SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report ( Date of Earliest Event Reported ) March 3, 1997
Capitol Multimedia, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-20102 52-1283993
(State of Jurisdiction) (Commission File Number) (IRS Employer ID No.)
200 Baker Avenue, Suite 300
Concord, MA 01742
(Address of Principle Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (508) 287-5888
- ------------------------------------------------------------------------
Former Name or Former Address, if Changed Since Last Report
<PAGE>
Item 7: Financial Statements and Exhibits
(a.) Financial Statements of Business Acquired
- ----------------------------------------------
The registrant hereby amends the unaudited financial statements dated
December 31, 1996 for Client Server Technologies, Inc. (CSTI) previously
incorporated as Schedule 3.3(a) of Exhibit 2.6 to the registrant's Form 8-K
filed on April 11, 1997. The amended financial statements are included in
Schedule 3.3(b) - Client Server Technologies, Inc. Audited Financial Statements
as of December 31, 1996.
(b.) Pro Forma Financial Statements
- -----------------------------------
1. Pro Forma Balance Sheet as of March 31, 1997, - assuming the acquisition of
---------------------------------------------
CSTI was consummated on March 31, 1997.
2. Pro Forma Statement of Operations for the year ended March 31 ,1997, -
----------------------------------------------------------------------
assuming the acquisition of CSTI was consummated on April 1, 1996, the
beginning of the fiscal year
The registrant hereby files pro forma financial statements as follows:
Page 1
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA FINANCIAL INFORMATION
Capitol Multimedia, Inc.
Pro Forma Combined Balance Sheet
As of March 31, 1997
(Unaudited)
Pro Forma Pro Forma
CMI CSTI Adjustments Combined
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 604,636 $ 155,428 $ -- $ 760,065
Short-term investments 997,036 997,036
Accounts receivable, less allowance for doubtful
accounts of $17,194 and $109,200 for
CMI and CSTI respectively 459,135 568,172 1,027,307
Notes and guaranteed royalties receivable 250,000 250,000
Prepaid expenses and other current assets 51,719 24,883 76,602
------------------------------------------------------------------
Total current assets 2,362,526 748,484 3,111,010
Property and Equipment:
Technical equipment 677,707 455,572 1,133,279
Furniture and fixtures 76,579 158,424 235,003
Other 124,109 136,858 260,967
------------------------------------------------------------------
878,395 750,854 1,629,249
Less: accumulated depreciation (544,816) (426,058) (970,874)
------------------------------------------------------------------
333,579 324,796 658,375
Notes and guaranteed royalties receivable 1,073,600 1,073,600
Investment in Subsidiary 3,853,060 (3,853,060) 1 --
Goodwill 510,395 316,787 2 827,182
Accumulated Amortization (83,983) 83,983 3 --
Other long term assets 40,872 200,000 4 240,872
------------------------------------------------------------------
Total assets $ 7,663,637 $ 1,499,692 $ (3,252,290) $ 5,911,039
==================================================================
</TABLE>
See accompanying notes.
Page 2
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Capitol Multimedia, Inc.
Pro Forma Combined Balance Sheet
As of March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
CMI CSTI Adjustments Combined
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 274,441 $ 156,327 $ - 430,768
Unearned revenue and other current liabilities 104,307 291,075 395,382
------------------------------------------------------------------
Total current liabilities 378,748 447,402 826,150
Notes payable to related parties 1,552,069 1,552,069
Deferred rent 83,328 83,328
------------------------------------------------------------------
Total Liabilities 2,014,145 447,402 2,461,547
Shareholders' equity:
Common stock, $.10 par value, 25,000,000 shares authorized
and 6,857,153 shares issued and outstanding at March 31,
1997 (CMI) 685,715 13,123 (13,123)5 685,715
Additional paid-in capital 16,747,202 665,677 (665,677)5 16,747,202
Dividends (567,410) 567,410 5
Accumulated earnings (deficit) (9,733,081) 940,900 (3,140,900)5 (11,933,081)
------------------------------------------------------------------
7,699,836 1,052,290 (3,252,290) 5,499,836
Less Treasury stock, at cost, 825,088 shares at
March 31, 1997 (2,050,344) (2,050,344)
------------------------------------------------------------------
Total shareholders' equity 5,649,492 1,052,290 (3,252,290) 3,449,492
------------------------------------------------------------------
Total liabilities and shareholders' equity $ 7,663,637 $ 1,499,692 $ (3,252,290) $ 5,911,039
==================================================================
</TABLE>
See accompanying notes.
