SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934: (FEE REQUIRED)
For the fiscal year ended September 30, 1995 Commission File No. 0-12329
LCS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2648333
(State of incorporation) (I.R.S. employer identification number)
120 Brighton Road
Clifton, New Jersey 07012
(Address of principal executive offices) (zip code)
Registrant's telephone number: (201) 778-5588
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the average of closing bid and asked prices, as of
December 1, 1995: $45,382,561. The number of shares of Common Stock ($.01 par
value) outstanding as of December 1, 1995: 4,213,548.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement in respect of the 1996 Annual Meeting of
Stockholders is incorporated by reference into Part III hereof to the extent
indicated in that Part. The Form 8-K dated September 1, 1995 is incorporated by
reference into Part IV hereof to the extent indicated in that Part. This Form
10-K consists of 52 pages. Index to exhibits is located at page 43.
<PAGE>
Part I
Item 1. Business.
LCS Industries, Inc. ("LCS" or the "Company"), a Delaware corporation,
offers clients a broad range of direct-response marketing services, including
fulfillment services (continuity and catalog processing), computer services
(database and relationship marketing) and list marketing services. LCS was
incorporated in November, 1969.
Contribution to total sales for the three most recent fiscal years by
the type of service described above is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
--------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Fulfillment services ................. 39% 30% 32%
Computer services .................... 13% 15% 17%
List marketing services .............. 48% 55% 51%
</TABLE>
On September 6, 1995, the Company announced that it had entered into an
agreement to provide computer services through the building of a marketing
database for a major non-U.S. communications company. The total expected
revenues through June, 1998 will approximate $40 million, subject to early
termination provisions. Initial revenues and earnings under the contract were
recorded during the fourth quarter of the fiscal year ended September 30, 1995.
On September 11, 1995, the Company announced that its wholly-owned
subsidiary, Catalog Resources, Inc. (CRI), had reached an agreement to continue
to provide fulfillment services to a major consumer products corporation. The
new agreement provides for approximately $4.4 million in guaranteed revenues
over a two year period for base processing levels. Additional revenues will be
derived over and above that amount based upon the volume of transactions
processed and other services provided.
On April 1, 1993, the Company acquired all the outstanding stock of
CRI. The initial purchase price was $3,500,000 and, in addition, certain
additional payments could have been earned by the former CRI shareholders if
CRI's pretax income, as defined, reached certain amounts during the next five
years. Of this amount, $1,500,000 was paid at the closing, consisting of
$750,000 in cash and 267,378 shares of the Company's common stock and the
balance payable in amounts of $400,000 on April 1 of each of the next five years
with payments to be 50 percent in cash and 50 percent in stock. On April 1,
1994, $400,000 was paid, consisting of $200,000 in cash and 57,578 shares of the
Company's common stock.
Effective August 1, 1994, the purchase agreement was amended to limit
to $8,100,000 the aggregate amount of additional purchase consideration to be
paid in addition to the $1,900,000 paid at such date. The additional amount to
be paid is based upon the operating performance of CRI over the eight year
period beginning October 1, 1994. Based upon CRI's earnings for each fiscal year
ending on September 30, a maximum annual payment of $1,012,500 will be paid in
January of the following year, which amount is subject to a dollar for dollar
reduction based on operating results. Such payments are calculated separately
for each year. Each payment will consist of 50 percent in cash and 50 percent in
common stock of the Company with the maximum number of shares to be delivered
under the purchase agreement, as amended, not to exceed 660,000 shares. The
portion of the above payments not made in stock is payable in cash. The number
of shares to be issued will be based on the market value, as defined, of the
common stock at the future payment dates. As of September 30, 1995, 464,904
shares had been delivered under the provisions of the purchase agreement, as
amended.
At September 30, 1994 the amounts due on January 1, 1995 and 1996,
under the terms of the purchase agreement, as amended, were recorded. The
January 1, 1995 payment of $1,012,500 was recorded as $506,250 current portion
of long-term debt and $506,250 common stock issuable. The present value
(interest at 7.75%) of the $1,012,250 payable January 1, 1996 was recorded as
$461,538 current portion of long-term debt and $461,538 common stock issuable.
As a result of the operating results achieved for the fiscal year ended
September 30, 1995, the September, 1995 signing of a two year extension of a
contract to provide fulfillment services to a major customer, forecasted
operating results for the 1996 fiscal year and the evaluation of anticipated
future operating results beyond fiscal 1996, it is probable that future CRI
earnings levels will be attained which will require the maximum future payments
of $6,075,000 to be made. As a result, the present value (interest at 8.75%) of
those payments has been recorded at September 30, 1995; $2,532,108 as long-term
debt and $1,945,983 as common stock issuable, with a corresponding increase in
goodwill. The common stock issuable amount reflects the maximum number of shares
(660,000 less those shares previously issued and delivered) issuable under the
terms of the purchase agreement, as amended, based on the market price of the
Company's common stock at September 30, 1995. This amount is subject to
adjustment, based on the future movements in the market price of the Company's
common stock.
The numbers of shares indicated above have been adjusted to give effect
to the 10% stock dividend paid in January, 1995 and the 2 for 1 stock split paid
as a 100% stock dividend on October 24, 1995.
Effective November 30, 1993, the Company sold its 80 percent interest
in Type-A-Scan, Inc. to the minority shareholder. At September 30, 1993, the
Company recorded a provision for loss on the sale of $385,000.
Fulfillment Services
Continuity/Order Entry
LCS' continuity/order entry services provide computer-based support to
the membership activities of book clubs, similar continuity (mail order) clubs
and catalog companies. Continuity clubs and catalog companies, a large part of
the direct-response industry, make repetitive mailings and periodic product
offerings to their members or customers. The LCS system supports these efforts
by processing and providing information with regard to orders, shipments,
billings, returns and credit criteria, cashiering (receiving and depositing
customer payments and related updating of customer files) and providing
personnel to respond to inquiries from club members.
The Company also provides computer-generated reports which clients use
in measuring profitability and in evaluating and controlling marketing efforts.
Lead/Inquiry Fulfillment
Leads and/or inquiries are generated by clients' advertisements which
require a mailed or telephoned (to toll-free "800" numbers) customer response.
These leads are received by LCS and are computer-processed using its proprietary
system which accommodates clients of varying sizes from any industry and with
differing volumes of activity.
Processing begins by converting the lead into machine-readable form.
Then, depending on the criteria supplied by the client, the Company processes
the lead in a variety of ways, including the elimination of non-productive leads
and the mailing, usually within 24 hours, of fulfillment packages containing the
client's literature or product. At the same time, a lead form generated by
computer is sent to the client's local sales office, warehouse, branch or retail
outlet so that a salesperson can directly contact the prospective customer.
Using codes identifying the sources of the lead, the LCS computer
system produces reports allowing the client to evaluate the effectiveness of the
advertising. In addition, upon return of the lead form containing the client's
disposition of the lead, LCS is able to produce reports evaluating the
performance of the client's sales force in handling the lead. The system may
also be customized in response to unique customer requirements.
Catalog Fulfillment
CRI provides fulfillment services to the catalog industry. This service
encompasses the maintaining of its clients' inventory, receiving its clients'
customer orders and payments by mail as well as by dedicated telemarketing
personnel via toll-free "800" numbers which are open twenty-four hours a day,
year-round, and the subsequent shipping of the merchandise. Orders received are
entered into CRI's computer system with appropriate validations being performed
prior to processing. This includes receiving payment, whether in the form of
check, money order or credit card. The CRI system includes various features
which are intended to minimize credit losses to its clients. The order is then
picked, packed and shipped. CRI also handles inventory returns for its clients
as well as providing dedicated customer service representatives to handle
customer inquiries, complaints, etc. Various reports are developed and provided
to CRI's clients to enable them to properly analyze their marketing efforts.
Outbound Telemarketing
LCS' outbound telemarketing service offers business to business and
business to consumer calling services to clients in the publishing, financial,
telecommunications and technology markets. Applications include direct sales,
renewals, market research and lead generation. The benefits of outbound
telemarketing include: better customer service through personal contact with
clients and increased sales effectiveness at a lower cost than in-person sales
efforts.
Computer Services
Direct-response marketing consists of selective and analytical methods
of reaching a specific audience for the sale of clients' goods and services.
These methods, applied singly or in combination, can accurately determine the
most responsive audience for a particular direct marketing effort. The Company's
computer systems tabulate, store and process this information for future use by
clients, resulting in the more efficient and cost-effective use of their sales
and advertising budgets.
Communications Database Development
The Company is also involved in the design, development and
implementation of marketing databases for communications companies both within
and outside the United States. This entails conversion of raw data on customer
billings and control data into marketing tools, the objective being retention of
customer base, increasing market share or winback of previously lost market
share.
List Maintenance
List maintenance involves the processing, updating and storing of
mailing lists and other demographic information on the Company's computers for
clients' promotional and list rental activities. Mailing lists may be combined
and enhanced with demographic information to form databases, which can be used
as the basis of additional client promotions or marketed to other list users
(see "Enhancement" below).
The Company maintains lists and databases for its clients who use them
for marketing their own products and services as well as for rental to other
marketers. The lists and databases maintained by LCS presently range in size
from several thousand to approximately twenty three million names. Certain
clients have on-line access to lists and databases maintained for them by LCS.
Each list or database may be used to produce a variety of end-use formats, such
as labels, listings, index cards, computer letters and magnetic tapes.
Demographic information can be customized for the client and used as the
selection criteria for a list or database rental.
In addition, lists can be presorted for maximum postal cost efficiencies.
"Fastfax," the Company's proprietary list fulfillment order processing
system, provides clients with on-line database list segment counting and order
selection capabilities using their own personal computer terminals. List orders
entered using this system can be fulfilled within 24-48 hours after
authorization.
