<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the quarterly period ended September 30, 1998
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission file number 0-27934
KATZ DIGITAL TECHNOLOGIES, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
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<CAPTION>
Delaware 13-3871120
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<S> <C>
(State or other (I.R.S. Employer
jurisdiction of Identification No)
incorporation or
organization)
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Twenty One Penn Plaza, New York, New York 10001
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(Address of Principal Executive Offices)
(212) 594-4800
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(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 Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's classes
of common equity, as of the last practicable date: 5,092,622 as of November
1, 1998
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<CAPTION>
Class Number of Shares
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<S> <C>
Common Stock, $.001 par value 5,092,622
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Transitional Small Business Disclosure Format (check one):
Yes No X
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KATZ DIGITAL TECHNOLOGIES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
NINE MONTHS ENDED SEPTEMBER 30, 1998
ITEMS IN FORM 10-QSB
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Facing Page
Page
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Part I
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II
Item 1. Legal Proceedings None
Item 2. Changes in Securities 12
Item 3. Default Upon Senior Securities 12
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 13
Signatures
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PART I
Item 1. Financial Statements
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<TABLE>
<CAPTION>
KATZ DIGITAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1998
(Unaudited) December 31, 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 432,593 $ 1,651,930
Accounts receivable, net of allowance for doubtful accounts of $375,123
and $94,738 at September 30, 1998 and December 31, 1997, respectively 9,423,764 4,723,183
Work-in-process inventory 477,907 100,483
Prepaid expenses and other current assets 379,213 106,651
Prepaid income taxes 339,516 185,554
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Total Current Assets 11,052,993 6,767,801
PROPERTY AND EQUIPMENT - NET 6,456,565 3,893,006
OTHER ASSETS 417,482 288,508
GOODWILL - NET 11,495,379 2,627,485
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$29,422,419 $ 13,576,800
================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 4,104,379 $ 1,732,277
Current portion of notes payable 194,505 -
Term loan 4,625,000 -
Revolving credit loan 5,189,000 -
Current portion of obligations under capital leases 1,491,518 739,603
Income taxes payable - -
Deferred taxes payable 58,000 186,000
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Total Current Liabilities 15,662,402 2,657,880
DEFERRED CREDITS 457,450 410,774
DEFERRED TAXES PAYABLE - 85,000
NOTES PAYABLE 250,792 300,000
OBLIGATIONS UNDER CAPITAL LEASES, NET OF
CURRENT PORTION 1,936,636 1,351,568
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Total Liabilities 18,307,280 4,805,222
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 5,000 shares authorized;
no shares issued - -
Common stock, $.001 par value; 25,000,000 shares authorized;
5,092,622 and 4,705,202 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively 5,093 4,705
Additional paid-in capital 9,088,848 7,687,621
Retained earnings 2,021,198 1,079,252
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Total Stockholders' Equity 11,115,139 8,771,578
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$29,422,419 $ 13,576,800
================================================
The accompanying notes are an integral part of these statements.
