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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27934
KATZ DIGITAL TECHNOLOGIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 13-3871120
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TWENTY-ONE PENN PLAZA
NEW YORK, NEW YORK 10001
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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ISSUER'S TELEPHONE NUMBER: (212) 594-4800
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EXCHANGE ON WHICH
TITLE OF CLASS REGISTERED
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Securities registered Common Stock, NASDAQ National Market
pursuant to Section 12(b) $.001 par
of the Exchange Act: value
Securities registered Common Stock,
pursuant to Section 12(g) $.001 par
of the Exchange Act: value
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Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 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 X No
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Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of Issuer'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.
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Issuer's revenues for its most recent fiscal year: $15,565,919
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of March 19, 1997: $5,421,744
The number of shares outstanding of the Issuer's Common Stock is 4,425,000
(as of March 19, 1997).
DOCUMENTS INCORPORATED BY REFERENCE
Part I -- none; Part II -- none; Part III -- The Issuer's Proxy Statement
to be filed prior to April 30, 1997.
Transitional Small Business Disclosure Format: Yes: No: X
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KATZ DIGITAL TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-KSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
ITEMS IN FORM 10-KSB
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PAGE
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Facing page.............................................................................
PART I
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Item 1. Description of Business. ................................................... 1
Item 2. Description of Properties. ................................................. 5
Item 3. Legal Proceedings. ......................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders. ....................... 6
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters. .................. 6
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations. ................................................................ 7
Item 7. Financial Statements........................................................ 9
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure. ................................................................ 25
PART III
- ----------
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act. .................................... 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............................................ 26
Signatures..............................................................................
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
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 expanded such
capabilities by adding Indigo and Heidelberg printing capabilities in February
1995 and February 1996, respectively. In August 1996, the Company acquired The
Sarabande Press, Inc., a company located in lower Manhattan of New York City,
providing services similar to those provided by the Company but to a different
customer base.
In December 1995, the Company effected a merger of its two predecessor
corporations into a new Delaware corporation for the sole purpose of relocating
its state of incorporation from New York to Delaware.
INDUSTRY OVERVIEW
Prepress services involves the transfer of an image into high resolution
masters. During the process, images and colors can be changed to achieve the
desired end result. Once the process is completed, the work is ready for volume
printing. Prior to the use of computers in the design of printed materials,
prepress services were labor-intensive mechanical processes. Digital prepress
services provide the ability to produce high-quality pre-production materials,
such as Iris and Fiery prints, film and paper proofs, full-color film
separations, match prints and plate-ready film, and allow customers to modify or
alter an image prior to approval of the design, in less time and at reduced
costs due to the elimination of labor-intensive mechanical processes.
Printing services traditionally consist of a variety of methods, such as
offset and web printing, which require the production of film for the creation
of printing plates. To produce printed materials using these methods, the
printing plates are installed on the printing press to enable ink to be
transferred to paper. Because of the need to produce film to create printing
plates and the amount of labor required, these methods are generally not cost
efficient for short-run printing. Digital printing enables the reproduction of
an image stored on a computer disk by a number of different digital printing
systems, including Indigo, Cactus and Heidelberg, without the need to create
plate-ready film or traditional printing plates. Instead, such image is either
transferred directly from the Company's computer network to special printing
plates included in the Indigo and Heidelberg short-run printing systems or
delivered directly to a plotter which, in turn, transfers the image to paper in
the Cactus printing process. As a result, digital printing provides a
cost-efficient means to print materials on demand and/or in limited quantities
as required. In addition, by eliminating the need for film in the process,
digital printing allows for faster turnaround times and "on-demand" printing.
The digital prepress and digital printing industry, which began in the
early 1990s as a result of the widespread use of computers, is a new and
emerging industry. The market for these services is growing rapidly and is
expected to continue to grow rapidly in the near future. The Company expects
(based on publicly available reports and articles) that annual revenues from
digital short-run printing services, exclusive of large format printing, will
increase from an estimated $7.2 billion during 1993, or approximately 9% of the
commercial printing market, to an estimated $21 billion, or approximately 20% of
the commercial printing market, by the year 2000. The Company also expects that
annual revenues generated by large format printing services, which were
approximately $260 million in 1994, will increase to approximately $10 billion
by the year 1998.
SERVICES
Prepress Services
The Company's prepress services involve the creation of a digital image,
either by downloading a file from a computer disk provided by the customer onto
the Company's computer network or by scanning printed
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material provided by the customer directly onto such network. The Company then
provides the reproduction of the digital image by any of several printing
processes. The Company's prepress services afford the Company's customers the
ability to modify and enhance an image throughout the design approval process,
with shorter turnaround times and at lower costs than traditional (non-digital)
prepress processes. Once the design is approved by the customer, the Company can
reproduce the image in various formats, including:
- Iris Prints. Iris prints are produced by a continuous-tone ink-jet Iris
digital printing system which continuously applies ink to paper, rather
than printing by noticeable dot patterns, resulting in higher quality
prints. The Company offers Iris printing services on its standard size
Iris printer, which produces printed materials in dimensions up to 11" x
17" on special Iris paper, available in gloss, semi-gloss and matte
finishes. The Company also offers Iris printing services on its
over-sized Iris printer, which produces printed materials in dimensions
up to 33" x 46" on almost any flexible stock medium, including paper,
acetate, vinyl and silk materials. The standard size Iris printer is
typically used to produce proofs for color and design positioning,
mock-ups, annual report proofs and presentation materials in quantities
between one and 150 copies. The over-sized Iris printer is typically used
to produce posters and exhibit and display items in quantities between
one and 50 copies. The Company's normal turnaround time for standard and
oversize Iris prints is approximately five hours and 24 hours,
respectively.
- Fiery Prints. The Company produces less expensive plain paper prints in
dimensions up to 11" x 17" on a Canon(R) color copier utilizing a
toner-based Fiery Raster Image Processor. Fiery prints are superior in
quality to standard color copies because they are printed directly from a
digital file. Fiery prints are generally used for design proofs,
presentation books, packaging labels and other pre-production materials
in varying quantities (typically between 25 and 150 copies), where cost
is more important than color and detail quality. The Company's normal
turnaround time for Fiery prints is approximately five hours.
- Imagesetter Film and Paper Output. The Company uses high-quality
imagesetters to produce black and white film and paper proofs in
dimensions up to 35" x 44". These proofs are typically used by customers
to review print advertisements, newspaper circulars and camera ready
artwork prior to final approval for printing. The Company's normal
turnaround time for these services is approximately five hours.
- Film Separations and Match Prints. Imagesetters are used to digitally
transfer images to any number of separate film pages, each representing a
different color in dimensions up to 35" x 44". The full-color film
separations are used to create printing plates for use in traditional
printing processes. In addition, the film separations can be used to
create match prints, whereby each piece of color film is transferred to
paper, resulting in a full-color proof for review by the customer. The
Company has the capability to digitally enhance, retouch and alter images
to customer specifications prior to the production of film. The Company's
normal turnaround time for these services ranges from approximately four
to 24 hours, depending on the quantity produced.
- Slides. The Company produces full-color slides, by digitally
transferring an image to a slide recorder. Slides are typically used by
customers as presentation materials. The Company's normal turnaround time
for producing slides ranges from approximately four to 24 hours,
depending on the service requested.