Merge/Purge
Merge/purge is a computerized system which recognizes and eliminates
duplicate names when combining large numbers of lists or databases for mailing
programs. It can also be used to identify names with high response potential by
identifying duplications between lists with similar demographics. Identification
of these multiple prospects enables the direct-response client to plan marketing
strategy, including follow-up promotions.
Because clients may wish to target a promotion to a highly segmented
audience, merge/purge can be applied to attributes (such as location or gender)
in addition to names in a number of lists and databases and, based upon the
clients' criteria, can generate refined lists identifying the target audience.
LCS' software can also remove (suppress) the names of persons who the
client deems inappropriate or who have a low probability of ordering based on
past experience.
Enhancement
Enhancement is the overlay of demographic information to computer lists
and databases to facilitate targeted mailing programs, sometimes in combination
with the list maintenance and merge/purge services. This information added by
LCS can include profiles of time in present residence, dwelling unit size,
occupation, income estimate, age, gender, presence and number of children,
telephone number and other information.
The Company has been selected by the U.S. Postal Service as one of 23
licensees for its National Change of Address System. As part of this program to
reduce the return rate of domestic mail, the Postal Service is furnishing
licensees every two weeks with changes of address on all recent U.S. business
and household moves. Utilizing this data, LCS is able to offer its clients the
ability to enhance existing lists to reflect the Postal Service's most current
change of address information, thereby increasing the cost-effectiveness of
mailings using such updated lists.
Computer Personalization
Computer personalization is the use of computerized lists to
personalize mass mailings of various forms including labels, computer letters,
complex insurance applications and many other forms. The Company subcontracts
this process.
List Marketing Services
The Company, through its consolidated subsidiary The SpeciaLISTS Ltd.,
provides consumer list marketing services. These services include:
-- List brokerage -- the recommendation of lists or segments of lists
for specific mailing campaigns and the securing of names from
various list owners for mailings. The Company consults with clients
to determine the best direct-mail strategy and optimal targeted
markets.
-- List management -- rental and promotion of proprietary and
client-owned lists for direct-mail promotions.
-- List compilation -- creation of proprietary lists drawn from
numerous sources, such as directories and attendance rosters.
Marketing
The Company currently markets its products and services throughout the
United States using in-house sales expertise. Leads are generated by personal
calls, print advertising in trade media, referrals, industry meetings and trade
shows and seminars. LCS uses its own direct-response and fulfillment services to
generate leads, support sales and facilitate follow-up. The generally close
working relationship between LCS and its clients offers opportunities for the
sale of additional related services. The Company makes a practice of identifying
and designing services to meet special needs of clients. The sales staff is
compensated by salary plus commissions or bonuses.
Although, during fiscal 1995, sales to one customer accounted for 11%
of the Company's consolidated revenues, management does not believe that the
loss of any single customer would have a continuing material adverse effect on
the Company and its subsidiaries taken as a whole. From time to time,
specifically in the communications area, the Company has been involved in major
projects. Over the past three years, the Company has been successful in
replacing completed projects for customers with new projects for other
customers. These projects have contributed significantly to the profits of the
Company. While projects anticipated for 1996 continue this pattern, there is no
assurance that this will continue to happen in the future.
Customer Trade Terms
As the Company is in a service business, a large proportion of its
consolidated current assets and a significant portion of its consolidated total
assets are represented by trade accounts receivable. Invoices for service to
clients of the Company and its subsidiaries are customarily rendered monthly for
recurring matters and at the completion of special projects. For financial
statement purposes, revenues and related costs are recognized when services are
performed. Revenues under long-term consulting contracts are recognized on the
percentage-of-completion method of accounting measured by the percentage of
labor hours incurred to date to the estimated total labor hours required for
each contract.
In the case of approximately 37% of the consolidated trade accounts
receivable of the Company and its subsidiaries as of September 30, 1995, various
payment terms exist ranging from payable upon receipt of invoice to 60 days from
date of invoice, and in the case of substantially all of the balance (primarily
those of SpeciaLISTS), payment terms are 60 days after the client's mailing
date.
Management believes that the consolidated trade accounts receivable of
the Company and its subsidiaries as of September 30, 1995, net of the allowance
for doubtful accounts reflected on the consolidated balance sheet as at such
date included in the Consolidated Financial Statements, are collectable in the
ordinary course of business.
Product Protection and Proprietary Rights
LCS uses several methods to ensure the protection of confidential
client data and its proprietary systems. The Company's computer tapes and disks
are accessible only to authorized personnel. LCS protects on-line access to data
by restricting access to on-line terminals and by utilizing a periodically
changing, segmented password system. To enhance safety in case of fire or other
natural disasters, duplicate tapes containing client data are stored at an
off-site location.
The Company considers certain of its software to be proprietary. It
currently relies upon trade secret laws and internal non-disclosure agreements
to protect the software. LCS has no patents or copyrights. In management's
opinion, no such patent or copyright protection is customary or necessary.
Competition
The segment of the computer services industry that serves the
direct-response marketing industry is highly competitive. Competition is related
primarily to technical capability and expertise, pricing, quality of work and
ability to meet deadlines and is not confined to specific geographic areas. The
industry in which LCS operates is subject to rapid client marketing changes
requiring constant adaptation to provide competitive services. Reliable data on
LCS's relative position in its market is not available.
The Company competes not only with other independent specialized
computer service companies but also with in-house computer service departments
of companies in the direct-response marketing industry.
Some of the companies with which LCS competes have access to
substantially greater financial and other resources and offer a wider range of
non-computer services than the Company.
Employees
As of November 30, 1995, the Company employed 1,673 persons, of whom
860 were employed on a full-time basis. LCS does not have any collective
bargaining agreements with its employees and believes its relations with its
employees to be good.
<PAGE>
Item 2. Properties.
The Company and its subsidiaries lease or sublease facilities at the
locations and under leases or subleases summarized as follows and in Note 11 of
Notes to Consolidated Financial Statements:
<TABLE>
<CAPTION>
Square Expiration
Location Feet Date
-------- ------- ----------
<C> <C> <C>
120 Brighton Road, Clifton, NJ (1) .............. 78,645 Sept. 2000
1200 Harbor Blvd., Weehawken, NJ (2) ............ 18,100 June 2003
100 Enterprise Place, Dover, DE (1)(5) .......... 55,000 Month to Month
Enterprise Business Park, Parcel #4,
Dover, DE (1) ........................ 124,000 Oct. 2005
155 Commerce Way, Dover, DE (1) (3) ............. 35,530 July 1999
Horsepond Road, Dover, DE (4) ................... 10,000 April 1995
2 McKee Road, Dover, DE (4) ..................... 20,000 Month to Month
155 Commerce Way, Dover, DE (4) ................. 56,762 April 1999
-------
TOTAL ........ 398,037
</TABLE>
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(1) Office, warehouse, production
(2) Office
(3) Five year renewal option available
(4) Warehouse
(5) Sublease
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Quarterly Stock Price Information
The Company's Common Stock is traded on the NASDAQ national market
under the symbol LCSI. The following table sets forth the quarterly high and low
bid prices of the Common Stock, as quoted on NASDAQ. Such quotations represent
prices between dealers and do not include retail mark-ups, mark-downs or
commissions, nor do they represent actual transactions.
In the first quarter of fiscal 1993, an initial cash dividend of $.10
per share was paid. Commencing in the second quarter of fiscal 1993, regular
quarterly dividends of $.025 per share were paid through the first quarter of
fiscal 1995. Commencing in the second quarter of fiscal 1995, regular quarterly
dividends of $.0375 were paid.
As of December 1, 1995, there were 147 registered holders of record of
the Company's Common Stock. This number does not include investors whose
securities are maintained at securities firms in "street name."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Bid Bid
- ------------------------------------------------------------------------------------------------------------------------
High Low High Low
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended Fiscal Year Ended
September 30, 1995 September 30, 1994
1st Quarter.................... $ 4-1/4 $ 3-3/8 1st Quarter........................ $ 3-3/4 $ 2-1/2
2nd Quarter................... 6-3/8 3-7/8 2nd Quarter........................ 4-3/4 3-1/8
3rd Quarter.................... 12-1/8 5-1/4 3rd Quarter........................ 4 3-1/8
4th Quarter.................... 16-1/2 10-3/8 4th Quarter........................ 3-3/4 3-1/4
</TABLE>
The prices above reflect retroactively the 2 for 1 stock split paid as a 100%
stock dividend on October 24, 1995.
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Five Year Review
Income Statement Data
(In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $78,863 $62,690 $53,002 $46,786 $ 42,475
Cost of sales 54,717 46,986 39,433 34,130 31,710
Gross profit 24,176 15,704 13,569 12,656 10,765
Selling and administrative expenses 13,653 13,270 12,094 10,491 9,746
Dividend and interest (income) expense, net (167) 65 (3) (125) (164)
Other expense ---- ---- 385 ---- ----
Income before income taxes 10,660 2,369 1,093 2,390 1,183
Net income 6,329 1,375 626 1,326 732
Per common and common equivalent share - Note
Primary earnings 1.33 .32 .16 .37 .22
Weighted average number of shares outstanding 4,755 4,306 3,841 3,560 3,336
Fully diluted earnings 1.25 .32 .16 .37 .22
Weighted average number of shares outstanding 5,050 4,307 3,847 3,560 3,370
Dividends per share .066 .045 .08 ---- ----
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Note - Retroactively restated to reflect the 10% stock dividend paid in January,
1995 and the 2 for 1 stock split paid as a 100% stock dividend on October
24, 1995.
