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:
For the fiscal year ended September 30, 1996 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. [ ]
Aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the average of high and low sales prices for
November 29, 1996: $45,424,002. The number of shares of Common Stock ($.01 par
value) outstanding as of November 29, 1996: 4,603,206.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement in respect of the 1997 Annual Meeting of
Stockholders is incorporated by reference into Part III hereof to the extent
indicated in that Part. The Form 10Q/A-1 dated August 8, 1996 is incorporated by
reference into Part IV hereof to the extent indicated in that Part. This Form
10-K consists of 46 pages. Index to exhibits is located at page 37.
<PAGE>
Part I
Item 1. Business.
LCS Industries, Inc. ("LCS" or the "Company"), a Delaware
corporation, provides outsourced direct marketing services and specializes in
fulfillment, list marketing and computer 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,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fulfillment services ....................... 37% 39% 30%
Computer services .......................... 19% 13% 15%
List marketing services .................... 44% 48% 55%
</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. Revenues and earnings under the contract were
recorded during the fourth quarter of the fiscal year ended September 30, 1995.
Revenues recognized under the contract amounted to 14% of consolidated sales for
the fiscal year ended September 30, 1996.
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.
<PAGE>
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, 1993. 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. Based on the terms of the amended
agreement and the achievement of the required operating results for the
preceding fiscal year, payments of $1,012,500, one half in cash and one half in
stock, were made on January 1, 1995 and 1996. As of September 30, 1996, 499,525
shares had been delivered under the provisions of the purchase agreement, as
amended.
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 was considered probable that
future CRI earnings levels would be attained which would 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 was 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 issued and delivered
prior to September 30, 1995) 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. No adjustment was recorded
during the current fiscal year. Based on the operating results for the fiscal
year ended September 30, 1996, the January 1, 1997 scheduled payment of
$1,012,000 will be paid.
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.
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.
<PAGE>
The Company also provides computer-generated reports which
clients use in measuring profitability and in evaluating and controlling
marketing efforts.
During the current fiscal year, the outbound telemarketing
operation has been integrated into the customer service function within
continuity fulfillment.
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.
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.
<PAGE>
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 win back 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 four 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, cartridges or disks.
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.
<PAGE>
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 24 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.
<PAGE>
Although, during fiscal 1996, revenues recognized in connection
with the contract to provide computer services to a non-U.S. communications
company amounted to 14% of consolidated sales, management does not believe that
the loss of any single customer would have a severe impact (as defined in
Statement of Position 94-6 "Disclosure of Certain Significant Risks and
Uncertainties" issued by the American Institute of Certified Public Accountants
in December, 1994) on the Company and its subsidiaries taken as a whole. This
contract contributes significantly to the profits of the Company. Historically,
the Company has been successful in replacing completed contracts. While the
current contract extends through June, 1998, subject to early termination, there
is no assurance that a replacement project will be obtained.
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 36% of the consolidated trade
accounts receivable of the Company and its subsidiaries as of September 30,
1996, 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, 1996, 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,
cartridges 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.
<PAGE>
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 29, 1996, the Company employed 1,630 persons, of
whom 872 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.
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 12
of Notes to Consolidated Financial Statements:
<TABLE>
<CAPTION>
Square Expiration
Location Feet Date
-------- ---- ----
<S> <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
97 Commerce Way, Dover, DE (1) ............ 124,000 Oct. 2005
155 Commerce Way, Dover, DE (1) (3) ....... 35,530 July 1999
2 McKee Road, Dover, DE (4) ............... 29,000 Month to Month
155 Commerce Way, Dover, DE (4) ........... 56,762 April 1999
-------
TOTAL 397,037
(1) Office, warehouse, production
(2) Office
(3) Five year renewal option available
(4) Warehouse
(5) Sublease
</TABLE>
<PAGE>
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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 tier of The
Nasdaq Stock Market(SM) under the symbol LCSI.The following table sets forth the
quarterly high and low sales 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.
In the first quarter of fiscal 1993, an initial cash dividend of $.10 per share
was paid. Regular quarterly dividends of $.025 share were paid from the second
quarter of fiscal 1993 through the first quarter of fiscal 1995 and $.0375 per
share were paid through the first quarter of fiscal 1996. Commencing in the
second quarter of fiscal 1996, subsequent to the 2 for 1 stock split paid as a
100% stock dividend on October 24, 1995, regular quarterly dividends of $.025
were paid.
As of December 2, 1996, there were 144 registered holders and an estimated 2,800
beneficial holders of record of the Company's common stock.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
September 30, 1996 September 30, 1995
------------------ ------------------
Price Price
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter................... $ 19 3/4 $ 13 $ 4 1/4 $ 3 3/8
2nd Quarter................... 28 12 3/8 6 3/8 3 7/8
3rd Quarter................... 27 10 1/4 12 1/8 5 1/4
4th Quarter................... 15 3/4 9 1/2 16 1/2 10 3/8
</TABLE>
The prices above, for 1995, 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, 1996 1995 1994 1993 1992
- ------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales ....................................... $ 95,570 $ 78,863 $ 62,690 $ 53,002 $ 46,786
Cost of sales ............................... 66,120 54,717 46,986 39,433 34,130
Gross profit ................................ 29,450 24,146 15,704 13,569 12,656
Selling and administrative expenses ......... 16,679 13,653 13,270 12,094 10,491
Dividend and interest (income) expense, net . (553) (167) 65 (3) (125)
Other expense ............................... -- -- -- 385 --
Income before income taxes .................. 13,324 10,660 2,369 1,093 2,290
Net income .................................. 7,838 6,329 1,375 626 1,326
Per common and common equivalent share (Note)
Primary earnings ............................ 1.53 1.33 .32 .16 .37
Weighted average number of shares outstanding 5,118 4,755 4,306 3,841 3,560
Fully diluted earnings ...................... 1.53 1.25 .32 .16 .37
Weighted average number of shares outstanding 5,125 5,050 4,307 3,847 3,560
Dividends per share ......................... .094 .066 .045 .08 --
Note - 1995 and prior years have been 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.