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<CAPTION>
KATZ DIGITAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net sales $ 10,597,588 $ 5,560,534 $ 32,668,638 $ 14,711,263
Cost of goods sold 5,242,472 2,486,337 16,061,272 6,546,880
------------ ------------ ------------ ------------
Gross profit 5,355,116 3,074,197 16,607,366 8,164,383
Selling, general and administrative expenses 4,425,065 2,420,204 13,224,705 6,635,271
------------ ------------ ------------ ------------
Operating income 930,051 653,993 3,382,661 1,529,112
Merger transaction costs 379,469 -- 379,469 --
Aborted stock offering costs 186,563 -- 186,563 --
Interest expense-net 291,654 27,021 878,796 76,407
Other (income) (7,363) -- (36,426) --
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Earnings before provision for income taxes 79,728 626,972 1,974,259 1,452,705
Provision for income taxes 152,987 310,226 1,032,312 716,945
------------ ------------ ------------ ------------
Net earnings (loss) $ (73,259) $ 316,746 $ 941,947 $ 735,760
Basic earnings per share $(0.01) $0.07 $0.19 $0.16
============ ============ ============ ============
Diluted earnings per share $(0.01) $0.07 $0.18 $0.16
============ ============ ============ ============
Weighted average shares outstanding:
Basic 5,074,016 4,546,349 5,023,123 4,486,550
Diluted 5,576,867 4,798,179 5,428,541 4,687,578
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<TABLE>
<CAPTION>
KATZ DIGITAL TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
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1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 941,947 $ 735,760
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,180,861 995,122
Deferred credits 46,676 115,840
Gain on early termination of capital lease -- (8,790)
Deferred taxes (213,000) (114,000)
Merger transaction costs 379,469
Aborted stock offering costs 186,563
Increase (decrease) in cash flows from changes
in operating assets and liabilities, net of
acquisitions in 1998:
Accounts receivable (1,012,643) (1,582,451)
Work-in-process inventory 101,008 (12,284)
Prepaid expenses and other current assets 4,877 23,872
Prepaid income taxes (153,962)
Other assets 98,858 12,094
Accounts payable and accrued expenses 451,575 396,760
Income taxes payable -- (68,975)
Net pension liability -- (36,808)
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Net cash provided by operating activities 3,012,229 456,140
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Cash flows from investing activities:
Acquisition of Speed Graphics (292,731)
Acquisition of Advanced Digital Services, Inc. -- (470,023)
Proceeds from sale of equipment 350,000
Purchase of property and equipment - net (466,351) (666,756)
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Net cash used in investing activities (409,082) (1,136,779)
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Cash flows from financing activities:
Distributions to stockholders -- (339,912)
Merger transaction costs (379,469)
Aborted stock offering costs (186,563)
Proceeds from exercise of stock options 7,955
Revolving credit borrowings 225,000
Term loan payments (1,375,000) --
Note payments (897,662) --
Payments of obligations under capital leases (1,216,745) (559,235)
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Net cash used in financing activities (3,822,484) (899,147)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,219,337) (1,579,786)
Cash and cash equivalents - beginning of period 1,651,930 3,428,175
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Cash and cash equivalents - end of period $ 432,593 $ 1,848,389
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Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 841,546 $ 171,596
Income taxes $ 1,421,014 $ 797,700
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
Capital lease obligations of $366,428 and $803,524 were incurred in the
nine month periods ended September 30, 1998 and 1997, respectively, as a
result of the Company entering into new equipment leases.
In conjunction with the 1996 acquisition of The Sarabande Press, Inc.,
notes payable, common stock, additional paid in capital and accrued
interest totaling $767,276 with a corresponding amount of goodwill, was
recorded in the nine month period ended September 30, 1997
See Note C for additional information and non-cash investing and financing
activities related to the acquisitions of Speed Graphics, Inc. and
Advanced Digital Services, Inc.
The accompanying notes are an integral part of these statements.
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KATZ DIGITAL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The summarized financial information included herein does not include all
disclosures required 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, 1997 and
for the year then ended in the Company's Form 10KSB as filed with the Securities
and Exchange Commission. These statements should be read in conjunction with the
data therein.
The financial information included herein 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 period. The
results for the interim periods are not necessarily indicative of results that
may be expected for the full fiscal year. Certain reclassifications have been
made to the prior year statements to conform to the current year presentation.
NOTE B - PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany transactions have been
eliminated.
NOTE C - ACQUISITIONS
As reported on a Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 13, 1997, on July 31, 1997 the Company completed
its acquisition by merger of Advanced Digital Services, Inc. ("ADS"). As
aggregate consideration for the merger, the ADS shareholders received $1,406,284
as adjusted, composed of cash in the amount of $500,000, 301,818 shares of the
Company's common stock (valued at $835,673), and promissory notes in the
aggregate principal amount of $70,611, with interest payable thereon at an
annual rate of 7% and becoming due and payable July 1, 2002. The purchase price
was in the quarter ended September 30, 1998 by $124,620 based on the collection
of certain accounts receivable. Concurrently with the merger, each of the ADS
shareholders, who were also the former principal officers of ADS, entered into
employment agreements to become Vice Presidents of the Company for five-year
terms, as well as agreements imposing certain noncompetition and confidentiality
restrictions.
The acquisition of ADS has been treated as a "purchase" for the purposes of
generally accepted accounting principles, with the purchase price allocated
based on the fair value of the assets acquired and liabilities assumed.
