND OTHER INCOME, NET
Interest and other income consists primarily of interest income earned
on the Company's cash and short-term investments and note receivable.
However, the $63,000 or 18% decrease in interest and other income for the year
ended March 1996 relates primarily to a reduction in the recognition of revenue
for services provided to the Company as partial consideration for the sale of
post-production assets in June 1993.
GAIN ON SALE OF ASSETS
In April 1994, the Company sold its 25% ownership interest in a CD-i
software title, recognizing a gain of approximately $47,000 on the transaction.
INCOME TAXES
The $16,000 in income taxes for the year ended March 1996 represents
alternative minimum tax liabilities on income earned during the period. The
Company's effective tax rate of 2% differed from the statutory rate due to
partial recognition of deferred tax assets which were fully reserved at March
1995. The Company has fully reserved deferred tax assets of $3,508,000 at
March 1996 and expects its effective tax rate to remain at 2% during fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash, cash
equivalents, and short-term investments. During the year ended March 1996,
cash, cash equivalents, and investments increased $859,000 or 25% to
$4,324,000. This increase relates to $500,000 in proceeds from the sale of
CD-i professional assets in August 1995, the collection of a $300,000 note
receivable in November 1995, and $108,000 in cash generated from operations.
Accounts receivable decreased $423,000 or 46% to $503,000 at March
1996 primarily as a result of a decrease in accounts receivable attributable
to the Company's professional CD-i operations. Short-term notes and guaranteed
royalties receivable increased $200,000 or 67% to $500,000 due to the
collection of a $300,000 note receivable in November 1995, offset by a $500,000
guaranteed royalty due November 1996 and relating to the Company's sale of CD-i
professional assets in August 1995.
Long-term notes and guaranteed royalties receivable increased $323,000
or 35% to $1,244,000 at March 1996. $250,000 of the increase represents a
minimum royalty guarantee due November 1997 resulting from the Company's sale
of certain CD-i professional assets in August 1995. The additional $73,000
increase is attributable to accrued interest on an $800,000 long-term note
receivable due July 1998.
Capitalized software costs and goodwill decreased $161,500 and
$601,000 or 100% as a result of the Company's sale of certain CD-i professional
assets in August 1995.
Accounts payable and accrued liabilities decreased $649,000 or 79% to
$173,000 at March 1996 primarily as a result of a decrease in trade accounts
and royalties payable of $237,000, and payments of $200,000 and $180,000 for
intellectual property rights acquired in connection with the development of
titles for Philips on a work-for-hire basis and management consulting fees and
salaries, respectively.
Unearned revenue and deferred rent decreased $295,000 or 82% to
$66,000 at March 1996 due primarily to recognition of revenue on work-for-hire
software development contracts accounted for under the percentage-of-completion
method.
The Company acquired 825,088 shares of its common stock and recognized
a gain of $2.5 million in connection with its sale of certain CD-i professional
assets to Philips Media, Inc. in August 1995.
The Company will use its working capital to finance ongoing operations
and fund the expansion of its development and production capabilities.
Management expects its existing cash and short-term
Page 11
<PAGE> 12
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 March 31, 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.
Page 12
<PAGE> 13
ITEM 7. FINANCIAL STATEMENTS
Report of Independent Auditors
The Board of Directors and Shareholders
Capitol Multimedia, Inc.
We have audited the accompanying consolidated balance sheets of Capitol
Multimedia, Inc. as of March 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended. 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 consolidated financial position of Capitol
Multimedia, Inc. at March 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
May 17, 1996
Page 13
<PAGE> 14
Capitol Multimedia, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31
1996 1995
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,961,393 $1,685,540
Short-term investments 2,362,975 1,779,410
Accounts receivable, less allowance for doubtful accounts
of $12,500 and $97,000 at March 31, 1996 and 1995, respectively 503,306 926,568
Notes and guaranteed royalties receivable 500,000 300,000
Prepaid expenses and other current assets 174,441 207,588
-----------------------------
Total current assets 5,502,115 4,899,106
Property and equipment:
Technical equipment 1,070,337 1,119,199
Furniture and fixtures 44,163 51,615
Other equipment 94,176 87,624
-----------------------------
1,208,676 1,258,438
Less: accumulated depreciation (841,861) (784,147)
-----------------------------
366,815 474,291
Notes and guaranteed royalties receivable 1,244,074 920,446
Capitalized software costs, net of accumulated
amortization of $2,821,000 at March 31, 1995 - 161,511
Goodwill, net of accumulated amortization of $213,000 at March
31,1995 - 601,435
Other long-term assets 32,481 31,579
-----------------------------
Total assets $7,145,485 $7,088,368
=============================
</TABLE>
See accompanying notes
Page 14
<PAGE> 15
Capitol Multimedia, Inc.