<CAPTION>
Balance Sheet Data
(In thousands)
September 30, 1995 1994 1993 1992 1991
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital ................ $19,359 $10,569 $ 4,673 $ 3,460 $ 6,351
Total assets ................... 64,970 49,737 31,815 28,983 20,708
Long-term debt and capital
lease obligations - net of
current portion ......... 4,583 3,436 1,805 1,983 411
Stockholders' equity ........... 30,861 22,048 12,865 11,339 9,410
</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, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Sales .......................................... 100.0% 100.0% 100.0%
Cost of sales .................................. 69.2 69.4 74.9
----- ----- -----
Gross profit ................................... 30.8 30.6 25.1
Selling and administrative ..................... 17.4 17.3 21.2
Dividend and interest (income) expense, net .... (.6) (.2) .1
----- ----- -----
Income before income taxes ..................... 14.0 13. 5 3.8
Provision for income taxes ..................... 5.8 5.5 1.6
----- ----- -----
Net income ..................................... 8.2% 8.0% 2.2%
</TABLE>
Fiscal Year 1996 Compared to Fiscal Year 1995
Sales in 1996 increased $16.7 million (21%) compared to 1995 principally as a
result of a $7.4 million (72%) increase in computer services, a $5.0 million
(17%) increase in fulfillment services and a $4.2 million (11%) increase in list
marketing. Computer services' increase reflects the revenues related to the $40
million contract to provide computer services through the building of a
marketing database for a major non-U.S. communications company. The contract
extends through June, 1998, subject to termination under certain circumstances.
Revenue is 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 the contract. Initial revenues from this contract
were recorded in the last quarter of fiscal 1995. The increase in fulfillment
services' sales reflects a 43% increase in continuity services, a 60% increase
in outbound telemarketing services partially offset by decreases of 43% in
inbound telemarketing revenues and 3% in the catalog fulfillment operation. Full
year billings in fiscal 1996 to new customers in fiscal 1995 and increased
billings to existing customers contributed to the continuity fulfillment
increase. The outbound telemarketing increase primarily resulted from billings
under a contract to provide business-to-consumer services for a
telecommunications company. Going forward, this service will be provided as an
integral part of the customer service function within continuity fulfillment.
The decrease in inbound telemarketing is part of the Company's strategic plan to
de-emphasize this service. The catalog fulfillment operation decrease includes a
24% decrease in revenues from an existing significant customer. The list
marketing increase resulted generally from an expanded customer base and
increased volumes with continuing customers.
Gross profit in 1996 increased $5.3 million (22%) compared to 1995. Gross
profit, as percentage of sales, was 31% in both fiscal 1996 and 1995. The
current year's margin includes the favorable impact from the margin associated
with the increased computer services revenues, as described above, offset by the
lower margins derived from the catalog fulfillment operation.
<PAGE>
Selling and administrative expenses in 1996 increased $3 million (22%) compared
to 1995. Selling and administrative expenses, as a percentage of sales, were 17%
in both fiscal years. The increase in the amount of these expenses reflects
increased expenses associated with the facility expansion at the catalog
fulfillment operation, the expenses associated with both the continuity
fulfillment and list marketing services' incremental revenues partially offset
by the minimal incremental selling and administrative costs associated with the
increase in computer services' revenues.
Net dividend and interest income in 1996 increased $386,000 from 1995. Dividend
and interest income in 1996 increased $636,000 (180%) from 1995 as a result of a
higher level of funds available for reinvestment, partially offset by lower
interest rates for much of the current year. Interest expense increased $250,000
in fiscal 1996 compared to 1995 primarily as a result of the $2,532,000 in
long-term debt recorded at September 30, 1995 for the future payments required
in connection with the acquisition of Catalog Resources, Inc. (CRI) and the
$2,500,000 proceeds received in March and June, 1996 in conjunction with a five
year term loan entered into by CRI to fund expansion of its warehouse and office
facilities. The available line of credit was not used during either fiscal year.
The effective tax rate in 1996 and 1995 was 41%. The provisions for taxes for
the two fiscal years reflect relatively normal relationships between book income
and taxes thereon.
Net income for 1996 increased 24% compared to 1995 primarily as a result of the
profit derived from computer services' increased revenues, improved contribution
of the continuity fulfillment operation partially offset by reduced contribution
from the catalog fulfillment operation.
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 significant 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.
<PAGE>
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.
Net dividend and interest income 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 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.
Liquidity and Capital Resources
Working capital at September 30, 1996 increased to $19,359,000 from $10,569,000
at the prior year end. Current assets increased $13,981,000 principally from
increases in cash and investments - held-to-maturity. Current liabilities
increased $5,191,000 primarily as a result of an increase in deferred revenue
and current portion of long-term debt. At September 30, 1996, the ratio of
long-term debt and long-term capital lease obligations to equity was .15 to 1.