- Transfers. The creation of transfers is a traditional prepress process
which involves the transfer of a negative from one surface to another
surface. This service is typically provided to customers who desire to
view a design on a different surface, such as a glass bottle, prior to
printing. This service can also be utilized to create overlays to enhance
transparencies used during presentations. The Company's normal turnaround
time for such services is approximately five hours.
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Digital Printing Services
The Company offers "on demand," digital short-run printing services
utilizing state-of-the-art equipment, enabling the Company to print materials
without the need to produce the film required to create printing plates used in
traditional printing processes. The Company utilizes the following digital
printing systems:
- Indigo E-Print 1000 Digital Press ("Indigo"). The Indigo printing system
is an ink-on-paper printing system which provides an affordable means to
print full-color materials in quantities from one to 1,500 copies.
Printing such limited quantities of most materials by traditional
printing processes is usually cost prohibitive. The Indigo printing
system can print materials in dimensions up to 11" x 17". The Indigo
printing system is typically used to produce sell sheets, compact disk
covers, cassette inserts, newsletters, fliers, brochures, pamphlets,
holiday cards and invitations. The Company's normal turnaround time for
Indigo printing services ranges from approximately twelve to 48 hours,
depending upon the number of copies being produced.
- Cactus 52" Plotter ("Cactus"). The Cactus printing system is a large
format printer which produces full-color materials in dimensions up to
52" in width and up to any length requested by the customer. The Cactus
printing system is typically used to produce posters, billboards and
other large format exhibits, such as bus station advertisements, intended
to be viewed from a distance. The Cactus printing system is a
cost-effective means to produce such materials in quantities as few as
one and up to 150 copies. The normal turnaround time for Cactus printing
services is approximately 24 hours.
- Heidelberg GTO-DI Perfector ("Heidelberg"). The Heidelberg printing
press is a five-color, high-quality printing press which produces
lithographic-quality printed materials. The Heidelberg printing press
prints materials using five colors on a wide variety of paper stock. The
Heidelberg printing press can be used to print materials such as
full-color research reports, post-cards and in-store promotional displays
in dimensions up to 14" x 20", in quantities up to 15,000 copies. The
normal turnaround time for such services ranges from approximately 48 to
72 hours, depending upon the number of copies being produced.
- Finishing. The Company offers a variety of finishing services, such as
laminating, mounting, collating, trimming, stitching, folding and
binding, to customer specifications.
Katz-On Line
The Company offers a service known as Katz On-Line, through which customers
communicate with the Company via computer modem. Customers are able to place
orders with the Company directly over Katz On-Line by completing order forms
electronically and downloading their files onto the Company's computer network.
Katz On-Line can also be used by customers to make inquiries about their
projects and send files to the Company to complete or add to a file previously
sent (either by Katz On-Line or otherwise). During 1996, the Company
significantly enhanced this service through the installation of ISDN
transmission lines, which increases the speed of transmission between the
Company and the customer, as well as the addition of internet capabilities. The
Company believes that Katz On-Line customers who utilize this service shorten
the turnaround time for completion of their projects. The Company anticipates
that Katz On-Line will assist the Company in expanding its customer base outside
of the New York City metropolitan area.
Digital Photography
In the second or third quarter of 1997, the Company intends to commence
operations of its newly constructed digital photography studio. The studio
consists of approximately 8,000 square feet of space and provides facilities for
digital photographic shoots of various types of products. Digital photography,
similar to traditional forms of photography, generally involves the shooting of
still shots of inanimate objects or live models. Unlike traditional photography,
the resulting images are captured and stored on a computer rather than on film
and can be more readily manipulated to meet customer requirements. The Company
expects that digital photography services will attract new customers, as well as
complement the digital printing services provided to existing customers.
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SALES AND MARKETING
The Company's sales efforts are conducted primarily through the efforts of
its 21 sales representatives. Each sales representative maintains a list of
current customers and is expected to solicit potential customers. The Company's
sales representatives are paid a percentage of net sales and, in certain cases,
receive a base salary.
The Company uses various marketing methods, including direct mailings,
in-person solicitations, print advertising, telemarketing and participation in
trade shows. The Company also periodically mails sales brochures and newsletters
and advertises in trade journals. In addition, the Company has sponsored events
in the reception area gallery of its corporate offices at which the Company's
and its customers' print work are exhibited.
The Company generally has not competed for projects through the process of
competitive bidding. The Company believes, however, that, as a result of the
recent increase in its digital printing services, the Company may seek to obtain
projects through the competitive bidding process. There can be no assurance that
the Company will be successful in having its bids accepted for such services,
or, if accepted, that awarded projects will generate sufficient revenues to
result in profitable operations.
COMPETITION
The commercial printing industry is highly fragmented and intensely
competitive. The Company faces competition from several large, financially
strong companies which offer a variety of (i) digital prepress services,
including Iris and Fiery prints and film separations and outputs, all of which
directly compete with the Company's prepress services, and traditional
(non-digital) prepress services which indirectly compete with the Company's
services; and (ii) printing services including digital short-run printing, such
as Indigo, and large format printing, such as Cactus, both of which directly
compete with the Company's printing services, and (iii) long-run traditional
printing services, which the Company does not provide. The Company also faces
competition from smaller printing companies which provide only certain of these
services. Competition is largely based on price, quality, speed and servicing
the specialized needs of customers.
The commercial printing industry, particularly the digital prepress and
printing segment of the industry, is characterized by rapidly evolving
production technology. The Company has invested significant funds in its
equipment, made commitments to finance its leased equipment and expended
substantial time and resources to train its personnel in the operation of its
existing equipment and integrate the operations of its production facility. In
the event of substantial improvements in digital prepress and printing
technologies and equipment, the Company may be required to acquire such new
technologies and equipment, at significant cost, and/or abandon all or a portion
of its existing equipment.
SUPPLY
The Company is dependent on a limited number of third-party suppliers for
most of the ink, film and paper used in its operations. The Company believes
that alternative sources of supply are available for most of such supplies. The
Company is, however, dependent on Indigo America, Inc., the only supplier of the
ink used in connection with the Indigo printing system. The Company also
purchases specially treated paper used for Indigo printing and for standard Iris
prints, from single source suppliers; however, alternative sources of supply are
available for such paper supplies. The Company is dependent on the ability of
its suppliers, among other things, to provide adequate inventories of such
materials within scheduled delivery times. The Company does not maintain
contracts with any of its suppliers and purchases supplies pursuant to purchase
orders placed from time to time in the ordinary course of business. Failure by a
supplier to continue to supply the Company with such material on commercially
reasonable terms, or at all, in the absence of readily available alternative
sources, would adversely affect the Company's ability to deliver products and
provide services in a timely manner and on a competitive cost basis. To date,
the Company has not experienced any material delays or disruptions in its
operations as a result of the failure by any of its suppliers to provide
necessary materials.
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CUSTOMERS
Substantially all of the Company's sales have been made to customers in the
New York City area. The Company's customers include advertising and graphic arts
agencies, publishers, investment banking firms, professional service firms and
commercial banks, as well as businesses in a variety of industries requiring
specialized printing services.
Many of the Company's relationships with its customers are long-standing.
During the year ended December 31, 1996, customers with which the Company had
relationships for three years or longer accounted for approximately 65% of the
Company's net sales. The Company, however, does not generally have any long-term
written commitments from its customers; rather sales are made for individual
projects pursuant to purchase orders placed from time to time in the ordinary
course of business. Continued engagements by customers for successive jobs are
primarily dependent upon the quality of customer service previously provided. No
single customer accounted for greater than 6% of the Company's net sales in the
year ended December 31, 1996.