<TABLE>
<CAPTION>
Balance Sheet Data
(In thousands)
- ---------------------------------------------------------------------------------------------------------------
September 30, 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 10,569 $ 4,673 $ 3,460 $ 6,351 $ 5,675
Total assets 49,737 31,815 28,983 20,708 19,173
Long-term debt and capital
lease obligations - net of
current portion 3,436 1,805 1,983 411 54
Stockholders' equity 22,048 12,865 11,339 9,410 7,821
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
sales represented by data derived from the Company's Consolidated Statements of
Income:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended September 30, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales ........................................ 100.0% 100.0% 100.0%
Cost of sales ................................ 69.4 74.9 74.4
Gross profit ................................. 30.6 25.1 25.6
Selling and administrative ................... 17.3 21.2 22.8
Dividend and interest (income) expense, net .. (.2) .1 --
Loss on sale of subsidiary ................... -- -- .7
----- ----- -----
Income before income taxes ................... 13.5 3.8 2.1
Provision for income taxes ................... 5.5 1.6 .9
----- ----- -----
Net income ................................... 8.0% 2.2% 1.2%
=== === ===
- --------------------------------------------------------------------------------
</TABLE>
Fiscal Year 1995 Compared to Fiscal Year 1994
Sales in 1995 increased $16.2 million (26%) compared to 1994 principally as a
result of a $11.5 million (61%) increase in fulfillment services, a $3.9 million
(11%) increase in list marketing services and a $.7 million (8%) increase in
computer services. The increase in fulfillment services' sales reflects a 150%
increase in the catalog fulfillment operation, a 50% increase in the continuity
fulfillment operation partially offset by a 64% decline in inbound telemarketing
revenues. Increased transaction volume from an existing customer was the primary
reason for the catalog fulfillment increase. Billings to new customers were the
primary reason for the continuity fulfillment increase. The decrease in inbound
telemarketing is part of the Company's plan to de-emphasize this service. The
list marketing increase resulted generally from an expanded customer base and
increased volumes with continuing customers. The computer services' increase
reflects the revenues of a new contract, announced September 6, 1995, to provide
computer services through the building of a marketing database for a major
non-U.S. communications company offset by lower revenues in other areas of
computer services. Initial revenues from the new contract were recorded in the
last quarter of fiscal 1995.
Gross profit was 31% of sales in 1995 compared to 25% in 1994. The improvement
in gross profit margin resulted primarily from the increased catalog fulfillment
revenues, described above, which have a higher gross profit margin than the
margins derived from the other fulfillment operations of the Company, the effect
of the new marketing database contract and the increased revenues and improved
profit margins of the continuity fulfillment operation.
Selling and administrative expenses in 1995 increased $.4 million ( 3%) compared
to 1994. The increase in selling and administrative expenses is not
proportionate to the 26% revenue gain for the year due primarily to minor
selling and administrative expenses associated with the incremental revenues at
the catalog fulfillment operation and the new marketing database contract and
the reassignment of selling personnel to operating units of the Company.
Dividend and interest (income) expense, net in 1995 increased $233,000 from
1994. Dividend and interest income in 1995 increased $176,000 (98%) from 1994.
During the current fiscal year, interest earned on invested funds coupled with
higher interest rates more than offset interest expense incurred on both
long-term debt and capital lease obligations. The line of credit was not used
during the entire year. In 1994, net interest expense was incurred due to
utilizing the line of credit for varying amounts and periods and higher levels
of long-term debt and capital lease obligations outstanding.
The effective tax rate in 1995 was 41% compared to 42% in 1994. The provisions
for taxes for the two fiscal years reflect relatively normal relationships
between book income and taxes thereon. Effective October 1, 1993, the Company
adopted the provisions of Statement of Financial Standards No. 109, "Accounting
for Income Taxes". The cumulative effect of adopting this statement was
immaterial.
Net income for 1995 increased 360% compared to 1994 primarily as a result of the
profitability of the catalog fulfillment operation, the increased revenues and
improved profit margin of the continuity fulfillment operation and the initial
profit derived from the new marketing database contract.
Fiscal Year 1994 Compared to Fiscal Year 1993
Sales in 1994 increased $9.7 million ( 18%) compared to 1993 principally as a
result of a $7.1 million ( 26%) increase in list marketing services, a $2.4
million (15%) increase in fulfillment services and a $.5 million (5%) increase
in computer services. The list marketing services' increase resulted from an
expanded customer base and increased volumes with continuing customers. The
fulfillment services' increase is primarily the result of including a full year
of operations of Catalog Resources, Inc., which was acquired in April, 1993,
offset by a 25% decrease in telemarketing sales. Computer services' revenues
derived from the contract with a major non-U.S. communications company were
mostly offset by decreases in other computer services.
Gross profit was 25% of sales in 1994 compared to 26% in 1993. The decrease
resulted from the higher percentage of total sales contributed by list marketing
services which has a lower gross profit margin than the other classes of
services. Selling and administrative expenses in 1994 increased $1.2 million
(10%) compared to 1993. The increase is attributable primarily to the
consolidation of Catalog Resources, Inc. for a full year and expenses associated
with the increased list marketing sales.
Dividend and interest (income) expense, net in 1994 increased $69,000 from 1993.
Dividend and interest income in 1994 increased $18,000 (11%) from 1993. The
increase results from the combination of increased dividend income offset by a
reduced level of funds available for investment compared to the prior year.
Interest expense in 1994 increased $87,000 (55%) from 1993. The increase
reflects the utilization of the unsecured line of credit for approximately nine
months of the current year coupled with higher levels of borrowing compared to
the prior year. Contributing to increased interest expense was the term-loan
entered into by Catalog Resources, Inc. to fund the expansion and upgrading of
its facilities.
The effective tax rate in 1994 was 42% compared to 43% in 1993. The provisions
for taxes for the two fiscal years reflect relatively normal relationships
between book income and taxes thereon. Effective October 1, 1993, the Company
adopted the provisions of Statement of Financial Standards No. 109, "Accounting
for Income Taxes". The cumulative effect of adopting this statement was
immaterial.
Net income for 1994 increased 120% compared to 1993 principally due to the
recording at September 30, 1993 of costs associated with three events which
occurred in the fourth quarter of that year aggregating $1,050,000 before taxes.
These were the decision to sell LCS' majority owned data entry company, accrual
of costs associated with the collection of amounts due from a client and lower
profit margins on certain projects during the fourth quarter.
Liquidity and Capital Resources
Working capital at September 30, 1995 increased to $10,569,000 from $4,673,000
at the prior year end. Current assets increased $13,168,000 principally from
increases in accounts receivable and cash. Current liabilities increased
$7,272,000 primarily as a result of increases in accounts payable, deferred
revenue and accrued salaries and commissions. At September 30, 1995, the ratio
of long-term debt and long-term capital lease obligations to equity was .16 to
1.
For the fiscal year ended September 30, 1995, cash generated by operations
increased $4,013,000 over such amounts generated in 1994. The increase was
primarily attributable to an increase in net income of $4,954,000 and a decrease
in adjustments to net income and changes in operating assets and liabilities of
$940,000. This decrease was primarily the result of increased depreciation and
amortization of $263,000, an increase in deferred taxes of $289,000, an increase
in accounts receivable of $3,763,000, an increase in prepaid expenses and other
current assets of $392,000, an increase in accounts payable and other expenses
of $651,000, an increase in deferred revenue of $3,614,000 and an increase in
security deposits of $619,000.
Cash used in investing activities decreased $421,000 over the prior year. This
decrease was primarily attributed to security maturities in 1995 of $535,000
compared to net security maturities of $125,000 in 1994.
During the current fiscal year, repayment of debt borrowings and dividends paid
were offset by funds received from the exercise of stock options and purchases
by the Employee Stock Purchase Plan. This resulted in a decrease in the use of
funds for financing activities of $1,892,000.
Pursuant to the purchase agreement, as amended, with CRI, the Company is
obligated to pay to CRI's selling shareholders in cash or stock up to an
aggregate of $10,000,000. Under such purchase agreement, the Company will pay
$1,012,500 (one-half in cash and one-half in stock) on January 1, 1996 bringing
the total payments to that date to $3,925,000. As outlined in Note 2 to the
accompanying consolidated financial statements, the present value of the
remaining $6,075,000 obligation has been recorded as of September 30, 1995
resulting in an increase in goodwill at that date of $4,478,000.
Management believes cash generated from current operations and other liquid
assets combined with the available bank credit line will be sufficient to meet
cash flow needs during the 1996 fiscal year, including the payment to former CRI
shareholders due January 1, 1996. At September 30, 1995, the Company has
committed to purchase warehouse and office equipment in connection with the
expansion of facilities at CRI amounting to approximately $3.0 million. The
Company is negotiating a $2.5 million five year term loan to substantially fund
these purchases.
Recently Issued Accounting Standards
In December, 1994, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 94-6 "Disclosure of Certain Significant Risks and
Uncertainties" which is effective for financial statements issued for years
ending after December 15, 1995. The risks and uncertainties this SOP deal with
can stem from the nature of the Company's operations, from the necessary use of
estimates in the preparation of the Company's financial statements, and from
significant concentration in certain aspects of the entity's operations. The
adoption of this SOP by the Company will result in additional disclosures to the
financial statements in fiscal 1997.
In March, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which requires
the adoption of the standard for fiscal years beginning after December 15, 1995.
This new accounting standard establishes the recognition and measurement of such
long lived assets and certain identifiable intangibles to be held and used by
the Company which must be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The Company has not yet determined the effect, if any, this new standard will
have on the balance sheet, net income and earnings per share upon its adoption.
Adoption of the new standard will have no effect on the Company's cash flows.
In October, 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires adoption of the
disclosure provisions no later than fiscal years beginning after December 15,
1995 and adoption of the recognition and measurement provisions for nonemployee
transactions no later than after December 15, 1995. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," but would be
required to disclose in a note to the financial statements pro forma net income
and, if presented, earnings per share as if the company had applied the new
method of accounting, as outlined in SFAS No. 123. The Company has not yet
determined if it will elect to change to the method outlined in SFAS No. 123,
nor has it determined the effect the new standard will have on net income and
earnings per share should it elect to make such a change. Adoption of the new
standard will have no effect on the Company's cash flows.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
LCS Industries, Inc.