Consolidated Balance Sheets
(continued)
<TABLE>
<CAPTION>
MARCH 31
1996 1995
----------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 173,019 $ 821,965
Unearned revenue and deferred rent 66,160 361,386
----------------------------------
Total current liabilities 239,179 1,183,351
Other long-term liabilities 97,115 80,360
----------------------------------
Total liabilities 336,294 1,263,711
Commitments - -
Shareholders' equity:
Common stock, $.10 par value; 10,000,000
shares authorized, 5,657,153 and 5,636,537
shares issued and outstanding at March
31, 1996 and 1995, respectively
565,715 563,654
Additional paid-in capital 15,817,202 15,760,921
Accumulated deficit (7,523,382) (10,499,918)
----------------------------------
8,859,535 5,824,657
Less treasury stock, at cost, 825,088 shares at
March 31, 1996 (2,050,344) -
----------------------------------
Total shareholders' equity 6,809,191 5,824,657
----------------------------------
Total liabilities and shareholders' equity $ 7,145,485 $ 7,088,368
==================================
</TABLE>
See accompanying notes
Page 15
<PAGE> 16
Capitol Multimedia, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995
------------------------------------
<S> <C> <C>
Net sales $4,349,980 $ 4,218,402
Operating expenses:
Research and development 2,368,511 3,479,064
Amortization of capitalized software - 2,615,708
Depreciation and amortization 334,598 209,154
General and administrative 1,513,106 2,666,950
------------------------------------
Total operating expenses 4,216,215 8,970,876
Operating income (loss) 133,765 (4,752,474)
Other income:
Interest and other income, net 363,695 355,871
Gain on sale of assets 2,539,820 47,234
------------------------------------
Income (loss) before income taxes 3,037,280 (4,349,369)
Provision for income taxes 60,744 -
------------------------------------
Net income (loss) $2,976,536 $(4,349,369)
====================================
Net income (loss) per share $ .58 $ (.77)
====================================
Weighted average number of shares outstanding 5,235,483 5,636,128
====================================
</TABLE>
See accompanying notes
Page 16
<PAGE> 17
Capitol Multimedia, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PAR PAID-IN TREASURY STOCK ACCUMULATED
SHARES VALUE CAPITAL SHARES COST DEFICIT TOTAL
------ -------- ----------- -------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 5,634,175 $563,418 $15,754,472 - $ - $ (6,150,549) $10,167,341
Issuance of
common stock pursuant to
exercise of employee 2,362 236 6,449 - - - 6,685
stock options
Net loss - - - - - (4,349,369) (4,349,369)
------------------------------------------------------------------------------------------------
Balance at March 31, 1995 5,636,537 563,654 15,760,921 - - (10,499,918) 5,824,657
Issuance of common stock
pursuant to exercise of
employee stock options 20,616 2,061 56,281 - - - 58,342
Repurchase of shares of common
stock - - - (825,088) (2,050,344) - (2,050,344)
Net income - - - - - 2,976,536 2,976,536
------------------------------------------------------------------------------------------------
Balance at March 31, 1996 5,657,153 $565,715 $15,817,202 (825,088) $(2,050,344) $ (7,523,382) $ 6,809,191
================================================================================================
</TABLE>
See accompanying notes
Page 17
<PAGE> 18
Capitol Multimedia, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995
--------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,976,536 $ (4,349,369)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of capitalized software costs - 2,615,708
Depreciation and amortization of property and equipment and
goodwill 334,598 209,154
Gain on sale of assets (2,539,820) (47,234)
Changes in assets and liabilities (net of effect from
disposition):
Accounts receivable 425,762 (41,969)
Prepaid expenses and other current assets (79,890) 141,491
Long-term notes, royalties, and other assets (74,530) (70,243)
Accounts payable and accrued liabilities (656,446) 271,356
Unearned revenue and deferred rent (278,471) 28,806
---------------------------------
Net cash provided by (used in) operating activities 107,739 (1,242,300)
INVESTING ACTIVITIES
Purchases of short-term investments (3,793,569) (10,315,629)
Proceeds from sales of short-term investments 3,210,004 13,132,026
Proceeds from sale of assets 500,000 100,000
Proceeds from note receivable 300,000 -
Capitalized software costs - (904,115)
Capital expenditures (106,663) (146,543)
---------------------------------
Net cash provided by investing activities 109,772 1,865,739
FINANCING ACTIVITIES
Proceeds from sale of common stock 58,342 6,685
Principal repayments of long-term debt - (61,768)
---------------------------------
Net cash provided by (used in) financing activities 58,342 (55,083)
---------------------------------
Net increase in cash and cash equivalents 275,853 568,356
Cash and cash equivalents at beginning of year 1,685,540 1,117,184
---------------------------------
Cash and cash equivalents at end of year $ 1,961,393 $ 1,685,540
=================================
</TABLE>
See accompanying notes
Page 18
<PAGE> 19
Capitol Multimedia, Inc.
