<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K/A
Current Report
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 9, 1998
(March 24, 1998)
KATZ DIGITAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-27934 13-3871120
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
Twenty-One Penn Plaza
New York, New York 10001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(212) 594-4800
1
<PAGE> 2
KATZ DIGITAL TECHNOLOGIES, INC.
INDEX TO FORM 8-K/A
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
MARCH 24, 1998
ITEMS IN FORM 8-K/A
Page
Facing page
Item 5. Other Events 3
Item 7. Financial Statements and Exhibits. 4
Signatures
Exhibit Index
2
<PAGE> 3
Item 5. OTHER EVENTS
(a) Modification of Terms of the Acquisition of Speed
Graphics, Inc. and DDP, Inc.
On January 23, 1998, Katz Digital Technologies, Inc. (the "Company" or the
"Registrant") filed a Current Report on Form 8-K (the "January 1998 Form 8-K")
with respect to the January 9, 1998 acquisition (the "Acquisition") by Katz N.Y.
Acquisition, Inc., a wholly-owned subsidiary of the Company ("KNY"), of
substantially all of the assets of Speed Graphics, Inc. ("SGI") and DDP, Inc.
("DDP"), an affiliate of SGI, pursuant to an Asset Acquisition Agreement (the
"Acquisition Agreement") by and among the Company, KNY, SGI, DDP and Mr. Ronald
Krivosheiw ("Krivosheiw"), the sole shareholder of SGI and DDP. Subsequent to
the Acquisition, SGI changed its name to Moondance, Inc. ("MI"). MI and DDP
shall sometimes be referred to collectively herein as "Moondance."
Pursuant to the terms of the Acquisition Agreement, as aggregate
consideration for the Acquisition (the "Acquisition Consideration"), Moondance
received cash in the amount of $9,214,000, 293,848 shares of the Company's
common stock (the "Shares"), and a promissory note in the principal amount of
$2,000,000, with interest payable thereon at an annual rate of 7% and becoming
due and payable on February 1, 2001 (the "Note"). Such Acquisition Consideration
was subject to adjustment in the event Moondance's net worth as of the date of
the Acquisition was greater or lesser than $2,904,000.00 (the "Purchase Price
Adjustment"), all as more fully specified in the January 1998 Form 8-K and the
Acquisition Agreement. In addition, concurrent with the Acquisition, Krivosheiw
was appointed as the Chief Operating Officer and a director of the Company.
Subsequent to the Acquisition, the Company, MI and Krivosheiw mutually
agreed to modify the Acquisition Consideration by prepaying the Note and
reducing the number of Shares. They also agreed to terminate Krivosheiw's
employment with the Company. On March 6, 1998, the Registrant, KNY, MI, DDP and
Krivosheiw entered into an agreement (the "Acquisition Agreement Amendment"),
whereby, inter alia:
1. The Company paid $1,750,000 to MI in consideration for the cancellation
of the Note and the waiving of any rights to the Purchase Price
Adjustment.
2. The number of Shares was reduced to 173,913 shares of Common Stock.
3. Krivosheiw's employment with the Company was terminated and he resigned
as a director of the Company.
3
<PAGE> 4
4. Krivosheiw and Moondance agreed to continue the non-competition
covenants contained in Krivosheiw's employment agreement with the Company
(a copy of which was filed as an exhibit to the January 1998 Form 8-K),
except that the term of such non-competition was revised so as to end on
March 6, 2003.
Except as amended by the Acquisition Agreement Amendment, the Acquisition
Agreement remains in full force and effect.
(b) Appointment of New President and Chief Operating Officer.
On March 9, 1998, the Board of Directors, based on the recommendations of
Management, unanimously agreed to appoint Michael Sklar as the Company's Chief
Operating Officer and President. Prior to such appointment, Mr. Sklar had been
the Company's Vice President - Business Development.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
The January 1998 Form 8-K was filed by the Registrant without the
financial statements and pro forma financial information required by Items
310(c) and (d) of Regulation S-B, as permitted by sections (a) and (b) of Item 7
of Form 8-K. This Current Report on Form 8-K/A provides such requisite financial
information.
(a) Financial Statements of SGI and DDP.
Following are the audited financial statements of SGI and DDP for the
years ended December 31, 1997 and 1996.
4
<PAGE> 5
SPEED GRAPHICS, INC. AND AFFILIATE
FINANCIAL STATEMENTS
DECEMBER 31, 1997
BERENSON & COMPANY LLP
<PAGE> 6
[Letterhead of Berenson & Company LLP -- Certified Public Accountants]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Speed Graphics, Inc. and Affiliate
New York, NY
We have audited the accompanying combined balance sheets of Speed Graphics, Inc.
and affiliate as of December 31, 1997 and 1996, and the related combined
statements of operations and retained earnings and cash flows for the years then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined 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 audits to obtain
reasonable assurance about whether the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Speed Graphics, Inc.
and affiliate as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Berenson & Company LLP
New York, NY
February 6, 1998
<PAGE> 7
Page 2
SPEED GRAPHICS, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 192,395 $ 1,953,649
Accounts receivable, net of allowance for doubtful
accounts of $155,000; $135,000-1996 (note 6) 3,687,938 3,971,619
Inventory and photographic supplies (note 6) 478,432 110,500
Prepaid expenses and other current assets (note 3) 277,439 126,992
----------- -----------
Total current assets 4,636,204 6,162,760
Property and equipment, net of accumulated depreciation
(notes 4 and 9) 3,230,199 3,958,169
Customer lists, net of accumulated amortization of $88,467
and $335,683-1996 4,533 13,716
Organization costs, net of accumulated amortization of
$1,175; $875-1996 325 625
Other assets (note 5) 227,832 219,121
----------- -----------
$ 8,099,093 $10,354,391
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Loan payable, bank (note 6) $ 500,000 $ 2,300,000
Current maturities of long-term debt (note 7) 344,558 260,299
Current maturities of equipment lease obligations (note 9) 838,958 830,429
Accounts payable 919,154 1,283,323
Accrued expenses (note 8) 752,057 1,126,488
Total current liabilities ----------- -----------
3,354,727 5,800,539
Long-term debt, less current maturities (note 7) 272,198 616,448
Equipment lease obligations, less current maturities (note 9) 1,347,928 1,558,324
----------- -----------
4,974,853 7,975,311
Commitments and contingencies (notes 5, 9 and 11) ----------- -----------
Stockholders equity:
Common stock, no par value; 250 shares authorized, 3,466 3,466
issued and outstanding 9,999 9,999
Additional paid-in capital 3,110,775 2,365,615
Retained earnings ----------- -----------
3,124,240 2,379,080
----------- -----------
$ 8,099,093 $10,354,391
=========== ===========
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
<PAGE> 8
Page 3
SPEED GRAPHICS, INC. AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Years ended
December 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 23,631,001 $ 22,920,458
Cost of sales 15,330,184 17,379,273
------------ ------------
Gross profit 8,300,817 5,541,185
Operating expenses 6,316,130 5,814,343
------------ ------------
Income (loss) from operations 1,984,687 (273,158)
------------ ------------
Other income (expense):
Interest and dividend income 69,351 64,456
Interest expense (495,707) (467,443)
Miscellaneous income -- 31
------------ ------------
(426,356) (402,956)
------------ ------------
Income (loss) before provision for income taxes 1,558,331 (676,114)
Provision for income taxes 213,171 18,379
------------ ------------
Net income (loss) 1,345,160 (694,493)
Retained earnings, beginning of year 2,365,615 3,260,108
Distributions 600,000 200,000
------------ ------------
Retained earnings, end of year $ 3,110,775 $ 2,365,615
============ ============
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
<PAGE> 9
Page 4
SPEED GRAPHICS, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
December 31,
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
Cash flows front operating activities:
Net income (loss) $ 1,345,160 $ (694,493)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for losses on accounts receivable 107,795 88,716
Depreciation and amortization 1,536,354 1,384,589
Amortization of customer lists 9,183 18,601
Amortization of organization costs 300 300
Loss on disposition of equipment 23,030 --
Changes in assets (increase) decrease:
Accounts receivable 175,886 (1,117,650)
Inventory and photographic supplies (367,932) 41,251
Prepaid expenses and other assets (159,158) (41,906)
Changes in liabilities increase (decrease):
Accounts payable (364,169) 747,229
Accrued expenses (374,431) 411,480
Accrued income taxes -- (10,358)
----------- ------------
Net cash provided by operating activities 1,932,018 827,759
----------- ------------
Cash flows from investing activities:
Payments to purchase property and equipment (109,574) (514,744)
Proceeds from disposition of equipment 10,762 --
----------- ------------
Net cash used by investing activities (98,812) (514,744)
----------- ------------
Cash flows from financing activities:
Net bank borrowings (repayments) (1,800,000) 200,000
Principal repayments on long-term debt
and capital leases (1,194,460) (880,308)
Distributions (600,000) (200,000)
----------- ------------
Net cash used by financing activities (3,594,460) (880,308)
----------- ------------
Net decrease in cash and cash equivalents (1,761,254) (567,293)
Cash and cash equivalents, beginning of year 1,953,649 2,520,942
----------- ------------
Cash and cash equivalents, end of year $ 192,395 $ 1,953,649
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 497,358 $ 468,065
Income taxes 20,101 23,304
</TABLE>
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations of $732,602 and $1,702,450 were incurred in
1997 and 1996, respectively, as a result of the Company entering into
leases for new equipment.