Page 3
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Capitol Multimedia, Inc.
Pro Forma Combined Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
CMI CSTI
Year Ended Year Ended
March 31, December 31, Pro Forma Pro Forma
1997 1996 Adjustments Combined
----------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 1,925,913 $ 3,652,591 $ 5,578,504
-----------------------------------------------------------------------
Cost of Revenue
Services 1,650,475 1,704,675
-----------------------------------------------------------------------
Gross profit 1,925,913 2,002,116 3,928,029
-----------------------------------------------------------------------
Operating expenses:
Research and development 2,181,457 729,943 2,911,400
General and administrative 1,523,682 450,362 1,974,044
Sales and marketing 443,170 443,170
Amortization 34,351 74,581 6 108,932
Depreciation 200,633 234,206 434,839
In process research and development 7
Consolidation expenses 462,567 462,567
-----------------------------------------------------------------------
Total operating expenses 4,368,339 1,892,032 74,581 6,334,952
-----------------------------------------------------------------------
Operating income (loss) (2,442,426) 110,084 (74,581) (2,406,923)
-----------------------------------------------------------------------
Other Income ( Expense):
Interest and other income, net 270,710 74,990 (36,170) 8 309,530
Gain (loss) on disposition of assets (37,983) (37,983)
-----------------------------------------------------------------------
Net income (loss) ($2,209,699) $ 185,074 ($ 110,751) ($2,135,376)
=======================================================================
Net income (loss) per share $ (.46) $ (.35)
=======================================================================
Weighted average number of shares outstanding 4,835,353 6,032,065 9
=======================================================================
</TABLE>
See accompanying notes.
Page 4
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Capitol Multimedia, Inc.
Notes to Pro Forma Combined Financial Statements
(Unaudited)
Note 1. Consolidating entry to eliminate investment in consolidated
subsidiary.
Note 2. Adjust goodwill to reflect amount from the CMI acquisition of CSTI ,
as accounted for under the purchase method of accounting for business
combinations.
Note 3. Adjustment of accumulated amortization to zero, the acquisition was
consummated on the last day of the year and no amortization taken.
Note 4. Entry to record developed software as an amortizable asset per the
third party valuation of intangible assets completed as part of the
purchase price accounting.
Note 5. Elimination of equity section of subsidiary and recording of
$2,200,000 accumulated deficit representing the write-off of in
process research and development calculated per the third party
valuation of intangible assets completed as part of the purchase price
accounting.
Note 6. Estimation of amortization of goodwill and developed software recorded
in connection with this acquisition.
Note 7. Write-off of in process research and development calculated per the
third party valuation of intangible assets completed as part of the
purchase price accounting represents a non-recurring write-off and as
such is not included in this Pro Forma Statement of Operations. This
non-recurring charge of $2,200,000 is reflected in the company's
Consolidated Statement of Operations for the year ended March 31,
1997.
Note 8. Estimation of the net change in interest income in connection with
this transaction.
Note 9. Pro Forma combined weighted average shares outstanding equals the CMI
shares outstnading prior to the acquisition of 4,832,065, plus the
1,200,000 shares issued to CSTI as part of the transaction.
These pro forma combined financial statements are qualified in their entirety by
and should be read in conjunction with the consolidated historical financial
statements and related notes thereto of Capitol Multimedia, Inc. (CMI) and CSTI.
The pro forma information is presented for illustrative purposes only and does
not purport to be indicative of the operating results or financial position that
would actually have occurred if the acquisition of CSTI had occurred on the
dates indicated, nor is it indicative of future operating results or financial
position.
Page 5
<PAGE>
(c.) Exhibits:
23.1 - Consent of Independent Auditors
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CAPITOL MULTIMEDIA, INC.
(Registrant)
Date: June 26, 1997 By: /s/ Edward Terino
-------------- -----------------
Edward Terino
Chief Financial Officer, Treasurer,
Secretary
EXHIBIT INDEX
Number Description of Exhibits Page
23.1 Consent of Independent Auditors 19
Page 6
<PAGE>
Schedule 3.3(b)
Client Server Technologies, Inc.