Clifton, New Jersey
We have audited the accompanying consolidated balance sheets of LCS Industries,
Inc. and subsidiaries as of September 30, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 1995. 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
misstatements. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of LCS Industries, Inc. and its
subsidiaries as of September 30, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1995 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Parsippany, NJ
November 8, 1995
<PAGE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended September 30, 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ............................. 78,863,443 62,690,115 53,002,153
Cost of sales ......................... 54,717,497 46,985,698 39,433,443
----------- ----------- -----------
Gross profit .......................... 24,145,946 15,704,417 13,568,710
Selling and administrative expenses ... 13,653,493 13,270,090 12,094,463
Other (income) expense:
Dividend and interest income ....... (354,600) (178,900) (161,344)
Interest expense ................... 187,461 244,457 157,940
Loss on sale of subsidiary ......... -- -- 385,000
----------- ----------- -----------
Income before income taxes ............ 10,659,592 2,368,770 1,092,651
Provision for income taxes ............ 4,331,000 994,000 467,000
----------- ----------- -----------
Net income ............................ 6,328,592 1,374,770 625,651
Per common and common equivalent share:
Primary earnings ...................... $ 1.33 $ .32 $ .16
=========== =========== ===========
Fully diluted earnings ................ $ 1.25 $ .32 $ .16
=========== =========== ===========
Dividends ............................. $ .066 $ .045 $ .08
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1995 1994
- ------------- ------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 8,630,831 $ 1,679,489
Investments - held-to-maturity ............................................... 199,859 535,068
Accounts receivable (less allowance
for doubtful accounts: 1995 - $624,000
and 1994 - $585,000) ..................................................... 23,815,919 17,916,539
Prepaid expenses and other current assets .................................... 1,891,837 1,231,221
Deferred income taxes ........................................................ 263,250 305,043
------------ ------------
Total current assets ....................................................... 34,801,696 21,667,360
------------ ------------
Investments - available-for-sale, net ........................................... 797,583 782,451
Investments - held-to-maturity .................................................. -- 199,859
Property and equipment, net ..................................................... 5,222,513 5,246,373
Goodwill (net of accumulated amortization:
1995 - $233,500 and 1994 - $100,000) ..................................... 7,853,675 3,499,092
------------ ------------
Other assets .................................................................... 1,061,166 420,344
$ 49,736,633 $ 31,815,479
============ ============
</TABLE>
(Continued)
<PAGE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1995 1994
- ------------- ------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 15,105,009 $ 12,060,895
Accrued salaries and commissions ............................................. 2,076,999 1,237,878
Other accrued expenses ....................................................... 2,352,477 2,457,307
Income taxes payable ......................................................... -- 153,803
Current portion of long-term debt ............................................ 567,294 606,709
Current portion of capital lease obligations ................................. 516,989 478,259
Deferred revenue ............................................................. 3,614,331 --
------------ ------------
Total current liabilities .................................................. 24,233,099 16,994,851
------------ ------------
Long-term debt, net of current portion .......................................... 2,804,790 837,446
Capital lease obligations, net of current portion ............................... 631,475 967,247
Deferred income taxes ........................................................... 19,750 150,543
Stockholders' equity:
Preferred stock $.01 par value; authorized
1,000,000 shares; issued - none
Common stock $.01 par value; authorized
6,000,000 shares; issued 1995 - 4,347,886
shares and 1994 - 1,909,337 shares ....................................... 43,479 19,093
Common stock issuable ........................................................ 2,407,521 967,788
Additional paid-in capital ................................................... 5,431,455 2,261,497
Retained earnings ............................................................ 14,451,854 9,912,936
------------ ------------
22,334,309 13,161,314
Less: treasury stock, at cost, 187,766 shares ............................... (207,953) (207,953)
marketable securities valuation adjustment,
net of deferred income taxes ....................................... (78,837) (87,969)
------------ ------------
Total stockholders' equity ................................................. 22,047,519 12,865,392
------------ ------------
$ 49,736,633 $ 31,815,479
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
LCS Industries, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Common Additional
$.01 Par Value Stock Paid-in Retained
Balance Shares Amount Issuable Capital Earnings
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 30, 1992 .......... 1,742,019 $ 17,420 -- $ 1,243,172 $ 8,357,415
Acquisition of Catalog
Resources, Inc.
Common stock issued ........ 121,536 1,215 -- 748,785 --
Present value of fixed
future stock distributions -- -- 831,136 -- --
Dividends paid .............. -- -- -- -- (278,071)
Net income .................. -- -- -- -- 625,651
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 1993 .......... 1,863,555 18,635 831,136 1,991,957 8,704,995
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition of Catalog
Resources, Inc.
Common stock issued ........ 26,172 262 (187,793) 187,531 --
Change in present value
of future stock
distributions, net ....... -- -- 324,445 -- --
Exercise of stock options ... 19,250 193 -- 79,870 --
Stock purchased through
Employee Stock
Purchase Plan .............. 360 3 -- 2,139 --
Dividends paid .............. -- -- -- -- (166,829)
Valuation adjustment ........ -- -- -- -- --
Net income .................. -- -- -- -- 1,374,770
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 1994 .......... 1,909,337 19,093 967,788 2,261,497 9,912,936
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition of Catalog
Resources, Inc.
Common Stock issued ........ 63,613 636 (506,250) 505,614 --
Present value of future
stock distributions ...... -- -- 1,945,983 -- --
Exercise of stock options ... 127,230 1,273 -- 651,260 --
Stock dividend - 10% ........ 179,929 1,799 -- 1,527,597 (1,529,396)
Stock dividend - 100% ....... 2,061,087 20,611 -- (20,611) --
Stock purchased through
Employee Stock
Purchase Plan 6,690 67 -- 80,098 --
Dividends paid .............. -- -- -- -- (260,278)
Valuation adjustment, net ... -- -- -- -- --
Tax benefit of exercise of
stock options .............. -- -- -- 426,000 --
Net Income .................. -- -- -- -- 6,328,592
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 1995 .......... 4,347,886 $ 43,479 $ 2,407,521 $ 5,431,455 $ 14,451,854
- ------------------------------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
<PAGE>
LCS Industries, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Marketable
Treasury Stock- Securities
at Cost Valuation
Balance Shares Amount Adjustment Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1992 .......... 187,766 $ (207,953) -- $ 9,410,054
Acquisition of Catalog
Resources, Inc.
Common stock issued ........ -- -- -- 750,000
Present value of fixed
future stock distributions -- -- -- 831,136
Dividends paid .............. -- -- -- (278,071)
Net income .................. -- -- -- 625,651
- -------------------------------------------------------------------------------------------------------------
September 30, 1993 .......... 187,766 (207,953) -- 11,338,770
- -------------------------------------------------------------------------------------------------------------
Acquisition of Catalog
Resources, Inc.
Common stock issued ........ -- -- -- --
Change in present value
of future stock
distributions, net ....... -- -- -- 324,445
Exercise of stock options ... -- -- -- 80,063
Stock purchased through
Employee Stock
Purchase Plan .............. -- -- -- 2,142
Dividends paid .............. -- -- -- (166,829)
Valuation adjustment ........ -- -- (87,969) (87,969)
Net income .................. -- -- -- 1,374,770
- -------------------------------------------------------------------------------------------------------------
September 30, 1994 .......... 187,766 (207,953) (87,969) 12,865,392
- -------------------------------------------------------------------------------------------------------------
Acquisition of Catalog
Resources, Inc.
Common Stock issued ........ -- -- -- --
Present value of future
stock distributions ...... -- -- -- 1,945,983
Exercise of stock options ... -- -- -- 652,533
Stock dividend - 10% ........ -- -- -- --
Stock dividend - 100% ....... -- -- -- --
Stock purchased through
Employee Stock
Purchase Plan -- -- -- 80,165
Dividends paid .............. -- -- -- (260,278)
Valuation adjustment, net ... -- -- 9,132 9,132
Tax benefit of exercise of
stock options .............. -- -- -- 426,000
Net Income .................. -- -- -- 6,328,592
- -------------------------------------------------------------------------------------------------------------
September 30, 1995 .......... 187,766 $ (207,953) $(78,837) $22,047,519
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES -- CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended September 30, 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income ......................................... $ 6,328,592 $ 1,374,770 $ 625,651
----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 1,861,883 1,598,746 1,067,813
Deferred income taxes .......................... (95,000) 194,000 (307,000)
Provision for doubtful accounts receivable ..... 121,625 160,487 313,000
Gains on sales of equipment .................... (9,750) -- --
Gain on sale of marketable securities .......... -- -- (3,602)
Loss on sale of subsidiary ..................... -- -- 385,000
Total adjustments .............................. 1,878,758 1,953,233 1,455,211
----------- ----------- -----------
Changes in operating assets and liabilities:
Accounts receivable ............................ (6,021,005) (2,285,043) (2,785,899)
Prepaid expenses and other current assets ...... (234,616) 157,678 (401,568)
Accounts payable and accrued expenses .......... 3,778,404 3,126,932 1,217,426
Income taxes payable ........................... (153,803) 147,737 (77,237)
Deferred revenue ............................... 3,614,331 -- --
Security deposits .............................. (581,846) 36,700 --
Other, net ..................................... (58,976) 24,503 (9,687)
----------- ----------- -----------
Total adjustments and changes .................. 2,221,247 3,161,740 (601,754)
----------- ----------- -----------
Net cash provided by operating activities ..... 8,549,839 4,536,510 23,897
----------- ----------- -----------
Cash flows from financing activities:
Changes in note payable, long-term debt and capital
leases (including current portion):
Borrowings ..................................... -- 1,350,000 2,664,009
Repayments ..................................... (1,117,273) (3,802,210) (728,309)
Dividends paid ..................................... (260,278) (166,829) (278,071)
Exercise of stock options .......................... 652,533 80,063 --
Employee stock purchase plan proceeds .............. 80,165 2,142 --
----------- ----------- -----------
Net cash (used in) provided by financing activities (644,853) (2,536,834) 1,657,629
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment ................ (1,589,400) (1,500,548) (1,758,292)
Net sales (purchases) of marketable securities ..... 535,068 125,823 (961,852)
Proceeds from sales of equipment ................... 100,688 -- --
Acquisition of business, net of cash acquired ...... -- -- (769,680)
----------- ----------- -----------
Net cash used in investing activities .............. (953,644) (1,374,725) (3,489,824)
----------- ----------- -----------
Cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents 6,951,342 624,951 (1,808,298)
Cash and cash equivalents at beginning of year ..... 1,679,489 1,054,538 2,862,836
----------- ----------- -----------
Cash and cash equivalents at end of year ........... $ 8,630,831 $ 1,679,489 $ 1,054,538
=========== =========== ===========
Continued on next page.