In 1996, equipment that had a net book value of $166,720 was sold in exchange
for the capital lease obligation of $166,720.
The accompanying notes are an integral part of the combined
financial statements.
<PAGE> 10
Page 5
SPEED GRAPHICS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. Nature of business:
The Company provides electronic and photographic imaging and short run
printing services for advertising, financial services, publishing and
retail industries within the New York City metropolitan region.
2. Significant accounting policies:
a. Cash and cash equivalents:
Cash and cash equivalents consist of deposits with banks and
financial institutions that are unrestricted as to withdrawal or
use, and have an overall maturity of three months or less. At
various times during the year, the Company's cash balances may
exceed the amount insured by the FDIC.
b. Inventory and photographic supplies:
Inventory and photographic supplies, consisting of film, chemicals
and paper, are stated at the lower of cost (first-in, first-out) or
market.
c. Property and equipment:
Property and equipment are stated at cost. Depreciation is provided
by both straight-line and accelerated methods over the estimated
useful lives of the respective assets, or period of the lease.
d. Customer lists:
Customer lists are stated at cost. Amortization is provided under
the straight-line method over five years. Customer lists are written
off when fully amortized.
e. Organization costs:
Organization costs are stated at cost. Amortization is provided
under the straight-line method over five years.
<PAGE> 11
Page 6
SPEED GRAPHICS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. Significant accounting policies: (Continued)
f. Income taxes:
Speed Graphics, Inc., with the consent of its stockholder, has
elected to be taxed as an S corporation under the provisions of the
Internal Revenue Code, which provides that, in lieu of corporate
income taxes, the stockholder is taxed on his proportionate share of
the Company's taxable income. The accompanying combined financial
statements do not include any provision or liability for corporate
federal income taxes; however, a provision has been provided for
applicable state and local income taxes.
DDP, Inc., an affiliate, is a corporation and federal, state and
local taxes are provided for, if applicable.
g. Combination policy:
The accompanying combined financial statements include the accounts
of Speed Graphics, Inc. and DDP, Inc., an affiliate, both of which
are under common control. All significant intercompany transactions
and balances have been eliminated in combination.
h. Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
3. Related party transactions:
Included in prepaid expenses and other current assets is $37,280-1997;
$-0-1996 due from the Companies' sole stockholder. The advance is payable
upon demand.
<PAGE> 12
Page 7
SPEED GRAPHICS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
4. Property and equipment:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Machinery and equipment $ 4,832,378 $ 3,611,046
Automobile and delivery equipment 24,516 140,266
Furniture and fixtures 494,714 482,704
Computer equipment 4,571,924 4,963,092
Leasehold improvements 1,551,119 1,551,119
----------- -----------
11,474,651 10,748,227
Less accumulated depreciation 8,244,452 6,790,058
----------- -----------
$ 3,230,199 $ 3,958,169
=========== ===========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1997 and 1996 was approximately $1,536,000 and $1,385,000, respectively.
5. Other assets:
Other assets include $140,851 and $133,708 at December 31, 1997 and 1996,
respectively, representing certificates of deposit which are held as
collateral against letters of credit totaling $81,553 and $90,667,
respectively. The standby letters of credit were issued in lieu of
security deposits relating to facility leases.
6. Loan payable, bank:
The loan payable, bank consists of borrowings under a $2,735,000 line of
credit payable on demand. Interest is due monthly at prime plus 1/4 %.
Borrowings under the line are collateralized by the Company's accounts
receivable and inventory and expires May 31, 1998. The Companies are
required to meet certain financial covenants. The Companies are in
compliance with all covenants at December 31, 1997.
<PAGE> 13
Page 8
SPEED GRAPHICS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
7. Long-term debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Note payable in connection with an improvement loan dated
June 22, 1996 due in monthly installments of $4,094
(including interest at 8%) commencing October 1996
through April 2006. $298,424 $322,322
Loan and security agreement dated June 9, 1994 payable
in monthly installments of $19,958 (including interest
at 10.26%) through May 1998 followed by a balloon
payment of $180,60. 270,351 470,784
Loan and security agreement dated June 10, 1994 payable
in monthly installments of $3,577 (including interest at
10.76%) through May 1998 followed by a balloon payment
of $31,97. 47,981 83,641
-------- --------
616,756 876,747
Less current maturities 344,558 260,299
-------- --------
$272,198 $616,448
======== ========
</TABLE>
The improvement loan was secured by an irrevocable and unconditional
letter of credit in the amount of $262,500 which expired September 30,
1997.
The loans are secured by the related machinery and computer equipment.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Years ending December 31, 1999 $ 28,403
2000 30,761
2001 33,314
2002 36,079
2003 39,073
Thereafter 104,568
--------
$272,198
========
</TABLE>
<PAGE> 14
Page 9
SPEED GRAPHICS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
8. Accrued expenses:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Salaries and wages $ 370,775 $ 914,300
Income taxes 179,757 --
Payroll and other taxes 9,831 17,353
Interest 15,184 16,835
Professional fees, medical insurance
and other 176,510 178,000
---------- ----------
$ 752,057 $1,126,488
========== ==========
</TABLE>
9. Leases:
The Company leases certain machinery and equipment under long-term lease
agreements (classified as capital leases) that expire over the next five
years. Leases of plant and office space and equipment, classified as
operating leases, expire in various years through 2006. These leases
generally require the Company to pay all executory costs (such as property
taxes, maintenance and insurance).
Property and equipment include the following leased property under capital
leases by major classes:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Machinery and equipment $2,137,058 $ 979,456
Computer equipment 2,720,259 3,145,249
Furniture and fixtures 26,192 26,192
Leasehold improvements 65,000 65,000
---------- ----------
4,948,509 4,215,897
Less accumulated depreciation 3,003,267 2,282,790
---------- ----------
$1,945,242 $1,933,107
========== ==========
</TABLE>
<PAGE> 15
Page 10
SPEED GRAPHICS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
9. Leases: (Continued)
The following is a schedule of future minimum lease payments for capital
leases and operating leases (with initial or remaining terms in excess of
one year) as of December 31, 1997:
<TABLE>
<CAPTION>
Capital Operating
leases leases
---------- ----------
<S> <C> <C>
Years ending December 31, 1998 $1,011,544 $1,954,000
1999 740,364 1,723,000
2000 465,346 1,363,000
2001 162,601 340,000
2002 73,302 279,000
Thereafter 61,085 697,000
---------- ----------
Total minimum lease payments 2,514,242 $6,356,000
==========
Less amount representing interest 327,356
----------
Present value of minimum lease payments 2,186,886
Less current maturities 838,958
----------
$1,347,928
==========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 amounted to
approximately $2,127,000 and $2,167,000, respectively.