Financial Statements
Year ended December 31, 1996
Contents
Report of Independent Auditors................................................8
Financial Statements
Balance Sheet.................................................................9
Statement of Operations......................................................10
Statement of Shareholders' Equity............................................11
Statement of Cash Flows......................................................12
Notes to Financial Statements................................................13
7
<PAGE>
Report of Independent Auditors
Board of Directors
Client Server Technologies, Inc.
We have audited the accompanying balance sheet of Client Server Technologies,
Inc. as of December 31, 1996 and the related statement of operations,
shareholders' equity, and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Client Server Technologies,
Inc. at December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Boston, Massachusetts
April 22, 1997
8
<PAGE>
Client Server Technologies, Inc.
Balance Sheet
December 31, 1996
Assets
Current assets:
Cash and cash equivalents $ 300,485
Accounts receivable, net of allowance for doubtful
accounts of $110,000 394,748
Prepaid expenses 23,090
-----------
Total current assets 718,323
Furniture and equipment, net 346,136
Goodwill and organization cost, net 434,976
-----------
Total assets $ 1,499,435
===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 79,147
Deferred revenue 236,243
-----------
Total current liabilities 315,390
Shareholders' equity:
Common stock, $.01 par value, 850,000 shares
authorized, 807,120 shares issued and outstanding 8,071
Class B common stock (non-voting), $.01 par value,
250,000 shares authorized, 157,500 shares issued
and outstanding 1,575
Additional paid-in capital 762,050
Retained earnings 432,512
Less treasury stock ( 25,202 shares), at cost (20,163)
-----------
Total shareholders' equity 1,184,045
-----------
Total liabilities and shareholders' equity $ 1,499,435
===========
See accompanying notes.
9
<PAGE>
Client Server Technologies, Inc.
Statement of Operations
Year ended December 31, 1996
Revenue
Consulting services $2,555,096
Software license 485,451
Software support 612,044
----------
Total revenue 3,652,591
Cost of revenue
Consulting services 1,535,014
Software support 169,661
----------
Total cost of revenue 1,704,675
----------
Gross profit 1,947,916
Operating expenses
General and administrative 564,719
Research and development 829,943
Sales and marketing 443,170
----------
Total operating expense 1,837,832
----------
Income from operations 110,084
Interest income 24,417
Other income 50,573
==========
Net income $ 185,074
==========
See accompanying notes.
10
<PAGE>
Client Server Technologies, Inc.
Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock (1) Additional
Par Paid-in Treasury Stock Retained
Shares Value Capital Shares Cost Earnings Total
------ ----- ------- ------ ---- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 964,620 $ 9,646 $ 762,050 (17,368) $ (13,896) $ 417,004 $1,174,804
March 1996 $.06 per share dividend (56,836) (56,836)
October 1996 $.12 per share dividend (112,730) (112,730)
Repurchase of common stock (7,834) (6,267) (6,267)
Net income 185,074 185,074
---------------------------------------------------------------------------------------
Balance at December 31, 1996 964,620 $ 9,646 $ 762,050 (25,202) $ (20,163) $ 432,512 $1,184,045
=======================================================================================
(1) Common stock consists of 807,120 shares of common and 157,500 shares of Class B common stock(non-voting).
</TABLE>
See accompanying notes.
11
<PAGE>
Client Server Technologies, Inc.
Statement of Cash Flows
Year ended December 31, 1996
Operating activities:
Net income $ 185,074
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 234,206
Loss on disposition of furniture and equipment 12,514
Change in operating assets and liabilities:
Accounts receivable 16,060
Prepaid expenses 6,958
Accounts payable and accrued expenses (258,816)
Deferred revenue 12,136
---------
Net cash provided by operating activities 208,132
Investing activities:
Purchase of furniture and equipment (68,299)
---------
Net cash used in investing activities (68,299)
Financing activities:
Shareholder dividends (169,566)
Purchase of treasury stock (6,267)
---------
Net cash used in financing activities (175,833)
---------
Net decrease in cash and cash equivalents (36,000)
Cash and cash equivalents at beginning of year 336,485
---------
Cash and cash equivalents at end of year $ 300,485
=========
See accompanying notes.
12
<PAGE>
Client Server Technologies, Inc.
Notes to Financial Statements
December 31, 1996
1. The Company
Client Server Technologies Inc. (the "Company") was incorporated on November 16,
1992 to provide supply chain management consulting services to middle market
companies ( companies ranging in size from $50 million to $1 billion).