INTELLECTUAL PROPERTY
Presently, the Company has not registered any patents or trademarks.
However, the Company has submitted an application to register a trademark for
the service mark "KATZ IT!"(TM) which the Company uses in connection with its
marketing for digital prepress and printing services.
GOVERNMENT AND ENVIRONMENTAL REGULATION AND COST OF COMPLIANCE
The Company's operations, although not heavily regulated, are subject to
limited federal, state and local laws, regulations and ordinances governing the
handling and disposal of hazardous substances and relating to employee safety
and health. The Company contracts the services of a third party to remove any
hazardous substances generated in its operations. The Company believes, based
upon its internal control procedures and disposal methods, that it is in
compliance in all material respects with all of such laws, regulations and
ordinances and that no permits or licenses are required for the operation of the
Company's business as presently conducted. To date, the cost of compliance with
such laws, regulations and ordinances has not been material. In the event the
Company expands its operations, it may be subject to additional environmental
laws, regulations or ordinances, including requirements to obtain certain
environmental permits. The Company cannot predict the environmental legislation
or regulations that may be enacted in the future or how existing or future laws
or regulations will be administered or interpreted. Developments such as
additional requirements imposed by more stringent laws or regulations, as well
as more vigorous enforcement policies of regulatory agencies or stricter
interpretation of existing laws, may require additional expenditures by the
Company, some or all of which may be material.
EMPLOYEES
As of March 10, 1997, the Company employed 148 persons, 144 of whom are
full-time employees, including six executive officers. The Company believes that
its relations with its employees are satisfactory. None of the Company's
employees are represented by a union.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases the following properties: (i) approximately 24,000
square feet of space at Twenty-One Penn Plaza, New York, New York, used for the
Company's principal executive offices and production facilities, expiring on
June 30, 2008, with a monthly base rent of $27,702, increasing to $36,937 per
month on July 1, 1998, and further increasing to $40,930 per month on April 1,
2002 for the remainder of the term of the lease; (ii) approximately 8,000 square
feet of space also at Twenty-One Penn Plaza, used for the Company's digital
photography studio, expiring on June 30, 2008, with a monthly base rent of
$11,678.13 until March 31, 2002 and $12,940.63 for the remainder of the term of
the lease; (iii) approximately 5,000 square feet of space at 611 Broadway, New
York, New York, used as a production facility, expiring on January 31, 2002,
with a monthly base rent of $7,400.25; and (iv) approximately 660 square feet of
space at 5300 West Atlantic
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Avenue, Delray Beach, Florida, used for sales offices, expiring February 28,
1998 at a monthly rent of $660. The Company believes that its current facilities
are satisfactory for its present needs.
The Company subleases approximately 5,000 square feet of space at 27 East
31st Street, New York, New York, which was previously used for the Company's
digital printing operations. The term of such sublease expires on September 30,
1999. The monthly base rent is $2,584 through March 31, 1997 and $2,750
commencing April 1, 1997 for the balance of the term. Such sublease will not
relieve the Company of its obligations under the lease in the event of a default
by the Company's subtenant.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Since March 1996, the Company's Common Stock has traded on the NASDAQ
National Market System under the symbol "KATC". The following table sets forth
the high and low sales prices of the Common Stock as reported by NASDAQ for each
full quarterly period since such date.
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HIGH LOW
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Fiscal Year Ending December 31, 1996
First Quarter (March 26 to March 31)....................... $ 6 1/4 $ 5 1/16
Second Quarter............................................. 8 1/8 5 1/4
Third Quarter.............................................. 5 3/4 3 3/4
Fourth Quarter............................................. 4 1/8 2 3/4
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Security Holders
To the best knowledge of the Company, at March 19, 1997, there were 33
record holders of the Company's Common Stock. The Company believes there are
numerous beneficial owners of the Company's Common Stock whose shares are held
in "street name." To the best knowledge of the Company, the number of beneficial
owners as of March 19, 1997 was 920.
Dividends
Except for S corporation distributions made to the Company's stockholders
prior to March 25, 1996 (the effective date of the initial public offering of
the Company's Common Stock), the Company has not paid, and has no current plans
to pay, dividends on its Common Stock. The Company currently intends to retain
all earnings for use in its business.
Sales of Unregistered Securities
In 1996, the Company granted options under its 1996 Stock Option Plan to 43
persons (39 employees, three non-employee directors and one advisor) to purchase
an aggregate of 308,500 shares of the Company's Common Stock at exercise prices
ranging from $4.00 to $5.75 per share.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth for the periods indicated, the percentage of
net sales represented by certain items reflected in the Company's statement of
operations. The statements of operations contained in the Company's financial
statements and the following table include pro forma adjustments for income
taxes.
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YEAR ENDED DECEMBER 31,
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1994 1995 1996
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Net Sales........................................... 100.0% 100.0% 100.0%
Cost of goods sold.................................. 44.4 44.7 51.4
Gross profit........................................ 55.6 55.3 48.6
Selling, general and administrative expenses........ 33.7 36.3 41.3
Net earnings (loss)................................. 19.0 16.1 (1.3)
Pro forma net earnings.............................. 10.9 9.2 2.2
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 were $15,565,919, an
increase of $4,922,181 or 46.2%, as compared to $10,643,738 for the year ended
December 31, 1995. The increase in net sales was primarily attributable to
increased digital short-run printing, sales from the acquisition of The
Sarabande Press, Inc. and an industry trend towards digital printing services
compared to more conventional printing. Digital printing growth was augmented in
February 1996 when the Company acquired its Heidelberg digital printing press.
Net sales also increased as a result of increased sales efforts and the addition
of new sales representatives. The increase in net sales is generally
attributable to increases in the amount of services provided, rather than
increases in the prices charged for its services, since the prices charged for
such services did not increase during the year.
Cost of goods sold for the year ended December 31, 1996 was $7,997,418, an
increase of $3,236,350, or 68.0%, as compared to $4,761,068 for the year ended
December 31, 1995. The increase in cost of goods sold was primarily attributable
to increased production personnel and startup costs for the Company's new
Heidelberg printing press, which generally has greater costs of sales as
compared to other services provided by the Company, and increased production
personnel in other digital short-run printing services. Other contributing
factors included additional costs associated with the Company's fulfillment of
increased orders for the Company's services, severe weather conditions which
hampered production efforts during the Company's move to its current facility in
January 1996 and the inclusion of the operations of The Sarabande Press, Inc.
which was acquired in August 1996.
Gross profit for the year ended December 31, 1996 was $7,568,501, an
increase of $1,685,831, or 28.7%, compared to $5,882,670 for the year ended
December 31, 1995. Gross profit as a percent of net sales decreased to 48.6% for
the year ended December 31, 1996 from 55.3% for the year ended December 31,
1995. The lower gross profit percentage in 1996 was attributable to certain
one-time costs associated with the Company's continued expansion into digital
short-run printing in addition to the impact of an increased proportion of sales
of this lower margin service (compared to digital prepress services).
Selling, general and administrative expenses for the year ended December
31, 1996 were $6,425,896, an increase of $2,561,851, or 66.3%, as compared to
$3,864,045 for the year ended December 31, 1995. The increase was primarily
attributable to increased costs associated with the Company's move to a larger
facility and additional management personnel reflecting increased levels of
business including the acquisition of The Sarabande Press, Inc.