10. Retirement plan:
On January 1, 1992, the Company adopted a 401(k) plan covering
substantially all employees. Profit sharing expense is funded through
contributions to the plan. Employees may elect to contribute up to 15% of
their salaries up to the maximum allowable under the Internal Revenue
Code. The Company makes a matching contribution equal to 25 % of the first
four percent of the employees' contribution. In addition, the Company can
make a discretionary contribution to the Plan, as determined by the Board
of Directors of the Company, which will be allocated among eligible
participants. Profit sharing expense for the years ended December 31, 1997
and 1996 was approximately $16,000 and $51,000, respectively.
<PAGE> 16
Page 11
SPEED GRAPHICS, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
11. Commitment
The Company is obligated under a noncompete agreement with a former
stockholder dated October 9, 1991, which was amended August 16, 1994, in
the amount of approximately $503,000, payable in monthly installments of
$17,389 through June 1997 and $11,979 from July 1997 through June 2001.
The amount paid for the years ended December 31, 1997 and 1996 were
$176,210 and $208,671, respectively.
The Company is obligated under several service contracts with various
terms. The Company expenses the cost of the contracts over their lives.
12. Subsequent event:
On January 1, 1998, Katz N.Y. Acquisition Inc., a wholly owned subsidiary
of Katz Digital Technologies Inc. ("KDTI"), purchased substantially all of
the Company's assets and assumed substantially all of the liabilities of
the Company. The purchase price is subject to an adjustment based on the
book value of the Company as of the closing date. The purchase price was
paid as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash $9,214,000
Promissory notes 2,000,000
Common stock 293,848 shares of KDTI
common stock
</TABLE>
<PAGE> 17
(b) Financial Statements of the Company.
Following are the audited financial statements of the Company for the
years ended December 31, 1997 and 1996.
5
<PAGE> 18
[Report of Independent Certified Public Accountants]
Katz Digital Technologies, Inc.
- --------------------------------------------------------------------------------
To the Stockholders of
Katz Digital Technologies, Inc.
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Katz Digital
Technologies, Inc. at December 31, 1997 and 1996 and the consolidated statements
of operations, stockholders` equity, and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Katz Digital
Technologies, Inc. as of December 31, 1997 and 1996, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton L.L.P
New York, New York
February 20, 1998
(except for Note O as to which the date is March 6, 1998)
16
<PAGE> 19
[Consolidated Balance Sheets]
Katz Digital Technologies, Inc.
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,651,930 $ 3,428,175
Accounts receivable, net of allowance for doubtful accounts of $140,238
and $94,738 at December 31, 1997 and 1996, respectively 4,723,183 3,216,386
Work-in-process inventory 100,483 69,328
Prepaid expenses and other current assets 106,651 163,514
Prepaid income taxes 185,554 --
-------------------------
Total current assets 6,767,801 6,877,403
Property and Equipment - Net (Note D) 3,893,006 3,568,853
Other Assets 288,508 80,333
Goodwill - Net (Notes B and I) 2,627,485 1,140,819
-------------------------
$13,576,800 $11,667,408
=========================
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses $ 1,732,277 $ 1,160,254
Current portion of obligations under capital leases (Note E) 739,603 699,029
Income taxes payable -- 66,151
Deferred taxes payable (Note F) 186,000 114,000
Due to stockholders (Note H) -- 339,912
-------------------------
Total current liabilities 2,657,880 2,379,346
Deferred credits (Note E) 410,774 265,520
Deferred taxes payable 85,000 265,000
Pension liability 191,258
Notes payable 300,000 --
Obligations under capital leases, net of current portion (Note E) 1,351,568 1,490,323
-------------------------
Total liabilities 4,805,222 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; 4,705,202
and 4,425,000 shares issued and outstanding at December 31, 1997
and 1996, respectively 4,705 4,425
Additional paid-in capital 7,687,621 6,860,267
Retained earnings 1,079,252 211,269
-------------------------
Total stockholders' equity 8,771,578 7,075,961
-------------------------
$13,576,800 $11,667,408
=========================
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 20
[Consolidated Statements of Operations]
Katz Digital Technologies, Inc.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 19,839,689 $ 15,565,919 $ 10,643,738
Cost of goods sold 9,159,226 6,988,499 4,096,862
--------------------------------------------
Gross profit 10,680,463 8,577,420 6,546,876
Operating expenses
Selling, general and administrative 9,116,431 7,434,815 4,528,251
--------------------------------------------
Operating income 1,564,032 1,142,605 2,018,625
Settlement (gain), curtailment loss (Note G) (154,450) 332,179
Interest expense, net 111,738 67,421 105,379
--------------------------------------------
Earnings before provision for income taxes 1,606,744 743,005 1,913,246
Provision for income taxes (Notes B and F)
Current 1,049,519 771,181 202,503
Deferred (310,758) 169,000 2,000
--------------------------------------------
738,761 940,181 204,503
--------------------------------------------
Net earnings (loss) $ 867,983 $ (197,176) $ 1,708,743
============================================
Pro forma data (Note J)
Historical income before income taxes $ 743,005 $ 1,913,246
Provision for income taxes 396,442 936,905
--------------------------------------------
Net earnings $ 346,563 $ 976,341
============================================
Basic Earnings Per Share $ .08 $ .33
============================================
Diluted Earnings Per Share $ .08 $ .33
============================================
Historical
Basic Earnings (Loss) Per Share $ .19 $ (.05) $ .57
============================================
Diluted Earnings (Loss) Per Share $ .19 $ (.05) $ .57
============================================
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 21
[Consolidated Statements of Stockholders' Equity]
Katz Digital Technologies, Inc.
<TABLE>
<CAPTION>
Minimum Additional Total
Common Stock Retained Pension Paid in Stockholders'
Shares Par Value Earnings Adjustment Capital Equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
----------------------------------------------------------------------------------
Net earnings 867,983 867,983
Stock issued for acquisitions 220,106 220 627,415 627,635
Stock issued on partial conversion
of note payable 60,096 60 199,939 199,999
----------------------------------------------------------------------------------
Balance at December 31, 1997 4,705,202 $ 4,705 $ 1,079,252 -- $ 7,687,621 $ 8,771,578
==================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 22
[Consolidated Statements of Cash Flows]
Katz Digital Technologies, Inc.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 867,983 $ (197,176) $ 1,708,743
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities
Depreciation and amortization 1,384,606 1,085,718 554,051
Deferred credits 145,254 265,520
Interest payable to stockholders 49,034
Settlement (gain), curtailment loss (154,450) 332,179
Deferred taxes (310,758) 169,000 2,000
Increase (decrease) in cash flows from changes in
operating assets and liabilities, net of
acquisitions in 1997 and 1996
Accounts receivable (1,083,728) (1,236,384) (138,274)
Work-in-process inventory (31,155) (62,038) (1,754)
Prepaid expenses and other current assets 78,954 (16,481) (44,028)
Other assets (208,175) 10,579 (61,566)
Accounts payable and accrued expenses 285,696 642,624 156,060
Income taxes (346,904) 6,986 (14,941)
Net pension liability (36,808) (32,257) (78,969)
------------------------------------------
Net cash provided by operating activities 590,515 1,017,304 2,081,322
------------------------------------------
Cash flows from investing activities
Purchase of property and equipment-net (759,026) (1,057,787) (394,290)
Purchase (release from escrow) of Certificate of Deposit 233,600 (233,600)
Cash paid for acquisitions (529,223) (1,297,948)
------------------------------------------
Net cash used in investing activities (1,288,249) (2,122,135) (627,890)
------------------------------------------
Cash flows from financing activities
Distributions to stockholders (339,912) (1,295,467) (1,353,173)
Payments of obligations under capital leases (738,599) (734,148) (356,172)
Net proceeds from public offering -- 6,361,892 --
------------------------------------------
Net cash (used in) provided by financing activities (1,078,511) 4,332,277 (1,709,345)
------------------------------------------
Net Increase (Decrease) in Cash
and Cash Equivalents (1,776,245) 3,227,446 (255,913)
Cash and cash equivalents - beginning of period 3,428,175 200,729 456,642
------------------------------------------
Cash and cash equivalents - end of period $ 1,651,930 $ 3,428,175 $ 200,729
==========================================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 248,841 $ 196,567 $ 115,394
Income taxes $ 1,303,820 $ 762,899 $ 217,444
==========================================
</TABLE>
Supplemental disclosures of noncash investing and financing activities
Capital lease obligations of $858,875, $1,848,931, and $792,986 were incurred in
December 31, 1997, 1996 and 1995, respectively, when the Company entered into
new leases for equipment.
