SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934: (FEE REQUIRED)
For the fiscal year ended September 30, 1997 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: (973) 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 and non-voting Common Stock
held by non-affiliates of the registrant, based on the average of high and low
sales prices for December 1, 1997: $70,719,894. The number of shares of Common
Stock ($.01 par value) outstanding as of December 1, 1997: 4,810,714.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement in respect of the 1998 Annual Meeting of
Stockholders is incorporated by reference into Part III hereof to the extent
indicated in that Part. This Form 10-K consists of 47 pages. Index to exhibits
is located at page 38.
<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,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fulfillment services ................. 38% 37% 39%
Computer services .................... 18% 19% 13%
List marketing services .............. 44% 44% 48%
</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. Initial
revenues under the contract were recorded during the fourth quarter of the
fiscal year ended September 30, 1995. Revenues recognized under the contract
amounted to 15% of consolidated sales for the fiscal year ended September 30,
1997.
In June, 1997, the Company recorded a loss on investment of
$954,000 (currently $863,000 net of taxes) representing a non-recurring charge
for the write-off of the Company's investment in McIntyre & King, Ltd. ("M&K").
This charge represented $.17 per share in the current fiscal year. The Company's
Board of Directors decided to sever the relationship with M&K due to unexpected
operating losses that would have required unacceptable demands on management's
time and financial support required to attempt to return M&K to profitability.
As a result, effective April 5, 1997, the Company agreed to rescind its
acquisition of M&K. The rescission agreement, dated June 30, 1997, provides for
the return of a portion of the down payment in one year. However, recovery was
uncertain and, therefore, the Company expensed all payments, advances and all
related costs. On November 28, 1997, the Company received a payment from M&K of
approximately $210,000 in final settlement of a portion of the down payment,
which will be recorded in other income in the quarter ended December 31, 1997.
On October 6, 1997, the Company announced the recording of a
non-recurring charge of $960,000 ($570,000 net of taxes or $.11 per share) in
the period ended September 30, 1997 relating to death benefits payable under
employment agreements and other severance amounts due the Company's former
Chairman, the late Arnold J. Scheine who passed away on September 22, 1997.
<PAGE>
Fulfillment Services
Continuity/Order Entry
LCS' continuity/order entry services provide computer-based
support to the membership activities of book clubs, similar continuity (mail
order) clubs and catalog companies. Continuity clubs and catalog companies, a
large part of the direct-response industry, make repetitive mailings and
periodic product offerings to their members or customers. The LCS system
supports these efforts by processing and providing information with regard to
orders, shipments, billings, returns and credit criteria, cashiering (receiving
and depositing customer payments and related updating of customer files) and
providing personnel to respond to inquiries from club members.
The Company also provides computer-generated reports which
clients use in measuring profitability and in evaluating and controlling
marketing efforts.
During the 1996 fiscal year, the outbound telemarketing operation
was 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
<PAGE>
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.
International Telecommunications
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
<PAGE>
potential by identifying duplications between lists with similar demographics.
Identification of these multiple prospects enables the direct-response client to
plan marketing strategy, including follow-up promotions.
Because clients may wish to target a promotion to a highly
segmented audience, merge/purge can be applied to attributes (such as location
or gender) in addition to names in a number of lists and databases and, based
upon the clients' criteria, can generate refined lists identifying the target
audience.
LCS' software can also remove (suppress) the names of persons who
the client deems inappropriate or who have a low probability of ordering based
on past experience.
Enhancement
Enhancement is the overlay of demographic information to computer
lists and databases to facilitate targeted mailing programs, sometimes in
combination with the list maintenance and merge/purge services. This information
added by LCS can include profiles of time in present residence, dwelling unit
size, occupation, income estimate, age, gender, presence and number of children,
telephone number and other information.
The Company has been selected by the U.S. Postal Service as one
of 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.
<PAGE>
Marketing
The Company currently markets its products and services
throughout the United States using in-house sales expertise. Leads are generated
by personal calls, print advertising in trade media, referrals, industry
meetings and trade shows and seminars. LCS uses its own direct-response and
fulfillment services to generate leads, support sales and facilitate follow-up.
The generally close working relationship between LCS and its clients offers
opportunities for the sale of additional related services. The Company makes a
practice of identifying and designing services to meet special needs of clients.
The sales staff is compensated by salary plus commissions or bonuses.
Although, during fiscal 1997, revenues recognized in connection
with the contract to provide computer services to a non-U.S. communications
company amounted to 15% 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, 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 34% of the consolidated trade
accounts receivable of the Company and its subsidiaries as of September 30,
1997, 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, 1997, 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
<PAGE>
on-line access to data by restricting access to on-line terminals and by
utilizing a periodically changing, segmented password system. To enhance safety
in case of fire or other natural disasters, duplicate tapes containing client
data are stored at an off-site location.
The Company considers certain of its software to be proprietary.
It currently relies upon trade secret laws and internal non-disclosure
agreements to protect the software. LCS has no patents or copyrights. In
management's opinion, no such patent or copyright protection is customary or
necessary.
Competition
The segment of the computer services industry that serves the
direct-response marketing industry is highly competitive. Competition is related
primarily to technical capability and expertise, pricing, quality of work and
ability to meet deadlines and is not confined to specific geographic areas. The
industry in which LCS operates is subject to rapid client marketing changes
requiring constant adaptation to provide competitive services. Reliable data on
LCS's relative position in its market is not available.
The Company competes not only with other independent specialized
computer service companies but also with in-house computer service departments
of companies in the direct-response marketing industry.
Some of the companies with which LCS competes have access to
substantially greater financial and other resources and offer a wider range of
non-computer services than the Company.
Employees
As of December 1, 1997, the Company employed 1,346 persons, of
whom 953 were employed on a full-time basis. LCS does not have any collective
bargaining agreements with its employees and believes its relations with its
employees to be good.
<PAGE>
Item 2. Properties.
The Company and its subsidiaries lease or sublease facilities at
the locations and under leases or subleases summarized as follows and in Note 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 September 2000
1200 Harbor Blvd., Weehawken, NJ (2) 18,100 June 2003
Jonathan's Landing, Magnolia, DE (4) 17,000 Month to Month
100 Enterprise Place, Dover, DE (1)(5) 55,000 Month to Month
97 Commerce Way, Dover, DE (1) 124,000 October 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
5725 S. University Dr., Davie, FL (2) 11,550 April 2002
555 Grove Street, Herndon, VA (2) 1,495 December 1998
European Economic Community (2) 8,000 June 1998
--------
TOTAL 435,082
</TABLE>
- ---------------
(1) Office, warehouse, production
(2) Office
(3) Five year renewal option available
(4) Warehouse
(5) Sublease
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Quarterly Stock Price Information
The Company's common stock is traded on the Nasdaq National Market tier of The
Nasdaq Stock MarketSM 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
per share were paid. Effective with the second quarter of fiscal 1997, regular
quarterly dividends of $.0375 per share were paid.