For the fiscal year ended September 30, 1996, cash generated by operations
increased $7,055,000 over such amounts generated in 1995. The increase was
primarily attributable to increases in net income of $1,509,000 and in
adjustments to net income and changes in operating assets and liabilities of
$5,546,000. This increase in adjustments to net income and changes in operating
assets was primarily the result of increased depreciation and amortization of
$460,000, a decrease in accounts receivable of $5,253,000, a decrease in prepaid
expenses and other current assets of $956,000, an increase in income taxes
payable of $369,000, an increase in deferred revenue of $911,000 and a decrease
in security deposits of $913,000 offset by a decrease in accounts payable of
$3,431,000.
Cash used in investing activities increased $13,141,000 over the prior year.
This increase was primarily attributed to an increase in
investments-held-to-maturity of $10,268,000 and an increase in additions to
property and equipment of $2,773,000 primarily for the expansion of warehouse
and office facilities at CRI.
<PAGE>
During the current fiscal year, funds provided by financing activities increased
$2,398,000, primarily as a result of $2,500,000 borrowed under the terms of a
five-year term loan to substantially fund the expansion of warehouse and office
facilities at CRI. Also contributing to the increase in financing funds were
higher receipts from the exercise of stock options and purchases through the
Employee Stock Purchase Plan and employment agreements of $174,000 partially
offset by higher dividend payments of $141,000.
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, 1997 bringing
the total payments to that date to $4,937,500. As outlined in Note 2 to the
accompanying consolidated financial statements, the present value of the
remaining obligation of $6,075,000 was recorded at 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 and the five-year term loan
mentioned above will be sufficient to meet cash flow needs during the 1997
fiscal year, including the payment to former CRI shareholders due January 1,
1997.
Recently Issued Accounting Standards
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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
------------------------
Deloitte & Touche LLP
Parsippany, NJ
November 4, 1996
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ............................. $ 95,570,436 $ 78,863,443 $ 62,690,115
Cost of sales ......................... 66,120,153 54,717,497 46,985,698
------------ ------------ ------------
Gross profit .......................... 29,450,283 24,145,946 15,704,417
Selling and administrative expenses ... 16,678,548 13,653,493 13,270,090
Other (income) expense:
Dividend and interest income ....... (990,108) (354,600) (178,900)
Interest expense ................... 437,198 187,461 244,457
------------ ------------ ------------
Income before income taxes ............ 13,324,645 10,659,592 2,368,770
Provision for income taxes ............ 5,487,000 4,331,000 994,000
------------ ------------ ------------
Net income ............................ $ 7,837,645 $ 6,328,592 $ 1,374,770
============ ============ ============
Per common and common equivalent share:
Primary earnings ...................... $ 1.53 $ 1.33 $ .32
============ ============ ============
Fully diluted earnings ................ $ 1.53 $ 1.25 $ .32
============ ============ ============
Dividends ............................. $ .094 $ .066 $ .045
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 11,893,982 $ 8,630,831
Investments - held-to-maturity .............................. 10,435,026 199,859
Accounts receivable (less allowance
for doubtful accounts: 1996 - $627,000
and 1995 - $624,000) .................................... 24,519,050 23,815,919
Prepaid expenses and other current assets ................... 1,596,819 1,891,837
Deferred taxes .............................................. 338,000 263,250
------------ ------------
Total current assets ...................................... 48,782,877 34,801,696
------------ ------------
Investments - available-for-sale, net .......................... 369,722 797,583
Property and equipment, net .................................... 7,549,229 5,222,513
Goodwill (net of accumulated amortization:
1996 - $519,855 and 1995 - $233,500) ....................... 7,567,326 7,853,675
Other assets ................................................... 700,793 1,061,166
------------ ------------
$ 64,969,947 $ 49,736,633
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 14,726,387 $ 15,105,009
Accrued salaries and commissions ............................ 2,389,837 2,076,999
Other accrued expenses ...................................... 2,513,841 2,352,477
Income taxes payable ........................................ 215,635 --
Current portion of long-term debt ........................... 1,047,989 567,294
Current portion of capital lease obligations ................ 390,399 516,989
Deferred revenue ............................................ 8,139,767 3,614,331
------------ ------------
Total current liabilities ................................. 29,423,855 24,233,099
------------ ------------
<PAGE>
<CAPTION>
September 30, 1996 1995
------------- ------------
<S> <C> <C>
Long-term debt, net of current portion ......................... 4,331,542 2,804,790
Capital lease obligations, net of current portion .............. 250,997 631,475
Deferred taxes ................................................. 103,000 19,750
Stockholders' equity:
Preferred stock $.01 par value; authorized
1,000,000 shares; issued - none
Common stock $.01 par value; authorized
15,000,000 shares; issued 1996 - 4,611,487
shares and 1995 - 4,347,886 shares ...................... 46,115 43,479
Common stock issuable ....................................... 1,945,983 2,407,521
Additional paid-in capital .................................. 7,223,263 5,431,455
Retained earnings ........................................... 21,887,737 14,451,854
------------ ------------
31,103,098 22,334,309
Less: treasury stock, at cost, 187,766 shares .............. (207,953) (207,953)
available-for-sale securities valuation adjustment,
net of deferred income taxes ...................... (34,592) (78,837)
------------ ------------
Total stockholders' equity ................................ 30,860,553 22,047,519
------------ ------------
$ 64,969,947 $ 49,736,633
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
$.01 Par Value Common Additional Treasury Stock-
------------------------ Stock Paid-In Retained at Cost
Balance Shares Amount Issuable Capital Earnings Shares Amount
------------------------ ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
October 1, 1993 ......... 1,863,555 $ 18,635 $ 831,136 $ 1,991,957 $ 8,704,995 187,766 ($207,953)
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 ........ 360 3 -- 2,139 -- -- --
Purchase Plan
Dividends paid .......... -- -- -- -- (166,829) -- --