During the year ended December 31, 1997, $500,000 of convertible promissory
notes were issued in connection with the 1996 acquisition of Sarabande of which
$199,939 was converted into 60,096 shares of common stock.
The accompanying notes are an integral part of these statements.
20
<PAGE> 23
[Notes to Consolidated Financial Statements]
Katz Digital Technologies, Inc.
- --------------------------------------------------------------------------------
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 operates in a single business segment and 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.
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, and trade accounts
receivable. The Company places its cash and cash equivalents 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. The carrying value of
financial instruments potentially subject to valuation risk (principally
consisting of cash and cash equivalents, accounts receivable and accounts
payable) approximate fair market value.
The Company is dependent upon a limited amount of third parties for
certain supplies and equipment 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 20 years. At December 31, 1997, and 1996,
accumulated amortization amounted to $91,361 and $67,859, respectively.
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.
9. Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," which requires
public companies to present basic
21
<PAGE> 24
[Notes to Consolidated Financial Statements (continued)]
- --------------------------------------------------------------------------------
earnings per share and, if applicable, diluted earnings per share. In accordance
with SFAS No. 128, all comparative periods have been restated as of December 31,
1997. Basic EPS is based on the weighted average number of common shares
outstanding without consideration of potential common stock. Diluted earnings
per share is based on the weighted average number of common and potential common
shares outstanding.
10. 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.
11. Reclassifications
Certain amounts have been reclassified to conform to the 1997 presentation.
Note C - Line of Credit
- --------------------------------------------------------------------------------
The Company entered into an agreement with a bank providing for a $3,000,000
line of credit. Borrowings under the line of credit bear interest at the prime
rate (8.5% on December 31, 1997), are collateralized by trade receivables of the
Company and becomes due on June 30, 1998. The line of credit contains certain
covenants including minimum net worth and tangible net worth requirements and
was terminated in January 1998 in connection with a new loan agreement (see Note
0). There was no balance outstanding at December 31, 1997.
Note D - Property and Equipment
- --------------------------------------------------------------------------------
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------
<S> <C> <C>
Furniture and fixtures $ 206,594 $ 137,765
Equipment 6,195,395 4,956,455
Leasehold improvements 576,366 493,932
---------------------
6,978,355 5,588,152
---------------------
Less: accumulated depreciation
and amortization (3,085,349) (2,019,299)
----------------------
$3,893,006 $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 $4,115,661 and $3,549,408 at 1997 and 1996,
respectively. The leases expire at various times through 2001. Accumulated
amortization amounted to $2,094,394 and $1,438,406 at 1997 and 1996,
respectively. The related future minimum lease payments, as of December 31,
1997, are as follows:
<TABLE>
<CAPTION>
Lease Payments
- ----------------------------------------------------
Fiscal year
<S> <C>
1998 $ 897,778
1999 791,190
2000 565,363
2001 101,405
----------
Net minimum lease payments 2,355,736
Amount representing interest 264,565
----------
Obligations under capital lease
agreements $2,091,171
==========
Current portion 739,603
Long-term portion 1,351,568
----------
$2,091,171
==========
</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, 1997, 1996 and 1995 was $1,027,000,
$765,000 and $296,000, respectively. The future minimum rentals for operating
leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
- ----------------------------------------------------
<S> <C>
1998 $ 984,508
1999 854,832
2000 770,261
2001 692,789
2002 581,366
Thereafter 3,149,900
----------
$7,033,656
==========
</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. At December 31, 1997 and 1996 deferred
rent totaled approximately $411,000 and $266,000, respectively.
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
22
<PAGE> 25
- --------------------------------------------------------------------------------
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 basis 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 J). 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.
Components of the Company's deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ------------------------------------------------------
<S> <C> <C>
Difference between accrual
and cash basis of accounting $ 551,000 $ 611,000
Accrued pension curtailment
(loss) (78,000)
Tax over financial statement
depreciation 52,000 (13,000)
Deferred rent (189,000) (125,000)
Goodwill amortization (47,000) (4,000)
Capital leases (31,000)
Allowance for doubtful
accounts (65,000) (12,000)
---------------------
$ 271,000 $ 379,000
=====================
Short-term $ 186,000 $ 114,000
Long-term 85,000 265,000
---------------------
$ 271,000 $ 379,000
=====================
</TABLE>
The provision for income taxes in 1997 consists of the following:
<TABLE>
<CAPTION>
Current
<S> <C>
Federal $ 649,653
State 399,866
----------
$1,049,519
Deferred (benefit) (310,758)
----------
$ 738,761
==========
</TABLE>
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the 1997 financial statements:
<TABLE>
<CAPTION>
Amount Percent
of Income
- ---------------------------------------------------------------
<S> <C> <C>
Provision for Federal income
taxes at the statutory rate $546,293 34.0%
State and local income taxes, net
of Federal income tax benefit 178,412 11.1
State ITC credits (24,750) (1.5)
Permanent differences 38,806 2.4
--------------------
$738,761 46.0%
====================
</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 covered 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 was 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, 1995, 1996 and 1997 was $249,000, $155,000 and $69,000,
respectively. The Plan's assets were 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 and a $154,450 settlement gain in 1997 ($.02 per share after tax).
23
<PAGE> 26
[Notes to Consolidated Financial Statements (continued)]
- --------------------------------------------------------------------------------
Net pension cost for the Company-sponsored pension plan prior to the curtailment
consists of the following:
<TABLE>
<CAPTION>
December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Normal service cost $ 151,799 $ 194,088
Interest cost 37,083 50,312
Actual return on plan assets (35,270) 17,954
Net amortization and deferral 1,000 (12,868)
-------------------------
Net pension cost $ 154,612 $ 249,486
=========================
</TABLE>
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, 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations
Estimated present value of vested benefits $ 429,661 $ 285,499
Estimated present value of nonvested benefits 106,295 87,254
-------------------------
Accumulated benefit obligation 535,956 372,753
Value of future pay increases 140,833 150,285
-------------------------
Projected benefit obligation 676,789 523,038
Estimated market value of plan assets 719,476 497,455
-------------------------
Excess (deficiency) of plan assets over projected benefit obligation 42,687 (25,583)
Prior service costs 438,389 457,449
Unrecognized net gain (340,155) (323,202)
-------------------------
Pension asset before curtailment loss $ 140,921 $ 108,664
=========================
Curtailment loss (332,179)
-------------------------
Pension liability $ (191,258)
=========================
</TABLE>
The assumptions used as of December 31, 1996 and 1995 in determining
pension expense and funded status shown above were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------
<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 $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 were 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 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.