Approximately $1,476,000 was allocated to goodwill.
As reported on Current Reports on Form 8-K filed with the Securities and
Exchange commission on January 23, 1998 and March 24, 1998 respectively, on
January 9, 1998 as amended on March 6, 1998, a wholly owned subsidiary of the
Company acquired substantially all the assets of Speed Graphics, Inc. ("Speed")
and DDP, Inc. an affiliate of Speed. Speed is based in New York City and
provides commercial photo lab, prepress photo imaging and digital short-run
printing services.
As aggregate consideration for the acquisition, Speed received cash in the
amount of $10,964,000 and 173,913 shares of the Company's common stock. In
addition, the Company incurred approximately $610,000 of expenses related to the
acquisition (principally legal, accounting and other professional services)
which were included in the calculation of the total purchase price. The
acquisition has been treated as a "purchase" for accounting purposes and
approximately $8,853,000 was allocated to goodwill. Goodwill is being amortized
over a 20 year period.
At June 30, 1998, the Company was still compiling certain information required
to complete the allocation of the purchase price of ADS and Speed. In July 1998
the remaining ADS contingency was resolved and resulted in no
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further adjustment. All Speed contingencies were resolved in the quarter ended
September 30, 1998 and resulted in the recording of additional immaterial
amounts.
Concurrently with the acquisition of Speed, the Company entered into a loan
agreement with a commercial bank whereby the bank agreed to loan the Company (i)
$6,000,000 in the form of a secured term loan and (ii) $7,000,000 in the form of
a secured revolving credit facility note. As of September 30, 1998, the Company
was not in compliance with one of its loan covenants as a result of expenses
incurred in conjunction with an aborted public stock offering and expenses
related to its merger activities. The Company is in the process of seeking a
waiver from the lender. If the waiver is not obtained, the outstanding balances
on the loans could become due and payable and as a result, the Company has
reclassified $7,814,000 of long-term debt to current liabilities.
NOTE D - PRO FORMA RESULTS
The unaudited pro forma results of operations, which reflects the purchases of
ADS and Speed as if they had occurred as of the beginning of the period, are as
follows:
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<CAPTION>
Nine Months Ended September 30,
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1998 1997
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<S> <C> <C>
Net Sales $32,668,638 $ 34,076,206
Net Earnings $ 941,947 $ 1,467,102
Pro Forma Net Earnings $ 941,947 $ 1,304,751
Pro Forma Basic Earnings Per Share $ .19 $ .26
Pro Forma Diluted Earnings Per Share $ .18 $ .25
</TABLE>
NOTE E - EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share,"
which is effective for financial statements for interim and annual periods
ending after December 31, 1997 and requires that all prior period earnings per
share data be restated. The Company's financial statements reflect this
adoption. The new standard eliminates primary and fully diluted earnings per
share and requires presentation of basic and, if applicable, diluted earnings
per common share. Basic earnings per common share is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding for the period. Diluted earnings per common share reflect the
weighted average common shares outstanding and dilutive potential common shares,
such as stock options.
NOTE F - EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 31, 1997. The
Statement addresses the reporting and presentation of comprehensive income and
its components. Adoption of SFAS No. 130 relates to disclosure within the
financial statements and did not impact the Company's financial statements.
In June 1997, the FASB also released SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. The Statement changes the way publicly owned
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports on a comprehensive basis beginning with the Company's
quarter ending March 31, 1999. Adoption of SFAS No. 131 is not expected to have
a material effect on the Company's financial statements.
NOTE G - CONTINGENCIES
The Company is involved in various claims arising in the ordinary course of
business which it believes would not have a material impact on the Company's
financial position or results of operations.
NOTE H - Merger Agreement
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On September 1, 1998 the Company entered into an Agreement and Plan of Merger
with Photobition Group PLC ("Photobition") under which the Company will become a
wholly-owned subsidiary of Photobition. The holders of outstanding shares of the
Company's common stock and vested options, warrants and other convertible
securities are expected to receive a total of approximately $47.0 million based
on a price of $8.78 per share and holders of unvested options are expected to
receive an additional approximately $3.0 million.