Valuation adjustment .... -- -- -- -- -- -- --
Net income .............. -- -- -- -- 1,374,770 -- --
--------- ------------ ------------ ------------ ------------ ------- ---------
September 30, 1994 ...... 1,909,337 19,093 967,788 2,261,497 9,912,936 187,766 (207,953)
--------- ------------ ------------ ------------ ------------ ------- ---------
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
and employment ........ 6,690 67 -- 80,098 -- -- --
agreements
Dividends paid .......... -- -- -- -- (260,278) -- --
Valuation adjustment .... -- -- -- -- -- -- --
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 14,451,854 187,766 (207,953)
--------- ------------ ------------ ------------ ------------ ------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(continued)
Available-for-
Sale Securities
Valuation
Adjustment Total
---------- -----
<S> <C> <C>
October 1, 1993 ........................ $ 0 $ 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 ....................... -- 2,142
Purchase Plan
Dividends paid ......................... -- (166,829)
Valuation adjustment ................... (87,969) (87,969)
Net income ............................. -- 1,374,770
------------- ------------
September 30, 1994 ..................... (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
and employment ....................... -- 80,165
agreements
Dividends paid ......................... -- (260,278)
Valuation adjustment ................... 9,132 9,132
Tax benefit of exercise
of
stock options ........................ -- 426,000
Net income ............................. -- 6,328,592
------------- ------------
September 30, 1995 ..................... (78,837) 22,047,519
------------- ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(continued)
Common Stock
$.01 Par Value Common Additional Treasury Stock-
------------------------ Stock Paid-In Retained at Cost
Balance Shares Amount Issuable Capital Earnings Shares Amount
------------------------ ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1995 ...... 4,347,886 43,479 2,407,521 5,431,455 14,451,854 187,766 (207,953)
--------- ------------ ------------ ------------ ------------ ------- ---------
Acquisition of Catalog
Resources, Inc. .......
Common stock issued ... 34,621 346 (461,538) 461,192 -- -- --
Exercise of stock options 216,903 2,169 -- 617,504 -- -- --
Stock Dividend - ........ 360 4 -- 251 -- -- --
converted shares
Stock purchased through
Employee Stock
Purchase Plan
and employment ........ 11,717 117 -- 153,861 -- -- --
agreements
Dividends paid .......... -- (401,762) -- --
Valuation adjustment, net -- -- -- -- -- -- --
Tax benefit of exercise
of
stock options ......... -- -- -- 559,000 -- -- --
Net income .............. -- -- -- -- 7,837,645 -- --
--------- ------------ ------------ ------------ ------------ ------- ---------
September 30, 1996 ...... 4,611,487 $ 46,115 $ 1,945,983 $ 7,223,263 $ 21,887,737 187,766 ($207,953)
--------- ------------ ------------ ------------ ------------ ------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(continued)
Available-for-
Sale Securities
Valuation
Adjustment Total
---------- -----
<S> <C> <C>
September 30, 1995 ..................... (78,837) 22,047,519
Acquisition of Catalog
Resources, Inc. ......................
Common stock issued .................. -- --
Exercise of stock options .............. -- 619,673
Stock Dividend - ....................... -- 255
converted shares
Stock purchased through
Employee Stock
Purchase Plan
and employment ....................... -- 153,978
agreements
Dividends paid ......................... -- (401,762)
Valuation adjustment, net .............. 44,245 44,245
Tax benefit of exercise
of
stock options ........................ -- 559,000
Net income ............................. -- 7,837,645
------------- ------------
September 30, 1996 ..................... ($ 34,592) $ 30,860,553
------------- ------------
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income .......................................................... $ 7,837,645 $ 6,328,592 $ 1,374,770
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................... 2,321,718 1,861,883 1,598,746
Deferred income taxes ........................................... (21,000) (95,000) 194,000
Provision for doubtful accounts receivable ...................... 65,000 121,625 160,487
Gains on sales of equipment ..................................... -- (9,750) --
Gain on sale of available-for-sale securities, net .............. (1,046) -- --
------------ ------------ ------------
Total adjustments ............................................... 2,364,672 1,878,758 1,953,233
Changes in operating assets and liabilities:
Accounts receivable ............................................. (768,131) (6,021,005) (2,285,043)
Prepaid expenses and other current assets ....................... 295,018 (660,616) 157,678
Accounts payable and accrued expenses ........................... 347,847 3,778,404 3,126,932
Income taxes payable ............................................ 215,635 (153,803) 147,737
Deferred revenue ................................................ 4,525,436 3,614,331 --
Security deposits ............................................... 331,262 (581,846) 36,700
Other, net ...................................................... 29,111 (58,976) 24,503
------------ ------------ ------------
Total adjustments and changes ................................... 7,340,850 1,795,247 3,161,740
------------ ------------ ------------
Net cash provided by operating activities ...................... 15,178,495 8,123,839 4,536,510
------------ ------------ ------------
Cash flows from financing activities:
Changes in note payable, long-term debt and capital
leases (including current portion):
Borrowings ...................................................... 2,500,000 -- 1,350,000
Repayments ...................................................... (1,251,888) (1,117,273) (3,802,210)
Dividends paid ...................................................... (401,507) (260,278) (166,829)
Exercise of stock options ........................................... 1,178,673 1,078,533 80,063
Employee Stock Purchase Plan and employment
agreement proceeds .............................................. 153,978 80,165 2,142
------------ ------------ ------------
Net cash (used in) provided by financing activities ................. 2,179,256 (218,853) (2,536,834)
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment ................................. (4,362,085) (1,589,400) (1,500,548)
Net (purchases) sales of investments-held-to-maturity ............... (9,732,515) 535,068 125,823
Proceeds from sales of equipment .................................... -- 100,688 --
------------ ------------ ------------
Net cash used in investing activities ............................... (14,094,600) (953,644) (1,374,725)
------------ ------------ ------------
Continued on next page.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued from previous page.