Note I - Acquisitions
- --------------------------------------------------------------------------------
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 was 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 was subject to
adjustment based on the gross revenue of Sarabande in the twelve (12) months
following the acquisition, was accounted for as contingent purchase price for
financial accounting purposes and consisted of: (i) a five hundred thousand
dollar ($500,000) promissory note with interest at the prime rate, payable to
Sarabande, and convertible
24
<PAGE> 27
- --------------------------------------------------------------------------------
at Sarabande's option into shares of the Company's common stock (the "Note"),
and (ii) 78,745 shares of the Company's common stock (the "Shares"). The 1996
financial statements reflect the $1,000,000 in cash paid at the closing and the
1997 financial statements reflect an additional $767,000 of contingent purchase
price which was recorded in the 1997 financial statements when the contingency
was resolved.
The acquisition of Sarabande has been treated as a "purchase" for the
purposes of generally accepted accounting principles, with the purchase price
plus acquisition expenses allocated based on the fair value of the assets
acquired and liabilities assumed. Approximately $1,734,000 has been allocated to
goodwill. The results of Sarabande have been included from its date of
acquisition.
Advanced Digital Services, Inc.
On July 31, 1997, The Company completed its acquisition of Advanced Digital
Services, Inc. (ADS), a digital prepress company located in New York City. The
purchase price of $1,585,673 was composed of $500,000 in cash, $250,000 in 7%
five year notes and 301,818 restricted shares of the Company's stock held in
escrow at December 31, 1997. The final purchase price is subject to adjustment
based on defined net worth, based on an audit of ADS's financial statements, the
collectability of certain accounts receivable and revenues generated by the ADS
operations during the twelve month period following the merger. The 1997
financial statements reflect a purchase price of $891,399 and the remaining
purchase price will be recorded when the contingency is resolved. In addition,
concurrent with the merger, the former shareholders of ADS each entered into
five year employment agreements, as well as agreements imposing certain
non-competition and confidentiality restrictions.
The acquisition of ADS has been accounted for 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 $648,000 was allocated to goodwill. The results of ADS
have been included from its date of acquisition.
Pro Forma Information
The unaudited pro forma results of operations, which reflect the purchase of ADS
and 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, 1997 1996
- -----------------------------------------------------
<S> <C> <C>
Net sales $21,340,028 $19,181,131
Net earnings $ 821,167 $ 389,779
Pro forma net earnings(1) $ 821,167 $ 780,265
Pro forma net earnings
per share - basic(1) $ .18 $ .19
Pro forma net earnings
per share - diluted(1) $ .17 $ .19
=========================
</TABLE>
(1) Also adjusted in 1996 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 Operations (Unaudited)
The pro forma adjustment in the 1996 and 1995 Statements of Operations reflect 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 in 1996 and 1995 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, 1996 1995
- ----------------------------------------------------
<S> <C> <C>
Federal $225,505 $553,482
State and local 170,937 383,423
--------------------
$396,442 $936,905
====================
</TABLE>
The differences between pro forma income tax expense in 1996 and 1995
shown in the Statements of Operations 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, 1996 1995
- ----------------------------------------------------
<S> <C> <C>
Computed income taxes
based on Federal
statutory corporate
rate of 34% $252,622 $650,504
State and local
income taxes, net
of Federal benefit 112,819 253,059
Permanent differences 31,001 33,342
--------------------
$396,442 $936,905
====================
</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.
25
<PAGE> 28
[Notes to Consolidated Financial Statements (continued)]
- --------------------------------------------------------------------------------
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, as amended on March 25, 1997,
provides for the grant of options to purchase up to 650,000 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 quarterly grants 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
$5.00 per share, the initial public offering price.
The following table summarizes option activity for the years ended
December 31, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Exercise Price
- --------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1995 - -
Granted 308,500 $4.99
Exercised - -
Forfeited (40,000) $4.69
------------------------
Balance at December 31, 1996 268,500 $5.04
Granted 347,500 $3.87
Exercised - -
Forfeited (56,000) $2.99
------------------------
Balance at December 31, 1997 560,000 $4.52
========================
</TABLE>
The following table summarizes option data as of December 31, 1997:
<TABLE>
<CAPTION>
Number Weighted Weighted Number
Outstanding as Average Average Exercisable as Weighted
Range of of December 31, Remaining Exercise of December 31, Average
exercise prices 1997 Contractual Life Price 1997 Exercise Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.63 to $5.75 560,000 4.9 $4.52 173,176 $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 years ended December 31, 1997 and 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>
<CAPTION>
1997 1996
- ----------------------------------------------------
<S> <C> <C>
Dividend yield 0% 0%
Risk-free interest rate 6.22% 6.03%
Expected life
Directors and officers 5 years 5 years
Others 4 years 4 years
Expected volatility 40% 57%
===================
</TABLE>
Had compensation cost been determined under SFAS No. 123 for the years
ended December 31, 1997 and 1996, net income and earnings per share would have
been reduced as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Net earnings
As reported $ 867,983 $ 346,563
Pro forma for stock options 613,685 153,497
Pro forma earnings per share
As reported (basic and diluted) $ .19 $ .08
Pro forma for stock options
(basic and diluted) $ .13 $ .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.
26
<PAGE> 29
- --------------------------------------------------------------------------------
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>
<CAPTION>
- ---------------------------------------------
<S> <C> <C>
1998 $ 1,727,408
1999 1,689,273
2000 890,471
2001 944,239
2002 736,995
-----------
$ 5,988,386
===========
</TABLE>
- --------------------------------------------------------------------------------
Note M - Interest Expense, Net
- --------------------------------------------------------------------------------
Interest expense, net is composed of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Interest expense $ 250,967 $ 245,601 $ 115,394
Interest income (139,229) (178,180) (10,015)
-----------------------------------
$ 111,738 $ 67,421 $ 105,379
===================================
</TABLE>
- --------------------------------------------------------------------------------
Note N - Earnings Per Share
- --------------------------------------------------------------------------------
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computation.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Historical
Basic shares 4,531,819 4,179,907 2,990,644
Dilution
Convertible notes 140,278
Stock options 52,289
Acquisition contingent earnout 17,319
------------------------------------------
Diluted shares 4,741,705 4,179,907 2,990,644
==========================================
Basic income (loss) available to common shareholders $ 867,983 $ (197,176) $ 1,708,743
Interest saved on convertible notes 18,952 -- --
------------------------------------------
Diluted income available to common shareholders $ 886,935 $ (197,176) $ 1,708,743
==========================================
Basic earnings (loss) per share $ .19 $ (.05) $ .57
==========================================
Diluted earnings (loss) per share $ .19 $ (.05) $ .57
==========================================
Pro Forma
Basic shares 4,179,907 2,990,644
Dilution
Convertible
Stock options 8,082
Acquisition contingent earnout
------------------------------------------
Diluted shares 4,187,989 2,990,644
==========================================
Basic income available to common shareholders $ 346,563 $ 976,341
Interest saved on convertible notes -- --
------------------------------------------
Diluted income available to common shareholders $ 346,563 $ 976,341
==========================================
Basic earnings per share $ .08 $ .33
==========================================
Diluted earnings per share $ .08 $ .33
==========================================
</TABLE>
27
<PAGE> 30
[Notes to Consolidated Financial Statements (continued)]
- --------------------------------------------------------------------------------
Options to purchase 429,000 and 268,500 shares of common stock at an
average price of $5.01 and $5.04 per share were outstanding during the years
ended December 31, 1997 and 1996, respectively. They were not included in the
computation of diluted earnings per share because the options' exercise price
was greater that the average market price of the common shares. The options,
which expire at various dates through October 1, 2007 were still outstanding at
December 31, 1997.