As of December 1, 1997, there were 124 registered holders and an estimated 2,400
beneficial holders of record of the Company's common stock.
<TABLE>
<CAPTION>
Price Price
- ------------------------------------------------------------------------------------------------------------------------------------
High Low High Low
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended Fiscal Year Ended
September 30, 1997 September 30, 1996
<S> <C> <C> <C> <C> <C>
1st Quarter................... $15 1/2 $12 1/2 1st Quarter........................ $19 3/4 $13
2nd Quarter................... 16 1/8 13 1/2 2nd Quarter........................ 28 12 3/8
3rd Quarter................... 17 1/4 13 3/4 3rd Quarter........................ 27 10 1/4
4th Quarter................... 20 14 4th Quarter........................ 15 3/4 9 1/2
</TABLE>
<PAGE>
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Five Year Review
Income Statement Data
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales ......................................... $ 100,627 $ 95,570 $ 78,863 $ 62,690 $ 53,002
Cost of sales ................................. 69,384 66,120 54,717 46,986 39,433
Gross profit .................................. 31,243 29,450 24,146 15,704 13,569
Selling and administrative expenses ........... 17,906 16,679 13,653 13,270 12,094
Dividend and interest (income) expense, net ... (1,000) (553) (167) 65 (3)
Other expense (Note 1) ........................ 1,914 -- -- -- 385
Income before income taxes .................... 12,423 13,324 10,660 2,369 1,093
Net income .................................... 6,987 7,838 6,329 1,375 626
Per common and common equivalent share (Note 2)
Primary earnings (Note 1) ..................... 1.37 1.53 1.33 .32 .16
Weighted average number of shares outstanding . 5,104 5,118 4,755 4,306 3,841
Fully diluted earnings (Note 1) ............... 1.35 1.53 1.25 .32 .16
Weighted average number of shares outstanding . 5,180 5,125 5,050 4,307 3,847
Dividends per share ........................... .138 .094 .066 .045 .08
- -------------------
</TABLE>
Note 1 - For 1997, includes write-off of the Company's investment
in McIntyre and King, Ltd of $954,000 (currently
$863,000 net of taxes or $.17 per share) and a
non-recurring charge of $960,000 ($570,000 net
of taxes or $.11 per share) related to the death
benefits under employment agreements and other
severance amounts due the Company's former
Chairman.
Note 2 - 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.
<TABLE>
<CAPTION>
Balance Sheet Data
(In thousands)
- --------------------------------------------------------------------------------------------
September 30, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital ................ $26,799 $19,359 $10,569 $ 4,673 $ 3,460
Total assets ................... 69,509 64,970 49,737 31,815 28,983
Long-term debt and capital
lease obligations - net of
current portion ......... 3,445 4,583 3,436 1,805 1,983
Stockholders' equity ........... 38,276 30,861 22,048 12,865 11,339
- -------------
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
sales represented by data derived from the Company's Consolidated Statements of
Income:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Year Ended September 30, 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales ...................................... 100.0% 100.0% 100.0%
Cost of sales .............................. 69.0 69.2 69.4
----- ----- -----
Gross profit ............................... 31.0 30.8 30.6
Selling and administrative ................. 17.8 17.4 17.3
Dividend and interest (income) expense, net (1.0) (.6) (.2)
Other expense .............................. 1.9 -- --
----- ----- -----
Income before income taxes ................. 12.3 14.0 13.5
Provision for income taxes ................. 5.4 5.8 5.5
----- ----- -----
Net income ................................. 6.9% 8.2% 8.0%
===== ===== =====
</TABLE>
Fiscal Year 1997 Compared to Fiscal Year 1996
Sales in 1997 increased $5.1 million (5%) compared to 1996 principally as a
result of a $2.9 million (8%) increase in fulfillment services and a $2.1
million (5%) increase in list marketing. The increase in fulfillment services
sales reflects 16% increases in both continuity and catalog fulfillment services
partially offset by a decrease of 82% in inbound telemarketing revenues, which
is in line with the Company's program to de-emphasize this activity. The
continuity increase was primarily the result of increased billings to existing
customers while the catalog increase resulted from billings to new customers,
increased billings to existing customers partially offset by the loss of
billings to several customers upon their acquisition by third parties. Computer
services revenues were comparable to the prior year and continue to benefit from
the revenues related to the previously announced $40 million contract to build a
marketing database for a major non-U.S. communications company. The contract
extends through June, 1998. 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 list marketing increase resulted generally from an expanded
customer base and increased volume with continuing customers.
Gross profit in 1997 increased $1.8 million (6%) compared to 1996. Gross profit,
as percentage of sales, was 31% in both fiscal 1997 and 1996. Both fiscal years
include the favorable impact from the margin associated with the computer
services revenues, as described above.
<PAGE>
Selling and administrative expenses in 1997 increased $1.2 million (7%) compared
to 1996. Selling and administrative expenses, as a percentage of sales, were 18%
in the current year compared to 17% in the comparable prior period. The increase
in the amount of these expenses reflects increased expenses associated with
incremental revenues and higher outlays for professional fees primarily related
to investment banking, financial public relations and expansion activities.
Net dividend and interest income in 1997 increased $445,000 from 1996. Dividend
and interest income in 1997 increased $453,000 (46%) from 1996 as a result of a
higher level of funds available for reinvestment and marginally higher interest
rates. Interest expense was comparable in both fiscal years. The unsecured line
of credit held available for the Company was not used during either fiscal year.
Other expense during the current fiscal year includes the June, 1997 recorded
loss on investment of $954,000 (currently $863,000 net of taxes) representing a
non-recurring charge for the write-off of the Company's investment in McIntyre &
King, Ltd. ("M&K"). This charge represented $.17 per share in the current fiscal
year. The Company's Board of Directors decided to sever the relationship with
M&K due to unexpected operating losses that would have required unacceptable
demands on management's time and financial support required to attempt to return
M&K to profitability. As a result, effective April 5, 1997, the Company agreed
to rescind its acquisition of M&K. The rescission agreement, dated June 30,
1997, provides for the return of a portion of the down payment in one year.