Net interest expense for the year ended December 31, 1996 was $67,421, a
decrease of $37,958, or 36.0%, as compared to $105,379 for the year ended
December 31, 1995. The decrease was due to interest income derived from the
investment of unused proceeds from the Company's initial public offering, offset
by interest costs associated with additional equipment leases. In 1996, the
curtailment loss of $322,179 resulted from the Company's decision to terminate
its defined benefit pension plan.
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Included in the 1996 provision for income taxes is a non-recurring charge
of $660,000 for additional Federal and state income taxes resulting from the
termination of the Company's S Corporation tax status.
As a result of the foregoing, net earnings (loss) decreased to a $197,176
loss for the year ended December 31, 1996 from earnings of $1,708,743 for the
year ended December 31, 1995, a decrease of $1,905,919. Net earnings, after
giving effect to a pro forma adjustment for income tax provisions, would have
been $346,563 and $976,341 for the years ended December 31, 1996 and 1995,
respectively.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales for the year ended December 31, 1995 were $10,643,738, an
increase of $2,495,404 or 30.6%, as compared to $8,148,334 for the year ended
December 31, 1994. The increase in net sales was primarily attributable to the
introduction of the Company's Indigo digital short-run printing services in
February 1995 and additional prepress services associated with such Indigo
digital short-run printing which, in the aggregate, accounted for approximately
$821,000 of net sales, or 32.9% of such increase, and an industry trend towards
digital printing services compared to more conventional printing processes. For
the year ended December 31, 1995, the Company's digital printing services,
including Indigo, accounted for approximately $2,350,000 or 22.1% of net sales,
compared to $730,000 or 9% of net sales for the year ended December 31, 1994.
The increase in net sales was also attributable to initial sales made by the
Company in markets outside the New York City area. The increase in net sales is
attributable to increases in the amount of services provided, rather than
increases in prices charged by the Company for its services, since the prices
for such services did not increase during the year ended December 31, 1995,
compared to the year ended December 31, 1994.
Cost of goods sold for the year ended December 31, 1995 was $4,761,068, an
increase of $1,143,835, or 31.6%, as compared to $3,617,233 for the year ended
December 31, 1994. The increase in cost of goods sold was primarily attributable
to payments of increased commissions to sales personnel and additional costs
associated with the fulfillment of increased orders for the Company's services.
Gross profit for the year ended December 31, 1995 was $5,882,670, an
increase of $1,351,569, or 29.8%, compared to $4,531,101 for the year ended
December 31, 1994. Gross profit as a percentage of net sales decreased to 55.3%
for the year ended December 31, 1995 from 55.6% for the year ended December 31,
1994.
Selling, general and administrative expenses for the year ended December
31, 1995 were $3,864,045, an increase of $1,119,118, or 40.8%, compared to
$2,744,927 for the year ended December 31, 1994. The increase was primarily
attributable to increased overhead costs and salaries of additional sales
personnel to manage the Company's expanded sales force due to increased sales
volume.
Interest expense for the year ended December 31, 1995 was $105,379, an
increase of $62,701, or 146.9%, compared to $42,678 for the year ended December
31, 1994. The increase was due to additional interest expenses payable under
additional capital leases acquired in 1995 relating to the Company's Indigo
printing system.
As a result of the foregoing, net earnings increased to $1,708,743 for the
year ended December 31, 1995, from $1,544,646 for the year ended December 31,
1994, an increase of $164,097, or 10.6%. Net earnings, after giving effect to a
pro forma adjustment for income tax provisions, would have been $976,341 and
$885,631 for the years ended December 31, 1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $4,498,057,
compared to working capital of $1,320,954 at December 31, 1995. Substantially
all of the working capital increase was attributable to increased cash and cash
equivalents including the unused portion of amounts raised through the Company's
initial public offering in 1996. Accounts receivable increased $1,236,384 and
work-in-process inventory increased $62,038 reflecting the Company's increased
volume of business in 1996 and was offset by increased current liabilities also
reflecting the greater levels of activity.
8
<PAGE> 11
Net cash provided by operating activities was $1,017,304 for the year ended
December 31, 1996. The increase in cash from operating activities included
non-cash charges from depreciation and amortization, deferred rent and the
curtailment loss which, in total, more than offset the net loss for the year.
Net cash from operating activities was also reduced by a net increase in
operating assets and liabilities. Net cash used in investing activities totaled
$2,122,135 and resulted principally from investment in property and equipment
and the acquisition of businesses. Net cash provided by financing activities
amounted to $4,332,277 including the net proceeds from the Company's initial
public offering of securities reduced by payments to stockholders and payments
made under capital lease obligations. Cash and cash equivalent balances
increased by $3,227,446 in 1996 to a total of $3,428,175 at December 31, 1996.
The Company maintains a $2,000,000 line of credit with a commercial bank.
At December 31, 1996, there were no outstanding borrowings under the line. The
Company believes that the current cash balances, current borrowing capacity and
cash generated by operations during the year will provide sufficient cash to
meet its operating requirements for the next twelve months.
ITEM 7. FINANCIAL STATEMENTS
The financial statements begin on page 10.
9
<PAGE> 12
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
Katz Digital Technologies, Inc.
