SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934:
For the fiscal year ended September 30, 1998
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. [X]
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, 1998: $54,473,637. The number of shares of Common
Stock ($.01 par value) outstanding as of December 1, 1998: 4,898,447.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement in respect of the 1999 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 48 pages. Index to exhibits
is located at page 41.
<PAGE>
Introduction
Part I
Item 1. Business.
LCS Industries, Inc. ("LCS" or the "Company"), a Delaware
corporation, provides outsourcing services specializing in international
telecommunications database development and management as well as 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,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fulfillment services 42% 38% 37%
Computer services 14% 18% 19%
List marketing services 44% 44% 44%
</TABLE>
On December 17, 1998, the Company and CustomerONE Holding
Corporation, a subsidiary of Onex Corporation, announced that they have entered
into a definitive merger agreement pursuant to which CustomerONE will acquire
all of the outstanding shares of LCS common stock at a price of $17.50 per share
in cash, representing an aggregate transaction value of approximately $97.3
million. Onex Corporation, the ninth largest company in Canada, is a diversified
company with 1997 consolidated revenues of $11 billion Canadian, consolidated
assets of $6.4 billion Canadian and 43,000 employees.
Pursuant to the merger agreement, CustomerONE commenced a cash
tender offer for all of the outstanding common shares of LCS common stock on
December 23, 1998. Consummation of the tender offer is subject to U.S. antitrust
regulatory clearance and other customary closing conditions.
The tender offer is not subject to financing. Onex has agreed to
provide CustomerONE with all necessary funds to affect the merger.
The Board of Directors of LCS has unanimously approved the merger
and has recommended that LCS stockholders accept the tender offer and approve
and adopt the merger agreement.
Headquartered in Buffalo, New York, CustomerONE is an outsourced
customer service and fulfillment provider. CustomerONE owns North Direct
Response, Inc., a premier teleservices provider, and Softbank Services Group, a
leading provider of outsourced customer service solutions.
In June, 1997, the Company recorded a loss on investment of
$954,000 ($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 prior 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, provided 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 was recorded in other income in the quarter ended December 31, 1997.
On December 30, 1997, the Company and former shareholders of
Catalog Resources, Inc. agreed to Amendment No. 2 of the purchase agreement
dated April 1, 1993 and amended August 1, 1994. This Amendment provides for the
payment made January 2, 1998 of $1,012,500 to be 100% in
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cash compared to the previously agreed 50% in cash and 50% in Common Stock of
the Company, subject to a maximum number of shares to be issued of 660,000.
Accordingly, the current portion of long-time debt at December 31, 1997 was
increased by $506,250 (50% of the $1,012,500 payment). This was offset by a
reduction in common stock issuable of $418,899, representing the present value
at September 30, 1995 of the originally anticipated stock issuance, and a charge
to additional paid-in capital of $87,351.
As a result of Amendment No. 2, the parties have agreed to reduce
the maximum number of shares issuable under the amended agreement by the shares
which would have been issued on January 2, 1998 based on the provisions of the
original agreement. The revised maximum number of shares issuable is 628,020 of
which 538,287 shares have been previously issued.
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
features which are intended to minimize credit losses to its clients. The order
is then picked,
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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
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.
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<PAGE>
Enhancement
Enhancement is the overlay of demographic information to computer
lists and databases to facilitate targeted mailing programs, sometimes in
combination with the list maintenance and merge/purge services. This information
added by LCS can include profiles of time in present residence, dwelling unit
size, occupation, income estimate, age, gender, presence and number of children,
telephone number and other information.
The Company has been selected by the U.S. Postal Service as one
of 23 licensees for its National Change of Address System. As part of this
program to reduce the return rate of domestic mail, the Postal Service is
furnishing licensees every two weeks with changes of address on all recent U.S.
business and household moves. Utilizing this data, LCS is able to offer its
clients the ability to enhance existing lists to reflect the Postal Service's
most current change of address information, thereby increasing the
cost-effectiveness of mailings using such updated lists.
Computer Personalization
Computer personalization is the use of computerized lists to
personalize mass mailings of various forms including labels, computer letters,
complex insurance applications and many other forms. The Company subcontracts
this process.
List Marketing Services
The Company, through its consolidated subsidiary The SpeciaLISTS
Ltd., provides consumer list marketing services. These services include:
-- List brokerage -- the recommendation of lists or segments
of lists for specific mailing campaigns and the securing
of names from various list owners for mailings. The
Company consults with clients to determine the best
direct-mail strategy and optimal targeted markets.
-- List management -- rental and promotion of proprietary and
client-owned lists for direct-mail promotions.
-- List compilation -- creation of proprietary lists drawn
from numerous sources, such as directories and attendance
rosters.