Notes To Financial Statement
1. ORGANIZATION AND BUSINESS
Capitol Multimedia, Inc. (the "Company"), a Delaware corporation organized in
1982, creates, produces, and licenses interactive software for the CD-ROM (PC
and Mac) platform.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions have
been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash equivalents consist
of cash in banks and investments in highly liquid, short-term instruments with
original maturities of 90 days or less.
SHORT-TERM INVESTMENTS
The Company has classified all marketable investment securities as
available-for-sale. Available-for-sale securities are carried at fair market
value with unrealized gains and losses reported as a separate component of
shareholders' equity. Any realized gains or losses and declines in value
judged to be other than temporary are included in other income (expense). At
March 31, 1996, marketable investment securities consisted of corporate bonds
and U.S. Government backed notes, maturing at various dates, and in varying
amounts, between 1996 and 1999. These securities are recorded at cost which
approximates fair market value.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of allowance for potential credit losses
and sales returns.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over estimated
useful lives of three years. Repair and maintenance expenditures are charged
to operations as incurred.
CAPITALIZED SOFTWARE COSTS
Software development costs incurred beyond the point of demonstrated
technological feasibility are capitalized. Capitalization ceases when a
product is available for general release to customers. All capitalized
software is amortized on a product-by-product basis using the ratio that
current gross revenues bear to the total of current and anticipated future
gross revenues with minimum amortization based on a straight-line method over
the product's useful life.
The establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software costs requires considerable judgment by
management with respect to numerous external factors, including, but not
limited to, anticipated future gross revenues, competition, estimated economic
lives and changes in software and hardware technologies. Provisions for
declines in the net realizable value of capitalized software costs are made in
the period in which they first become determinable (Note 3).
GOODWILL
Goodwill represents the excess purchase price paid over the net assets acquired
in the purchase of Philips Media's (Philips) partnership interest in a joint
venture during fiscal 1992. The goodwill balance was written-off in connection
with the Company's sale of professional CD-i assets in 1996 (Note 5).
REVENUE RECOGNITION
Revenue derived from the sale of software and hardware products and software
licensing arrangements is recognized in accordance with Statement of Position
91-1 "Software Revenue Recognition." Revenue from the sale of hardware and
software products, net of allowances for returns, is recognized upon shipment.
Licensing fees and royalties pursuant to licensing arrangements are recognized
when the Company fulfills all its obligations in accordance with such
agreements.
Revenues related to software development services are recorded as services are
rendered and costs incurred. The Company accounts for long-term contracts
under the percentage-of-completion method and records revenues as work on
contracts progresses. Provisions for anticipated losses are made in the period
in which they first become determinable. Under software development
arrangements, the Company may retain a
Page 19
<PAGE> 20
Capitol Multimedia, Inc.
Notes To Financial Statements
residual royalty interest for product sales and/or ownership of software or
other assets for the Company's future use.
Unearned revenue represents payments received in advance of the performance of
software development services.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement No.
123 (FAS No. 123), "Accounting for Stock-Based Compensation" which is effective
for fiscal years beginning after December 15, 1995. FAS No. 123 permits a
company to choose either a new fair value-based method or the current
Accounting Principles Board Opinion No. 25 intrinsic value-based method of
accounting for its stock-based compensation arrangements. The Company has
elected to continue to follow its current practice, but will, in fiscal year
1997, provide the FAS No. 123 required pro forma disclosures of net income and
earnings per share computed as if the fair value-based method had been applied.
INCOME TAXES
The Company accounts for income taxes under the liability method.