We have audited the accompanying balance sheets of Katz Digital
Technologies, Inc. at December 31, 1995 and 1996 and the statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Katz Digital Technologies,
Inc. as of December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
GRANT THORNTON LLP
New York, New York
February 11, 1997, except for the second paragraph
of Note G, as to which the date is February 20, 1997
10
<PAGE> 13
KATZ DIGITAL TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
ASSETS 1995 1996
---------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................ $ 200,729 $ 3,428,175
Certificate of deposit (Note C).................................. 233,600
Accounts receivable, net of allowance for doubtful accounts of
$61,238 and $94,738 at December 31, 1995 and 1996,
respectively.................................................. 1,980,002 3,216,386
Work-in-process inventory........................................ 7,290 69,328
Prepaid expenses and other current assets........................ 137,663 163,514
---------- -----------
Total current assets..................................... 2,559,284 6,877,403
PROPERTY AND EQUIPMENT -- NET (Note D)............................. 1,629,288 3,568,853
DEFERRED PENSION COSTS (Note G).................................... 108,664
OTHER ASSETS....................................................... 110,805 80,333
GOODWILL -- NET (Notes B and I).................................... -- 1,140,819
---------- -----------
$4,408,041 $11,667,408
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses............................ $ 517,630 $ 1,160,254
Current portion of obligations under capital leases (Note E)..... 451,535 699,029
Income taxes payable............................................. 59,165 66,151
Deferred taxes payable (Note F).................................. 210,000 114,000
Due to stockholders (Note H)..................................... -- 339,912
---------- -----------
Total current liabilities................................ 1,238,330 2,379,346
Deferred credits (Note E)........................................ -- 265,520
Deferred taxes payable........................................... -- 265,000
Pension liability................................................ -- 191,258
Obligations under capital leases, net of current portion (Note
E)............................................................ 672,121 1,490,323
---------- -----------
Total liabilities........................................ 1,910,451 4,591,447
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note E)
STOCKHOLDERS' EQUITY (Notes A, H, I and K)
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 and 4,425,000 shares issued and outstanding at
December 31, 1995 and 1996, respectively...................... 2,800 4,425
Additional paid-in capital....................................... -- 6,860,267
Retained earnings................................................ 2,494,790 211,269
---------- -----------
Total stockholders' equity............................... 2,497,590 7,075,961
---------- -----------
$4,408,041 $11,667,408
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE> 14
KATZ DIGITAL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................ $8,148,334 $10,643,738 $15,565,919
Cost of goods sold................................... 3,617,233 4,761,068 7,997,418
---------- ----------- -----------
Gross profit............................... 4,531,101 5,882,670 7,568,501
Operating expenses
Selling, general and administrative................ 2,744,927 3,864,045 6,425,896
---------- ----------- -----------
Total operating expenses................... 2,744,927 3,864,045 6,425,896
---------- ----------- -----------
Operating income..................................... 1,786,174 2,018,625 1,142,605
Curtailment loss (Note G)............................ 332,179
Interest expense, net................................ 42,678 105,379 67,421
---------- ----------- -----------
Earnings before provision for income
taxes.................................... 1,743,496 1,913,246 743,005
Provision for income taxes (Notes B and F)
Current............................................ 177,850 202,503 771,181
Deferred........................................... 21,000 2,000 169,000
---------- ----------- -----------
198,850 204,503 940,181
---------- ----------- -----------
NET EARNINGS (LOSS)........................ $1,544,646 $ 1,708,743 $ (197,176)
========== =========== ===========
Pro forma data (Note J)
Historical income before provision for income
taxes........................................... $1,743,496 $ 1,913,246 $ 743,005
Provision for income taxes......................... 857,865 936,905 396,442
---------- ----------- -----------
Net earnings............................... $ 885,631 $ 976,341 $ 346,563
========== =========== ===========
Net earnings per share............................... $.33 $.08
=== ===
Weighted average number of common shares
outstanding........................................ 2,990,644 4,116,395
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE> 15
KATZ DIGITAL TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK MINIMUM
------------------ PENSION ADDITIONAL TOTAL
PAR RETAINED LIABILITY PAID IN STOCKHOLDERS'
SHARES VALUE EARNINGS ADJUSTMENT CAPITAL EQUITY
--------- ------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993.... 2,800,000 $2,800 $ 1,500,498 $ -- $ 1,503,298
Net earnings.................... -- -- 1,544,646 -- 1,544,646
Distributions to stockholders... -- -- (905,924) -- (905,924)
Minimum pension liability
adjustment (Note G)........... -- -- -- (94,136) (94,136)
--------- ------ -------- -------- ----------
BALANCE AT DECEMBER 31, 1994.... 2,800,000 2,800 2,139,220 (94,136) 2,047,884
Net earnings.................... -- -- 1,708,743 -- 1,708,743
Distributions to stockholders... -- -- (1,353,173) -- (1,353,173)
Minimum pension liability
adjustment (Note G)........... -- -- -- 94,136 94,136
--------- ------ -------- -------- ----------
BALANCE AT DECEMBER 31, 1995.... 2,800,000 2,800 2,494,790 -- 2,497,590
--------- ------ -------- -------- ----------
Net loss........................ -- -- (197,176) -- (197,176)
Distributions to stockholders... -- -- (1,586,345) -- (1,586,345)
Net proceeds from public
offering...................... 1,625,000 1,625 $6,360,267 6,361,892
Transfer of S Corp. retained
earnings to additional paid-in
capital....................... -- -- (500,000) -- 500,000 --
--------- ------ -------- -------- ---------- ----------
BALANCE AT DECEMBER 31, 1996.... 4,425,000 $4,425 $ 211,269 $ -- $6,860,267 $ 7,075,961
========= ====== ======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE> 16
KATZ DIGITAL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss)............................... $ 1,544,646 $ 1,708,743 $ (197,176)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities
Depreciation and amortization.................. 333,417 554,051 1,085,718
Deferred rent.................................. 265,520
Interest payable to stockholders............... 49,034
Curtailment loss............................... 332,179
Increase (decrease) in cash flows from changes
in operating assets and liabilities, net of
acquisitions in 1996
Accounts receivable.......................... (510,364) (138,274) (1,236,384)
Work-in-process inventory.................... (1,731) (1,754) (62,038)
Prepaid expenses and other current assets.... (5) (44,028) (16,481)
Other assets................................. (30,727) (61,566) 10,579
Accounts payable and accrued expenses........ 77,897 156,060 642,624
Income taxes payable......................... 59,352 (14,941) 6,986
Deferred taxes payable....................... 21,000 2,000 169,000
Net pension liability........................ (29,695) (78,969) (32,257)
----------- ----------- -----------
Net cash provided by operating activities...... 1,463,790 2,081,322 1,017,304
----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment................ (152,376) (394,290) (1,057,787)
Purchase (release from escrow) of Certificate of
Deposit........................................ (233,600) 233,600
Cash paid for acquisitions........................ -- (1,297,948)
----------- ----------- -----------
Net cash used in investing activities.......... (152,376) (627,890) (2,122,135)
----------- ----------- -----------
Cash flows from financing activities
Distributions to stockholders..................... (905,924) (1,353,173) (1,295,467)
Payments of obligations under capital leases...... (234,790) (356,172) (734,148)
Net proceeds from public offering................. 6,361,892
----------- ----------- -----------
Net cash (used in) provided by financing
activities................................... (1,140,714) (1,709,345) 4,332,277
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 170,700 (255,913) 3,227,446
Cash and cash equivalents -- beginning of period.... 285,942 456,642 200,729
----------- ----------- -----------
Cash and cash equivalents -- end of period.......... $ 456,642 $ 200,729 $ 3,428,175
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest....................................... $ 45,511 $ 115,394 $ 196,567
Income taxes................................... $ 102,188 $ 217,444 $ 762,899
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
Capital lease obligations of $345,854, $792,986, and $1,848,931 were
incurred in December 31, 1994, 1995 and 1996, respectively, when the Company
entered into new leases for equipment.
The accompanying notes are an integral part of these statements.
14
<PAGE> 17
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A -- DESCRIPTION OF BUSINESS
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 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.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Revenue Recognition
Revenue is recognized upon the shipment of finished merchandise to
customers.
2. Income Taxes
Prior to the consummation of a public offering on March 26, 1996, the
Company filed its Federal and state income tax returns under the provisions of
Subchapter S of the Internal Revenue Code. Accordingly, no provision had been
made 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. The Company was, however, liable for
certain state and local taxes, which are reflected in the accompanying financial
statements. Upon closing of the public offering, the Company's income tax status
as an S Corporation terminated. The Company converted to a C Corporation,
adopting the accrual basis of accounting, and is subject to both Federal and
state income taxes. Deferred income taxes are recognized because of differences
between financial and tax reporting.
Pro forma income taxes reflect an additional provision for income taxes at
the effective statutory Federal, state and local rates applied to the Company's
financial statement income in each period.
3. Property and Equipment
Property and equipment are carried at cost. Depreciation of the fixed
assets is computed principally by the straight-line method for financial
reporting purposes over 5-7-year periods. Capital leases are recorded at the
lower of fair market value or the present value of future minimum lease
payments. These leases are amortized on the straight-line method over 3-7 years.
4. Work-in-Process Inventory
Inventories are stated at the lower of cost (first-in, first-out) or
market.
5. Concentrations and Fair Value of Financial Instruments
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, certificates of
deposit and trade accounts receivable. The Company places its cash and cash
equivalents, and certificates of deposit with high credit quality institutions.