</TABLE>
<PAGE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES -- CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued from previous page.
<TABLE>
<CAPTION>
For the Years Ended September 30, 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest ....................................... $ 153,000 $ 264,000 $ 133,000
Income taxes ................................... $ 4,637,000 $ 652,000 $ 930,000
Supplemental disclosures of non-cash investing
and financing activities:
Acquisition of business:
Fair value of assets acquired .................. $ 4,478,091 $ 648,890 $ 4,444,049
Cash consideration paid ........................ -- -- (855,219)
Issuance of debt ............................... (2,532,108) (324,445) (831,136)
Common stock issued ............................ -- -- (750,000)
Common stock issuable .......................... (1,945,983) (324,445) (831,136)
----------- ----------- -----------
Liabilities assumed ............................ $ -- $ -- $ 1,176,558
=========== =========== ===========
</TABLE>
For the years ended September 30, 1995 and 1994, $506,250 and $187,793 of
common stock issuable was converted into 139,948 and 57,578 shares,
respectively, of the Company's common stock in accordance with the terms of
the Catalog Resources, Inc. purchase agreement.
Capital lease obligations:
For the year ended September 30, 1995, 1994 and 1993, capital lease
obligations of $216,000, $162,000 and $937,000, respectively, were incurred
for the leasing of equipment.
Valuation adjustment:
At September 30, 1994, a valuation adjustment of $87,969, net of deferred
income taxes, was recorded in a separate shareholder's equity account
representing the net unrealized losses on the available-for-sale marketable
securities portfolio. For the year ended September 30, 1995, the account
was adjusted to reflect an increase in market values of $9,132, net of
deferred income taxes.
Stock Dividends:
On January 31, 1995, 179,929 shares of the Company's common stock were paid
as a 10% stock dividend.
The September 30, 1995 financial statements reflect the 2 for 1 stock split
(2,061,087 shares) paid as a 100% stock dividend on October 24, 1995.
See Notes to Consolidated Financial Statements.
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
A - Business and Consolidation - The consolidated financial statements include
the accounts of LCS Industries, Inc. (the "Company") and its subsidiaries. All
material intercompany transactions and balances have been eliminated in
consolidation. The Company provides fulfillment and information processing
services specializing in continuity and catalog processing, database and
relationship marketing and list marketing.
B - Cash and cash equivalents - Cash and cash equivalents include short-term
cash investments with maturities of three months or less at date of acquisition.
Such investments are carried at cost, which approximates market, and amounted to
$7,606,000 and $712,000 at September 30, 1995 and 1994, respectively.
C - Investments - Effective September 30, 1994, the Company adopted the
provisions of Statement of Financial Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". In accordance with the provisions of
this Statement, the Company has classified its investments in debt securities
into held-to-maturity, trading or available-for-sale based upon management's
intent with respect to such investments and the Company's ability to so hold.
Equity securities are classified as available-for-sale or trading depending on
management's intent. Market values are based on publicly quoted market prices.
D - Property and equipment - Property and equipment are stated at cost.
Depreciation and amortization, which includes the amortization of assets
recorded under capital leases, are computed using the straight-line method over
the estimated serviceable lives of the respective assets or the initial or
remaining terms of leases. Leasehold improvements are amortized, using the
straight-line method, over the shorter of the estimated useful life of the asset
or the life of the lease.
E - Goodwill - Represents the unamortized excess cost of acquiring Catalog
Resources, Inc. over the fair value of the net assets received at the
acquisition date. This asset is being amortized on the straight-line basis over
30 years. The consolidated statements of operations for the fiscal years ended
September 30, 1995, 1994 and 1993 include goodwill amortization of $123,500,
$51,000 and $49,000, respectively.
The Company regularly assesses the recoverability of goodwill through a review
of profitability and cash flows of the business acquired.
F - Revenue recognition - Sales and related cost of sales are recognized when
services are performed.
Revenues under long-term consulting contracts are recognized based on the
percentage of completion method of accounting measured by the percentage of
labor hours incurred to date to the estimated total labor hours required for
each contract. Deferred revenue represents billings in excess of revenues
recognized as sales.
G - Income taxes - Effective October 1, 1993, the Company adopted the provisions
of Statement of Financial Standards No. 109, "Accounting for Income Taxes". The
cumulative effect of adopting this statement was immaterial. This statement
required a change from the deferred method of accounting for income taxes of APB
Opinion 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled.
H - Earnings Per Common Share - Earnings per common share are based on the
weighted average number of common and common equivalent shares outstanding
during the year. Stock options are common stock equivalents. For the years ended
September 30, 1995, 1994 and 1993, the weighted average number of shares used in
determining primary earnings per common share was 4,755,365, 4,306,009 and
3,840,810, respectively. For the same periods, the weighted average number of
shares used in determining fully diluted earnings per common share was
5,049,958, 4,307,184 and 3,847,274, respectively. Fully diluted earnings per
common share is presented due to the effect of dilution resulting from
outstanding options calculated using the year end stock market price (such
market price is higher than the average quarterly price used in computing
primary earnings per common share).
The weighted average shares used in the computations of fiscal years 1994 and
1993 primary and fully diluted earnings per share have been restated to reflect
the shares currently deemed issuable in accordance with the agreement, as
amended, relating to the acquisition of CRI, the 10% stock dividend paid January
31, 1995 and the 2 for 1 stock split paid as a 100% stock dividend on October
24, 1995. Other references to shares and per share data, as appropriate, reflect
the effects of these stock dividends.
I - Reclassifications - Certain reclassifications have been made to the 1994 and
1993 financial statements to conform to the 1995 presentation.
Note 2 - Acquisition
On April 1, 1993, the Company completed the purchase of all the outstanding
stock of Catalog Resources, Inc. (CRI). CRI's results of operations are included
in the Company's Consolidated Statements of Income from that date. The initial
purchase price was $3,500,000. In addition, certain additional payments could
have been earned by the former CRI shareholders if CRI's pretax income, as
defined by the agreement, reached certain amounts during the next five years. Of
the initial purchase price, $1,500,000 was paid at the closing, consisting of
$750,000 in cash and 267,378 shares of the Company's common stock and the
balance payable in amounts of $400,000 on April 1 of each of the next five
years, with payments to be 50 percent in cash and 50 percent in stock. On April
1, 1994, $400,000 was paid, consisting of $200,000 in cash and 57,578 shares of
the Company's common stock. Effective August 1, 1994, the purchase agreement was
amended to limit to $8,100,000 the aggregate amount of additional purchase
consideration to be paid in addition to the $1,900,000 paid at such date. The
additional amount to be paid is based upon the operating performance of CRI over
the eight year period beginning October 1, 1994. Based upon CRI's earnings for
each fiscal year ending on September 30, a maximum annual payment of $1,012,500
is payable in January of the following year, which amount is subject to a
dollar-for-dollar reduction based on CRI's operating results. Such payments are
calculated separately for each year. Each payment will consist of 50 percent in
cash and 50 percent in common stock of the Company with the maximum number of
shares to be delivered under the purchase agreement, as amended, not to exceed
660,000 shares. The portion of these payments not made in stock is payable in
cash. The number of shares to be issued will be based on the market value, as
defined, of the common stock at the future payment dates. As of September 30,
1995, 464,904 shares, had been delivered under the provisions of the purchase
agreement, as amended.
The accompanying consolidated balance sheet at September 30, 1994 includes the
amounts due on January 1, 1995 and 1996, under the terms of the purchase
agreement, as amended. The January 1, 1995 payment of $1,012,500 was recorded as
$506,250 current portion of long-term debt and $506,250 common stock issuable.
The present value (interest at 7.75%) of the $1,012,250 payable January 1, 1996
was recorded as $461,538 current portion of long-term debt and $461,538 common
stock issuable.
As a result of the operating results achieved for the fiscal year ended
September 30, 1995, the September, 1995 signing of a two year extension of a
contract to provide fulfillment services to a major customer, forecasted
operating results for the 1996 fiscal year and the evaluation of anticipated
future operating results beyond fiscal 1996, it is probable that future CRI
earnings levels will be attained which will require the maximum future payments
of $6,075,000 to be made. As a result, the present value (interest at 8.75%) of
those payments has been recorded at September 30, 1995; $2,532,108 as long-term
debt and $1,945,983 as common stock issuable, with a corresponding increase in
goodwill. The common stock issuable amount reflects the maximum number of shares
(660,000 less those shares previously issued and delivered) issuable under the
terms of the purchase agreement, as amended, based on the market price of the
Company's common stock at September 30, 1995. This amount is subject to
adjustment, based on the future movements in the market price of the Company's
common stock.
Note 3 - Investments
As a result of the decline in market value of the available-for-sale security
portfolio during fiscal 1994, a valuation adjustment of $87,969, net of deferred
income taxes, was recorded in a separate shareholders' equity account at
September 30, 1994. During the current fiscal year, the valuation account was
adjusted to reflect an increase in market value of $9,132, net of deferred
income taxes.