However, recovery was uncertain and, therefore, the Company expensed all
payments, advances and all related costs. On November 28, 1997, the Company
received a payment from M&K of approximately $210,000 in final settlement of a
portion of the down payment, which will be recorded in other income in the
quarter ended December 31, 1997. On October 6, 1997, the Company announced the
recording of a non-recurring charge of $960,000 ($570,000 net of taxes or $.11
per share) in the period ended September 30, 1997 relating to death benefits
payable under employment agreements and other severance amounts due the
Company's former Chairman, the late Arnold J. Scheine who passed away on
September 22, 1997.
The effective tax rate in 1997 was 44% compared to 41% in 1996. The provisions
for taxes for the two fiscal years reflect relatively normal relationships
between book income and taxes thereon with the exception of the loss on
investment in M&K, as described above. The Company currently does not anticipate
realizing sufficient capital gains during the tax carryforward period to offset
this capital loss and, accordingly, no tax benefit has been recorded.
Net income for 1997 decreased $851,000 (11%) compared to 1996 primarily as a
result of the other expense charges, described above, partially offset by higher
contribution levels for the continuity and catalog operations. Excluding the
impact of the other expense charges, net income would have increased $587,000 or
7%.
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.
<PAGE>
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.
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.
<PAGE>
Liquidity and Capital Resources
Working capital at September 30, 1997 increased to $26,799,000 from $19,359,000
at the prior year end. Current assets increased $5,555,000 principally from
increases in cash and investments - held-to-maturity partially offset by a
decrease in accounts receivable. Current liabilities decreased $1,884,000
primarily as a result of a decrease in deferred revenue partially offset by
increases in accrued salaries and commissions and other accrued expenses. At
September 30, 1997, the ratio of long-term debt to equity was .09 to 1.
For the fiscal year ended September 30, 1997, cash generated by operations
decreased $6,526,000 over such amounts generated in 1996. The decrease was
primarily attributable to decreases in net income of $851,000 and in adjustments
to net income and changes in operating assets and liabilities of $5,675,000.
This decrease in adjustments to net income and changes in operating assets was
primarily the result of a decrease in deferred revenue of $8,541,000 and an
increase in prepaid expenses of $722,000 partially offset by a decrease in
accounts receivable of $2,004,000 and increases in accounts payable and accrued
expenses of $2,019,000.
Cash used in investing activities decreased $9,218,000 over the prior year. This
decrease was primarily attributed to a decline in additions to investments of
$6,619,000 and a reduction in additions to property and equipment of $2,599,000.
During the current fiscal year, funds used by financing activities increased
$3,230,000, primarily as a result of lower borrowings of $2,500,000, reduced
funds from the exercise of stock options of $260,000 and lower proceeds from
Employee Stock Purchase Plan and employment agreement purchases of $47,000
combined with increased repayments of debt of $197,000 and dividend payments of
$227,000.
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 on January 1, 1998 bringing the total payments to that date to
$5,950,000. As outlined in Note 2 to the accompanying consolidated financial
statements, the present value of the remaining obligation of $6,075,000, at
September 30, 1995 was recorded at that time resulting in an increase in
goodwill at that date of $4,478,000.
Management believes cash generated from current operations and other liquid
assets combined with the available bank credit line will be sufficient to meet
cash flow needs during the 1998 fiscal year, including the payment to former CRI
shareholders due January 1, 1998.
Recently Issued Accounting Standards
In March, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
share", which supersedes Accounting Principles Board Opinion No. 15. SFAS 128 is
effective for Financial Statements issued for periods ending after December 15,
1997 and simplifies the computation of earnings per share by replacing the
presentation of primary earnings per share with a presentation of basic earnings
per share. The Statement requires dual presentation of basic and diluted
earnings per share by entities with complex capital structures. Basic earnings
per share includes no dilution and is computed by dividing income available to
<PAGE>
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. Management of the Company does not believe that
there will be any material effect from adopting SFAS No. 128.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires a reconciliation of net income to comprehensive income in
the financial statements. Comprehensive income includes items that are excluded
from net income and reported as components of stockholders' equity, such as
unrealized gains and losses on certain investments in debt and equity
securities, foreign currency items and minimum pension liability adjustments.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Management of the Company does not believe there will be any material effect
from adopting SFAS No. 130.
In June, 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 requires the reporting of
profit and loss, specific revenue and expense items and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company has not yet fully determined what additional disclosures
may be required in connection with adopting SFAS No. 131.
<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 (the "Company") as of September 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Parsippany, NJ
November 4, 1997
(November 28, 1997 as to Note 13)
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, ..... 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales ............................. $ 100,627,292 $ 95,570,436 $ 78,863,443
Cost of sales ......................... 69,383,846 66,120,153 54,717,497
------------- ------------- -------------
Gross profit .......................... 31,243,446 29,450,283 24,145,946
Selling and administrative expenses ... 17,905,852 16,678,548 13,653,493
Other (income) expense:
Dividend and interest income ....... (1,442,707) (990,108) (354,600)
Interest expense ................... 443,642 437,198 187,461
Other expense ...................... 1,914,000 -- --
------------- ------------- -------------
Income before income taxes ............ 12,422,659 13,324,645 10,659,592
Provision for income taxes ............ 5,436,000 5,487,000 4,331,000
------------- ------------- -------------
Net income ............................ $ 6,986,659 $ 7,837,645 $ 6,328,592
============= ============= =============
Per common and common equivalent share:
Primary earnings ...................... $ 1.37 $ 1.53 $ 1.33
============= ============= =============
Fully diluted earnings ................ $ 1.35 $ 1.53 $ 1.25
============= ============= =============
Dividends ............................. $ .138 $ .094 $ .066
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 14,619,271 $ 11,893,982