Note O - Subsequent Event
- --------------------------------------------------------------------------------
On January 9, 1998, as amended on March 6, 1998, a wholly-owned subsidiary of
the Company acquired substantially all of 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 valued at
$750,000.
Concurrently with the acquisition, 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 note and (ii) $7,000,000 in the
form of a secured revolving credit facility note. The term loan note is payable
in sixteen (16) quarterly installments and bears interest at either the bank's
Alternate Base Rate or the adjusted LIBOR rate plus the Application Margin, at
the Company's option. The revolving credit loans, which are available at the
lesser of $7,000,000 or the Adjusted Borrowing Base, are payable on December 31,
2002 and each revolving credit loan may be designated by the Company as an
Alternate Base Rate Loan or a Eurodollar Loan. The Company used a portion of the
available financing to fund the cash portion of the acquisition consideration.
The loan agreement contains certain restrictive covenants including minimum
tangible net worth, fixed charge coverage and funded debt ratio.
Note P - Future Effect of Recently Issued Accounting Pronouncements
- --------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which is effective for the Company's fiscal year ending December 31,
1998. The statement addresses the reporting and displaying of comprehensive
income and its components. Earnings per share will only be reported for net
income and not for comprehensive income. Adoption of SFAS No. 130 is not
expected to have a material effect on the Company's financial statement
disclosures.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for the
Company's fiscal year ending December 31, 1998. The statement changes the way
public 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. Adoption of SFAS No. 131 is not expected
to have a material effect on the Company's financial statement disclosures.
28
<PAGE> 31
(c) Pro Forma Financial Information
Following is a pro forma unaudited condensed balance sheet as of December
31, 1997, and pro forma unaudited condensed statements of earnings for the year
ended December 31, 1997.
6
<PAGE> 32
Katz Digital Technologies, Inc.
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma unaudited condensed consolidated balance sheet has been
prepared by taking the December 31, 1997 balance sheets of Katz Digital
Technologies, Inc. (the "Company") and Speed Graphics, Inc, and DDP, Inc.,
(together, "Speed") and giving effect to the acquisition of Speed by the Company
as if it had occurred as of December 31, 1997. The pro forma condensed balance
sheet has been prepared for information purposes only and does not purport to be
indicative of the financial condition that necessarily would have resulted had
this transaction taken place at December 31, 1997.
The following pro forma unaudited condensed consolidated statement of earnings
for the year ended December 31, 1997 gives effect to the Company's acquisition
of Speed as if it had occurred at the beginning of the period. The sales and
results of operations included in the following pro forma unaudited condensed
consolidated statement of earnings are not considered necessarily to be
indicative of anticipated results of operations for periods subsequent to the
transaction, nor are they considered necessarily to be indicative of the results
of operations for the periods specified had the transaction actually been
completed at the beginning for the respective period.
These financial statements should be read in conjunction with the notes to the
pro forma unaudited condensed financial statements which follow, the financial
statements of the Company, and related notes thereto, and the financial
statements of Speed and related notes thereto, included herein.
<PAGE> 33
Katz Digital Technologies, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
For The Year Ended December 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Historical Historical Increase
KATZ SPEED (Decrease) Pro Forma
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Current Assets
Cash and equivalents $ 1,651,930 $ 192,395 $ (500,000)(c) $1,344,325
Receivables 4,723,184 3,687,938 8,411,122
Inventory 100,483 478,432 578,915
Prepaid and other 292,204 277,439 569,643
---------- ---------- ---------- ----------
Total Current Assets 6,767,801 4,636,204 (500,000) 10,904,005
Property and Equipment - Net 3,893,006 3,230,199 470,828 (a) 7,594,033
Other Assets 288,508 232,690 521,198
Goodwill - Net 2,627,485 8,675,283 (a) 11,302,768
----------- ---------- ---------- ----------
$13,576,800 $8,099,093 $ 8,646,111 $30,322,004
=========== ========== ========= ==========
Current Liabilities
Accounts payable and accrued liabilities $ 1,732,277 $1,671,211 $ 556,351 (a) $ 3,959,839
Loan payable-bank 500,000 (500,000)(c) --
Current portion of capital lease obligations 739,603 838,958 1,578,561
Current portion of long-term debt 344,558 344,558
Current portion of term loan 1,500,000(a) 1,500,000
Deferred taxes payable 186,000 186,000
---------- ------------ --------- ----------
Total Current liabilities 2,657,880 3,354,727 1,556,351 7,568,958
Deferred Credits 410,774 410,774
Deferred Taxes 85,000 85,000
Long-Term Debt 272,198 272,198
Term Loan 4,500,000 (a) 4,500,000
Revolving Credit 4,964,000 (a) 4,964,000
Notes Payable 300,000 300,000
Capital Lease Obligations 1,351,568 1,347,928 2,699,496
---------- ---------- ----------- ----------
Total Liabilities 4,805,222 4,974,853 11,020,351 20,800,426
---------- ---------- ----------- ----------
Total Stockholders Equity 8,771,578 3,124,240 750,000 (a) 9,521,578
(3,124,240)(b)
---------- ---------- ----------- ----------
$13,576,800 $8,099,093 $ 8,646,111 $30,322,004
========== ========== =========== ==========
</TABLE>
<PAGE> 34
Katz Digital Technologies, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
For The Year Ended December 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Historical Historical Increase
KATZ SPEED (Decrease) Pro Forma
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $19,839,689 $23,631,001 $43,470,690
Cost of goods sold 9,159,226 15,330,184 24,489,410
---------------------------- -----------
Gross profit 10,680,463 8,300,817 18,981,280
Selling, general and administrative expenses 9,116,431 6,316,130 $(1,414,000) (a) 14,452,325
433,764 (c)
---------------------------- -----------
Operating income 1,564,032 1,984,687 (980,236) 4,528,955
Settlement (gain) (154,450) (154,450)
Interest expense, net 111,738 426,356 823,595 (b) 1,361,689
---------------------------- ----------- -----------
Earnings before provision for income taxes 1,606,744 1,558,331 156,641 3,321,716
Provision for income taxes 738,761 213,171 576,057 (d) 1,527,989
---------------------------- ----------- -----------
Net earnings $ 867,983 $ 1,345,160 $ (419,416) $ 1,793,727
============================ =========== ===========
Basic Earnings Per Share $ 0.19 $ 0.38
Diluted Earnings Per Share $ 0.19 $ 0.36
</TABLE>
<PAGE> 35
Katz Digital Technologies, Inc.
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The accompanying pro forma unaudited condensed consolidated balance sheet and
statement of operations present the financial position and results of operations
of Katz Digital Technologies, Inc. (the "Company") giving effect to the
acquisition on January 9, 1998 as amended on March 6, 1998 through the
acquisition of the assets of Speed Graphics, Inc. and DDP, Inc. (together,
"Speed") by a wholly owned subsidiary of the Company.
As aggregate consideration for the acquisition, Speed received $10,964,000 in
cash and 173,913 shares of the Company's common stock (valued at $750,000).
Concurrently with the acquisition, 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 note and (ii) $7,000,000 in the
form of a secured revolving credit facility note. The Company used a portion of
the available financing to fund the cash portion of the acquisition
consideration.
The adjustments below were prepared based on data currently available and in
some cases are based on estimates of approximations. It is possible that the
actual amounts to be recorded may have an impact on the results of operations
and the balance sheet different from that reflected in the accompanying pro
forma unaudited condensed consolidated financial statements. It is therefore
possible that the entries presented below will not be the amounts actually
recorded at the closing date.
Balance sheet at December 31, 1997:
(a) To record the acquisition of Speed for a fixed purchase price of
$11,714,000, plus acquisition expenses of $556,351, and to allocate
purchase price to assets acquired and excess purchase price to
goodwill.