In general, such investments exceed the FDIC insurance limit. The Company
provides credit, in the normal course of business, to a significant number of
advertising firms in New York City. The Company routinely assesses the financial
strength of its customers and, as a consequence, believes that its trade
accounts receivable exposure is limited.
15
<PAGE> 18
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The carrying value of financial instruments potentially subject to valuation
risk (principally consisting of cash, certificates of deposit, accounts
receivable and accounts payable) approximate fair market value.
The Company is dependent upon a limited amount of third parties for certain
supplies used in its operations. Although the Company believes that alternatives
are available for most of the supplies, one product is available from a sole
source. The Company's inability to obtain these supplies could have a severe
impact in the near term.
6. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could affect those estimates.
7. Goodwill
Goodwill represents the excess of purchase price over net assets of
businesses acquired and is being amortized by the straight-line method over its
estimated useful lives ranging from 5 to 10 years. At December 31, 1996,
accumulated amortization amounted to $67,859.
The Company considers goodwill impairment by applying a number of factors
as of each balance sheet date including (i) current operating results of the
applicable business, (ii) projected future operating results of the applicable
business, (iii) the occurrence of any significant regulatory changes which may
have an impact on the continuity of the business, and (iv) any other material
factors that affect the continuity of the applicable business. The amortization
period for goodwill is determined on a case-by-case basis for each acquisition
from which goodwill arises based on a review of the nature of the business
acquired as well as the factors cited above.
8. Cash Equivalents
The Company considers all highly liquid securities, including certificates
of deposit, with an original maturity of three months or less to be cash
equivalents.
NOTE C -- LINE OF CREDIT
The Company entered into an agreement with a bank providing for a
$2,000,000 line of credit. Borrowings under the line of credit bear interest at
the prime rate plus 1/2% (8.75% on December 31, 1996), are collateralized by
trade receivables of the Company and become due on June 30, 1997. Availability
under the line of credit was reduced in 1995 by $467,200 as a result of entering
into a letter of credit agreement (Note E) and a $233,600 certificate of deposit
was placed in escrow. In 1996, the restricted $233,600 certificate of deposit
was released by the bank, and the line of credit availability was increased in
the amount of the letter of credit. The line of credit contains certain
covenants including minimum net worth and tangible net worth requirements.
16
<PAGE> 19
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
---------- -----------
<S> <C> <C>
Furniture and fixtures............................. $ 81,249 $ 137,765
Equipment.......................................... 2,589,051 4,956,455
Leasehold improvements............................. 112,268 493,932
---------- -----------
2,782,568 5,588,152
Less accumulated depreciation and amortization..... (1,153,280) (2,019,299)
---------- -----------
$1,629,288 $ 3,568,853
========== ===========
</TABLE>
NOTE E -- LEASE COMMITMENTS
1. Capital Lease Agreements
The Company has entered into various capital lease agreements for computers
and other equipment, carried at $1,901,405 and $3,549,408 at 1995 and 1996,
respectively. The leases expire at various times through 2001. Accumulated
amortization amounted to $835,476 and $1,438,406 at 1995 and 1996, respectively.
The related future minimum lease payments, as of December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
----------
<S> <C>
Fiscal year
1997........................................................... $ 873,240
1998........................................................... 737,599
1999........................................................... 522,570
2000........................................................... 353,914
2001........................................................... 67,269
----------
Net minimum lease payments....................................... 2,554,592
Amount representing interest..................................... 365,240
----------
Obligations under capital lease agreements....................... $2,189,352
==========
Current portion.................................................. $ 699,029
Long-term portion................................................ 1,490,323
----------
$2,189,352
==========
</TABLE>
2. Operating Lease Commitments
The Company leases office space and various equipment under operating lease
arrangements which run through 2008. The rent expense under these operating
leases for the years ended December 31, 1994, 1995 and
17
<PAGE> 20
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996 was $283,225, $304,536 and $723,659, respectively. The future minimum
rentals for operating leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Year ending December 31, 1997.................................... $1,020,318
1998........................................................... 868,414
1999........................................................... 765,259
2000........................................................... 655,869
2001........................................................... 583,380
Thereafter..................................................... 4,261,421
----------
$8,154,661
==========
</TABLE>
On September 27, 1995, the Company entered into a lease for office space
which expires in June 2008. In order to secure the lease, the Company entered
into a letter of credit agreement for $467,200. Rent expense under this lease is
accounted for on the straight-line basis.
NOTE F -- INCOME TAXES
Prior to the consummation of a public offering, the Company filed its
Federal and state income tax returns under the provisions of Subchapter S of the
Internal Revenue Code utilizing the cash basis of accounting. Accordingly, no
provision was recorded 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 became subject to both Federal and state income taxes. Accordingly, $660,000
of 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 in connection with the breaking of the S Corporation
election. Such charge is solely due to the termination of the Subchapter S
status and is nonrecurring.
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Deferred income taxes arise principally from differences between the
accrual method of accounting used for financial reporting and the cash method of
accounting used for income tax purposes through March 26, 1996 and differences
in amounts deducted for pension expense for income tax purposes and amounts
deducted for financial reporting purposes (Note I). The effect of the change to
the accrual method of accounting for income tax purposes will be included in
taxable income ratably over a four year-period.
18
<PAGE> 21
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Components of the Company's deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
-------- ---------
<S> <C> <C>
Difference between accrual and cash basis of
accounting.......................................... $154,003 $ 611,000
Accrued pension (curtailment)......................... 47,950 (78,000)
Tax over financial statement depreciation............. 8,047 (13,000)
Deferred rent......................................... (125,000)
Goodwill amortization................................. (4,000)
Allowance for doubtful accounts....................... (12,000)
-------- ---------
$210,000 $ 379,000
======== =========
Short-term............................................ $210,000 $ 114,000
Long-term............................................. -- 265,000
-------- ---------
$210,000 $ 379,000
======== =========
</TABLE>
NOTE G -- PENSION PLAN
On December 30, 1993, the Company adopted a qualified defined benefit plan
(the "Plan") which replaced a weighted profit-sharing plan. The Plan covers all
employees with at least one year of service who are at least 21 years of age.
Pension plan benefits are based on participants' compensation. The annual
contribution is based on the minimum amounts as determined under the Employee
Retirement Income Security Act of 1974 ("ERISA"). The pension expense for the
years ended December 31, 1994, 1995 and 1996 was $165,824, $249,486 and
$154,612, respectively. The Plan's assets are invested in guaranteed investment
contracts and life insurance policies.
On February 20, 1997, the Board of Directors adopted a resolution to
terminate the Company's defined benefit plan as of March 20, 1997. Under the
provisions of SFAS No. 88, "Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the
Company recognized a $332,179 ($.04 per share after tax) net curtailment loss in
1996.