Investments - held-to-maturity .............................. 14,410,101 10,435,026
Accounts receivable (less allowance
for doubtful accounts: 1997 - $496,000
and 1996 - $627,000) .................................... 23,163,774 24,519,050
Prepaid expenses and other current assets ................... 1,460,990 1,596,819
Deferred taxes .............................................. 684,000 338,000
------------ ------------
Total current assets ...................................... 54,338,136 48,782,877
------------ ------------
Investments - available-for-sale, net .......................... 123,708 369,722
Property and equipment, net .................................... 7,093,790 7,549,229
Goodwill (net of accumulated amortization: 1997 -
$806,204 and 1996 - $519,855) .............................. 7,280,977 7,567,326
Other assets ................................................... 672,656 700,793
------------ ------------
$ 69,509,267 $ 64,969,947
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 14,798,326 $ 14,726,387
Accrued salaries and commissions ............................ 3,127,141 2,389,837
Other accrued expenses ...................................... 3,899,876 2,513,841
Income taxes payable ........................................ 290,407 215,635
Current portion of long-term debt ........................... 1,087,511 1,047,989
Current portion of capital lease obligations ................ 211,580 390,399
Deferred revenue ............................................ 4,124,699 8,139,767
------------ ------------
Total current liabilities ................................. 27,539,540 29,423,855
------------ ------------
Long-term debt, net of current portion ......................... 3,444,533 4,331,542
Capital lease obligations, net of current portion .............. -- 250,997
Deferred taxes ................................................. 249,000 103,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
September 30, 1997 1996
------------ ------------
<S> <C> <C>
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 1997 - 4,854,847
shares and 1996 - 4,611,487 shares ...................... 48,548 46,115
Common stock issuable ....................................... 1,490,431 1,945,983
Additional paid-in capital .................................. 8,702,971 7,223,263
Retained earnings ........................................... 28,245,206 21,887,737
------------ ------------
38,487,156 31,103,098
Less: Treasury stock, at cost, 187,766 shares .............. (207,953) (207,953)
Available-for-sale securities valuation adjustment,
net of deferred income taxes .................... (3,009) (34,592)
------------ ------------
Total stockholders' equity ................................ 38,276,194 30,860,553
------------ ------------
$ 69,509,267 $ 64,969,947
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
$.01 Par Value Common Additional
----------------------------------- Stock Paid-in
Balance Shares Amount Issuable Capital
---------------------------------------------------------------
<S> <C> <C> <C> <C>
October 1, 1994 ................. 1,909,337 $ 19,093 $ 967,788 $ 2,261,497
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
Stock dividend - 100% ........... 2,061,087 20,611 -- (20,611)
Stock purchased through
Employee Stock Purchase Plan
and employment agreements ..... 6,690 67 -- 80,098
Dividends paid .................. -- -- -- --
Valuation adjustment ............ -- -- -- --
Tax benefit of exercise of
stock options ................. -- -- -- 426,000
Net income ...................... -- -- -- --
--------- ------------ ----------- -----------
September 30, 1995 .............. 4,347,886 43,479 2,407,521 5,431,455
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 - converted shares 360 4 -- 251
Stock purchased through
Employee Stock Purchase Plan
and employment agreements ..... 11,717 117 -- 153,861
Dividends paid .................. -- (401,762) -- --
Valuation adjustment, net ....... -- -- -- --
Tax benefit of exercise of
stock options ................. -- -- -- 559,000
Net income ...................... -- -- -- --
--------- ------------ ----------- -----------
September 30, 1996 .............. 4,611,487 46,115 1,945,983 7,223,263
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Treasury Stock - Available-for-
at Cost Sale Securities
Retained --------------------------- Valuation
Balance Earnings Shares Amount Adjustment Total
- ------- -------- ------ ------ ---------- -----
<S> <C> <C> <C> <C> <C>
October 1, 1994 ................. $ 9,912,936 187,766 ($ 207,953) ($ 87,969) $ 12,865,392
Acquisition of Catalog
Resources, Inc. ...............
Common stock issued ........... -- -- -- -- --
Present value of future
stock distributions ......... -- -- -- -- 1,945,983
Exercise of stock options ....... -- -- -- -- 652,533
Stock dividend - 10% ............ (1,529,396) -- -- -- --
Stock dividend - 100% ........... -- -- -- -- --
Stock purchased through
Employee Stock Purchase Plan
and employment agreements ..... -- -- -- -- 80,165
Dividends paid .................. (260,278) -- -- -- (260,278)
Valuation adjustment ............ -- -- -- 9,132 9,132
Tax benefit of exercise of
stock options ................. -- -- -- -- 426,000
Net income ...................... 6,328,592 -- -- -- 6,328,592
------------ -------- ------------ ------------ ------------
September 30, 1995 .............. 14,451,854 187,766 (207,953) (78,837) 22,047,519
Acquisition of Catalog
Resources, Inc. ...............
Common stock issued ........... -- -- -- -- --
Exercise of stock options ....... -- -- -- -- 619,673
Stock Dividend - converted shares -- -- -- -- 255
Stock purchased through
Employee Stock Purchase Plan
and employment agreements ..... -- -- -- -- 153,978
Dividends paid .................. (401,762) -- -- -- (401,762)
Valuation adjustment, net ....... -- -- -- 44,245 44,245
Tax benefit of exercise of
stock options ................. -- -- -- -- 559,000
Net income ...................... 7,837,645 -- -- -- 7,837,645
------------ -------- ------------ ------------ ------------
September 30, 1996 .............. 21,887,737 187,766 (207,953) (34,592) 30,860,553
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
$.01 Par Value Common Additional
----------------------------------- Stock Paid-in
Balance Shares Amount Issuable Capital
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Acquisition of Catalog
Resources, Inc. ...............
Common stock issued ........... 38,762 388 (455,552) 455,164
Exercise of stock options ....... 195,675 1,956 -- 517,543
Stock Dividend - converted shares 318 3 -- 218
Stock purchased through
Employee Stock Purchase Plan
and employment agreements ..... 8,605 86 -- 106,783
Dividends paid .................. -- -- -- --
Valuation adjustment, net ....... -- -- -- --
Tax benefit of exercise of
stock options ................. -- -- -- 400,000
Net income ...................... -- -- -- --
--------- ------------ ----------- -----------
September 30, 1997 .............. 4,854,847 $ 48,548 $ 1,490,431 $ 8,702,971
========= ============ ============ ============
<CAPTION>
Treasury Stock - Available-for-
at Cost Sale Securities
Retained --------------------------- Valuation
Balance Earnings Shares Amount Adjustment Total
- ------- -------- ------ ------ ---------- -----
<S> <C> <C> <C> <C> <C>
Acquisition of Catalog
Resources, Inc. ...............
