<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission File No. 0-27934
Katz Digital Technologies, Inc.
(Exact name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3871120
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Twenty One Penn Plaza, New York, New York 10001
(Address of Principal Executive Offices) (Zip Code)
(212) 594-4800
(Issuer's Telephone Number
Including Area Code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes: No: None Required
--- -------------
State the number of shares outstanding of each of the Issuer's classes
of common stock, as of May 9, 1996.
Class Number of Shares
Common Stock, $.01 par value 4,425,000
Transitional Small Business Disclosure Format:
Yes: No: X
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PAGE 1 of 13 PAGES
<PAGE> 2
KATZ DIGITAL TECHNOLOGIES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
QUARTER ENDED MARCH 31, 1996
ITEMS IN FORM 10-QSB
Facing Page Page
Part I
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9
Part II
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Default Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. 12
Signatures 13
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE> 4
KATZ DIGITAL TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, March 31, 1996
CURRENT ASSETS 1995 (Unaudited)
---- -----------
<S> <C> <C>
Cash ................................................ $ 200,729 $ 6,518,395
Certificate of deposit .............................. 233,600 233,600
Accounts receivable, net of allowance for doubtful
accounts of $61,238 and $68,738 at December 31,
1995, and March 31, 1996, respectively ......... 1,980,002 2,650,964
Work-in-process inventory ........................... 7,290 51,003
Prepaid expenses and other current assets ........... 137,663 142,581
----------- -----------
Total current assets ........................... 2,559,284 9,596,543
PROPERTY AND EQUIPMENT - NET ........................ 1,629,288 3,287,937
DEFERRED PENSION COSTS .............................. 108,664 108,664
OTHER ASSETS ........................................ 110,805 195,700
----------- -----------
$ 4,408,041 $13,188,844
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses .......... $ 517,630 930,414
Current portion of obligations under capital
leases ....................................... 451,535 488,370
Income taxes payable ........................... 59,165 69,954
Deferred taxes payable ......................... 210,000 332,000
Note payable-bank .............................. -- 532,800
Due to stockholders ............................ -- 1,127,786
----------- -----------
Total current liabilities ................... 1,238,330 3,481,324
Deferred taxes payable ......................... -- 601,000
Other deferred liabilities ..................... -- 107,934
Obligations under capital leases, net of current
portion ...................................... 672,121 2,097,751
----------- -----------
Total liabilities .............................. 1,910,451 6,288,009
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Preferred stock, $.001 par value; 5,000 shares
authorized; no shares issued ................. -- --
Common stock, $.001 par value; 25,000,000
shares authorized; 2,800,000 shares issued
and outstanding at December 31, 1995 and
4,425,000 at March 31, 1996 .................. 2,800 4,425
Additional paid-in capital ..................... -- 6,872,689
Retained earnings .............................. 2,494,790 23,721
----------- -----------
Total stockholders' equity ..................... 2,497,590 6,900,835
----------- -----------
$ 4,408,041 $13,188,844
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
KATZ DIGITAL TECHNOLOGIES, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended March 31
1995 1996
---- ----
<S> <C> <C>
Net Sales ......................................... 2,548,814 3,343,114
Cost of goods sold ................................ 1,025,751 1,671,654
----------- -----------
Gross Profit ............................. 1,523,063 1,671,460
Operating expenses
Selling, general and administrative ...... 984,848 1,311,650
----------- -----------
Total operating expenses ................. 984,848 1,311,650
----------- -----------
Operating income .................................. 538,215 359,810
----------- -----------
Interest expense, net ............................. 27,959 32,534
----------- -----------
Earnings before provision for income taxes 510,256 327,276
Income taxes (including $723,000 nonrecurring
provision relating termination of Subchapter S
Status on March 25, 1996) ......................... 56,264 775,000
Net earnings (loss) ...................... $ 453,992 $ (447,724)
=========== ===========
Pro forma data
Historical income before provision for
income taxes ............................. $ 510,256 $ 327,276
Provision for income taxes ............... $ 250,887 165,563
----------- -----------
Net earnings ...................................... $ 259,369 $ 161,713
=========== ===========
Earnings per share:
Pro forma earnings per share ............. $ 0.09 $ 0.05
=========== ===========
Weighted average shares outstanding ...... 2,954,443 3,051,224
=========== ===========
</TABLE>
5
<PAGE> 6