The transaction is subject to standard closing conditions, including the
approval of the Company's shareholders. Photobition has deposited $2.0 million
in escrow to be paid to the Company if the transaction fails to close under
certain conditions and the Company has agreed to pay a break-up fee in the same
amount if the Company withdraws from the merger to accept a competing
acquisition proposal or for certain other breaches of its obligations under the
agreement. Gary Katz, the Company's chairman, chief executive officer and
largest shareholder, and his family have agreed to vote their shares of stock in
favor of the merger. The Company has granted Photobition an option to acquire up
to 19.9% of the Company's stock in the event the Company accepts an alternative
acquisition proposal. The agreements also provide for Mr. Katz to remain with
the Company upon completion of the merger and enter into a one-year consulting
agreement at a monthly fee of $41,667.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 condensed
consolidated statements of operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 49.5% 44.7% 49.2% 44.5%
Gross profit 50.5% 55.3% 50.8% 55.5%
Selling, general and administrative
expenses 41.8% 43.5% 40.5% 45.1%
Net earnings (loss) (.7%) 5.7% 2.9% 5.0%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales for the three months ended September 30, 1998 were $10,597,588,
an increase of $5,037,054, or 90.6%, compared to $5,560,534 for the three months
ended September 30, 1997. The increase in net sales was primarily attributable
to the inclusion of sales from Speed Graphics, Inc. ("Speed"), whose assets and
business were acquired as of January 1, 1998 (the "Speed Acquisition").
Cost of goods sold for the three months ended September 30, 1998 was
$5,242,472, an increase of $2,756,135, or 110.9%, compared to $2,486,337 for the
three months ended September 30, 1997. The increase in cost of goods sold was
primarily attributable to costs related to the increased sales resulting from
the Speed Acquisition.
Gross profit for the three months ended September 30, 1998 was $5,355,116,
an increase of $2,280,919, or 74.2%, compared to $3,074,197 for the three months
ended September 30, 1997. Gross profit as a percent of net sales decreased to
50.5% for the three months ended September 30, 1998 from 55.3% in the prior
year. The lower gross profit percentage in 1998 was primarily attributable to
the inclusion in sales of Speed's non-digital or traditional photo-lab services,
which historically have a lower gross profit percentage than digital products
and services.
Selling, general and administrative expenses for the three months ended
September 30, 1998 were $4,425,065, an increase of $2,004,861, or 82.8%,
compared to $2,420,204 for the three months ended September 30, 1997. The
increase was primarily attributable to selling, general and administrative costs
related to the Speed operations.
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In the quarter ended September 30, 1998, the Company charged against
income costs related to two specific activities: $379,469 relating to merger
related activities and $186,563 related to an aborted stock offering.
Net interest expense for the three months ended September 30, 1998 was
$291,654, an increase of $264,633, compared to $27,021 for the three months
ended September 30, 1997. The increase was due to interest costs associated with
borrowings used to finance the Speed Acquisition plus the interest costs of
Speed's capital leases.
The Company's effective tax rate for the three months ended September 30,
1998 was 191.9%, compared to 49.5% for the three months ended September 30,
1997. The unusual tax rate in 1998 results from certain merger related costs not
being tax deductible.
As a result of the foregoing, net earnings decreased to a loss of $73,259
($.01 per diluted share) for the three months ended September 30, 1998 from
earnings of $316,746 ($.07 per diluted share) for the prior comparable period,
a decrease of $390,005, or $.08 per diluted share.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Net sales for the nine months ended September 30, 1998 were $32,668,638,
an increase of $17,957,375, or 122.1%, compared to $14,711,263 for the nine
months ended September 30, 1997. The increase in net sales was primarily
attributable to the inclusion of sales from Speed.
Cost of goods sold for the nine months ended September 30, 1998 was
$16,061,272, an increase of $9,514,392, or 145.3%, compared to $6,546,880 for
the nine months ended September 30, 1997. The increase in cost of goods sold was
primarily attributable to costs related to the increased sales resulting from
the Speed Acquisition.
Gross profit for the nine months ended September 30, 1998 was $16,607,366,
an increase of $8,442,983, or 103.4%, compared to $8,164,383 for the nine months
ended September 30, 1997. Gross profit as a percent of net sales decreased to
50.8% for the nine months ended September 30, 1998 from 55.5% in the prior year.