Common stock issued ........... -- -- -- -- --
Exercise of stock options ....... -- -- -- -- 519,499
Stock Dividend - converted shares -- -- -- -- 221
Stock purchased through
Employee Stock Purchase Plan
and employment agreements ..... -- -- -- -- 106,869
Dividends paid .................. (629,190) -- -- -- 629,190
Valuation adjustment, net ....... -- -- -- 31,583 31,583
Tax benefit of exercise of
stock options ................. -- -- -- -- 400,000
Net income ...................... 6,986,659 -- -- -- 6,986,659
------------ -------- ------------ ------------ ------------
September 30, 1997 .............. $ 28,245,206 187,766 ($ 207,953) ($ 3,009) $ 38,276,194
============ ======= ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income ............................................ $ 6,986,659 $ 7,837,645 $ 6,328,592
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 2,504,699 2,321,718 1,861,883
Deferred income taxes ............................. (220,600) (21,000) (95,000)
Provision for doubtful accounts receivable ........ 119,000 65,000 121,625
Gains on sales of equipment ....................... -- -- (9,750)
Gain on sale of available-for-sale securities, net (474) (1,046) --
------------ ------------ ------------
Total adjustments ................................. 2,402,625 2,364,672 1,878,758
Changes in operating assets and liabilities:
Accounts receivable ............................... 1,236,276 (768,131) (6,021,005)
Prepaid expenses and other current assets ......... (426,921) 295,018 (660,616)
Accounts payable and accrued expenses ............. 2,366,400 347,847 3,778,404
Income taxes payable .............................. 74,450 215,635 (153,803)
Deferred revenue .................................. (4,015,068) 4,525,436 3,614,331
Security deposits ................................. 12,893 331,262 (581,846)
Other, net ........................................ 15,244 29,111 (58,976)
------------ ------------ ------------
Total adjustments and changes ..................... 1,665,899 7,340,850 1,795,247
------------ ------------ ------------
Net cash provided by operating activities ............. 8,652,558 15,178,495 8,123,839
------------ ------------ ------------
Cash flows from financing activities:
Changes in note payable, long-term debt and capital
leases (including current portion):
Borrowings ........................................ -- 2,500,000 --
Repayments ........................................ (1,448,425) (1,251,888) (1,117,273)
Dividends paid ........................................ (628,969) (401,507) (260,278)
Exercise of stock options ............................. 919,499 1,178,673 1,078,533
Employee Stock Purchase Plan and employment
agreement proceeds ................................ 106,869 153,978 80,165
------------ ------------ ------------
Net cash (used in) provided by financing activities ... (1,051,026) 2,179,256 (218,853)
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment ................... (1,762,911) (4,362,085) (1,589,400)
Net (purchases) sales of investments .................. (3,113,332) (9,732,515) 535,068
Proceeds from sales of equipment ...................... -- -- 100,688
------------ ------------ ------------
Net cash used in investing activities ................. (4,876,243) (14,094,600) (953,644)
------------ ------------ ------------
Cash and cash equivalents:
Net increase in cash and cash equivalents ............. 2,725,289 3,263,151 6,951,342
Cash and cash equivalents at beginning of year ........ 11,893,982 8,630,831 1,679,489
------------ ------------ ------------
Cash and cash equivalents at end of year .............. $ 14,619,271 $ 11,893,982 $ 8,630,831
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued from previous page.
For the Years Ended September 30, 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest ......................................... $ 273,000 $ 219,000 $ 153,000
Income taxes ..................................... $ 5,337,000 $ 4,261,000 $ 4,637,000
Supplemental disclosures of non-cash investing
and financing activities:
Acquisition of business:
Fair value of assets acquired .................... $ -- $ -- $ 4,478,091
Issuance of debt ................................. -- -- (2,532,108)
Common stock issuable ............................ -- -- (1,945,983)
----------- ----------- -----------
Liabilities assumed .............................. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
For the years ended September 30, 1997, 1996 and 1995, $455,552, $461,538
and $506,250 of common stock issuable was converted into 38,762, 34,621
and 139,948 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, capital lease obligations of
$216,000, were incurred for the leasing of equipment. There were no
capital lease obligations entered into during the years ended September
30, 1997 and 1996.
Valuation adjustment:
For the years ended September 30, 1997, 1996, and 1995, the account was
adjusted to reflect an increase in market values of the
available-for-sale securities portfolio of $31,583, $44,245, and $9,132,
net of deferred income taxes.
Stock Dividends:
During Fiscal 1997, 318 shares of the Company's common stock were paid as
dividends upon exchange of 133 shares of the Company's "old" common
stock.
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.
<PAGE>
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. and its Subsidiaries (the "Company"). The
Company provides outsourcing services specializing in international
telecommunications, fulfillment, list 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. All material
intercompany transactions and balances have been eliminated in consolidation.
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
$12,931,369 and $9,835,000 at September 30, 1997 and 1996, 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 - Long-Lived Assets - Effective October 1, 1996, the Company adopted Statement
of Financial Accounting Standards ("SFAS 121") , "Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to Be Disposed Of". Long-lived
assets and identifiable intangibles to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Impairment is measured by comparing the
carrying value of the long-lived assets to the estimated undiscounted future
cash flows expected to result from use of the assets and their eventual
disposition. The Company determined that as of September 30, 1997, there had
been no impairment in the carrying value of long-lived assets.
F - 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.
<PAGE>
G - 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, 1997, 1996 and 1995 include goodwill amortization of $286,300,
$286,400 and $123,500, respectively. The Company regularly assesses the
recoverability of goodwill in accordance with the provisions of SFAS No.
121.
H - 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.
I - Income taxes - The Company records income taxes based on the provisions of
Statement of Financial Standards No. 109, "Accounting for Income Taxes".
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.
J - 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, 1997, 1996 and 1995, the weighted average number of shares used in
determining primary earnings per common share was 5,103,838, 5,118,085 and
4,755,365, respectively. For the same periods, the weighted average number of
shares used in determining fully diluted earnings per common share was
5,179,756, 5,124,568 and 5,049,958, 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 1997, 1996
and 1995 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 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.
K - Reclassifications - Certain reclassifications have been made to the 1996 and
1995 financial statements to conform to the 1997 presentation.
Note 2 - Acquisition
On April 1, 1993, the Company completed the purchase of all the outstanding
stock of Catalog Resources, Inc. ("CRI"). CRI's results of operations are
included in the Company's Consolidated Statements of Income from that date. The
initial purchase price was $3,500,000. In addition, certain additional payments
<PAGE>
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, 1996 and 1997. As of September 30, 1997, 538,287 shares had
been delivered under the provisions of the purchase agreement, as amended.
Based on an evaluation at September 30, 1995 of current operations and
anticipated future operating results, it was considered probable at that date
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, 1997, the January 1, 1998 scheduled payment of
$1,012,000 will be paid.
Note 3 - Investments
During the years ended September 30, 1997 and 1996, the valuation account
related to the available-for-sale marketable securities portfolio was adjusted
to reflect increases in market values of $31,583 and $44,245, respectively, net
of deferred taxes.
<PAGE>
The following table sets forth the components of investments held at September
30, 1997:
<TABLE>
<CAPTION>
Market Unrealized Holding
Available-for-sale: Cost Value Loss
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government due January 31, 1999 $ 24,996 $ 24,695 $ (301)
Equity securities 103,799 99,013 (4,786)
- -------------------------------------------------------------------------------------------
Total $ 128,795 $ 123,708 $ (5,087)
- -------------------------------------------------------------------------------------------
Held-to-maturity:
- -------------------------------------------------------------------------------------------
Commercial paper-various issues $14,410,101 $14,410,101 $ 0
- -------------------------------------------------------------------------------------------
</TABLE>
During the year ended September 30, 1997, proceeds from redemptions of
investments were $24,445,993 resulting in a realized gain of $474. The Company
uses specific identification for securities sold.