For the Years Ended September 30, 1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Cash and cash equivalents:
Net increase in cash and cash equivalents ........................... 3,263,151 6,951,342 624,951
Cash and cash equivalents at beginning of year ...................... 8,630,831 1,679,489 1,054,538
------------ ------------ ------------
Cash and cash equivalents at end of year ............................ $ 11,893,982 $ 8,630,831 $ 1,679,489
============ ============ ============
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 219,000 $ 153,000 $ 264,000
Income taxes $ 4,261,000 $ 4,637,000 $ 652,000
Supplemental disclosures of non-cash investing
and financing activities:
Acquisition of business:
Fair value of assets acquired $ --- $ 4,478,091 $ 648,890
Issuance of debt --- (2,532,108) (324,445)
Common stock issuable --- (1,945,983) (324,445)
------------ ------------ ------------
Liabilities assumed $ --- $ --- $ ---
============ ============ ============
</TABLE>
For the years ended September 30, 1996, 1995 and 1994, $461,538, $506,250
and $187,793 of common stock issuable was converted into 34,621, 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, as amended.
Capital lease obligations:
For the year ended September 30, 1995 and 1994, capital lease obligations
of $216,000, and $162,000, respectively, were incurred for the leasing of
equipment. There were no capital lease obligations entered into during
the year ended September 30, 1996.
Valuation adjustment:
For the year ended September 30, 1996, the account was adjusted to
reflect an increase in market values of the available-for-sale securities
portfolio of $44,245, net of deferred income taxes. A similiar adjustment
of $9,132, net of deferred income taxes, was made at September 30, 1995.
<PAGE>
Stock Dividends:
On January 5, 1996, 360 shares of the Company's common stock were paid as
dividends upon exchange of 150 shares of the Company's "old" common
stock.
On January 31, 1995, 179,929 shares of the Company's common stock were
paid as a 10% stock dividend.
On October 24, 1995, 2,061,087 shares of the Company's common stock were
issued as a result of a 2 for 1 stock split paid as a 100% stock
dividend. The September 30, 1995 financial statements reflect this stock
split.
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 outsourced direct marketing services and
specializes in fulfillment, list marketing and computer services. The Company's
services are performed within the United States and Canada except for a computer
services contract with a non-U.S.
communications company.
B - Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenue and expenses during the period reported.
Actual results could differ from those estimates. Estimates are made when
accounting for allowance for doubtful accounts, sales adjustments, depreciation
and amortization, carrying value of goodwill, costs to complete long-term
contracts which are accounted for using the percentage-of-completion method of
accounting, taxes and contingencies.
C - 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
$9,835,000 and $7,606,000 at September 30, 1996 and 1995, respectively.
D - Investments - The Company records its investments based on 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.
E - 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.
F - 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, 1996, 1995 and 1994 include goodwill amortization of $286,355,
$123,500 and $51,000, respectively. The Company regularly assesses the
recoverability of goodwill.
<PAGE>
G - 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.
H - Income taxes - The Company records income taxes based on the provisions of
Statement of Financial Standards No. 109, "Accounting for Income Taxes". 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.
I - 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, 1996, 1995 and 1994, the weighted average number of shares used in
determining primary earnings per common share was 5,118,085, 4,755,365 and
4,306,009, respectively. For the same periods, the weighted average number of
shares used in determining fully diluted earnings per common share was
5,124,568, 5,049,958 and 4,307,184, 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 1996, 1995
and 1994 primary and fully diluted earnings per share include the shares
issuable in accordance with the agreement, as amended, relating to the
acquisition of Catalog Resources, Inc. The weighted average shares used in the
computations of fiscal 1995 and 1994 primary and fully diluted earnings per
share have been restated to reflect 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.
J - Reclassifications - Certain reclassifications have been made to the 1995 and
1994 financial statements to conform to the 1996 presentation.
<PAGE>
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, 1993. 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. Based on the terms of the amended agreement
and the achievement of the required operating results for the preceding fiscal
year, payments of $1,012,500, one half in cash and one half in stock, were made
on January 1, 1995 and 1996. As of September 30, 1996, 499,525 shares had been
delivered under the provisions of the purchase agreement, as amended.
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 significant customer, forecasted
operating results for the 1996 fiscal year and the evaluation of anticipated
future operating results beyond fiscal 1996, it was considered probable at
September 30, 1995 that future CRI earnings levels would be attained which would
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 was 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 issued and
delivered prior to September 30, 1995) 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. No adjustment was
recorded during the current fiscal year. Based on the operating results for the
fiscal year ended September 30, 1996, the January 1, 1997 scheduled payment of
$1,012,000 will be paid.
Note 3 - Investments
During the years ended September 30, 1996 and 1995, the valuation account
related to the available-for-sale marketable securities portfolio was adjusted
to reflect increases in market values of $44,245 and $9,132, respectively, net
of deferred taxes.