Net pension cost for the Company-sponsored pension plan prior to the
curtailment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Normal service cost.................................... $194,088 $151,799
Interest cost.......................................... 50,312 37,083
Actual return on plan assets........................... 17,954 (35,270)
Net amortization and deferral.......................... (12,868) 1,000
-------- --------
Net pension cost....................................... $249,486 $154,612
======== ========
</TABLE>
19
<PAGE> 22
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the funded status of the plan to the amount reported
in the Company's balance sheet is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Actuarial present value of benefit obligations
Estimated present value of vested benefits.... $ 622,856 $ 285,499 $ 429,661
Estimated present value of nonvested
benefits................................... 69,141 87,254 106,295
--------- --------- ---------
Accumulated benefit obligation............. 691,997 372,753 535,956
Value of future pay increases................. 51 150,285 140,833
--------- --------- ---------
Projected benefit obligation............... 692,048 523,038 676,789
Estimated market value of plan assets........... 151,098 497,455 719,476
--------- --------- ---------
(Deficiency) excess of plan assets over
projected benefit obligation............. (540,950) (25,583) 42,687
Prior service costs............................. 476,509 457,449 438,389
Unrecognized net loss (gain).................... 94,136 (323,202) (340,155)
Adjustment to recognize minimum liability....... (540,899)
--------- --------- ---------
Pension (liability) asset before
curtailment loss......................... $(511,204) $ 108,664 140,921
========= =========
Curtailment loss................................ (332,179)
---------
Pension liability............................... $(191,258)
=========
</TABLE>
The assumptions used as of December 31, 1995 and 1996 in determining
pension expense and funded status shown above were as follows:
<TABLE>
<S> <C>
Discount rate........................................................ 7.09%
Rate of salary progression........................................... 3.00
Long-term rate of return on assets................................... 7.09
</TABLE>
NOTE H -- STOCKHOLDERS' EQUITY
Initial Public Offering
On March 26, 1996, the Company consummated an initial public offering of
1,600,000 shares of its common stock at a price of $5.00 per share. The net
proceeds to the Company from the offering were approximately $6,361,892. In
connection with the public offering, the Company declared to its principal
stockholders an S Corporation dividend of retained earnings in excess of
$500,000. To the extent that the Company did not have sufficient cash to pay
such distribution, it issued promissory notes payable in an aggregate monthly
amount of $100,000, which payments commenced in April and are payable through
March 25, 1997 with interest at 9% per annum.
In connection with the December 1995 merger as described in Note A, the
Board of Directors declared a 14,000-to-1 stock split of the Company's common
stock, resulting in outstanding shares of 2,800,000. An amount equal to $2,800
was transferred from retained earnings to the common stock account as of January
1, 1993 to retroactively reflect the split.
The Certificate of Incorporation authorizes the Board of Directors to issue
preferred stock, from time to time, in one or more series, with such voting
powers, designations, preferences, and relative, participating, optional,
conversion or other special rights, and such qualifications, limitations and
restrictions, as the Board of Directors may, in its sole discretion, determine.
20
<PAGE> 23
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- ACQUISITION OF THE SARABANDE PRESS, INC.
On August 1, 1996, the Company completed the acquisition of certain of the
assets of The Sarabande Press, Inc. ("Sarabande"), a digital pre-press firm
located in New York City. The purchase price for the acquired assets, which will
not exceed $1,900,000, is subject to adjustment based on the performance of
Sarabande. At closing, the Company paid Sarabande one million dollars in cash.
The $900,000 balance of the purchase price, which is subject to adjustment
based on the gross revenue of Sarabande in the twelve (12) months following the
acquisition and has been accounted for as contingent purchase price for
financial accounting purposes, consisted of: (i) a five hundred thousand dollar
($500,000) promissory note with interest at the prime rate, payable to
Sarabande, and convertible at Sarabande's option into shares of the Company's
common stock (the "Note"), and (ii) 78,745 shares (valued at $400,000) of the
Company's common stock (the "Shares"). If the sales of Sarabande are less than
the minimum provided for in the purchase agreement, first the number of Shares,
and then the principal amount of the Note, will be reduced. The statements
reflect the $1,000,000 in cash paid at the closing and the $900,000 contingent
purchase price has not been given effect in the financial statements and will be
recorded when the contingency is resolved.
The acquisition of Sarabande has been treated as a "purchase" for the
purposes of generally accepted accounting principles, with the minimum purchase
price of $1,000,000 plus acquisition expenses allocated based on the fair value
of the assets acquired and liabilities assumed. Approximately $990,678 was
allocated to goodwill. The results of Sarabande have been included from its date
of acquisition.
The unaudited pro forma results of operations, which reflect the purchase
of Sarabande into the Company as if the combination occurred as of the beginning
of each period, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net sales......................................... $13,135,338 $16,992,885
Net earnings...................................... $ 1,891,344 $ 60,639
Pro forma net earnings(1)......................... $ 1,083,499 $ 451,125
Pro forma net earnings per share(1) $.36 $.11
</TABLE>
- ---------------
(1) Also adjusted to reflect additional income taxes which the Company was not
subject to because of its status as an S Corporation.
The pro forma information should be read in conjunction with the related
historical information.
NOTE J -- PRO FORMA INFORMATION
1. Pro Forma Statements of Earnings (Unaudited)
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 was not
subject to until March 26, 1996. The pro forma provision for income taxes, after
giving effect to the Federal statutory rate of 34% and an approximate state and
local tax provision of 14% after reflecting the Federal tax benefit, consists of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Federal.................................... $501,307 $553,482 $225,505
State and local............................ 356,558 383,423 170,937
-------- -------- --------
$857,865 $936,905 $396,442
======== ======== ========
</TABLE>
21
<PAGE> 24
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The differences between pro forma income tax expense shown in the
statements of earnings and the pro forma computed income tax expense based on
the Federal statutory corporate tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Computed income taxes based on Federal
statutory corporate rate of 34%.......... $592,789 $650,504 $252,622
State and local income taxes, net of
Federal benefit.......................... 235,328 253,059 112,819
Permanent differences...................... 29,748 33,342 31,001
-------- -------- --------
$857,865 $936,905 $396,442
======== ======== ========
</TABLE>
2. Pro Forma Earnings Per Share
Pro forma earnings per share are based on the weighted average number of
common 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 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 shareholder
distribution in excess of 1995 undrawn earnings and shares contingently issuable
in connection with the Sarabande acquisition. Stock options have not been
included in the calculation as their inclusion would be antidilutive.
NOTE K -- STOCK OPTIONS AND STOCK PURCHASE WARRANTS
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 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 those 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 as of the effective date of its public offering at
$5 per share, the initial public offering price.
The following table summarizes option activity for the year ended December
31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
------- --------
<S> <C> <C>
Balance, December 31, 1995
Granted................................................ 308,500 $ 4.99
Exercised.............................................. -- --
Forfeitures............................................ (40,000) 4.69
-------
Balance at December 31, 1996............................. 268,500 5.04
=======
</TABLE>
22
<PAGE> 25
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, options outstanding for 268,500 shares were
exercisable at prices ranging from $4.00 to $5.75, and the weighted remaining
contractual life was 4.3 years.
The following table summarizes option data as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 LIFE PRICE 1996 PRICE
------------------ ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$4 to $6.......... 268,500 4.3 $ 5.04 61,000 $ 5.00
</TABLE>
The Company applies APB Opinion No. 25 in measuring stock compensation.
Accordingly, no compensation cost has been recorded for options granted to
employees or directors in the year ended December 31, 1996. The fair value of
each option granted has been estimated on the grant date using the Black-Scholes
Option Valuation Model. The following assumptions were made in estimating fair
value:
<TABLE>
<S> <C>
Dividend yield...................................................... 0%
Risk-free interest rate............................................. 6.03%
Expected life after vesting period
Directors and officers............................................ 2 years
Others............................................................ 1 year
Expected volatility................................................. 57.15%
</TABLE>
Had compensation cost been determined under SFAS No. 123 for the year ended
December 31, 1996, net income and earnings per share would have been reduced as
follows:
<TABLE>
<S> <C>
Net earnings
As reported..................................................... $346,563
Pro forma for stock options..................................... 153,497
Pro forma earnings per share
As reported..................................................... $.08
Pro forma for stock options..................................... .04
</TABLE>
During the initial phase-in period of SFAS No. 123, such compensation
expense may not be representative of the future effects of applying this
statement.