Marketing
The Company currently markets its products and services
throughout the United States using in-house sales expertise. Leads are generated
by personal calls, print advertising in trade media, referrals, industry
meetings and trade shows and seminars. LCS uses its own direct-response and
fulfillment services to generate leads, support sales and facilitate follow-up.
The generally close working relationship between LCS and its clients offers
opportunities for the sale of additional related services. The Company makes a
practice of identifying and designing services to meet special needs of clients.
The sales staff is compensated by salary plus commissions or bonuses.
Although, during fiscal 1998, revenues recognized in connection
with the contract to provide computer services to a non-U.S. telecommunications
company amounted to 12% 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 contributed significantly to the profits of the Company and was
completed June 30, 1998. On July 1, 1998, the Company began work under an
additional $6.0 million one-year contract with the same telecommunications
company. There is no assurance that additional replacement projects will be
obtained in the future providing the same level of sales or profits.
4
<PAGE>
Customer Trade Terms
As the Company is in a service business, a large proportion of
its consolidated current assets and a significant portion of its consolidated
total assets are represented by trade accounts receivable. Invoices for service
to clients of the Company and its subsidiaries are customarily rendered monthly
for recurring matters and at the completion of special projects. For financial
statement purposes, revenues and related costs are recognized when services are
performed. Revenues under long-term consulting contracts are recognized on the
percentage-of-completion method of accounting measured by the percentage of
labor hours incurred to date to the estimated total labor hours required for
each contract.
In the case of approximately 36% of the consolidated trade
accounts receivable of the Company and its subsidiaries as of September 30,
1998, 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, 1998, net of
the allowance for doubtful accounts reflected on the consolidated balance sheet
as at such date included in the Consolidated Financial Statements, are
collectable in the ordinary course of business.
Product Protection and Proprietary Rights
LCS uses several methods to ensure the protection of confidential
client data and its proprietary systems. The Company's computer tapes,
cartridges and disks are accessible only to authorized personnel. LCS protects
on-line access to data by restricting access to on-line terminals and by
utilizing a periodically changing, segmented password system. To enhance safety
in case of fire or other natural disasters, duplicate tapes containing client
data are stored at an off-site location.
The Company considers certain of its software to be proprietary.
It currently relies upon trade secret laws and internal non-disclosure
agreements to protect the software. LCS has no patents or copyrights. In
management's opinion, no such patent or copyright protection is customary or
necessary.
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, 1998, the Company employed 1,494 persons, of
whom 881 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.
5
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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 13
of Notes to Consolidated Financial Statements, as to future rental expenses:
<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 December 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
---------
TOTAL 425,587
</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.
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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 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.
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, 1998, there were 170 registered holders and an estimated 1,600
beneficial holders of record of the Company's common stock.
- --------------------------------------------------------------------------------
Price
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
Fiscal Year Ended
September 30, 1998
1st Quarter.................. $21-3/4 $14
2nd Quarter.................. 18 12-3/8
3rd Quarter.................. 17-1/8 13-1/4
4th Quarter.................. 18 11-3/4
Fiscal Year Ended
September 30, 1997
1st Quarter.................. $15-1/2 $12-1/2
2nd Quarter.................. 16-1/8 13-1/2
3rd Quarter.................. 17-1/4 13-3/4
4th Quarter.................. 20 14
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Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Five Year Review
Income Statement Data
(In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales ......................................... $ 94,209 $ 100,627 $ 95,570 $ 78,863 $ 62,690
Cost of sales ................................. 65,973 69,384 66,120 54,717 46,986
Gross profit .................................. 28,236 31,243 29,450 24,146 15,704
Selling and administrative expenses ........... 16,533 17,906 16,679 13,653 13,270
Dividend and interest (income) expense, net ... (1,299) (1,000) (553) (167) 65
Other expense (Note 1) ........................ (210) 1,914 -- -- --
Income before income taxes .................... 13,212 12,423 13,324 10,660 2,369
Net income .................................... 7,835 6,987 7,838 6,329 1,375
Per common and common equivalent share (Note 2)
Basic earnings (Note 1) ....................... 1.63 1.51 1.81 1.57 .36
Weighted average number of shares outstanding . 4,808 4,625 4,330 4,020 3,871
Diluted earnings (Note 1) ..................... 1.52 1.37 1.53 1.33 .32
Weighted average number of shares outstanding . 5,158 5,104 5,118 4,755 4,306
Dividends per share ........................... .150 .138 .094 .066 .045
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Note 1 - 1997 includes write-off of the Company's investment in McIntyre
and King, Ltd. ("M&K") of $954,000 ($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. 1998 includes a $210,000 recovery
related to the M&K transaction.
Note 2 - 1995 and 1994 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.