The lower gross profit percentage in 1998 was primarily attributable to the
inclusion in sales of Speed's non-digital or traditional photo-lab services,
which historically have a lower gross profit than digital products and services.
Selling, general and administrative expenses for the nine months ended
September 30, 1998 were $13,224,705, an increase of $6,589,434, or 99.3%,
compared to $6,635,271 for the nine months ended September 30, 1997. The
increase was primarily attributable to selling, general and administrative costs
related to the Speed operations.
In the nine months ended September 30, 1998, the Company charged against
income costs related to two specific activities: $379,469 relating to merger
related activities and $186,563 related to an aborted stock offering.
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Net interest expense for the nine months ended September 30, 1998 was
$878,796, an increase of $802,389, compared to $76,407 for the nine months ended
September 30, 1997. The increase was due to interest costs associated with
borrowings used to finance the Speed Acquisition plus the interest costs of
Speed's capital leases.
The Company's effective tax rate for the nine months ended September 30,
1998 was 52.3% compared to 49.4% for the nine months ended September 30, 1997.
The increased tax rate in 1998 results from certain merger related costs not
being tax deductible.
As a result of the foregoing, net earnings increased to $941,947 ($.18 per
diluted share) for the nine months ended September 30, 1998 from $735,760 ($.16
per diluted share) for the prior comparable period, an increase of $206,187, or
$.02 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had negative working capital of
$4,609,409, compared to positive working capital of $4,109,921 at December 31,
1997, a decrease of $8,719,330. The negative working capital at September 30,
1998 and principal reason for the decrease from December 31, 1997 was the
reclassification of the Company's Revolving Credit Loans and non-current portion
of its Term Loans (a combined total of $7,814,000) from non-current liabilities
to current liabilities. See Note C to the Condensed Consolidated Financial
Statement.
Net cash provided by operating activities totaled $3,012,229 for the nine
months ended September 30, 1998, compared to $456,140 for the prior comparable
period. The increase in cash from operating activities in the first nine months
of 1998 compared to the first nine months of 1997 resulted principally from (i)
an increase in net income, (ii) the increase in depreciation and amortization
which now includes amounts from Speed's operations, as well as the goodwill
amortization from the Speed Acquisition and (iii) a smaller increase in accounts
receivable, as compared to the first nine months of 1997. These increases were
partially offset by increases in prepaid income taxes resulting from the
overpayment of estimated taxes.
Cash used in investing activities decreased $727,697 from the prior year
to $409,082. Reduced cash usage resulted from (i) lower levels of spending for
new equipment, and (ii) proceeds from the sale of certain redundant equipment,
partially offset by the cash used for the Speed Acquisition.
Cash used in financing activities increased $2,923,337 to $3,822,484 in
the first nine months of 1998 as a result of the inclusion of payments due under
Speed's capital leases, scheduled payments on the Company's Term Loans used to
finance the Speed Acquisition and repayment of debt related to equipment
disposed of during the nine month period.
The net effect of cash flows from operating activities, investing
activities and financing activities was a net decrease in cash during the first
nine months of 1998 of $1,219,337 to an ending balance of $432,593.
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<PAGE> 13
The Company maintains a $7,000,000 revolving credit facility with a
commercial bank, of which $5,189,000 was outstanding at September 30, 1998, an
increase of $200,000 from June 30, 1998. The Company believes that current cash
balances, available borrowing capacity on its revolving credit facility and cash
generated from operations will provide sufficient cash to meet its operating
requirements for the next twelve months. See "Cautionary Statement Regarding
Forward Looking Information." As of September 30, 1998, the Company was not in
compliance with one of its loan covenants as a result of expenses incurred in
conjunction with an aborted public stock offering and expenses related to its
merger activities. The Company is in the process of seeking a waiver from the
lender. If the waiver is not obtained, the outstanding balances on the loans
could become due and payable and as a result, the Company has reclassified
$7,814,000 of long-term debt to current liabilities.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
This quarterly report on Form 10-QSB contains certain forward-looking
statements and information relating to the Company that are based on the beliefs
of management, as well as assumptions made by and information currently
available to the Company. When used in this document, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions, as they relate to
the Company, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including those described in this quarterly report on Form 10-QSB. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements.