The following table sets forth the components of investments held at September
30, 1996:
<TABLE>
<CAPTION>
Market Unrealized 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 (56,971)
- ---------------------------------------------------------------------------------------------
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.
<PAGE>
Note 4 - Allowance for Doubtful Accounts
Activity in the Allowance for Doubtful Accounts for the three years ended
September 30, 1997 includes:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Year Ended September 30, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $627,000 $624,000 $585,000
Additions - charged to expense 119,000 65,000 121,625
Deductions (250,000) (62,000) (82,625)
- -------------------------------------------------------------------------------------------------
Balance at end of year $496,000 $627,000 $624,000
- -------------------------------------------------------------------------------------------------
</TABLE>
Note 5 - Property and Equipment
The components of property and equipment include:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $ 3,094,284 $ 2,845,137
Leasehold improvements 2,207,228 2,093,435
Computer equipment 7,508,056 6,828,373
Computer equipment under capital leases 1,915,567 1,915,567
Other equipment 4,228,200 3,616,807
- --------------------------------------------------------------------------------
18,953,335 17,299,319
Less: Accumulated depreciation and amortization 11,859,545 9,750,090
- --------------------------------------------------------------------------------
$ 7,093,790 $ 7,549,229
- --------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization charged to operations was $2,218,000, $2,035,000,
and $1,738,000 for 1997, 1996 and 1995, respectively.
Note 6 - Unsecured Line of Credit
A bank holds available, until March 31, 1998, a $5,000,000 unsecured bank line
of credit. The line of credit has been renewed annually. During fiscal years
1997 and 1996, the available line of credit was not used.
<PAGE>
Note 7 - Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of:
- --------------------------------------------------------------------------------
September 30, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Payable to former shareholders of CRI $2,499,945 $2,784,375
Notes payable to banks 2,032,099 2,595,156
- --------------------------------------------------------------------------------
4,532,044 5,379,531
Less: Current portion 1,087,511 1,047,989
- --------------------------------------------------------------------------------
$3,444,533 $4,331,542
- --------------------------------------------------------------------------------
</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 $180,314 as of September 30,
1997. 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, 1997 of $2,024,905. 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.
Maturities of long-term debt include:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Year Ended
September 30, Amount
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 1,087,511
1999 1,005,597
2000 982,489
2001 732,976
2002 723,471
- --------------------------------------------------------------------------------
Total long-term debt $ 4,532,044
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note 8 - Provision for Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year Ended September 30, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $4,413,000 $4,292,000 $3,471,000
State 1,244,000 1,216,000 955,000
- ----------------------------------------------------------------------------------------------------------
Total provision for current income taxes 5,657,000 5,508,000 4,426,000
- ----------------------------------------------------------------------------------------------------------
Deferred
Federal (179,000) (22,000) (85,000)
State (42,000) 1,000 (10,000)
---------------------------------------------------------------------------------------------------------
Total provision for deferred income taxes (221,000) (21,000) (95,000)
- ----------------------------------------------------------------------------------------------------------
Total provision for income taxes $5,436,000 $5,487,000 $4,331,000
- ----------------------------------------------------------------------------------------------------------
</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, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate $4,248,000 $4,564,000 $3,624,000
State income taxes - net of federal tax benefit 740,000 791,000 619,000
Non-deductible expenses 149,000 148,000 85,000
Non-taxable income (5,000) (16,000) (15,000)
Valuation allowance against capital loss carryforward 298,000 --- ---
Other 6,000 --- 18,000
- ----------------------------------------------------------------------------------------------------------
Total provision for income taxes $5,436,000 $5,487,000 $4,331,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The components of deferred income tax assets and liabilities include:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net Current Net Non-current Net Current Net Non-current
Asset Liability Asset Liability
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property and equipment $ -- $251,000 $ -- $127,000
Allowance for doubtful accounts 201,000 -- 256,000 --
Non-deductible expenses 392,000 -- -- --
Unrealized holding loss on
marketable securities -- (2,000) -- (24,000)
Vacation accrual 91,000 -- 82,000 --
Capital loss carryforward 298,000 -- -- --
Valuation allowance against capital
loss carryforward (298,000) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $684,000 $249,000 $338,000 $103,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 9 - Stock Options
The Company has an Incentive Stock Option Plan (the "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.
Stockholders at the 1997 annual meeting approved the 1996 non-qualified
Non-Employee Directors Stock Option Plan ("1996 Plan"), which provides for the
granting of options covering 250,000 shares. Each non-employee director, who is
a non-employee director at the date of grant of the option and who was a
non-employee at all times during the fiscal year preceding the date of grant,
shall be granted an option to purchase 11,000 shares of the common stock on the
date the 1996 Plan was approved by the stockholders and on each succeeding 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 the 1996 Plan
are based on the market value on the date of grant. During fiscal 1997, 22,000
shares were granted, based on fiscal year 1996 results, at a price of $15.00,
all of which are outstanding. At September 30, 1997, 4,400 of these shares were
exercisable. No options were granted for fiscal year 1997. The 1993
non-qualified Non-Employee Directors Stock Option Plan ("1993 Plan") was
terminated as a result of the approval of the 1996 Plan. The 1993 Plan has
11,600 options which remain outstanding at prices of $3.53-$16.00. At September
30, 1997, 4,200 shares were exercisable at prices of $3.53- $16.00. There was no
other activity in this plan during fiscal 1997.
Non-employee directors have been granted non-qualified options, at the fair
market value on the date of grant, to purchase 54,000 shares of the Company's
common stock at prices of $2.05 to $5.38 per share. At September 30, 1997,
44,000 options were exercisable. During the current year, 2,000 options were
exercised and no options were cancelled.
<PAGE>
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). In accordance
with Nasdaq Stock Market(sm) rules, the required stockholders' approval covering
35,400 of those shares was obtained at the 1997 annual meeting.