<PAGE>
The following table sets forth the components of investments held at September
30, 1995:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Market Unrealized Holding
Available-for-sale: Cost Value Gain / (Loss)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government due 1/31/99 ............... $ 24,996 $ 24,260 $ (736)
Equity securities ......................... 903,924 773,323 (130,601)
- ------------------------------------------------------------------------------------------------
Total ..................................... $ 928,920 $ 797,583 (131,337)
Deferred income tax effect ................ 52,500
- ------------------------------------------------------------------------------------------------
Marketable securities valuation adjustment,
net of deferred income taxes ............ $ (78,837)
- ------------------------------------------------------------------------------------------------
Held-to-maturity:
- ------------------------------------------------------------------------------------------------
U.S. Government due 5/15/96 ............... $ 199,859 $ 199,020 $ (839)
- ------------------------------------------------------------------------------------------------
</TABLE>
During the year ended September 30, 1995, proceeds from redemptions of
investments were $540,000. No realized gains or losses resulted from the
redemption of these securities.
The following table sets forth the components of investments held at September
30, 1994:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Market Unrealized Holding
Available-for-sale: Cost Value Gain / (Loss)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government due 1/31/99 ............... $ 24,996 $ 22,825 $ (2,171)
Equity securities ......................... 903,924 759,626 (144,298)
- ------------------------------------------------------------------------------------------------
Total ..................................... $ 928,920 $ 782,451 (146,469)
Deferred income tax effect ................ -- -- 58,500
- ------------------------------------------------------------------------------------------------
Marketable securities valuation adjustment,
net of deferred income taxes ............ -- -- $ (87,969)
- ------------------------------------------------------------------------------------------------
Held-to-maturity:
- ------------------------------------------------------------------------------------------------
U.S. Government due 2/09/95 ............... $ 195,095 $ 196,269 $ 1,174
U.S. Government due 7/31/95 ............... 139,973 137,508 (2,465)
U.S. Government due 9/25/95 ............... 200,000 196,320 (3,680)
U.S. Government due 5/15/96 ............... 199,859 192,440 (7,419)
- ------------------------------------------------------------------------------------------------
Total ..................................... $ 734,927 $ 722,537 $ (12,390)
- ------------------------------------------------------------------------------------------------
</TABLE>
During the year ended September 30, 1994, proceeds from redemptions of
investments were $494,565. No realized gains or losses resulted from the
redemption of these securities.
<PAGE>
Note 4 - Allowance for Doubtful Accounts
Activity in the Allowance for Doubtful Accounts for the three years ended
September 30, 1995 includes:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended September 30, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year ......... $ 585,000 $ 560,000 $ 356,000
Additions - charged to expense ....... 121,625 160,467 313,000
Deductions ........................... (82,625) (135,467) (109,000)
- --------------------------------------------------------------------------------
Balance at end of year ............... $ 624,000 $ 585,000 $ 560,000
- --------------------------------------------------------------------------------
</TABLE>
Note 5 - Property and Equipment
The components of property and equipment include:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures ............................. $ 1,979,289 $ 1,758,346
Leasehold improvements ............................. 1,619,583 1,485,317
Computer equipment ................................. 5,792,492 5,219,216
Computer equipment under capital leases ............ 1,915,567 1,699,514
Transportation and other equipment ................. 1,629,411 1,097,373
- --------------------------------------------------------------------------------
12,936,342 11,259,766
Less: Accumulated depreciation and amortization ... 7,713,829 6,013,393
- --------------------------------------------------------------------------------
$ 5,222,513 $ 5,246,373
- --------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization charged to operations was $ 1,738,000, $1,547,000,
and $995,000 for 1995, 1994 and 1993, respectively.
Note 6 - Unsecured Line of Credit
The Company has available a $3,000,000 unsecured bank line of credit bearing
interest at the bank's base rate (8.75% at September 30, 1995). The line of
credit expires March 31, 1996. During fiscal 1995, the line of credit was not
used.
During the fiscal year ended September 30, 1994, maximum borrowings under a
previous unsecured line of credit agreement were $2,600,000 with interest paid
at rates of 6.5% to 7.75%.
<PAGE>
Note 7 - Long-Term Debt
Long-term debt consists of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Payable to former shareholders of CRI $ 2,993,646 $ 967,788
Note payable to bank 378,438 476,367
- --------------------------------------------------------------------------------
3,372,084 1,444,155
Less: Current portion 567,294 606,709
- --------------------------------------------------------------------------------
$ 2,804,790 $ 837,446
- --------------------------------------------------------------------------------
</TABLE>
See Note 2 for a description of the amounts due to the former shareholders of
CRI. The note payable to bank is a five year term loan payable through December
15, 1998 with interest at 6.9%. The loan is secured by certain equipment located
at CRI with a net book value of $343,000 as of September 30, 1995.
Maturities of long-term debt include:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Year Ended
September 30 Amount
- --------------------------------------------------------------------------------
<S> <C> <C>
1996 $ 567,294
1997 569,015
1998 540,560
1999 422,752
2000 354,201
Thereafter 918,262
- --------------------------------------------------------------------------------
Total long-term debt $ 3,372,084
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note 8 - Provision for Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Year Ended September 30, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal .............................................. $ 3,471,000 $ 636,000 $ 567,000
State ................................................ 955,000 164,000 207,000
- -----------------------------------------------------------------------------------------------------
Total provision for current income taxes ............ 4,426,000 800,000 774,000
- -----------------------------------------------------------------------------------------------------
Deferred
Federal .............................................. (85,000) 146,000 (247,000)
State ................................................ (10,000) 48,000 (60,000)
- -----------------------------------------------------------------------------------------------------
Total provision for deferred income taxes ........... (95,000) 194,000 (307,000)
- -----------------------------------------------------------------------------------------------------
Total provision for income taxes .................... $ 4,331,000 $ 994,000 $ 467,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
The total provision for income taxes varies from the U.S. federal statutory
rate. The following reconciliation shows the significant differences in the tax
at statutory and effective rates:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year Ended September 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate .......... $ 3,624,000 $ 806,000 $ 372,000
State income taxes - net of federal tax benefit 619,000 134,000 98,000
Non-deductible expenses ....................... 85,000 39,000 11,000
Non-taxable income ............................ (15,000) (21,000) (14,000)
Other ......................................... 18,000 36,000 --
- -------------------------------------------------------------------------------------------
Total provision for income taxes ......... $ 4,331,000 $ 994,000 $ 467,000
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The components of deferred income tax assets and liabilities include:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
September 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Net Current Net Non-current Net Current Net Non-current
Asset Liability Asset Liability
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property and equipment $ -- $ 72,250 $ -- $160,000
Allowance for doubtful accounts 249,000 -- 240,000 --
Non-deductible expenses -- -- 41,000 --
Unrealized holding loss on
marketable securities -- (52,500) -- (55,000)
Vacation accrual 48,000 -- 38,000 --
Change to accrual accounting for CRI (33,750) -- (23,000) 46,000
Other -- -- 9,043 (457)
- -------------------------------------------------------------------------------------------------------------------
Total $263,250 $19,750 $305,043 $150,543
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred income tax benefit for the fiscal year ended September 30, 1993 was
computed under the provisions of APB Opinion 11 and results from timing
differences in the recognition of revenue and expense for tax and financial
statement purposes. The sources of these differences include:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended September 30, 1993
- --------------------------------------------------------------------------------
<S> <C>
Loss on sale of subsidiary ................................... $(167,000)
Provision for doubtful accounts
in excess of accounts written off ......................... (94,000)
Accrued expenses ............................................. (120,000)
Excess of tax over book depreciation - net ................... 31,000
Other - net .................................................. 43,000
- --------------------------------------------------------------------------------
Total provision for deferred tax benefit ................. $(307,000)
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note 9 - Stock Options
The Company has an Incentive Stock Option Plan which was adopted and became
effective in May, 1993. The Plan calls for granting incentive stock options to
certain officers and other employees, as defined, under current tax laws to
purchase shares of the Company's common stock. The stock options are exercisable
at prices not less than the fair market value of the common stock on the date
the options are granted. The aggregate number of shares which may be issued
under the Plan is 2,200,000.
The Company also has a non-qualified Non-Employee Directors Stock Option Plan.
The aggregate number of shares which may be issued under the Directors Plan is
220,000 Each non-employee director shall be granted an option to purchase 5,000
shares of the common stock on the fifth business day following the public
release of the Company's annual earnings for any fiscal year in which sales and
net income per share of common stock increase by more than 5% over the prior
fiscal year. Options granted under this Plan are based on the market value on
the date of grant. At September 30, 1995, 22,000 options have been granted under
this plan at a price of $3.525 per share. At September 30, 1995, 4,400 shares
were exercisable but none have been exercised. Based on 1995's results, options
covering 10,000 shares are issuable.
Non-employee directors and a consultant to the Company have been granted
non-qualified options, at fair market value, to purchase 65,000 shares of the
Company's common stock at $2.045 to $5.375 per share. At September 30, 1995,
48,750 shares were exercisable but none have been exercised.
During the year ended September 30, 1995, certain officers of the Company were
issued non-qualified options to purchase 75,000 shares of the Company's common
stock at a price of $5.75 per share(110% of fair market value). The options were
exercisable immediately but none have been exercised at September 30, 1995.