NET INCOME (LOSS) PER SHARE
Primary net income (loss) per share is based on the weighted average number of
common shares and dilutive common stock equivalents outstanding for the period.
The treasury stock method is used in computing the common stock equivalents.
For purposes of this computation, the weighted average number of common shares
outstanding has been restated for all periods to include the common stock
issued in the pooling of interests transaction with Animation Magic, Inc. (Note
4).
RECLASSIFICATION
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
GEOGRAPHIC AREA OF OPERATIONS
At March 31, 1996, approximately 80% of the Company's labor force was employed
by Company's subsidiary in St. Petersburg, Russia.
FOREIGN CURRENCY TRANSACTIONS
As the functional currency of the Company's foreign subsidiary is the United
States dollar, the Company does not record foreign currency translation
adjustments. Foreign currency transaction gains and losses are a result of the
effect of exchange rate changes on transactions denominated in currencies other
than the functional currency and are generally included in determining net
income (loss) for the period in which the exchange rate changes. Such amounts
were not material for fiscal years 1996 or 1995.
3. CAPITALIZED SOFTWARE COSTS
The Company recognizes that the increase in the number of emerging formats and
new titles in the entertainment software industry has significantly reduced the
predictability of market acceptance and shelf life for products and therefore,
has not capitalized any software development costs since April 1, 1995.
Due to the changing retail environment and increased competition in the
marketplace, the Company reduced its capitalized software costs on completed
titles to their estimated net realizable values at March 31, 1995. The effect
of accelerating amortization for this reduction was to increase net loss by
$2,326,000. In addition, during 1995, the Company expensed $747,000 in assets
relating to its decision to discontinue publishing titles for the CD-i and Sega
CD platforms. The aggregate amount of these write-downs increased the net loss
by $3,073,000 or $.55 per common share.
4. ACQUISITION OF ANIMATION MAGIC, INC.
On February 13, 1995, the Company acquired all of the outstanding stock of
Animation Magic, Inc. (AMI) in exchange for 703,750 shares of the Company's
common stock. The transaction was accounted for as a pooling of interests.
Accordingly, the consolidated financial statements include the accounts of the
Company, AMI and its wholly owned Russian subsidiary for all periods presented.
Page 20
<PAGE> 21
Capitol Multimedia, Inc.
Notes To Financial Statements
Selected information for the period prior to the acquisition is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 13, 1995
-----------------
<S> <C>
Net sales:
CMI $ 3,476,066
AMI 959,308
Intercompany eliminations (338,100)
-----------
Combined $ 4,097,274
-----------
Net income (loss):
CMI $(1,077,350)
AMI 65,927
-----------
Combined $(1,011,423)
-----------
Net loss per share:
CMI $ (.22)
-----------
Combined $ (.18)
-----------
</TABLE>
5. SALE OF ASSETS
PROFESSIONAL CD-I ASSETS
On August 11, 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 November 1996 and $250,000 in November 1997. Under the Agreement,
total royalty payments are not to exceed $2,000,000. In connection with the
sale, the Company recognized a gain of approximately $2,500,000. The non-cash
portions of this transaction have been excluded from the statements of cash
flows. Pro forma statements of operations, assuming the sale of assets was
consummated on April 1, 1994, are presented below.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995
----------------------------------
(Unaudited)
<S> <C> <C>
Net sales $3,968,235 $ 2,647,925
Operating expenses:
Research and development 2,030,802 2,362,176
Amortization of capitalized software - 2,615,708
Depreciation 131,871 114,545
General and administrative 1,393,951 2,103,750
----------------------------------
Total operating expenses 3,556,624 7,196,179
Operating income (loss) 411,611 (4,548,254)
Other income:
Interest and other income, net 293,923 357,225
Gain on sale of assets - 47,234
----------------------------------
Income (loss) before income taxes 705,534 (4,143,795)
Provision for income taxes 15,762 -
----------------------------------
Net income (loss) $ 689,772 $(4,143,795)
==================================
Net income (loss) per share $ .14 $ (.86)
==================================
Weighted average number of shares outstanding 4,821,919 4,811,040
==================================
</TABLE>
Page 21
<PAGE> 22
Capitol Multimedia, Inc.