<TABLE>
<CAPTION>
<S> <C>
Purchase price paid in cash $10,964,000
Purchase price paid in Company common stock 750,000
Accrued expenses 556,351
-----------
Total purchase price $12,270,351
Financed by:
Term loan $ 6,000,000
Revolving credit 4,964,000
Company common stock 750,000
Accrued expenses 556,351
-----------
Total purchase price $12,270,351
</TABLE>
<PAGE> 36
(b) To eliminate equity, additional paid in capital and retained
earnings of Speed
(c) To pay off outstanding balance on short-term credit line
Statement of earnings for the year ended December 31, 1997:
(a) To eliminate compensation and related taxes, benefits and expenses
of the office of the former president of Speed.
(b) To record interest on borrowings to finance cash payment to Speed
Term loan of $6,000,000 at 7.625%
Revolving credit of $4,964,000 at 7.375%
(c) To record goodwill amortization based on a twenty-year life.
(d) To record the tax effect of pro forma adjustments and record income
tax expense as if Speed had been subject to Federal and additional
state and local income taxes which it was not subject to because
it was an S corporation.
<PAGE> 37
(d) Exhibits.
Exhibit
Number Description
- ------ -----------
2.1*+ Asset Acquisition Agreement by and among the
Registrant, Katz N.Y. Acquisition, Inc., Speed
Graphics, Inc., DDP, Inc. and Ronald Krivosheiw, with
schedules thereto.(P)
2.2** Agreement dated March 6, 1998, by and among the
Registrant, Katz N.Y. Acquisition, Inc., Moondance,
Inc., DDP, Inc. and Ronald Krivosheiw.
4.1* Subordinated Promissory Note of Registrant to Speed
Graphics, Inc. (included in Exhibit 2.1 as a schedule
thereto.).
4.2*+ Loan Agreement by and among the Registrant, Katz N.Y.
Acquisition, Inc., Advanced Digital Services, Inc. and
the Bank of New York, with schedules thereto.
4.3* Term Loan Note of Registrant to the Bank of New York (included
in Exhibit 4.2 as a schedule thereto.).
4.4* Revolving Credit Loan Note of Registrant to the Bank of
New York (included in Exhibit 4.2 as a schedule
thereto.).
4.5* Subordination Agreement by and between Speed Graphics,
Inc. and the Bank of New York.
27** Financial Data Schedule.
- ------------------
* Filed as an exhibit to the Registrant's Current Report on Form 8-K, filed
with the Commission on January 23, 1998, and incorporated herein by
reference.
** Filed herewith.
+ Confidential treatment requested as to portions of this
Exhibit.
(P) Portions of this Exhibit filed by paper with the Commission pursuant to a
continuing hardship exemption.
7
<PAGE> 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: March 24, 1998
KATZ DIGITAL TECHNOLOGIES, INC.
By: /s/ Donald L. Flamm
----------------------
Donald L. Flamm
Vice President - Finance
and Chief Financial Officer
8
<PAGE> 39
EXHIBIT INDEX
Exhibit
Number Description
2.1*+ Asset Acquisition Agreement by and among the Registrant,
Katz N.Y. Acquisition, Inc., Speed Graphics, Inc., DDP, Inc.
and Ronald Krivosheiw, with schedules thereto.(P)
2.2** Agreement dated March 6, 1998, by and among the Registrant,
Katz N.Y. Acquisition, Inc., Moondance, Inc., DDP, Inc. and
Ronald Krivosheiw.
4.1* Subordinated Promissory Note of Registrant to Speed
Graphics, Inc. (included in Exhibit 2.1 as a schedule
thereto.).
4.2*+ Loan Agreement by and among the Registrant, Katz N.Y.
Acquisition, Inc., Advanced Digital Services, Inc. and the
Bank of New York, with schedules thereto.
4.3* Term Loan Note of Registrant to the Bank of New York (included
in Exhibit 4.2 as a schedule thereto.).
4.4* Revolving Credit Loan Note of Registrant to the Bank of New
York (included in Exhibit 4.2 as a schedule thereto.).
4.5* Subordination Agreement by and between Speed Graphics, Inc.
and the Bank of New York.
27** Financial Data Schedule.
- ------------------
* Filed as an exhibit to the Registrant's Current Report on Form 8- K, filed
with the Commission on January 23, 1998, and incorporated herein by
reference.
** Filed herewith.
+ Confidential treatment requested as to portions of this Exhibit.
(P) Portions of this Exhibit filed by paper with the Commission pursuant to a
continuing hardship exemption.
9
<PAGE> 1
Exhibit 2.2
AGREEMENT dated March 6, 1998, by and among KATZ DIGITAL TECHNOLOGIES, INC., a
Delaware corporation, having an address at Twenty-One Penn Plaza, New York, New
York 10001 (hereafter referred to as "KDTI"); KATZ N.Y. ACQUISITION, INC., a
Delaware corporation, having an address at Twenty-One Penn Plaza, New York, New
York 10001 (hereafter referred to as "KDTI-NY" or "Purchaser"); MOONDANCE, INC.
a New York corporation formerly known as SPEED GRAPHICS, INC., having an address
at 40 Central Park South, New York, New York 10119 (hereafter referred to as
"MI"); DDP, INC., a New York corporation, having an address at 40 Central Park
South, New York, New York 10119 (hereafter referred to as "DDP", and,
collectively with MI referred to as "MOON"); and RONALD KRIVOSHEIW, an
individual residing at 40 Central Park South, New York, New York 10019
(hereafter referred to as "RONALD").
W I T N E S S E T H :
WHEREAS, KDTI, KDTI-NY, MOON and RONALD are parties to that certain Asset
Acquisition Agreement dated as of January 1, 1998 (the "Acquisition Agreement");
WHEREAS, RONALD, Purchaser and KDTI-NY wish to provide herein for certain
amendments to the Acquisition Agreement and for the mutually acceptable terms of
the termination of RONALD's employment with Purchaser; and.
WHEREAS, MOON has agreed to accept prepayment of the Promissory Note and the
parties have agreed that the Purchase Price for the Acquired Assets (as such
capitalized terms are defined in the Acquisition Agreement) will be adjusted in
the manner provided for in this Agreement, and the parties have therefore agreed
to modify the Acquisition Agreement upon the terms and conditions hereof.
NOW, THEREFORE, in consideration of the agreements herein set forth and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and notwithstanding anything to the contrary in the Acquisition
Agreement, the parties hereto agree as follows:
I. Capitalized terms in this Agreement are used with the same respective
meanings ascribed thereto in the Acquisition Agreement.
II. The number of Shares is hereby reduced to 173,913 shares of Common Stock.
III. The Excluded Assets shall be deemed to include a 1987 Rolls Royce
automobile (VIN SCAZN02A1HCX20634) (the "Rolls Automobile") and a 1997 Lexus
automobile (VIN JT6HJ88J3V0173916) (the "Lexus Automobile"). The Motor Vehicle
Lease Agreement dated November 13, 1997 between MOON and Lexus Financial
Services New York, as assignee of Rallye Lexus, regarding the Lexus Automobile
shall not be cancelled or transferred to KDTI and shall remain in full force and
effect and shall be the sole liability and responsibility of MOON.
<PAGE> 2
IV. Purchaser hereby acknowledges receipt of (i) the Share Certificate (together
with a stock power duly executed, in such manner as is necessary to transfer the
Shares represented thereby in accordance with Article 8 of the Uniform
Commercial Code of New York) representing 293,848 shares of Common Stock and
(ii) the Promissory Note, each of which previously was delivered by MI to KDTI
for reissuance in the name of "Moondance, Inc."