<PAGE>
The following schedule sets forth the activity under the 1983 Incentive Stock
Option Plan for the years ended September 30, 1995, 1994 and 1993. Granting of
options under this plan ceased in May, 1993.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Incentive options Number Option Price
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding September 30, 1992 239,310 $2.75 - $8.25
Granted 160,000 $5.75 - $5.91
Expired or cancelled (1,500) $7.50 - $8.25
- -------------------------------------------------------------------------------------------------
Outstanding September 30, 1993 397,810 $2.75 - $8.25
Exercised (19,250) $3.25 - $4.50
Expired or cancelled (3,500) $7.50 - $9.25
- -------------------------------------------------------------------------------------------------
Outstanding September 30, 1994 375,060 $2.75 - $8.25
Exercised (120,767) $3.46 - $7.50
Expired or cancelled (3,849) $6.82 - $7.50
Stock dividend - 10% 32,506 $2.50 - $7.50
Stock dividend - 100% 282,950 $1.25 - $3.75
- -------------------------------------------------------------------------------------------------
Outstanding September 30, 1995 565,900 $1.25 - $3.75
- -------------------------------------------------------------------------------------------------
Exercisable September 30, 1995 477,900 $1.25 - $3.75
- -------------------------------------------------------------------------------------------------
</TABLE>
The following schedule sets forth the activity of the 1993 Incentive Stock
Option Plan for the years ended September 30, 1995 and 1994. No options were
granted prior to October 1, 1993.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Incentive options Number Option Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Granted in 1994 83,000 $5.00 - $ 7.75
- ------------------------------------------------------------------------------------------------
Outstanding September 30, 1994 83,000 $5.00 - $ 7.75
Granted 211,600 $7.36 - $33.69
Exercised (6,463) $4.55 - $ 5.91
Expired or cancelled (19,250) $4.55 - $ 5.91
Stock dividend - 10% 8,300 $4.55 - $ 7.05
Stock dividend - 100% 277,187 $2.88 - $16.85
- ------------------------------------------------------------------------------------------------
Outstanding September 30, 1995 554,374 $2.88 - $16.85
- ------------------------------------------------------------------------------------------------
Exercisable September 30, 1995 84,976 $2.88 - $ 3.53
- ------------------------------------------------------------------------------------------------
Available for grant September 30, 1995 1,632,700
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note 10 - 1994 Employee Stock Purchase Plan
At the annual meeting of stockholders in March, 1994, the 1994 Employee Stock
Purchase Plan was adopted. The Plan provides eligible employees of the Company
and it's subsidiaries the opportunity to acquire up to 300,000 shares of common
stock. Purchases are made on a monthly basis through payroll deductions of from
1% to 10% of eligible compensation. Shares are offered at a 15% discount from
the closing price on the last trading date of each month with no brokerage
commissions. Participation in the Plan began September 1, 1994. For the years
ended September 30, 1995 and 1994, 13,552 and 792 shares have been purchased,
respectively.
Note 11 - Employee Retirement Savings Plan (401K)
The Company sponsors a tax deferred retirement savings plan which permits
eligible employees to contribute varying percentages of their compensation up to
the limit allowed by the Internal Revenue Service. The plan also provides for
discretionary Company contributions. No discretionary contributions were made
for the years ended September 30, 1995, 1994 and 1993.
The Company matches employees' contributions to a maximum of 25% of the
employee's first 6% contributed. Matching contributions charged to expense were
$154,000, $128,000 and $108,000 for the fiscal years ended September 30, 1995,
1994 and 1993, respectively.
<PAGE>
Note 12 - Operating and Capital Lease Commitments
The Company and its subsidiaries lease certain properties, equipment and
software under noncancellable long-term leases, both operating and capital,
which expire at various dates. Certain of the leases on real estate require the
payment of real estate taxes. Minimum rentals under the leases are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Fiscal Year Capital Leases Operating Leases
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 585,040 $ 2,108,627
1997 415,382 2,169,563
1998 257,965 2,050,053
1999 126 1,828,449
2000 1,501,788
Thereafter 5,198,407
- ----------------------------------------------------------------------------------
1,258,513 $14,856,887
Less: Imputed interest 110,049
- ----------------------------------------------------------------------------------
Present value of capital lease obligations $1,148,464
- ----------------------------------------------------------------------------------
</TABLE>
Real estate, equipment and software operating lease costs include:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended September 30, 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate .................... $1,227,000 $1,120,000 $ 804,000
Equipment and software ......... 774,000 1,159,000 1,040,000
- --------------------------------------------------------------------------------
Total ....................... $2,001,000 $2,279,000 $1,844,000
- --------------------------------------------------------------------------------
</TABLE>
Note 13 - Sales of Subsidiaries
Effective November 30, 1993, the Company sold its 80 percent interest in
Type-A-Scan, Inc. to the minority shareholder. At September 30, 1993, the
Company recorded a provision for loss on the sale of $385,000. This amount
includes the write-off of the Company's investment, employee severance payments
and the assumption of certain of Type-A-Scan's liabilities. The accompanying
Consolidated Statement of Income for the year ended September 30, 1993 included
sales of $609,000 and a loss before income taxes of $131,200 relating to the
operations of Type-A-Scan, Inc.
Note 14 - Commitments and Contingencies
The Company is involved in various legal claims and disputes that are normal and
incidental to the Company's business. In the opinion of management, after
consultation with legal counsel, the amount of losses that might be sustained,
if any, from such claims and disputes would not have a material effect on the
Company's financial statements.
At September 30, 1995, the Company's subsidiaries have employment contracts with
certain of their officers with terms expiring at various times through September
30, 2002, which provide for aggregate future minimum compensation of $2,327,000.
Certain of these agreements also provide for commissions and bonuses based on
results of the respective subsidiary's operations.
During the current fiscal year, one of the Company's subsidiaries entered into a
$500,000 standby letter of credit agreement securing the timely payments, by the
subsidiary, of amounts owing to a customer. No claims were made against this
agreement during the year. The fair value of the standby agreement approximates
the cost of the agreement.
At September 30, 1995, the Company has committed to purchase warehouse and
office equipment, in connection with the expansion of facilities at CRI,
amounting to approximately $3,000,000.
Note 15 - Major Customer
For the year ended September 30, 1995, sales to one customer amounted to 11% of
consolidated sales.
* * * * * *
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
Part III
Item 10. Directors, Executive Officers and Significant Employees of the
Registrant.
The information appearing in the Company's Proxy Statement with respect
to its 1996 Annual Meeting of Stockholders (the "Proxy Statement") under the
caption "Election of Directors" is incorporated herein by reference.
The following is a list as of December 1,1995, showing the names and
ages of all principal executive officers and significant employees of the
Company and its subsidiaries, all positions and offices with the Company held by
each of them and the year from which each said office has been continuously
held. All executive officers are elected annually and hold office at the
pleasure of the Company's Board of Directors.
<TABLE>
<CAPTION>
Position with the Company
Name Age and Date from which Held
- ---- --- --------------------------
<S> <C> <C>
Arnold J. Scheine......... 57 President and Director-1969
Marvin Cohen.............. 61 Senior Vice President and Secretary-1981,
Director-1969
Pat R. Frustaci........... 41 Vice President - Finance, Chief Financial Officer,
Treasurer and Assistant Secretary - 1995
Charlotte Griffiths....... 53 Vice President - Administration 1995,
Vice President - 1985
James E. Quinlan........ 57 Controller-1988
William Rella............. 53 President - Fulfillment Services - 1994
Kathryn Barber............ 41 President - Telemarketing 1991
Gerry King................ 46 President - Catalog Resources, Inc. - 1993
Lon Mandel................ 40 President and Chief Operating Officer - The SpeciaLISTS
Ltd. - 1987
Phyllis Stein............. 43 President - List Brokerage Division, The SpeciaLISTS
Ltd. - 1987
</TABLE>
All executive officers of the Company and other significant employees,
other than Ms. Barber, Mr. King and Mr. Frustaci, have, as their principal
occupations, been employed in positions as officers with the Company or its
subsidiaries for more than the last five years. Prior to joining the Company,
Ms. Barber was self-employed as an independent telemarketing consultant from
1990-1991 and was Director of Sales, ICT Group, Inc. from 1988-1991. Mr. King
was President of Catalog Resources, Inc. prior to its acquisition by the Company
from July 1, 1988 to March 31, 1993. Mr. Frustaci was Chief Executive Officer of
Turn-Key Solutions, Inc. in 1991, an independent consultant providing financial
and system consulting services during 1992 and 1993 and was Vice President and
Chief Financial Officer for Image Business Systems, Inc. during 1994.
Based solely upon a review of Forms 3 and 4 and amendments thereto,
furnished to the Company pursuant to Rule 16a-3(e) during its fiscal year ended
September 30, 1995, and Forms 5 and amendments thereto furnished to the Company
with respect to such fiscal year, there was no officer, director or 10%
stockholder of the Company who failed to file, on a timely basis, as disclosed
in the above Forms, reports required by Section 16(a) of the Securities and
Exchange Act of 1934, as amended, during such fiscal year or prior fiscal years.
Item 11. Executive Compensation
The information appearing in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information appearing in the Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information appearing in the Proxy Statement under the caption
"Election of Directors" is incorporated herein by reference.