<PAGE>
The following table sets forth the components of investments held at September
30, 1996:
<TABLE>
<CAPTION>
Unrealized
Market Holding
Available-for-sale: Cost Value Loss
- ------------------- ---- ----- ----
<S> <C> <C> <C>
U.S. Government due January 31, 1999 $ 24,996 $ 24,375 $ (621)
Equity securities ................... 402,318 345,347 (59,971)
----------- ----------- -----------
Total ............................... $ 427,314 $ 369,722 $ (57,592)
=========== =========== ===========
Held-to-maturity:
Commercial paper-various issues ..... $10,435,026 $10,435,026 $ 0
----------- ----------- -----------
</TABLE>
During the year ended September 30, 1996, proceeds from redemptions of
investments were $702,511 resulting in a realized gain of $1,046. The Company
uses specific identification for securities sold.
The following table sets forth the components of investments held at September
30, 1995:
<TABLE>
<CAPTION>
Unrealized
Market Holding
Available-for-sale: Cost Value Loss
- ------------------- ---- ----- ----
<S> <C> <C> <C>
U.S. Government due January 31, 1999 ...... $ 24,996 $ 24,260 $ (736)
Equity securities ......................... 903,924 773,323 (130,601)
--------- --------- ---------
Total ..................................... $ 928,920 $ 797,583 $(131,337)
========= ========= =========
Held-to-maturity:
U.S. Government due May 15, 1996 .......... $ 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.
<PAGE>
Note 4 - Allowance for Doubtful Accounts
Activity in the Allowance for Doubtful Accounts for the three years ended
September 30, 1996 includes:
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year ......... $ 624,000 $ 585,000 $ 560,000
Additions - charged to expense ....... 65,000 121,625 160,467
Deductions ........................... (62,000) (82,625) (135,467)
--------- --------- ---------
Balance at end of year ............... $ 627,000 $ 624,000 $ 585,000
--------- --------- ---------
</TABLE>
Note 5 - Property and Equipment
The components of property and equipment include:
<TABLE>
<CAPTION>
September 30, 1996 1995
- ------------- ---- ----
<S> <C> <C>
Furniture and fixtures ............................. $ 2,845,137 $ 1,979,289
Leasehold improvements ............................. 2,093,435 1,619,583
Computer equipment ................................. 6,828,373 5,792,492
Computer equipment under capital leases ............ 1,915,567 1,915,567
Other equipment .................................... 3,616,807 1,629,411
----------- -----------
17,299,319 12,936,342
Less: Accumulated depreciation and amortization ... 9,750,090 7,713,829
----------- -----------
$ 7,549,229 $ 5,222,513
----------- -----------
</TABLE>
Depreciation and amortization charged to operations was $ 2,035,000, $1,738,000,
and $1,547,000 for 1996, 1995 and 1994, 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 (8.25% at September 30, 1996). The line of
credit expires March 31, 1997. During fiscal years 1996 and 1995, the line of
credit was not used.
<PAGE>
Note 7 - Long-Term Debt
Long-term debt consists of:
<TABLE>
<CAPTION>
September 30, 1996 1995
- ------------- ---- ----
<S> <C> <C>
Payable to former shareholders of CRI .......... $2,784,375 $2,993,646
Notes payable to banks ......................... 2,595,156 378,438
---------- ----------
5,379,531 3,372,084
Less: Current portion .......................... 1,047,989 567,294
---------- ----------
$4,331,542 $2,804,790
---------- ----------
</TABLE>
See Note 2 for a description of the amounts due to the former shareholders of
CRI.
Notes payable to banks consist of one note for 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 $261,604 as of September 30,
1996. A second note is for a five year term loan payable through June 27, 2001
with interest at 7.99%. This loan is secured by certain equipment located at CRI
with a net book value at September 30, 1996 of $2,417,997. CRI must continue to
meet a financial ratio test and maintain net worth of at least $5,000,000 after
September 30, 1996. The Company has guaranteed the repayment of this loan.
<TABLE>
<CAPTION>
Maturities of long-term debt include:
Fiscal Year Ended
September 30, Amount
------------- ------
<S> <C> <C>
1997 $ 1,047,989
1998 1,054,143
1999 974,205
2000 946,717
2001 698,454
Thereafter 658,023
-----------
Total long-term debt $ 5,379,531
===========
</TABLE>
<PAGE>
Note 8 - Provision for Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Current
Federal ................................... $ 4,292,000 $ 3,471,000 $ 636,000
State ..................................... 1,216,000 955,000 164,000
----------- ----------- -----------
Total provision for current income taxes 5,508,000 4,426,000 800,000
----------- ----------- -----------
Deferred
Federal ................................... (22,000) (85,000) 146,000
State ..................................... 1,000 (10,000) 48,000
----------- ----------- -----------
Total provision for deferred income taxes (21,000) (95,000) 194,000
=========== =========== ===========
Total provision for income taxes ........ $ 5,487,000 $ 4,331,000 $ 994,000
=========== =========== ===========
</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, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate .......... $ 4,564,000 $ 3,624,000 $ 806,000
State income taxes - net of federal tax benefit 791,000 619,000 134,000
Non-deductible expenses ....................... 148,000 85,000 39,000
Non-taxable income ............................ (16,000) (15,000) (21,000)
Other ......................................... -- 18,000 36,000
----------- ----------- -----------
Total provision for income taxes ...... $ 5,487,000 $ 4,331,000 $ 994,000
=========== =========== ===========
</TABLE>
<PAGE>
The components of deferred income tax assets and liabilities include:
<TABLE>
<CAPTION>
September 30, 1996 1995
- ------------- -------------------------------- -------------------------------
Net Current Net Non-current Net Current Net Non-current
Asset Liability Asset Liability
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Property and equipment .............................. $ -- $ 127,000 $ -- $ 72,250
Allowance for doubtful accounts ..................... 256,000 -- 249,000 --
Unrealized holding loss on
marketable securities ......................... -- (24,000) -- (52,500)
Vacation accrual .................................... 82,000 -- 48,000 --
Change to accrual accounting for CRI ................ -- -- (33,750) --
--------- --------- --------- ---------
Total ....................................... $ 338,000 $ 103,000 $ 263,250 $ 19,750
</TABLE>
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, who has been a non-employee director at all
times during the fiscal year, 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, 1996, 32,000 options have been granted under
this plan at prices of $3.525 and $16.00 per share. During fiscal 1996, 9,800
options were exercised, 10,600 options were cancelled and, at September 30,
1996, 1,000 options were exercisable. Based on 1996's results, options covering
5,000 shares are issuable.