YEAR 2000
The Year 2000 issue ("Y2K") is the result of computer programs using a
two-digit format, as opposed to a four-digit format, to indicate the year in any
date. Computer systems with such software will be unable to interpret date
beyond the year 1999 which could cause a system failure or other computer
errors, leading to disruptions in operations. During 1997, the Company initiated
a review to determine its exposure to Y2K related issues. The review focused on
three potential areas of exposure:
Financial and Information Systems. In August 1997, the Company migrated
its accounting systems to a new integrated MIS system which is already Y2K
compliant. The Company has converted all its prior records and those of its
acquired companies to this new system. The new system has been running actual
Company transactions since August 1997 and the operations of each of the
entities subsequently acquired by the Company have been successfully migrated to
that system since July 1998. In addition, the Company uses an independent
service bureau to process payroll and payroll tax related operations and has
been notified by the service bureau that its payroll application had implemented
Y2K compliant code in March 1998. Total costs of conversion to date have not
been material.
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<PAGE> 14
Production Systems. The Company has completed its review of key production
hardware and software, which, with the exception of one group of
hardware/software, has been determined to be Y2K compliant. The vendor who
supplied the original non-compliant hardware/software is not providing an
upgrade and the Company is currently exploring third-party upgrade
opportunities. Estimates of the cost of such an upgrade are not material. While
this review continues, the Company is also testing the non-compliant equipment
by using dates after January 1, 2000. To date, no production disruptions have
been experienced.
External (Vendor) Systems. Although the Company believes that the
information systems of its vendors (insofar as they relate to the Company's
business) will comply with Y2K requirements, the Company has mailed a survey to
confirm with key vendors their readiness or intent to be Y2K compliant prior to
June 30, 1999. The failure of any key vendor to provide such information will
result in the Company's developing contingency plans at that time, including use
of alternate vendors. Any costs that may be incurred by the Company that are
related to external systems' Y2K issues are unknown at this time (other than the
immaterial cost of the survey itself), however, management expects that after
reviewing and evaluating responses to the survey, it will be able to complete an
assessment of its Y2K exposure and estimate the costs associated with resolving
any Y2K issues.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 31, 1997. The Statement addresses the reporting and presentation of
comprehensive income and its components. Adoption of SFAS No. 130 relates to
disclosure within the financial statements and did not impact the Company's
financial statements.
In June 1997, the FASB also released SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which is effective for fiscal
years beginning after December 15, 1997. The Statement changes the way publicly
owned companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports on a comprehensive basis beginning with
the Company's quarter ending March 31, 1999. Adoption of SFAS No. 131 is not
expected to have a material effect on the Company's financial statements.
-11-
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) Recent Sales of Unregistered Securities.
On July 1, 1998, the Company granted to its three directors who are not
employees of the Company options to purchase an aggregate of 15,000 shares of
the Company's Common Stock at an exercise price of $6.375 per share. Such
options were non-qualified options granted outside the Company's 1996 Stock
Option Plan, as amended (the "Plan"). Such options were granted in lieu of
options that would otherwise have automatically been granted to such optionees
pursuant to the Plan, but for the fact that an insufficient number of options
were available under the Plan for such grant.
The grant of all of the securities listed above were transferred
without registration under the Securities Act of 1933, as amended (the "Act"),
as they did not involve any public offering, pursuant to the provisions of
Section 4(2) of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
In accordance with the terms of a Loan Agreement dated as of January 8,
1998 and amended on May 11, 1998 (the "Loan Agreement") by and among the
Company, certain of its wholly owned subsidiaries and the Bank of New York (the
"Lender"), the Lender loaned the Company $6 million under a term loan note (the
"Term Loan") and agreed to loan the Company up to $7 million under a revolving
credit and letter of credit facility (the "Revolving Credit Loan").
Pursuant to the provisions of the Loan Agreement, in the event the
Company fails to maintain the Fixed Charge Coverage Ratio (as defined in the
Loan Agreement) during a fiscal quarter, an Event of Default (as defined in the
Loan Agreement) will have occurred. The Company failed to maintain such Fixed
Charge Coverage Ratio for the quarter ended September 30, 1998. Accordingly, an
Event of Default has occurred, thereby giving the Lender the right to demand
full repayment of all amounts borrowed under the Term Loan and Revolving Credit
Loan.