The following schedule sets forth the activity under the 1983 Incentive Stock
Option Plan for the years ended September 30, 1997, 1996 and 1995. Granting of
options under this plan ceased in May, 1994.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Incentive options Number Option Price
- ----------------------------------------------------------------------------------
<S> <C> <C>
Outstanding September 30, 1994 375,060 $1.25 - $ 3.75
Exercised (120,767) $1.73 - $ 3.75
Expired or cancelled (3,849) $3.41 - $ 3.75
Stock dividend - 10% 32,506 $1.25 - $ 3.75
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
Exercised (176,300) $2.25 - $ 3.41
- ----------------------------------------------------------------------------------
Outstanding September 30, 1997 224,400 $1.25 - $ 2.69
- ----------------------------------------------------------------------------------
Exercisable September 30, 1997 224,400 $1.25 - $ 2.69
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following schedule sets forth the activity of the 1993 Incentive Stock
Option Plan for the years ended September 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Incentive options Number Option Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding September 30, 1994 83,000 $ 2.27 - $ 3.53
Granted 211,600 $ 3.18 - $16.85
Exercised (6,463) $ 2.27 - $ 2.95
Expired or cancelled (19,250) $ 2.27 - $ 2.95
Stock dividend - 10% 8,300 $ 2.27 - $ 3.52
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 $ 2.96 - $16.85
Granted 110,800 $12.75 - $15.00
Exercised (17,375) $ 2.96 - $15.50
Expired or Cancelled (117,448) $ 2.96 - $15.50
- --------------------------------------------------------------------------------
Outstanding September 30, 1997 583,950 $ 2.96 - $16.85
- --------------------------------------------------------------------------------
Exercisable September 30, 1997 358,475 $ 2.96 - $16.85
- --------------------------------------------------------------------------------
Available for grant September 30, 1997 1,553,346
- --------------------------------------------------------------------------------
</TABLE>
The following schedule sets forth the status of the incentive stock options
outstanding and exercisable at September 30, 1997:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-
Range of Average
Exercise Number of Remaining Exercise Number of Exercise
Prices Shares Life-Years Price Shares Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1983 Incentive Plan
$1.25 to $2.69 224,400 4.7 $ 2.63 224,400 $ 2.63
1993 Incentive Plan
$2.96 to $5.50 120,000 6.7 3.54 87,725 3.45
$12.75 to $16.85 463,800 8.2 15.47 270,750 16.48
- -------------------------------------------------------------------------------------------------------
Total 1993 Plan 583,950 358,475
- -------------------------------------------------------------------------------------------------------
Total Plans 808,350 582,875
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," issued in October, 1995. In accordance with the provisions of
SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at the various grant dates, as
prescribed by SFAS No. 123, net income and earnings per share would have been
adjusted to the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
Year Ended September 30, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income - as reported $6,986,659 $7,837,645
Net income - pro forma 6,751,871 7,726,185
Earnings per share - as reported - fully diluted 1.35 1.53
Earnings per share - pro forma - fully diluted 1.30 1.51
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Binery Option Pricing Model with the following assumptions:
Expected dividend yield - .80%
Expected stock volatility - 59.65%
Risk free interest rates - 5.84 - 6.13%
Expected life of options - 5 - 10 Years
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of the effect on future amounts. SFAS No. 123 does not
apply to awards granted prior to the Company's 1996 fiscal year.
The Company's stock options are not transferrable, and the actual value of the
stock options that an employee may realize, if any, will depend on the excess of
the market price on the date of exercise over the exercise price. The Company
has based its assumption for stock price volatility on the variance of weekly
closing prices of the Company's stock for the last three years. The risk-free
rate of return used equals the yield on zero-coupon U.S. Treasury issues on the
grant date based on the grants estimated life.
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 (the "Purchase Plan") was adopted. The Purchase 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 Purchase Plan
began September 1, 1994. For the years ended September 30, 1997, 1996 and 1995,
shares purchased totaled 6,892, 9,968 and 13,552, 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 1997, 1996 and
1995, a total of 1,713, 1,749 and 143 shares, respectively, were purchased under
these agreements.
<PAGE>
Note 11 - Employee Retirement Savings Plan (401K)
The Company sponsors a tax deferred retirement savings plan ("401K Plan") which
permits eligible employees to contribute varying percentages of their
compensation up to the limit allowed by the Internal Revenue Service. The 401K
Plan also provides for discretionary Company contributions. No discretionary
contributions were made for the years ended September 30, 1997, 1996 and 1995.
The Company matches employees' contributions to a maximum of 25% of the
employee's first 6% contributed. The Company's matching contributions were
temporarily increased to 35% of eligible employee contributions in fiscal years
1997 and 1996, during the period of January 1 to June 30. Matching contributions
charged to expense were $189,000, $196,000 and $154,000 for the fiscal years
ended September 30, 1997, 1996 and 1995, 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>
1998 $218,746 $ 2,279,000
1999 1,907,000
2000 1,495,000
2001 1,172,000
2002 1,172,000
Thereafter 2,818,000
- ---------------------------------------------------------------------------------------
218,746 $10,843,000
Less: Imputed interest 7,166
- ---------------------------------------------------------------------------------------
Present value of capital lease obligations $211,580
- ---------------------------------------------------------------------------------------
</TABLE>
Real estate, equipment and software operating lease costs include:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Year Ended September 30, 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate $2,535,000 $2,324,000 $1,227,000
Equipment and software 740,000 788,000 774,000
- -------------------------------------------------------------------------------------
Total $3,275,000 $3,112,000 $2,001,000
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note 13 - Other Expense
In June, 1997, the Company recorded a loss on investment of $954,000 (currently
$863,000 net of taxes) representing a non-recurring charge for the write-off of
the Company's investment in McIntyre & King, Ltd. ("M&K"). This charge
represented $.17 per share in the current fiscal year. The Company's Board of
Directors decided to sever the relationship with M&K due to unexpected operating
losses that would have required unacceptable demands on management's time and
financial support required to attempt to return M&K to profitability. As a
result, effective April 5, 1997, the Company agreed to rescind its acquisition
of M&K. The rescission agreement, dated June 30, 1997, provides for the return
of a portion of the down payment in one year. However, recovery was uncertain
and, therefore, the Company expended all payments, advances and all related
costs. On November 28, 1997, the Company received a payment from M&K of
approximately $210,000 in final settlement of a portion of the down payment,
which will be recorded in other income in the quarter ended December 31, 1997.
On October 6, 1997, the Company announced the recording of a non-recurring
charge of $960,000 ($570,000 net of taxes or $.11 per share) in the period ended
September 30, 1997 related to death benefits payable under employment agreements
and other severance amounts due the Company's former Chairman, the late Arnold
J. Scheine who passed away on September 22, 1997.
Note 14 - Fair Value of Financial Statements
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosure About Fair Value of Financial Instruments". The
carrying amounts of cash and cash equivalents, investments - held-to-maturity,
trade receivables, other current assets, accounts payable and amounts included
in investments and accruals meeting the definition of a financial instrument
approximate fair value. The carrying values and related estimated fair values
for the Company's long-term debt payable to banks is estimated based on the
current rates offered to the Company for debt of the same maturities as follows:
<TABLE>
<CAPTION>
September 30, 1997 1996
<S> <C> <C>
Carrying value $2,032,000 $2,595,000
Fair value 2,037,000 2,602,000
</TABLE>
Note 15 - 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.