Non-employee directors have been granted non-qualified options, at fair market
value on the date of grant, to purchase 65,000 shares of the Company's common
stock at prices of $2.045 to $5.375 per share. At September 30, 1996, 4,400
options were exercisable. During the current year, 9,500 options were exercised
and 5,500 options were cancelled.
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 (100% of fair market value). Of the total
options granted, options covering 35,400 shares represent the excess over 1% of
the voting outstanding shares at the date of grant. In March, 1996, the Company
was advised that, in accordance with Schedule D of The Nasdaq Stock Market(sm)
bylaws, the granting of such options in excess of 1% of the Company's
outstanding shares of common stock requires shareholder approval. The Company
has restricted the exercisability of these options until shareholder approval
can be obtained at the 1997 stockholders' meeting.
<PAGE>
The following schedule sets forth the activity under the 1983 Incentive Stock
Option Plan for the years ended September 30, 1996, 1995 and 1994. Granting of
options under this plan ceased in May, 1994.
<TABLE>
<CAPTION>
Incentive options Number Option Price
- ----------------- ------ ------------
<S> <C> <C>
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)
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
Exercised .............................. (165,200) $ 2.05 - $ 3.41
-------- -------------------
Outstanding September 30, 1996 ......... 400,700 $ 1.25 - $ 3.41
-------- -------------------
Exercisable September 30, 1996 ......... 356,700 $ 1.25 - $ 3.41
-------- -------------------
</TABLE>
The following schedule sets forth the activity of the 1993 Incentive Stock
Option Plan for the years ended September 30, 1996, 1995 and 1994.
<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
Granted .............................. 110,000 $ 15.50
Exercised ............................ (32,403) $ 2.88- $ 5.75
Expired or Cancelled ................. (23,998) $ 2.96- $ 5.75
--------- -------------------
Outstanding September 30, 1996 ....... 607,973 $ 2.88- $ 16.85
--------- -------------------
Exercisable September 30, 1996 ....... 337,775 $ 2.96- $ 16.85
--------- -------------------
Available for grant September 30, 1996 1,539,198
---------
</TABLE>
<PAGE>
Note 10 - 1994 Employee Stock Purchase Plan and Employment Agreements
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 its subsidiaries the opportunity to acquire up to 300,000 shares of common
stock. Purchases are made on a monthly basis through payroll deductions of 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, 1996, 1995 and 1994, share purchased total 9,968, 13,552 and
792, respectively.
Employment agreements with officers of a subsidiary include the provision for
the quarterly purchase of the Company's common stock to the extent of 5% of any
bonus earned, as defined. Shares are offered at a discount from the quarter end
closing market price of the common stock. During fiscal years 1996 and 1995, a
total of 1,749 and 143 shares, respectively, were purchased under these
agreements.
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, 1996, 1995 and 1994.
The Company matches employees' contributions to a maximum of 25% of the
employee's first 6% contributed. During the period January 1, 1996 to June 30,
1996, the Company's matching contributions were temporarily increased to 35% of
eligible employee contributions. Matching contributions charged to expense were
$196,000, $154,000 and $128,000 for the fiscal years ended September 30, 1996,
1995 and 1994, respectively.
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>
1997 $ 427,091 $ 2,602,130
1998 256,071 2,367,622
1999 126 1,961,075
2000 1,608,752
2001 1,171,788
Thereafter 3,990,101
--------- ------------
683,288 $ 13,701,468
Less: Imputed interest 41,892
---------
Present value of capital lease obligations $ 641,396
---------
</TABLE>
<PAGE>
Real estate, equipment and software operating lease costs include:
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Real estate .................... $2,324,323 $1,227,000 $1,120,000
Equipment and software ......... 788,173 774,000 1,159,000
---------- ---------- ----------
Total ...................... $3,112,496 $2,001,000 $2,279,000
---------- ---------- ----------
</TABLE>
Note 13 - 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, 1996, the Company and its subsidiaries have employment
agreements with certain of their officers with terms expiring at various times
through September 30, 2002, which provide for aggregate future minimum
compensation of $2,770,000. 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 had in effect
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.
Note 14 - Major Customers
For the year ended September 30, 1996, revenues recognized under the contract to
provide computer services to a non-U.S. communications company amounted to 14%
of consolidated sales. For the year ended September 30, 1995, sales to another
significant 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 1997 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 November 29,1996, 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.......... 58 President and Director-1969
Marvin Cohen................ 62 Senior Vice President and Secretary-1981,
Director-1969
Pat R. Frustaci.............. 42 Vice President - Finance, Chief Financial Officer,
Treasurer and Assistant Secretary - 1995
Charlotte Griffiths.......... 54 Vice President - Administration 1995
Vice President - 1985
James E. Quinlan......... 58 Controller-1988
William Rella................. 54 President - Fulfillment Services - 1994
Gerry King..................... 47 President - Catalog Resources, Inc. - 1993
Lon Mandel................... 41 President and Chief Operating Officer - The SpeciaLISTS
Ltd. - 1987
Phyllis Stein................... 44 President - List Brokerage Division, The SpeciaLISTS
Ltd. - 1987
</TABLE>
All executive officers of the Company and other significant
employees, other than 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,
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.