While the Company is seeking the Lender's waiver of such Event of
Default, no assurances can be given that the Lender will grant such waiver or
that the Company will be able to meet the requisite Fixed Charge Coverage Ratio
in future quarters.
-12-
<PAGE> 16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description
3.1 Certificate of Incorporation (1)
3.2 By-Laws (1)
4.1+ Loan Agreement by and among the Company, Katz
N.Y. Acquisition, Inc., Advanced Digital
Services, Inc. and the Bank of New York, with
schedules thereto.(2)
4.2 First Amendment and Waiver to Loan Agreement by
and among the Company, Katz N.Y. Acquisition,
Inc., Advanced Digital Services, Inc. and the
Bank of New York.(3)
4.3 Term Loan Note of the Company to the Bank of New
York (included in Exhibit 4.1 as a schedule
thereto).(2)
4.4 Revolving Credit Loan Note of the Company to the
Bank of New York (included in Exhibit 4.1 as a
schedule thereto).(2)
4.5 Subordination Agreement by and between Speed
Graphics, Inc. and the Bank of New York.(2)
27.1* Financial Data Schedule
------------------
* Filed herewith.
+ Confidential treatment requested as to portions of
this Exhibit at the time of its filing with the
Commission.
(1) Filed as an exhibit to the Registrant's Registration Statement
on Form SB-2 (File No. 333-1190) and the amendments thereto,
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Current Report on Form
8-K, filed with the Commission on January 23, 1998,
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form
10-QSB, filed with the Commission on August 14, 1998,
incorporated herein by reference.
-13-
<PAGE> 17
(b) REPORTS ON FORM 8-K
On September 11, 1998, the Company filed a Current Report on Form 8-K,
disclosing that on September 1, 1998, the Company, Photobition Group PLC
("Photobition") and KDT Acquisition Corp. ("KDTA") entered into an Agreement and
Plan of Merger that provides for the merger of KDTA into the Company, upon the
terms and subject to the conditions set forth therein. See Note H to the
Condensed Consolidated Financial Statement.
No other Current Reports on Form 8-K were filed during the third
quarter of the fiscal year ending December 31, 1998.
-14-
<PAGE> 18
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.
KATZ DIGITAL TECHNOLOGIES, INC.
Dated: November 9, 1998 By: /s/ Gary Katz
-----------------------------
Gary Katz
Chairman & Chief Executive
Officer
Dated: November 9, 1998 By: /s/ Donald L. Flamm
-----------------------------
Donald L. Flamm
Principal Financial Officer
(Chief Financial Officer)
-15-
<PAGE> 19
EXHIBIT INDEX
(a) EXHIBITS
Exhibit No. Description
3.1 Certificate of Incorporation (1)
3.2 By-Laws (1)
4.1+ Loan Agreement by and among the Company, Katz
N.Y. Acquisition, Inc., Advanced Digital
Services, Inc. and the Bank of New York, with
schedules thereto.(2)
4.2 First Amendment and Waiver to Loan Agreement by
and among the Company, Katz N.Y. Acquisition,
Inc., Advanced Digital Services, Inc. and the
Bank of New York.(3)
4.3 Term Loan Note of the Company to the Bank of New
York (included in Exhibit 4.1 as a schedule
thereto).(2)
4.4 Revolving Credit Loan Note of the Company to the
Bank of New York (included in Exhibit 4.1 as a
schedule thereto).(2)
4.5 Subordination Agreement by and between Speed
Graphics, Inc. and the Bank of New York.(2)
27.1* Financial Data Schedule
------------------
* Filed herewith.
+ Confidential treatment requested as to portions of
this Exhibit at the time of its filing with the
Commission.
(1) Filed as an exhibit to the Registrant's Registration Statement
on Form SB-2 (File No. 333-1190) and the amendments thereto,
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Current Report on Form
8-K, filed with the Commission on January 23, 1998,
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form
10-QSB, filed with the Commission on August 14, 1998,
incorporated herein by reference.
-16-
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