KATZ DIGITAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1995 March 31, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net earnings ........................................ $ 453,992 $ (447,724)
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation and amortization ................... 130,018 224,007
Increase (decrease) in cash flows from
changes in operating assets and liabilities
Accounts receivable ........................ 70,359 (670,962)
Work-in-process inventory .................. (1,635) (43,713)
Other current assets ....................... 46,555 (4,918)
Other assets ............................... 3,570 (84,895)
Accounts payable and accrued
expenses ................................. 195,740 412,784
Income taxes payable ....................... (29,900) 10,789
Deferred taxes payable ..................... -- 723,000
Note payable-bank .......................... -- 532,800
Other deferred liabilities ................. (39,058) 107,934
Net pension liability ...................... 31,378 --
----------- -----------
Net cash provided by operating activities ....... 861,019 759,102
----------- -----------
Cash flows from investing activities
Purchase of property and equipment ................ (118,464) (258,423)
----------- -----------
Net cash used in investing activities ...... (118,464) (258,423)
----------- -----------
Cash flows from financing activities
Distributions to stockholders ..................... (337,189) (395,467)
Payments of obligations under capital leases ...... (67,200) (161,860)
Net proceeds from public offering ................. -- 6,374,314
----------- -----------
Net cash provided by (used in) financing activities (404,389) 5,816,987
Net increase (decrease) in cash and cash
equivalents ..................................... 338,166 6,317,666
Cash -- beginning of period ......................... 456,642 200,729
----------- -----------
Cash -- end of period ............................... 794,808 6,518,395
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest ................................... $ 27,568 $ 36,369
=========== ===========
Income taxes ............................... $ 79,724 $ 86,164
=========== ===========
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
Capital lease obligation of $658,049 and 1,699,272 were incurred in the
quarter ended March 31, 1995 and 1996, respectively, when the Company
entered into new leases for equipment.
6
<PAGE> 7
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A -- DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Katz Digital Technologies, Inc. (the "Company") was formed in December 1995 and
is incorporated in the state of Delaware as a result of a merger between Katz
Graphics Corporation, which was formed in August 1991, and Katz Digital
Technologies, Inc., which was formed in November 1986, and which were both New
York corporations. The merger was accounted for in a manner similar to a pooling
of interests, and, accordingly, the accompanying financial statements include
the accounts of Katz Graphics Corporation and Katz Digital Technologies, Inc.
for all periods presented. Assets and liabilities were recorded at net book
value.
The Company provides a broad range of digital prepress and digital short-run
printing services to produce full-color and black and white printed materials to
a wide variety of market segments, principally in the New York City area.
The summarized financial information included herein does not include all
disclosures required to be included in a complete set of financial statements
prepared in conformity with generally accepted accounting principles. Such
disclosures were included with the financial statements of the Company at
December 31, 1995 and for the year then ended included in the Registration
Statement on Form SB-2 (Registration No. 333-1190) and related prospectus as
declared effective by the Securities and Exchange Commission on March 25, 1996.
Such statements should be read in conjunction with the data herein.
The financial information contains all adjustments (consisting of normal
recurring accruals) which, in the opinion of management, are deemed necessary
for a fair presentation of the results for the interim periods. The results for
the interim periods are not necessarily indicative of results that may be
expected for the full fiscal year.
NOTE B -- TERMINATION OF S CORPORATION STATUS AND PRO FORMA
INFORMATION
Pro Forma Information
Prior to the consummation of the public offering the Company filed its Federal
and state income tax returns under the provisions of Subchapter S of the
Internal Revenue Code. Accordingly, no provision was provided in the
accompanying financial statements for Federal and certain state income taxes for
the S Corporation periods, since the income of the Company was taxable directly
to its stockholders. On March 26, 1996 the Company converted to a C Corporation,
adopted the accrual basis of accounting, and is subject to both Federal and
state income taxes. Accordingly, $723,000 additional Federal and state income
taxes, applicable to temporary differences in the recognition of income and
expenses for financial accounting and income tax reporting purposes existing at
March 26, 1996 have been recorded and charged to operations for the three months
ended March 31, 1996. Such charge is solely from the termination of the
Subchapter S status and is nonrecurring.