Notes To Financial Statements
VIDEO POST-PRODUCTION ASSETS
In connection with its June 1993 sale of video post-production assets, the
Company holds a secured note for $800,000, interest accruing at 8.0% and
compounding annually, principal plus accrued interest due on July 31, 1998 with
an option to convert the note into stock of the purchaser at any time after the
purchaser, in its sole discretion, reorganizes as contemplated from an S
Corporation to a C Corporation. The interest rate on the note may be adjusted
from time to time over the term of the obligation as interest is charged at a
rate equal to the interest rate set by the purchaser's bank in its loan for the
purchase of the assets. Under the terms of the asset sale agreement, the
Company agreed not to compete with the purchaser in the video post-production
business for a five year period commencing June 1993.
6. NET INCOME (LOSS) PER SHARE
The following table presents the components of the shares used to compute
weighted average number of shares outstanding for the net income (loss) per
share calculation.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1996 1995
-------------------------
<S> <C> <C>
Weighted average number of shares
outstanding during the year 5,120,117 5,636,128
Incremental shares issuable pursuant to outstanding options
and warrants 115,366 -
-------------------------
Weighted average number of shares used in the computation of
net income (loss) per share 5,235,483 5,636,128
=========================
</TABLE>
In computing net income per share using the treasury stock method, net income
has been increased by $74,500 in interest income for the year ended March 31,
1996. Fully diluted and primary net income per share for the year ended March
31, 1996 were not materially different.
7. CAPITAL STOCK
WARRANTS
At March 31, 1996, the Company had outstanding warrants to purchase 578,200
shares of its common stock, as follows:
In April 1992, the Company issued Series A Warrants to purchase 375,500 shares
(344,500 warrants, each of which entitles the holder to purchase 1.09 shares of
Common Stock) at an exercise price of $5.72 per share through March 31, 1997.
In addition, the Company issued 30,000 warrants to an underwriter to purchase
30,000 units, each unit consisting of three shares of common stock and one
Series A Warrant, at an exercise price of $18.45 per unit, exercisable for a
four year period commencing March 31, 1993.
In April 1993, in connection with the Regulation S offering, the Company issued
a warrant to purchase 80,000 shares of common stock to the placement agent at a
price of $8.25 per share, exercisable for a four year period commencing April
9, 1994.
STOCK OPTIONS
At March 31, 1996, the Company had outstanding options to purchase 906,761
shares of its Common Stock as follows.
GRANTS PURSUANT TO EMPLOYMENT ARRANGEMENTS
During 1995, the Company granted options to purchase 330,000 shares of common
stock, at prices ranging between $3.75 and $3.96 per share, pursuant to various
employment arrangements. At March 31, 1996, 130,000 of these options were
exercisable. These options expire at various dates, and in varying amounts,
between 2002 and 2006.
NON-QUALIFIED EMPLOYEE STOCK OPTION PLAN
In 1993, the Company adopted the Amended and Restated 1991 Non-Qualified
Capitol Multimedia, Inc. Employee Stock Option Plan (the Employee Plan). The
Employee Plan permits the Company to grant
Page 22
<PAGE> 23
Capitol Multimedia, Inc.
Notes To Financial Statements
options for 616,000 shares of common stock to its employees and consultants.
Options are granted at the fair market value of the Company's common stock on
the date of grant. The following table sets forth employee stock options
granted, exercised, canceled, and outstanding under the Employee Plan:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------
NUMBER OF EXERCISE
OPTIONS PRICE
--------------------------------
<S> <C> <C>
Balance at March 31, 1994 250,568 $2.83 - $10.50
Granted 298,715 6.25 - $7.00
Exercised (2,362) $2.83
Canceled (203,903) $7.00 - $10.50
--------------------------------
Balance at March 31, 1995 343,018 $2.83 - $10.50
Granted 334,761 $3.75 - $6.25
Exercised (20,616) $2.83
Canceled (240,402) $2.83 - $10.50
--------------------------------
Balance at March 31, 1996 416,761 $3.75 - $6.375
================================
</TABLE>
At March 31, 1996, 142,761 options outstanding under the Employee Plan were
exercisable. There were 69,954 and 164,313 option shares available for grant
under the Employee Plan at March 31, 1996 and 1995, respectively.