NOTE L -- EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain officers
and employees.
Amounts due under such employment agreements are as follows:
<TABLE>
<S> <C>
1997............................................................. $1,168,000
1998............................................................. 1,223,000
1999............................................................. 1,166,000
2000............................................................. 360,000
2001............................................................. 210,000
----------
$4,127,000
==========
</TABLE>
23
<PAGE> 26
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- INTEREST EXPENSE, NET
Interest expense, net is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
------- -------- ---------
<S> <C> <C> <C>
Interest expense, net
Interest expense......................... $45,511 $115,394 $ 245,601
Interest income.......................... (2,833) (10,015) (178,180)
------- -------- ---------
$42,678 $105,379 $ 67,421
======= ======== =========
</TABLE>
24
<PAGE> 27
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required under this Item relating to members of the Board
of Directors, Executive Officers, promoters and control persons of the Company,
as well as compliance with Section 16(a) of the Exchange Act will be included in
the Company's 1997 Notice of Annual Meeting of Stockholders and Proxy Statement
under the headings "Security Ownership of Certain Beneficial Owners and
Management," "Election of Directors," "Executive Officers," and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934," which will be filed
within 120 days after the close of the Company's fiscal year, and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required under this Item relating to executive compensation
will be included in the Company's 1997 Notice of Annual Meeting of Stockholders
and Proxy Statement under the heading "Executive Compensation," which will be
filed within 120 days after the close of the Company's fiscal year, and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item relating to security ownership of
certain beneficial owners and management will be included in the Company's 1997
Notice of Annual Meeting of Stockholders and Proxy Statement under the heading
"Security Ownership of Certain Beneficial Owners and Management," which will be
filed within 120 days after the close of the Company's fiscal year, and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item relating to certain relationships
and related transactions will be included in the Company's 1997 Notice of Annual
Meeting of Stockholders and Proxy Statement under the heading "Certain
Relationships and Related Transactions," which will be filed within 120 days
after the close of the Company's fiscal year, and is incorporated herein by
reference.
25
<PAGE> 28
KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of the Company(1)
3.2 By-Laws of the Company(1)
4.1 Form of Common Stock Certificate(1)
10.1 1996 Stock Option Plan(1)
10.2 Employment Agreement by and between the Company and Gary Katz(1)
10.3 Employment Agreement by and between the Company and Lisa K. Sklar(1)
10.4 Employment Agreement by and between the Company and Michael Sklar(1)
10.5 Employment Agreement by and between the Company and Geoffrey Barsky(1)
10.6 Lease of the Company's offices at Twenty-One Penn Plaza, New York, New York(1)
13 1997 Notice of Annual Meeting of Stockholders and Proxy Statement(2)
21 Subsidiaries of the Company(*)
27 Financial Data Schedule(*)
</TABLE>
- ---------------
* Filed herewith.
(1) Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
dated March 25, 1996 (File No. 333-1190), and the amendments thereto, and
incorporated herein by reference.
(2) To be filed by the Company within 120 days after the close of the Company's
fiscal year, and is incorporated herein by reference.
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the fourth quarter
of the fiscal year ended December 31, 1996.
26
<PAGE> 29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Issuer
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 20, 1997 KATZ DIGITAL TECHNOLOGIES, INC.
By: /s/ GARY KATZ
------------------------------------
Gary Katz
Chairman and CEO
In accordance with the Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Issuer and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------ ---------------
<C> <S> <C>
/s/ GARY KATZ Chairman and Chief Executive Officer March 20, 1997
- ---------------------------------------- (Principal Executive Officer)
Gary Katz
/s/ DONALD L. FLAMM Vice President -- Finance and Chief March 20, 1997
- ---------------------------------------- Financial Officer (Principal
Donald L. Flamm Financial and Accounting Officer)
/s/ MICHAEL D. SKLAR Vice President -- Business March 20, 1997
- ---------------------------------------- Development and Director
Michael D. Sklar
/s/ MURRAY L. SKALA Director March 20, 1997
- ----------------------------------------
Murray L. Skala
/s/ RONALD B. GRUDBERG Director March 20, 1997
- ----------------------------------------
Ronald B. Grudberg
/s/ BURTT R. EHRLICH Director March 20, 1997
- ----------------------------------------
Burtt R. Ehrlich
</TABLE>
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Company (1)..............................
3.2 By-Laws of the Company (1)...................................................
4.1 Form of Common Stock Certificate (1).........................................
10.1 1996 Stock Option Plan (1)...................................................
10.2 Employment Agreement by and between the Company and Gary Katz (1)............
10.3 Employment Agreement by and between the Company and Lisa K. Sklar (1)........
10.4 Employment Agreement by and between the Company and Michael Sklar (1)........
10.5 Employment Agreement by and between the Company and Geoffrey Barsky (1)......
10.6 Lease of the Company's offices at Twenty-One Penn Plaza, New York, New York
(1)..........................................................................
13 1997 Notice of Annual Meeting of Stockholders and Proxy Statement (2)........
21 Subsidiaries of the Company (*)..............................................
27 Financial Data Schedule (*)..................................................
</TABLE>
- ---------------
* Filed herewith.
(1) Filed as an Exhibit to the Company's Registration Statement on Form SB-2,
dated March 25, 1996 (File No. 333-1190), and the amendments thereto, and
incorporated herein by reference.
(2) To be filed by the Company within 120 days after the close of the Company's
fiscal year, and is incorporated herein by reference.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Katz Boston Acquisition Corp., a Delaware corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE KATZ
DIGITAL TECHNOLOGIES, INC. FINANCIAL STATEMENTS AS PRESENTED IN THE COMPANY'S
FORM 10-KSB FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,428,175
<SECURITIES> 0
<RECEIVABLES> 3,216,386
<ALLOWANCES> 94,738
<INVENTORY> 69,328
<CURRENT-ASSETS> 6,877,403
<PP&E> 3,568,853
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,667,408
<CURRENT-LIABILITIES> 2,379,346
<BONDS> 0
0
0
<COMMON> 4,425
<OTHER-SE> 7,071,536
<TOTAL-LIABILITY-AND-EQUITY> 11,667,408
<SALES> 15,565,919
<TOTAL-REVENUES> 15,565,919
<CGS> 7,997,418
<TOTAL-COSTS> 6,425,896
<OTHER-EXPENSES> 332,179
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,421
<INCOME-PRETAX> 743,005
<INCOME-TAX> 940,181<F1>
<INCOME-CONTINUING> (197,176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (197,176)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THE PROVISION FOR INCOME TAXES INCLUDES A ONE-TIME CHARGE OF $660,000 RELATING
TO ADDITIONAL FEDERAL AND STATE INCOME TAXES APPLICABLE TO TEMPORARY DIFFERENCES
IN THE RECOGNITION OF INCOME AND EXPENSES FOR FINANCIAL ACCOUNTING AND INCOME
TAX REPORTING AT MARCH 26, 1996.
</FN>
</TABLE>