The environment of rapid technological change and intense competition which is
characteristic of the software development industry results in frequent new
products and evolving industry standards. The Company's continued success
depends on its ability to enhance current products and develop new products on a
timely basis in order to keep pace with the changes in technology and
competitors' innovations.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market, and
consists of short-term, highly liquid investments with original maturities of 90
days or less. Cash equivalents consist principally of overnight repurchase
agreements.
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position 91-1
"Software Revenue Recognition" issued by the American Institute of Certified
Public Accountants. Specifically revenue from the sale of software licenses is
recognized upon delivery of the software pursuant to license agreements. Upon
delivery the Company has no significant vendor obligations remaining. The
Company generally warrants that its products will function substantially in
accordance with documentation provided to customers for approximately six months
following initial installation. Historically, warranty costs have not been
material. The Company recognizes consulting service revenue, which includes
installation and post installation support under separate agreements, as the
services are provided. Software support revenue, which consists of maintenance
fee agreements, is recognized ratably over the term of the maintenance period.
Payments for maintenance fees are generally made in advance.
13
<PAGE>
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash equivalents and accounts receivable. The risk with
respect to cash equivalents is minimized by the Company's policies in which
investments are only placed with highly rated issuers with relatively short
maturities. The risk with respect to accounts receivable is minimized by the
creditworthiness of the Company's customers, the variety of industries in which
the customers operate, and the Company's credit and collection policies. The
Company performs ongoing credit evaluations of its customers, generally does not
require collateral, and maintains allowances for potential credit losses which,
when realized, have been within the range of management's expectations.
Software Development Costs
The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed" (SFAS No. 86). Under SFAS
No. 86, software development costs incurred until technological feasibility is
established are expensed as research and development. Software development costs
incurred after technological feasibility, which is defined as successful
beta-site testing, is established are capitalized and amortized over the
products' useful life commencing with general release. Amortization is provided
using the straight-line method over the useful life which generally is three
years or less. Software costs eligible for capitalization were not material
during 1996.
Furniture and Equipment
Furniture and equipment are recorded at cost and consist of computers,
furniture, equipment and purchased software. Depreciation is computed by the use
of straight-line methods over the estimated useful lives of the assets which are
three years for purchased software and five years for furniture and fixtures and
computers and equipment.
Goodwill and Organization Cost
Goodwill represents the excess purchase price paid over the net assets acquired
in the purchase of certain assets, business and properties in 1994. Goodwill is
being amortized on a straight line basis over a 15 year period, which is
management's estimate of its useful life. Organization Cost related to the
incorporation of the Company were capitalized and are being amortized on a
straight line basis over a 5 year period, which is management's estimate of its
useful life. Management expects the carrying amounts of these assets to be
recovered.
14
<PAGE>
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 to follow either a new fair value-based method or the current
Accounting Principles Board Opinion No. 25 ( APB 25) intrinsic value-based
method of accounting for its stock-based compensation arrangements for
employees. The Company has elected to continue to account for its stock-based
compensation plans for employees utilizing the provisions of APB 25. FAS No. 123
requires disclosure of pro forma information regarding net income and net income
per share based on fair value accounting for stock-based compensation plans.
Income Taxes
In 1992, the shareholders of the Company elected, under the provisions of
Subchapter S of the Internal Revenue Code, to include the Company's income in
their federal and state income tax returns. Accordingly, the Company has made no
provision for federal or state income taxes.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant areas in which estimates are
used include product warranty claims, allowance for doubtful accounts, useful
lives of furniture and equipment and certain accrued expenses. Actual results
could differ from those estimates.
Fair value of Instruments
The fair value of the Company's financial instruments approximates carrying
value as of December 31, 1996.