<PAGE>
At September 30, 1997, 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 $1,050,000. 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 16 - Major Customers
For the years ended September 30, 1997 and 1996, revenues recognized under the
contract to provide computer services to a non-U.S. communications company
amounted to 15% and 14%, respectively, 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 1998 Annual Meeting of Stockholders (the "Proxy Statement") under the
caption "Election of Directors" is incorporated herein by reference.
The following is a list as of December 1, 1997, 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>
William Rella 55 President, Chief Operating Officer and Director - 1997
President - Fulfillment Services - 1994
Marvin Cohen 63 Senior Vice President and Secretary-1981,
Director-1969-1997
Pat R. Frustaci 43 Vice President - Finance, Chief Financial Officer,
Treasurer and Assistant Secretary - 1995
James E. Quinlan 59 Controller-1988
Gerry King 48 President - Catalog Resources, Inc. - 1993
Lon Mandel 42 President and Chief Operating Officer - The SpeciaLISTS
Ltd. - 1987
Phyllis Stein 45 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, 1997, 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 two
officers. These persons were Arnold J. Scheine, former President, who filed,
however, not on a timely basis, two Forms 4 relating to the transfer of 80,162
shares of Common Stock, to Scheine Holdings, Inc. and William Rella, President,
who filed, however, not on a timely basis, a Form 4 relating to the award of an
incentive stock option covering 40,000 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
Independent Auditors' Opinion................
Consolidated Statements of Income
for the Years Ended September 30,
1997, 1996 and 1995.................
Consolidated Balance Sheets as
of September 30, 1997 and 1996......
Consolidated Statements of Changes
in Stockholders' Equity for the
Years Ended September 30, 1997,
1996 and 1995......................
Consolidated Statements of Cash Flows
for the Years Ended September 30,
1997, 1996 and 1995.................
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) 3.1 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 letter dated April 14, 1997 related
to the holding available of a line of credit
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). (13)
10.14 1996 Non-Employee Directors Stock Option Plan (14)
<PAGE>
11 Computation of Earnings Per Share and Common
Equivalent Share
22 List of Subsidiaries
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 10K 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.
<PAGE>
(12) Incorporated by Reference to Exhibit to the
Company's Current Report on Form 8-K dated
September 1, 1995, File No. 0-12329.
(13) Incorporated by Reference to Exhibit to the
Company's Quarterly Report on Form 10Q/A-1
dated August 8, 1996, File No. 0-12329.
(14) Incorporated by Reference to the Company's
Proxy Statement dated December 30, 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, 1997.
<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/William Pella
----------------
William Rella
President
Date: December 18, 1997
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, 1997.
Signature Title
--------- -----
/s/William Rella President (Principal Executive Officer) and Director
- -----------------
William Rella
/s/Pat R. Frustaci Vice President - Finance, Chief Financial Officer,
- ------------------
Pat R. Frustaci Treasurer and Assistant Secretary (Principal
Accounting Officer)
/s/Marvin Cohen Senior Vice President and Secretary
- ---------------
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, 1997
E X H I B I T S
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
10.5 The Bank of New York letter dated
April 14, 1997 related to the
holding available of a line of credit
11 Computation of Earnings Per
Share and Common Equivalent
Share
22 List of Subsidiaries
23 Consent of Deloitte & Touche LLP
EXHIBIT 10.5
<PAGE>
(THE BANK OF NEW YORK, NA)
National Community Division
April 14, 1997
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
$5,000,000 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, 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.
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 provided in the first sentence of this paragraph,
this line of credit shall be held available until March 31, 1998. 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 this line of credit is held
available.
Very truly yours,
THE BANK OF NEW YORK (NJ)
By: /s/Brian J. Clark
-----------------
Brian J. Clark
Title: Vice President
EXHIBIT 11
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE AND
COMMON EQUIVALENT SHARE
For the Years Ended September 30,
1997 1996 1995 (A)
---------- ---------- ----------
<S> <C> <C> <C>
Primary earnings per share:
Weighted average shares outstanding ....... 4,624,702 4,329,663 4,019,576
Weighted average - dilutive stock options . 371,985 627,947 540,693
Shares issuable in connection with the
acquisition of Catalog Resources, Inc. . 107,151 160,475 195,096
---------- ---------- ----------
5,103,838 5,118,085 4,755,365
========== ========== ==========
Net income ................................ $6,986,659 $7,837,645 $6,328,592
Primary earnings per share and common
equivalent share ....................... $ 1.37 $ 1.53 $ 1.33
========== ========== ==========
Fully diluted earnings per share:
Weighted average shares outstanding ....... 4,624,702 4,329,663 4,019,576
Weighted average - dilutive stock options . 447,903 634,430 835,286
Shares issuable in connection with the
acquisition of Catalog Resources, Inc. . 107,151 160,475 195,096
---------- ---------- ----------
5,179,756 5,124,568 5,049,958
========== ========== ==========
Net income ................................ $6,986,659 $7,837,645 $6,328,592
Fully diluted earnings per share and common
equivalent share ....................... $ 1.35 $ 1.53 $ 1.25
========== ========== ==========
</TABLE>
(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.
EXHIBIT 22
<PAGE>
SUBSIDIARIES OF LCS INDUSTRIES, INC.
Set forth below are the names of all subsidiaries of LCS as of December
1, 1997 required to be listed on Exhibit 22 to LCS's 1997 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, 1997, November 28, 1997 as to Note 13, appearing in
this Annual Report on Form 10-K of LCS Industries, Inc. for the year ended
September 30, 1997.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Parsippany, New Jersey
December 16, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,619,271
<SECURITIES> 14,410,101
<RECEIVABLES> 23,659,774
<ALLOWANCES> 496,000
<INVENTORY> 201,871
<CURRENT-ASSETS> 54,338,136
<PP&E> 18,953,333
<DEPRECIATION> 11,859,543
<TOTAL-ASSETS> 69,509,267
<CURRENT-LIABILITIES> 27,539,540
<BONDS> 0
0
0
<COMMON> 48,548
<OTHER-SE> 38,227,646
<TOTAL-LIABILITY-AND-EQUITY> 69,509,267
<SALES> 0
<TOTAL-REVENUES> 100,627,292
<CGS> 0
<TOTAL-COSTS> 69,383,846
<OTHER-EXPENSES> 17,905,852
<LOSS-PROVISION> 119,000
<INTEREST-EXPENSE> 443,642
<INCOME-PRETAX> 12,422,659
<INCOME-TAX> 5,436,000
<INCOME-CONTINUING> 6,986,659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,986,659
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.35
</TABLE>