The pro forma adjustment in the statements of earnings reflects a provision for
income taxes based upon pro forma pretax earnings as if the Company had been
subject to Federal and additional state and local income taxes which it is not
currently subject to. The pro forma income tax provision has been prepared in
accordance with SFAS No. 109.
7
<PAGE> 8
Pro Forma Earnings Per Share
Pro Forma earnings per share are based on the weighted average number of common
and common equivalent shares outstanding during the period. The shares
outstanding for the period give retroactive effect to the merger and
recapitalization of the Company as well as 154,443 shares deemed to be
outstanding, which represent the approximate number of shares deemed to be sold
by the Company (at an assumed initial public offering price of $5.00 per share)
to fund the portion of the $1,127,786 distribution in excess of 1995 undrawn
earnings.
NOTE C -- STOCKHOLDERS' EQUITY
Initial Public Offering
On March 26, 1996, the Company consummated an initial public offering of
1,600,00 shares of its Common Stock at a price of $5.00 par share. The net
proceeds to the Company from the offering were approximately $6,400,000. In
connection with the offering the Company declared to its principal stockholders,
an S Corporation dividend of retained earnings in excess of $500,000.
NOTE D -- STOCK OPTION PLAN
In February 1996, the Board of Directors and Stockholders approved the adoption
of a stock option plan (the "Plan"). The Plan provides for the grant of options
to purchase up to 350,000 shares of the company's common stock. These options
may be granted to employees, officers of the Company, nonemployee directors of
the Company and consultants to the Company. The Plan provides for granting of
options to purchase the Company's common stock at not less than the fair market
value of such shares on the date of the grant.
The Plan provides for a one-time automatic grant of an option to purchase 20,000
shares of common stock at the market value of the common stock on the date of
the grant to these directors serving on the Board of Directors on the date that
the Plan was adopted and also to those persons who become nonemployee directors
of the Company in the future, upon their appointment or election as directors of
the Company. The Plan also provides for an annual grant to each nonemployee
director of the Company of options to purchase 5,000 shares at the market value
of the common stock of the Company on the date of each grant.
The Company granted options to purchase an aggregate of 241,000 shares of common
stock under the Plan at $5.00 per share.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Katz Digital Technologies, Inc. (the "Company") provides a broad range
of digital prepress and digital short-run printing services to produce
full-color and black and white printed materials. The company was organized in
1987 as a typography brokerage business and, in February 1991, discontinued
substantially all of its typography brokerage operations and commenced offering
digital prepress services. The company commenced offering digital short-run
printing services in February 1994 with its Cactus printing system and recently
expanded such capabilities by adding Indigo and Heidelberg printing capabilities
in February 1995 and February 1996 respectively.
In December 1995, the Company effected a merger of its two predecessor
corporations into a newly-formed Delaware corporation for the sole purpose of
relocating its state of incorporation from New York to Delaware.
On March 26, 1995, the Company consummated an initial public offering
of 1,600,000 shares of its common stock at a price of $5.00 per share.
Quarter ended March 31, 1996 compared to the Quarter ended March 31, 1995.
Net sales for the quarter ended March 31, 1996 were $3,343,114, an
increase of $794,300 or 31.2% compared to $2,548,814 for the quarter ended March
21, 1995. The increase in net sales was primarily attributable to increased
digital short-run printing services and additional pre-press services associated
with digital short-run printing, which in the aggregate accounted for
approximately $405,497 or 51% of such increase, and an industry trend towards
digital printing services compared to more conventional printing processes. In
addition, the Company introduced the Heidelberg printing press in late February,
1996, which accounted for approximately $55,000 of net sales in the first
quarter. The increase in net sales is attributable to increases in the amount of
services provided, rather than increases in the prices charged by the Company
for its services, since the prices for such services did not increase during the
quarter ended March 31, 1996, as compared to the quarter ended March 31, 1995.