3. Furniture and Equipment
Furniture and equipment consists of the following at December 31, 1996:
Computers and equipment $ 443,488
Furniture and fixtures 146,190
Purchased software 132,967
---------
722,645
Less accumulated depreciation (376,509)
---------
15
<PAGE>
Furniture and equipment , net $ 346,136
=========
4. Goodwill and Organization Costs
Goodwill and organization costs consist of the following at December 31, 1996:
Goodwill $ 507,961
Organization costs 2,434
---------
510,395
Less accumulated amortization (75,419)
---------
Goodwill and organization costs, net $ 434,976
=========
5. Stock Options
Grants Pursuant to Employment Arrangements
The Company has various stock option plans pursuant to certain employment
agreements which provide for the grant of incentive awards to officers and other
key employees. Some of the stock options granted under the Plan may qualify as
"incentive stock options" under Section 422A of the Internal Revenue Code. The
price at which shares may be purchased with an option shall be specified by the
Board at the date the option is granted, but in the case of an incentive stock
option shall not be less than fair market value on the date of grant. The
duration of any option shall be specified by the Board, but no option designated
as an "incentive stock option" may be exercised beyond ten years from the date
of grant. No options were granted, canceled or exercised in 1996. At December
31, 1996, 151,252 shares were exercisable.
The following table represents weighted average price and life information about
significant option groups outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Weighted
Option Average Average Average
Grant Number Remaining Exercise Number Exercise
Date Outstanding Life (yrs) Price Exercisable Price
---- ----------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
1992 129,000 5.9 .100 120,938 .100
1993 17,500 6.7 .100 15,313 .100
1995 30,000 8.6 .100 15,000 .100
----------- -----------
176,500 151,251
=========== ===========
</TABLE>
16
<PAGE>
5. Stock Options, continued
The pro-forma net income, as if the compensation cost for the options granted in
1995 had been determined based on the fair value at the grant date in accordance
with the provisions of FAS 123, is not materially different from the actual
reported net income for the year ended December 31, 1996. The fair value of the
options at the date of grant were estimated using the Black-Scholes model with
expected option lives of one year from the date of grant, assuming an interest
rate of 6.0% and a future dividend yield of 0%.
The effect on 1996 pro forma net income of expensing the estimated fair value of
the stock options granted in 1996 are not necessarily representative of the
effects on reporting the results of operations for future years as the periods
presented include only one year of option grants under the Company's plan.
6. Lease Commitments
The Company leases office space under a non-cancelable operating lease. Future
minimum rental payments required under the operating lease with non-cancelable
terms in excess of one year at December 31, 1996 are as follows:
1997 $ 137,296
1998 124,494
1999 95,606
------------
Total $ 357,396
============
Rent expense under operating leases was approximately $265,000 for the year
ended December 31, 1996.
7. Significant Customers
During 1996, approximately 66% of the Company's revenues were derived from four
customers. These customers accounted for 23%, 20%, 13% and 10% respectively.
8. Employee Retirement Plan
On January 1, 1995, the Company adopted a 401k retirement plan ( the Retirement
Plan) that covers substantially all of the Company's employees. Each eligible
employee may contribute up to 15% of their compensation, subject to certain
limitations, to the retirement plan. The Company makes a matching contribution
of 30% on the first 8% of the participant's elective deferral. Company
contributions during 1996 totaled $26,183.
17
<PAGE>
9. Employee Stock Purchase Plan
The Company has a stock purchase plan that allows employees to purchase between
1,000 and 3,000 shares of the Company's non-voting common stock at $.80 per
share. Current employee shareholders will be provided the opportunity to
purchase additional shares only after all non-shareholder employees have been
provided with the same purchase opportunity. The Company has reserved 25,000
shares of its non-voting common stock for the plan. No purchases have been made
under the plan as of December 31,1996.
10. Subsequent Events
On March 31, 1997, all of the Company's outstanding stock was acquired by
Capitol Multimedia, Inc. for $3,853,060. The purchase price was composed of
1,200,000 unregistered shares of the Company's common stock discounted to a
value of $1,050,000, the issuance of non-interest bearing convertible long-term
notes totaling $1,945,000 to sellers and discounted to a value of $1,552,069,
and cash payments totaling $1,250,991. The transaction was accounted for under
the purchase method of accounting for business combinations.
On March 31, 1997, pursuant to various stock option agreements as disclosed in
Note 5 all outstanding options became exercisable upon the qualifying event
noted above. All options were exercised by employees at that time.
On March 31, 1997, various employees purchased a total of 15,000 shares of the
Company's Class B common stock at a purchase price of $.80 per share.
18
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation of our report included in this Form 8K/A into
the Registration Statement Form S-8 pertaining to the 1991 Non-Qualified
Employee Stock Option Plan and the 1992 Non-Qualified, Non Employee Director
Stock Option Plan of Capitol Multimedia, Inc.
ERNST & YOUNG LLP
Boston, Massachusetts
June 24, 1997
19