<PAGE>
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, 1996, 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, except for one officer. Such person was Kathryn Barber,
former President of the Outbound Telemarketing Services Division, who filed,
however, not on a timely basis, three Form 4's relating to her beneficial sale
of 13,200 shares of Common Stock.
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 Income
for the Years Ended September 30,
1996, 1995 and 1994
Consolidated Balance Sheets as
of September 30, 1996 and 1995
Consolidated Statements of Changes
in Stockholders' Equity for the
Years Ended September 30, 1996,
1995 and 1994
Consolidated Statements of Cash Flows
for the Years Ended September 30,
1996, 1995 and 1994
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 July 15, 1996
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)
10.12 Employment agreement between Arnold J. Scheine and LCS
Industries, Inc. (13)
10.13 Employment agreement between Arnold J. Scheine and LCS
Industries, XXX (a group company). (14)
11 Computation of Earnings per Share and Common Equivalent
Share
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.
<PAGE>
(13) Incorporated by Reference to Exhibit to the
Company's Current Report on Form 10Q/A-1 dated
August 8, 1996, File No. 0-12329.
(14) Incorporated by Reference to Exhibit to the
Company's Current Report on Form 10Q/A-1 dated
August 8, 1996, File No. 0-12329.
(b) Reports on Form 8-K
LCS Industries, Inc. did not file any Forms 8-K during
the last quarter of its fiscal year ended September 30,
1996.
<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, 1996
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, 1996.
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 Secretary (Principal
Pat R. Frustaci Accounting Officer)
/s/Marvin Cohen Senior Vice President, Secretary and Director
- ---------------
Marvin Cohen
/s/Joseph R. Barbaro Director
- --------------------
Joseph R. Barbaro
/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, 1996
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
July 15, 1996
11 Computation of Earnings Per
Share and Common Equivalent
Share
22 List of Subsidiaries
23 Consent of Deloitte & Touche LLP
(THE BANK OF NEW YORK, NA)
National Community Division
July 15, 1996
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.
<PAGE>
Unless cancelled earlier as provide din the first sentence of this paragraph,
this line of credit shall be held available until March 31, 1997. 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, 1996.
Very truly yours,
THE BANK OF NEW YORK (NJ)
By: /s/Brian J. Clark
-----------------
Brian J. Clark
Title: Vice President
<TABLE>
<CAPTION>
EXHIBIT 11
LCS INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE AND
COMMON EQUIVALENT SHARE
For the Years Ended September 30,
1996 1995 (A) 1994 (A)
---------- ---------- ----------
<S> <C> <C> <C>
Primary earnings per share:
Weighted average shares outstanding ....... 4,329,663 4,019,576 3,870,261
Weighted average - dilutive stock options . 627,947 540,693 240,652
Shares issuable in connection with the
acquisition of Catalog Resources, Inc. . 160,475 195,096 195,096
---------- ---------- ----------
5,118,085 4,755,365 4,306,009
========== ========== ==========
Net income ................................ $7,837,645 $6,328,592 $1,374,770
Primary earnings per share and common
equivalent share ....................... $ 1.53 $ 1.33 $ .32
========== ========== ==========
Fully diluted earnings per share:
Weighted average shares outstanding ....... 4,329,663 4,019,576 3,870,261
Fully diluted earnings per share:
Weighted average - dilutive stock options . 634,430 835,286 241,827
Shares issuable in connection with the
acquisition of Catalog Resources, Inc. . 160,475 195,096 195,096
---------- ---------- ----------
5,124,568 5,049,958 4,307,184
========== ========== ==========
Net income ................................ $7,837,645 $6,328,592 $1,374,770
Fully diluted earnings per share and common
equivalent share ....................... $ 1.53 $ 1.25 $ .32
========== ========== ==========
(A) 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.
</TABLE>
SUBSIDIARIES OF LCS INDUSTRIES, INC.
Set forth below are the names of all subsidiaries of LCS as of
November 29, 1996 required to be listed on Exhibit 22 to LCS's 1996 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, XXX 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
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 4, 1996, appearing in this Annual Report on Form 10-K of
LCS Industries, Inc. for the year ended September 30, 1996.
/s/Deloitte & Touche LLP
- -----------------------
Deloitte & Touche LLP
Parsippany, New Jersey
December 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,893,982
<SECURITIES> 10,435,026
<RECEIVABLES> 25,146,050
<ALLOWANCES> 627,000
<INVENTORY> 225,616
<CURRENT-ASSETS> 48,782,877
<PP&E> 17,299,319
<DEPRECIATION> 9,750,090
<TOTAL-ASSETS> 64,969,947
<CURRENT-LIABILITIES> 29,423,855
<BONDS> 0
0
0
<COMMON> 46,115
<OTHER-SE> 30,814,438
<TOTAL-LIABILITY-AND-EQUITY> 64,969,947
<SALES> 0
<TOTAL-REVENUES> 95,570,436
<CGS> 0
<TOTAL-COSTS> 66,120,153
<OTHER-EXPENSES> 16,678,548
<LOSS-PROVISION> 65,000
<INTEREST-EXPENSE> 437,198
<INCOME-PRETAX> 13,324,645
<INCOME-TAX> 5,487,000
<INCOME-CONTINUING> 7,837,645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,837,645
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.53
</TABLE>