Net sales also increased due to increased sales efforts and the addition of
three new sales representatives.
Cost of goods sold for the quarter ended March 31, 1996 was $1,671,654,
an increase of $645,903, or 63.0%, as compared to $1,025,751 for the quarter
ended March 31, 1995. The increase was attributable to increased production
personnel and start up costs for the Company's new Heidelberg printing press,
which generally has higher cost of sales as compared to the other services
provided by the Company, increased production personnel in other digital
short-run printing services and increased commissions to sales personnel,
additional costs associated with the Company's fulfillment of increased orders
for the Company's services and severe weather conditions which hampered
production efforts during the Company's move to its new headquarters in January
1996.
Selling, general and administrative expenses for the quarter ended
March 31, 1996 were $1,311,650, an increase of $326,802, or 33.1%, as compared
to $984,848 for the quarter ended March 31, 1995. This increase was primarily
attributable to increased overhead costs associated with the Company's move to
larger headquarters coupled with additional management personnel to manage the
increased space and expanded sales force.
Interest expense for the quarter ended March 31, 1996 was $32,534, an
increase of $4,575, or 16.3%, as compared to $27,959 for the quarter ended March
31, 1995. The increase is primarily attributable to borrowings under the
Company's credit facility.
9
<PAGE> 10
Included in income taxes for the quarter ended March 31, 1996, is a
nonrecurring charge of $723,000 for additional Federal and state income taxes
resulting from the termination of Subchapter S status.
As a result of the foregoing, the Company recorded a net loss of
$447,724 for the quarter ended March 31, 1996 as compared to net earnings of
$453,992. Excluding the non recurring provision relating to the termination of
the Company's Subchapter S on Match 25, 1996 of $723,000, pro forma net income
would have been $161,713 for the quarter ended March 31, 1996 as compared to pro
forma net earnings of $259,369 for the quarter ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
On March 26, 1996 the Company consummated an initial public offering of
an aggregate of 1,600,000 shares of its Common Stock at a price of $5.00 per
share. Net proceeds from the offering were approximately $6,400,000. Prior to
the offering, the Company historically financed its working capital requirements
principally through cash flow from operations and the use of its credit
facility.
Net cash provided by operating activities was $759,102 for the quarter
ended March 31, 1996. The increase in cash provided by operating activities
during the quarter ended March 31, 1996 was primarily attributable to
depreciation and amortization, and an increase in accounts payable and accrued
expenses, income taxes payable and deferred taxes payable, partially offset by
an increase in accounts receivable, work in process inventory and other assets.
Net cash used in investing activities for the quarter ended March 31, 1996 was
$258,423 and reflects the Company's purchase of property and equipment. Net cash
provided by financing activities for the quarter ended March 31, 1996 was
$5,816,987 and reflects stockholder distributions of $395,467 and payments of
capital lease obligation of $161,860. In addition, the company received
approximately $6,370,000 from the consumamtion of its initial public offering.
At March 31, 1996, the Company had cash of $6,518,395.
Net cash provided by operating activities was $861,019 for the quarter
ended March 31, 1995. The increase in cash provided by operating activities
during the quarter ended March 31, 1995 was attributable to net earnings,
depreciation and amortization, and increases in the pension liability, income
taxes payable, and accounts payable and accrued expenses, coupled with an
increase in accounts receivable. Net cash used in investing activities for the
quarter ended March 31, 1995 was $118,464 and reflects the purchase of property
and equipment. Net cash used in financing activities for quarter ended March 31,
1995 was $404,389 and reflects stockholder distributions of $337,189 and
payments of capital lease obligations of $67,200.