NON-QUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
In 1995, the Company adopted the Amended and Restated 1992 Non-Qualified Stock
Option Plan for Non-Employee Directors (the Director Plan). The Director Plan
permits the Company to grant options to purchase 300,000 shares of common stock
to its non-employee directors. Grants of options to purchase 15,000 shares of
common stock at fair market value are automatic upon a director's election to
the Board and on the date of each subsequent annual meeting during a director's
tenure. Each option granted under the Director Plan is exercisable only during
the period in which the director is serving on the Company's Board or within
the thirty day period following resignation or other termination. The
following table sets forth non-employee director stock options granted,
exercised, canceled, and outstanding under the Director Plan:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------
NUMBER OF EXERCISE
OPTIONS PRICE
-------------------------------------------
<S> <C> <C>
Balance at March 31, 1994 225,000 $6.25 - $11.625
Granted 100,000 $7.875
Exercised - -
Canceled (50,000) $9.45
-------------------------------------------
Balance at March 31, 1995 275,000 $6.25 - $11.625
Granted 175,000 $3.916
Exercised - -
Canceled (290,000) $3.916 - 11.625
-------------------------------------------
Balance at March 31, 1996 160,000 $3.916
===========================================
</TABLE>
At March 31, 1996, 160,000 options outstanding under the Director Plan were
exercisable. There were 140,000 and 25,000 option shares available for grant
under the Director Plan at March 31, 1996 and 1995, respectively.
Page 23
<PAGE> 24
Capitol Multimedia, Inc.
Notes To Financial Statements
8. SIGNIFICANT CUSTOMERS
At March 31, 1996, the Company had sales of approximately $2,460,000 to two
customers which represented 57% of net sales. At March 31, 1995, the Company
had sales of approximately $2,629,000 to three customers which represented 62%
of net sales.
9. INCOME TAXES
The provision for income taxes includes a federal alternative minimum tax
("AMT") resulting from restrictions on the use of net operating loss
carryforwards for AMT purposes.
Significant components of deferred tax assets as of March 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 3,128,000 $ 4,078,000
Depreciable and amortizable assets - 15,000
Unearned revenue 11,000 168,000
Allowance for doubtful accounts 5,000 39,000
Alternative minimum tax credit carryfoward 52,000 -
Investment tax credit carryforwards 281,000 281,000
Other 31,000 36,000
-------------------------------
Total 3,508,000 4,617,000
Valuation allowance for deferred tax assets (3,508,000) (4,617,000)
-------------------------------
Net deferred tax assets $ - $ -
===============================
</TABLE>
At March 31, 1996, the Company had net operating loss carryforwards of
$7,820,000. The valuation allowance for deferred tax assets decreased by
$1,109,000 from 1995 to 1996 due to the use of net operating loss
carryforwards. Net operating loss and investment tax credit carryforwards
expire in varying amounts beginning in 1999 through 2010.
10. COMMITMENTS
LEASE COMMITMENTS
The Company leases facilities under a noncancelable operating lease expiring in
fiscal 2004 with an option to renew for an additional five year term. Total
rent expense for operating leases amounted to $263,400 and $216,000 for the
years ended March 31, 1996 and 1995, respectively.
At March 31, 1996, minimum annual commitments under noncancelable operating
leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31:
----------------------------
<S> <C>
1997 $ 361,000
1998 361,000
1999 278,000
2000 275,000
2001 275,000
Thereafter 836,000
-----------
Total $ 2,386,000
===========
</TABLE>
Page 24
<PAGE> 25
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to
the information contained in the "Election of Directors" and "Executive
Officers" sections of the Company's Proxy Statement for its 1996 Annual Meeting
of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information contained in the "Executive Compensation" section of the
Company's Proxy Statement for its 1996 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference to
the information contained in the "Security Ownership of Certain Beneficial
Owners" and "Security Ownership of Management" sections of the Company's Proxy
Statement for its 1996 Annual Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information contained in the "Transactions with Beneficial Owners,
Directors, and Executive Officers" section of the Company's Proxy Statement for
its 1996 Annual Meeting of Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
A list of the exhibits included as part of this report is set forth in
the Exhibit Index which immediately precedes such exhibits and which is
incorporated herein by reference.
(B) REPORTS ON FORM 8-K
On March 27, 1996, the Company filed a Form 8-K, disclosing the following
unrelated amendments to previously filed exhibits: (i) The First Amendment to
the Warrant Agreement Between the Company and North American Transfer Co. which
extended the expiration date of the Company's Series A Warrants one year to
March 31, 1997, and (ii) The First Amendment to the Registration Rights
Agreement Dated February 13, 1995 which extended registration rights of
pre-acquisition Animation Magic, Inc. shareholders one year to February 12,
1998. The Form 8-K was dated February 26, 1996.
FORWARD-LOOKING INFORMATION
This report on Form 10-KSB contains forward-looking statements. There are
certain important factors that could cause results to differ materially from
those anticipated by the statements made above.