<PAGE>
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)1. Financial Statements
Report of Deloitte & Touche LLP on
Financial Statements
Consolidated Statements of Operations
for the Years Ended September 30,
1995, 1994 and 1993
Consolidated Balance Sheets as
of September 30, 1995 and 1994
Consolidated Statements of Changes
in Stockholders' Equity for the
Years Ended September 30, 1995,
1994 and 1993
Consolidated Statements of Cash Flows
for the Years Ended September 30,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
(a)2. Financial Statement Schedules
Schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
<PAGE>
Exhibits
(a)3 3.1 Restated Certificate of Incorporation of the Company (1)
3.2 By-laws, as amended, of the Company (2)
10.1 Lease Agreement dated April 11, 1980, as amended, between the
Company and Saul Rachmiel, with respect to premises located
at 120 Brighton Road, Clifton, New Jersey (3)
10.2 1983 Stock Option Plan as Amended and
Restated (4)
10.3 1993 Incentive Stock Option Plan as Amended
and Restated (11)
10.4 1993 Non-Employee Directors Stock Option Plan (8)
10.5 The Bank of New York line of credit commitment letter dated
April 19, 1995
10.6 Master Equipment Lease Agreement dated
December 8, 1989 between the Company and
Forsythe/McArthur Associates, Inc. (5)
10.7 Agreement of Purchase and Sale of Stock dated
April 1, 1993 among the Company,
Catalog Resources, Inc. and the sellers of
all of the outstanding shares of Catalog
Resources, Inc. (6)
10.8 1994 Employee Stock Purchase Plan (7)
10.9 Form of Software Development Agreement
between LCS Industries, Inc. and a major
non-U.S. communications company (9)
10.10 Amendment No.1 dated as of August 1, 1994, to Agreement of
Purchase and Sale of Stock dated April 1, 1993, among LCS
Industries, Inc., Catalog Resources, Inc., and the
stockholders of Catalog Resources, Inc. (10)
10.11 Form of Marketing Database Agreement
between LCS Industries, Inc. and a major
non-U.S. communications company (12)
11 Statement re Computation of Per Share Earnings
22 List of Subsidiaries
<PAGE>
23 Consent of Deloitte & Touche LLP
------------------------
(1) Incorporated by reference to Exhibit filed with the Company's
Registration Statement on Form 8-A, File No. 0-12329, filed
with the Commission on June 27, 1983.
(2) Incorporated by reference to Exhibit to the Company's
Registration Statement on Form S-18, Registration No.
3-87557-N.Y.
(3) Incorporated by reference to Exhibit to the Company's
Registration Statement on Form S-18, Registration No.
2-79941-N.Y.
(4) Incorporated by reference to Exhibit to the Company's
Registration Statement on Form S-8, Registration No. 33-12508.
(5) Incorporated by reference to Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1990, File No. 0-12329.
(6) Incorporated by reference to Exhibit to the Company's Current
Report on Form 8-K dated April 1, 1993, File No. 0-12329.
(7) Incorporated by reference to Exhibit to the Company's
Registration Statement on Form S-8, Registration No. 33-83058.
(8) Incorporated by reference to Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1993, File No. 0-12329. (9)Incorporated by reference to
Exhibit to the Company's Current Report on Form 8-K dated
January 18, 1994, File No. 0-12329.
(10) Incorporated by reference to Exhibit to the Company's Current
Report on Form 8-K dated September 13, 1994, File No. 0-12329.
(11) Incorporated by Reference to Exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30,
1994, File No. 0-12329.
(12) Incorporated by Reference to Exhibit to the Company's Current
Report on Form 8-K dated September 1, 1995, File No. 0-12329.
(b) Reports on Form 8-K
On September 8, 1995, the Company filed an agreement dated
September 1, 1995 to provide computer services through the building
of a marketing database.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LCS INDUSTRIES, INC.
By: /s/Arnold J. Scheine
-----------------------
Arnold J. Scheine
President
Date: December 18, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on December 18, 1995.
Signature Title
--------- -----
/s/ Arnold J. Scheine President (Principal Executive Officer
- ------------------------------- and Director
Arnold J. Scheine
/s/ Pat R. Frustaci Vice President - Finance, Chief Financial
- ------------------------------- Officer, Treasurer and Assistant
Pat R. Frustaci Secretary (Principal Accounting Officer)
/s/ Marvin Cohen Senior Vice President, Secretary and
- ------------------------------- Director
Marvin Cohen
/s/ Lee Gray Director
- -------------------------------
Lee Gray
/s/ Bernard Ouziel Director
- -------------------------------
Bernard Ouziel
<PAGE>
LCS INDUSTRIES, INC.
Commission File No. 0-12329
-------
Annual Report on Form 10-K
for the
Fiscal Year Ended September 30, 1995
E X H I B I T S
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
10.5 The Bank of New York line of
credit commitment letter dated
April 19, 1995
11 Statement re Computation of
Per Share Earnings
22 List of Subsidiaries
23 Consent of Deloitte & Touche LLP
10.5
<PAGE>
(THE BANK OF NEW YORK, NA)
April 19, 1995
LCS Industries, Inc.
120 Brighton Road
Clifton, NJ 07012-1694
Attn: Pat R. Frustaci
Vice President-Finance
Dear Pat:
The Bank of New York National Association (the "Bank") is pleased to
confirm that it holds available to LCS Industries, Inc. (the "Company") a
$3,000,000 unsecured line of credit.
Advances under this line of credit shall be evidenced by, shall be
payable as provided in, and shall bear interest at the rate specified in, a
promissory note of the Company in the form included with this letter.
All obligations of the Company to the Bank with respect to this line
of credit shall be guaranteed, jointly and severally, by Spec Holdings, Inc.,
The SpeciaLISTS, Ltd., Computer Marketing Systems, inc. and Catalog Resources,
Inc. (collectively, the "Guarantors") pursuant to a guarantee in the form
included with this letter.
For so long as this line of credit is held available to the Company or
the Company has any obligations outstanding under this line of credit, (i)
neither the Company nor any of its Guarantors shall create, incur, assume or
suffer to exist any pledge, lien, charge or other encumbrance upon or with
respect to any of the accounts receivable of the Company and/or any of the
Guarantors and (ii) the Company shall deliver to the Bank, within 15 days after
the end of each calendar month, an aging schedule of the accounts receivable of
the Company which is satisfactory to the Bank in the form and content.
As you know lines of credit are cancelable at any time by either
party, and any advance under this line of credit is subject to the Bank's
satisfaction, at the time of such advance, with the condition (financial and
otherwise), business, prospects and operations of the Company and each of the
Guarantors. Unless cancelled earlier as provide din the first sentence of this
paragraph, this line of credit shall be held available until March 31, 1996.
Additionally, all advances under this line of credit will have to be reduced to
zero for a period of thirty consecutive days during the period ending December
31, 1995.
Very truly yours,
THE BANK OF NEW YORK
NATIONAL ASSOCIATION
By: /s/Brian J. Clark
Title: Vice President
BJC:sp
11
<PAGE>
EXHIBIT 11
LCS INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE AND
COMMON EQUIVALENT SHARE (B)
For the Years Ended September 30,
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Primary earnings per share:
Weighted average shares outstanding ...... 4,019,576 3,870,261 3,613,864
Weighted average - dilutive stock options 540,693 240,652 129,398
Shares issuable in connection with the
acquisition of Catalog Resources, Inc ... 195,096 195,096 97,548 (A)
---------- ---------- ----------
4,755,365 4,306,009 3,840,810
========== ========== ==========
Net income ............................... $6,328,592 $1,374,770 $ 625,651
Primary earnings per share and common
equivalent share ........................ $ 1.33 $ .32 $ .16
---------- ---------- ----------
Fully diluted eamings per share:
Weighted average shares outstanding ...... 4,019,576 3,870,261 3,613,864
Weighted average - dilutive stock options 835,286 241,827 135,862
Shares issuable in connection with the
acquisition of Catalog Resources, Inc. .. 195,096 195,096 97,548 (A)
---------- ---------- ----------
5,049,958 4,307,184 3,847,274
========== ========== ==========
Net income ............................... $6,328,592 $1,374,770 $ 625,651
Fully diluted eamings per share and common
equivalent share ........................ $ 1.25 $ .32 $ .16
========== ========== ==========
</TABLE>
(A) Acquisition of CRI completed April 1, 1993. Therefore, one-half of the
shares issuable represent the weighted average shares for that period.
(B) All shares and equivalent shares reflect the 10% stock dividend paid in
January, 1995 and the 2 for 1 stock split paid as a 100% dividend on October
24, 1995.
22
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF LCS INDUSTRIES, INC.
Set forth below are the names of all subsidiaries of LCS as of
December 1, 1995 required to be listed on Exhibit 22 to LCS's 1995 Annual Report
on Form 10-K. Indented companies are direct subsidiaries of the company under
which they are indented.
Percentage Owned by State of
Immediate Parent Incorporation
------------------- -------------
LCS INDUSTRIES, INC.
(Parent) N/A Delaware
LCS Canada, Inc. 100% Delaware
LCS Industries, Ltd. 100% EEC
Spec Holdings, Inc. 100% New York
The SpeciaLISTS Ltd. 100% - Class A New York
80% - Class B
Computer Marketing
Systems, Inc. 51% New York
Catalog Resources, Inc. 100% Delaware
Catalog Liquidators, Inc. 100% Delaware
23
<PAGE>
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Stockholders of
LCS Industries, Inc.
Clifton, New Jersey
We consent to the incorporation by reference in Registration Statements No.
33-12508, No. 33-122552, No. 33-83058, No. 33-90036 and No. 33-59935 of LCS
Industries, Inc. on Forms S-8, S-3, S-8, S-8 and S-3, respectively, of our
report dated November 8, 1995, appearing in this Annual Report on Form 10-K of
LCS Industries, Inc. for the year ended September 30, 1995.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Parsippany, New Jersey
December 20, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 8,630,831
<SECURITIES> 199,859
<RECEIVABLES> 24,439,919
<ALLOWANCES> 624,000
<INVENTORY> 243,211
<CURRENT-ASSETS> 34,801,696
<PP&E> 12,936,342
<DEPRECIATION> 7,713,829
<TOTAL-ASSETS> 49,736,633
<CURRENT-LIABILITIES> 24,233,099
<BONDS> 0
<COMMON> 43,479
0
0
<OTHER-SE> 22,004,040
<TOTAL-LIABILITY-AND-EQUITY> 49,736,633
<SALES> 0
<TOTAL-REVENUES> 78,863,443
<CGS> 0
<TOTAL-COSTS> 54,717,497
<OTHER-EXPENSES> 13,653,493
<LOSS-PROVISION> 121,625
<INTEREST-EXPENSE> 187,461
<INCOME-PRETAX> 10,659,592
<INCOME-TAX> 4,331,000
<INCOME-CONTINUING> 6,328,592
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,328,592
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.25
</TABLE>