V. Concurrently with the execution and delivery of this Agreement:
a. KDTI has paid $1,750,000.00 to MI in immediately available funds
by wire transfer to Mellon Bank, Pittsburgh, PA (ABA No. 043-000261), for credit
to Merrill Lynch (Acct. No. 101-1730), for final credit to the account of Ronald
Krivosheiw (Acct. No. 821- 61183);
b. a Share Certificate representing the Shares (as such term has
been amended by this Agreement) has been issued to Moondance, Inc.;
c. KDTI has executed and delivered documents transferring ownership
of the Rolls Automobile to MI;
d. KDTI has delivered to MOON a copy of a letter from The Bank of
New York acknowledging and agreeing to (i) the prepayment and cancellation of
the Promissory Note as contemplated by this Agreement and (ii) the termination
of the Subordination Agreement.
VI. MI and RONALD acknowledge that no interest or other amounts shall be due or
payable under the Promissory Note for the period beginning March 1, 1998.
VII. The Purchase Price shall not be adjusted as provided in Section 3.3.2 of
the Acquisition Agreement, and any and all rights of either party with respect
to any adjustment to the Purchase Price provided for in Section 3.3.2 of the
Acquisition Agreement are hereby waived by the parties.
VIII. The parties agree that the portion of the Purchase Price allocated to the
value of the machinery and equipment constituting part of the Acquired Assets,
including furniture and computer equipment but excluding leasehold improvements,
shall be $3,075,350.00. The parties agree that the value of such leasehold
improvements is as stated on the Closing Date Balance Sheet prepared by the
Present Accountants. The parties further acknowledge that there are certain
other Closing Date Balance Sheet accounts, the value of which have not yet been
finally agreed upon, and that such value shall be resolved in accordance with
the provisions of Section 3.3.1 of the Acquisition Agreement.
IX. Section 8.7 of the Acquisition Agreement is hereby deleted in its entirety
and RONALD hereby resigns as an officer and director of KDTI. Nothing in this
Agreement shall or shall be deemed to limit, alter or otherwise affect in any
manner any rights of RONALD under (i) the
11
<PAGE> 3
Certificate of Incorporation of KDTI, (ii) the By-laws of KDTI or (iii) the
directors' and officers' liability insurance maintained by KDTI, in each case
for any acts or omissions of RONALD in his capacity as an officer, director or
employee of KDTI on and after the Closing and on or prior to the date of this
Agreement.
X. RONALD's employment under the Employment Agreement is hereby terminated as of
the date hereof. It is agreed that such termination has been mutually agreed
upon by the parties, and is without cause by the Company and other than for good
reason by RONALD. RONALD acknowledges receipt in full of all compensation and
other benefits due to him under the Employment Agreement, and further
acknowledges that he is not entitled to any stock options under KDTI's Employee
Stock Option Plan notwithstanding the provisions of Section 8.10 of the
Acquisition Agreement.
XI. MOON and RONALD confirm that, notwithstanding the termination of RONALD's
employment under the Employment Agreement, the non-competition covenants
included in the Employment Agreement survive such termination, and MOON and
RONALD agree to perform and comply with the non-competition covenants included
in the Employment Agreement, as though fully set forth herein and in the
Acquisition Agreement as applicable to, and enforceable against, both MOON and
RONALD; provided, however, that for purposes of this Agreement the term
"Restricted Period" shall mean the period commencing on the day hereof and
ending on the fifth anniversary of the date of this Agreement.
XII. KDTI will continue to carry RONALD as an insured under KDTI's group health
insurance plan during the eighteen (18) month period following the date of this
Agreement, and will reimburse RONALD for the cost of maintaining such coverage
(the "Insurance Reimbursement"), and if such coverage may under the provisions
of applicable law be extended beyond such eighteen (18) month period, then KDTI
will continue such coverage and Insurance Reimbursement for up to six (6) months
(or such lesser period permitted by applicable law) following the end of the
initial eighteen (18) month period.
XIII. For the two (2) week period beginning on March 6, 1998, KDTI agrees to
make Kelli Began (or if she resigns her employment, any other KDTI secretary
approved by RONALD, such approval not to be unreasonably withheld or delayed)
available during normal business hours to (A) answer or receive telephone calls
placed to, and receive messages for, RONALD or MOON at the offices of KDTI; (B)
collect or receive personal correspondence addressed to RONALD or MOON and
received at the offices of KDTI; and (C) forward to RONALD such telephone calls
in a manner reasonably directed by RONALD and forward correspondence to him by
regular mail to an address designated by him. During such period KDTI also
agrees to afford RONALD (or his agents or designees) access to the offices of
KDTI to remove or cause to be removed his personal effects and other items
constituting the Excluded Assets.
XIV. The parties agree that the $35,000.00 reimbursement due to MOON under
Section 3.3.1 of the Acquisition Agreement for the fees of the
12
<PAGE> 4
Present Accountants in preparing and resolving any issues regarding the Closing
Date Balance Sheet (the "Accountants' Reimbursement") shall be satisfied in the
following manner: the Present Accountants' outstanding invoice No. 0070928 dated
January 31, 1998, in the amount of $25,837.00 shall be paid by MOON or Ronald,
and such amount shall be credited against the $37,280.00 (the "Advance") demand
obligation due from RONALD to SPEED reflected on the Closing Date Balance Sheet,
leaving a balance of $11,443.00 due from RONALD on account of the Advance, and
$9,163.00 due from KDTI on account of the Accountants' Reimbursement. The
balance of the Accountants' Reimbursement shall be satisfied in the same manner
as provided in the preceding sentence, and the remaining balance of the Advance,
if any, shall be paid by crediting against such balance the amount of the
Insurance Reimbursement due to RONALD from KDTI. A copy of any additional
invoice(s) from the Present Accountants shall be given to KDTI.
XV. Each of KDTI and KDTI-NY reaffirms the representations and warranties
contained in Section 7.3 and 7.4 of the Acquisition Agreement with respect to
this Agreement to the same extent as if set forth fully herein; provided,
however, that references in such representations and warranties as so reaffirmed
hereby to "this Agreement and the Other Documents to which it is a party" or
words of similar effect shall be deemed to be references to this Agreement.
XVI. Each of MOON and Ronald reaffirms the representations and warranties
contained in Section 6.18 and 6.19 of the Acquisition Agreement with respect to
this Agreement to the same extent as if set forth fully herein; provided,
however, that references in such representations and warranties as so reaffirmed
hereby to "this Agreement and the Other Documents to which it is a party" or
words of similar effect shall be deemed to be references to this Agreement.
XVII. The parties acknowledge and agree that neither this Agreement nor any of
the transactions contemplated hereby shall constitute or shall be deemed to
constitute a breach of any of the parties' respective representations,
warranties, covenants or other agreements in the Acquisition Agreement or the
Employment Agreement.
XVIII. The provisions of Sections 10.1, 10.2, 10.5, 10.7, 10.8 and 10.9 of the
Acquisition Agreement are incorporated by reference in this Agreement as if
separately stated herein; provided, however, that references in such Sections as
so incorporated herein to "this Agreement and the Other Documents" or words of
similar effect shall be deemed to be references to this Agreement.
XIX. Except as amended by this Agreement, the Acquisition Agreement remains in
full force and effect.
<PAGE> 5
IN WITNESS WHEREOF, the individual parties have executed and the corporate
parties have each caused its corporate name to be hereunto subscribed by their
respective duly authorized officers on the date first written above.
KATZ DIGITAL TECHNOLOGIES, INC. KATZ N.Y. ACQUISITION INC.
By: By:
---------------------- ----------------------
GARY KATZ GARY KATZ
Chief Executive Officer President
MOONDANCE, INC. DDP, INC.
By: By:
---------------------- ----------------------
Name: Ronald Krivosheiw Name: Ronald Krivosheiw
Title: President Title:
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Ronald Krivosheiw
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