Page 25
<PAGE> 26
Among them, but not limited to these, are the anticipated growth of certain
market segments; the positioning and release dates of Company products;
quarterly fluctuations and seasonality; political, social and economic
stability in Russia; the competitive environment in the software industry;
dependence on certain distribution channels; dependence upon evolving
technologies and hardware; and dependence on 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 results are included in Company filings with the Securities
and Exchange Commission, including without limitation its Registration
Statements on Form S-3 (Registration Nos. 33-45725 and 333-2476, respectively),
as amended.
Page 26
<PAGE> 27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CAPITOL MULTIMEDIA, INC.
By: /s/ Robert I. Bogin
----------------------------------------
Robert I. Bogin
President and Chief Executive Officer
June 13, 1996
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below hereby constitutes and appoints Robert I. Bogin and Catherine K.
Hoopes and each of them, his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him or her and in his
or her name, place, and stead, in any and all capacities to sign any and all
amendments or supplements to this Form 10-KSB, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
necessary or appropriate to be done in and about the foregoing, as fully to all
intents and purposes as he or she might or could do in person, lawfully do, or
cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title & Date
---- ------------
<S> <C>
/s/ Robert I. Bogin President, Chief Executive Officer, and Chairman of
- - --------------------------------------------- the Board of Directors
Robert I. Bogin June 13, 1996
/s/ Catherine K. Hoopes Chief Financial Officer (Principal Financial Officer)
- - --------------------------------------------- June 13, 1996
Catherine K. Hoopes
/s/ Robin S. Rothstein Controller (Principal Accounting Officer)
- - --------------------------------------------- June 13, 1996
Robin S. Rothstein
/s/ Philip R. Redmond Director
- - --------------------------------------------- June 14, 1996
Philip R. Redmond
/s/ Bernard M. Frank Director
- - --------------------------------------------- June 14, 1996
Bernard M. Frank
/s/ Nico B. M. Letschert Director
- - --------------------------------------------- June 10, 1996
Nico B. M. Letschert
/s/ Igor R. Razboff Director
- - --------------------------------------------- June 13, 1996
Igor R. Razboff
</TABLE>
Page 27
<PAGE> 28
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Name Page
------ ------------ -----
<S> <C>
*2.1 Agreement for the Acquisition of the Outstanding Stock of Animation Magic, Inc.--Management
Shareholders, dated December 15, 1994 (incorporated by reference herein to the exhibit filed
with the Company's Form 8-K, dated February 13, 1995).
*2.2 Agreement for the Acquisition of the Outstanding Stock of Animation Magic, Inc.--Minority
Shareholders, dated December 15, 1994 (incorporated by reference herein to the exhibit filed
with the Company's Form 8-K, dated February 13, 1995).
*2.3 Asset Purchase Agreement By and Between Capitol Multimedia, Inc. (as "Seller") and Philips
Media, Inc. (as "Purchaser") dated August 11, 1995 (incorporated by reference herein to the
exhibit filed with the Company's Form 8-K, dated August 11, 1995).
*3.1 Certificate of Incorporation, as amended (incorporated by reference herein to the exhibit filed
with the Company's Form S-18 (or a Post-Effective Amendment thereto), Registration No.
33-45725-A).
*3.2 Bylaws of the Company (incorporated by reference herein to the exhibit filed with the Company's
Form S-18 (or a Post-Effective Amendment thereto), Registration No. 33-45725-A).
*4.1 Specimen of Stock Certificate-Common stock (incorporated by reference herein to the exhibit
filed with the Company's Form S-18 (or a Post-Effective Amendment thereto), Registration No.
33-45725-A).
*4.2 Specimen of Series A Warrant (incorporated by reference herein to the exhibit filed with the
Company's Form S-18 (or a Post-Effective Amendment thereto), Registration No. 33-45725-A).
*4.3 Form of Underwriter Warrant (incorporated by reference herein to the exhibit filed with the
Company's Form S-18 (or a Post-Effective Amendment thereto), Registration No. 33-45725-A).
*4.4 Form of Warrant Agreement with Warrant Agent (incorporated by reference herein to the exhibit
filed with the Company's Form S-18 (or a Post-Effective Amendment thereto), Registration No.
33-45725-A).
*4.5 Amended and Restated 1991 Non-Qualified Capitol Multimedia, Inc. Employee Stock Option Plan
(incorporated by reference herein to the exhibit filed with the Company's Form 10-QSB dated
September 30, 1995).