In June 1995, the Company obtained a $1,000,000 line of credit (the
"Credit Line") from European American Bank ("EAB"). The Credit Line bears
interest at a prime rate plus 1%, and is available until June 30, 1996. The
Credit Line provides for the issuance of term loans (the "Term Loans") in
amounts not to exceed $400,000 in the aggregate, which bear interest at prime
rate plus 1 1/2%. the aggregate of all amounts outstanding under the Credit Line
may not exceed $1,000,000. The availability of funds under the Credit Line has
been reduced to $467.200 as a result of the issuance by EAB of a standby letter
of credit to secure the Company's obligations under the lease for its current
facilities. At March 31, 1996, the Company had $532,800 outstanding under the
Credit Line in addition to $467,000 outstanding under the letter of credit. The
Company, in April 1996, used a portion of the net proceeds of the offering to
repay the amount of its borrowings under the Credit Line. The Company, however,
intends to use, from time to time, as the need arises, the increased borrowing
capabilities from such reduction of outstanding borrowings, The Company has
pledged to EAB all of its accounts receivable, machinery, equipment, fixtures
and furnishings to secure its obligations under the Credit Line and has also
pledged a certificate of deposit in the amount of $233,600 to secure its
obligations under the letter of credit.
10
<PAGE> 11
The Company had elected to be taxed as an S corporation and,
accordingly, was not subject to Federal income taxes. Net income has been taxed
for Federal income taxes purposes directly to the company's stockholders. On
March 26, 1996 the Company converted to a C corporation, adopted the accrual
basis of accounting and became subject to both Federal and additional state
income taxes. From January 1, 1996 through March 25, 1996, the Company made S
corporation distributions in the aggregate amount of approximately $387,400. The
Company declared an S corporation distribution to its principal stockholders of
its retained earnings in excess of $500,000 on March 25, 1996. On March 26,
1996, the Company converted to a C corporation, adopted the accrual basis of
accounting and is subject to both Federal and state income taxes. Distributions
will be made pursuant to the Stockholder Notes in monthly installments of
$100,000, commencing one month after the date of the offering.
The Company's primary cash requirements have been to expand its
operations, fund the cost of its capital leases and pay overhead costs in
connection with the operation of its business. The Company anticipates, based on
currently proposed plans and assumptions relating to its operations, that the
proceeds from the public offering of $1,600,000 of its common stock, together
with projected cash flow from operations and available cash resources, including
the Credit Line, will be sufficient to satisfy its anticipated cash
requirements, for at least twelve months.
11
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
3.1 Certificate of Incorporation (1)
3.2 By-Laws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Underwriter's Warrant Agreement (1)
10.1 1996 Stock Option Plan
10.2 Employment Agreement with Gary Katz (1)
10.3 Employment Agreement with Lisa Katz-Sklar (1)
10.4 Employment Agreement with Michael Sklar (1)
10.5 Employment Agreement with Geoffrey Barsky (1)
10.6 Lease of offices at Twenty-One Penn Plaza, New York,
New York (1)
------------------
(1) Filed as an exhibit to the Issuer's Registration Statement on
Form SB-2 (File No. 333-11960) and amendments thereto and
incorporated herein by reference.
(B) REPORT ON FORM 8-K
No reports on Form 8-K were filed during the first quarter of 1996.
12
<PAGE> 13
SIGNATURES
In accordance with Section 13 or 15(d) of the exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned,
thereto duly authorized.
Registrant:
KATZ DIGITAL TECHNOLOGIES, INC.
Dated: May 10, 1996 By: /s/ Gary Katz
----------------------------------
Gary Katz
President & Chief Executive Officer
Dated: May 10, 1996 By: /s/ Mitchell M. Cohen
----------------------------------
Mitchell M. Cohen
Chief Accounting Officer
13
<PAGE> 14
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 6518395
<SECURITIES> 233600
<RECEIVABLES> 2719702
<ALLOWANCES> 68738
<INVENTORY> 51003
<CURRENT-ASSETS> 9596543
<PP&E> 3287937
<DEPRECIATION> 0
<TOTAL-ASSETS> 13188844
<CURRENT-LIABILITIES> 3451324
<BONDS> 0
0
0
<COMMON> 4425000
<OTHER-SE> 6872689
<TOTAL-LIABILITY-AND-EQUITY> 13185844
<SALES> 3343114
<TOTAL-REVENUES> 3343114
<CGS> 1671654
<TOTAL-COSTS> 1311650
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36534
<INCOME-PRETAX> 327276
<INCOME-TAX> 775000
<INCOME-CONTINUING> (447724)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (447724)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