*4.6 Amended and Restated 1992 Non-Qualified Stock Option Plan for Non-Employee Directors
(incorporated by reference herein to the exhibit filed with the Company's 1995 Proxy
Statement).
*4.7 First Amendment to the Warrant Agreement Between Capitol Multimedia, Inc. and North American
Transfer Co. (incorporated by reference herein to the exhibit filed with the Company's Form
8-K, dated February 26, 1996).
*4.8 First Amendment to the Registration Rights Agreement Dated February 13, 1995 (incorporated by
reference herein to the exhibit filed with the Company's Form 8-K, dated February 26, 1996).
*9.1 Voting Trust Agreement-Noble Investment Co. of Palm Beach (incorporated by reference herein
to the exhibit filed with the Company's Form S-18 (or a Post-Effective Amendment thereto),
Registration No. 33-45725-A).
</TABLE>
Page 28
<PAGE> 29
INDEX OF EXHIBITS
<TABLE>
<S> <C> <C>
*10.19 Employment Agreement-Robert I. Bogin, President (incorporated by reference herein to the
exhibit filed with the Company's Form S-18 (or a Post-Effective Amendment thereto),
Registration No. 33-45725-A).
*10.27 Employment AgreementE-ECatherine K. Hoopes, Chief Financial Officer (incorporated by reference
herein to the exhibit filed with the Company's Form 10-Q, dated June 30, 1992).
*10.31 Placement Agreement with Noble Investment Co. of Palm Beach, March 31, 1993 (incorporated by
reference herein to the exhibit filed with the Company's Form 8-K, dated April 8, 1993).
*10.32 Placement Agent Warrant to Purchase Shares of Capitol Multimedia, Inc., April 8, 1993
(incorporated by reference herein to the exhibit filed with the Company's Form 8-K, dated April
8, 1993).
*10.33 Asset Purchase Agreement By And Between Henninger Video, Inc. And Capitol Multimedia, Inc.,
June 22, 1993--excluding exhibits and schedules (incorporated by reference herein to the
exhibit filed with the Company's Form 8-K, dated June 30, 1993).
*10.37 First Amendment to Employment Agreement - Catherine K. Hoopes, Chief Financial Officer, dated
February 3, 1993 (incorporated by reference herein to the exhibit filed with the Company's Form
10-QSB, dated June 30, 1993).
*10.39 First Modification to Employment Agreement -- Catherine K. Hoopes, Chief Financial Officer,
April 1, 1995 (incorporated by reference herein to the exhibit filed with the Company's Form
8-K, dated April 1, 1995).
*10.44 Employment Agreement between Capitol Multimedia, Inc. and Igor Razboff (contained in Exhibit
2.1).
*10.45 Employment Agreement between Capitol Multimedia, Inc. and Dale DeSharone (contained in Exhibit
2.1).
*21.1 List of Capitol Multimedia, Inc. Subsidiaries (incorporated by reference herein to the exhibit
filed with the Company's Form 10-KSB, dated March 31, 1995).
24.1 Powers of Attorney (contained on signature page hereof) 27
27.1 Financial Data Schedule 30
*99.1 Form of Indemnification Agreement as signed by directors and officers of the Company
(incorporated by reference herein to the exhibit filed with the Company's Form 10-QSB, dated
June 30, 1993).
</TABLE>
* Incorporated by reference from the filing indicated
Page 29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Capital
Mulitmedia, Inc's March 31, 1996 Financial Statements and is qualified in its
entirety by reference to such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,961,393
<SECURITIES> 2,362,975
<RECEIVABLES> 1,015,806
<ALLOWANCES> 12,500
<INVENTORY> 0
<CURRENT-ASSETS> 5,502,115
<PP&E> 1,208,676
<DEPRECIATION> 841,861
<TOTAL-ASSETS> 7,145,485
<CURRENT-LIABILITIES> 239,179
<BONDS> 0
0
0
<COMMON> 565,715
<OTHER-SE> 6,243,476
<TOTAL-LIABILITY-AND-EQUITY> 7,145,485
<SALES> 4,349,980
<TOTAL-REVENUES> 4,713,675
<CGS> 0
<TOTAL-COSTS> 4,216,215
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,037,280
<INCOME-TAX> 60,744
<INCOME-CONTINUING> 2,976,536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,976,536
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
</TABLE>