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data
(In thousands)
- ------------------------------------------------------------------------------------
September 30, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital ................ $34,947 $26,799 $19,359 $10,569 $ 4,673
Total assets ................... 69,379 69,509 64,970 49,737 31,815
Long-term debt and capital
lease obligations - net of
current portion ......... 2,575 3,445 4,583 3,436 1,805
Stockholders' equity ........... 46,210 38,276 30,861 22,048 12,865
- ------------------------------------------------------------------------------------
</TABLE>
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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, 1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales ............................................ 100.0% 100.0% 100.0%
Cost of sales .................................... 70.0 69.0 69.2
----- ----- -----
Gross profit ..................................... 30.0 31.0 30.8
Selling and administrative ....................... 17.6 17.8 17.4
Dividend and interest (income) expense, net ...... (1.4) (1.0) (0.6)
Other (income) expense ........................... (.2) 1.9 --
----- ----- -----
Income before income taxes ....................... 14.0 12.3 14.0
Provision for income taxes ....................... 5.7 5.4 5.8
----- ----- -----
Net income ....................................... 8.3% 6.9% 8.2%
===== ===== =====
- ------------------------------------------------------------------------------------
</TABLE>
Fiscal Year 1998 Compared to Fiscal Year 1997
Sales in 1998 declined $6.4 million (6%) compared to 1997 principally as a
result of a $4.3 million (24%) decrease in computer services, a $2.7 million
(6%) decrease in list marketing partially offset by a $0.6 million (1%) increase
in fulfillment services. The lower computer services revenues reflect reduced
billings, compared to the prior year, for the last phase of the three-year $40.0
million contract to build and manage a marketing database for a major non-U.S.
telecommunications company which contract was completed June 30, 1998. On July
1, 1998, the Company began work under an additional $6.0 million one-year
contract with the same telecommunications company. The list marketing decline
reflects customer attrition and industry softness not fully offset by new
customers. The fulfillment increase is comprised of a 10% increase in continuity
services offset by a 9% decrease in the catalog fulfillment operation. The
continuity increase resulted primarily from higher activity levels from existing
clients. The decline in the catalog fulfillment operation resulted from several
customers being acquired by third parties, as previously reported. During the
second half of fiscal 1998, contracts with several new catalog fulfillment
customers were finalized.
Gross profit in 1998 decreased $3.0 million (10%) compared to 1997. Gross profit
margin was 30% in 1998 compared to 31% in 1997. The lower gross profit amount
resulted primarily from the decrease in sales volume. The reduced margin
resulted from the impact of the lower computer services sales, as described
above, which carry a higher gross profit percentage than the other operations
partially offset by an improved margin in the list marketing area.
Selling and administrative expenses in 1998 declined $1.4 million (8%) compared
to 1997. Selling and administrative expenses, as a percentage of sales, were 18%
in both 1998 and 1997. The decrease in the amount of selling and administrative
expenses is primarily due to lower executive compensation, travel and
communication costs.
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Dividend and interest income in 1998 increased $0.2 million (13%) as a result of
a higher level of funds available for investment and marginally higher interest
rates. Interest expense declined $0.1 million in 1998 compared to 1997 which
resulted from reduced debt levels and capital lease obligations. The unsecured
line of credit held available for the Company was not used during either fiscal
year.
Other income in 1998 of $0.2 million reflects a payment received from McIntyre &
King, Ltd. ("M&K") and represents final settlement of a portion of the
down-payment made in connection with the 1997 rescinded purchase agreement, as
described below. Other expense in 1997 included the June, 1997 recorded loss on
investment of $1.0 million ($0.9 million net of taxes) representing a
non-recurring charge for the write-off of the Company's investment in M&K and
represented $.17 per share. 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, provided 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 at that time. On October
6, 1997, the Company announced the recording of a non-recurring charge of $1.0
million ($0.6 million 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 1998 was 41% compared to 44% in 1997. The provisions
for taxes for the two fiscal years reflect relatively normal relationships
between book income and taxes therein with the exception, in 1997, 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, a full valuation allowance has
been recorded for the tax benefit.
Primarily because of the non recurrence of the other expense charges in 1997, as
described above, net income increased $0.8 million (12%) for 1998 compared to
1997. Lower executive compensation, travel and communication expenses and the
M&K payment of $0.2 million contributed to the increase as well. The impact of
the decline in sales in 1998 versus 1997 substantially reduced the positive
impact of these items.
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. telecommunications 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.
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
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<PAGE>
associated with incremental revenues and higher outlays for professional fees
primarily related to investment banking, financial public relations and
expansion activities.
Dividend and interest income in 1997 increased $0.5 million (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 $1.0 million ($0.9 million 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, provided 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 $0.2 million in final settlement of
a portion of the down payment, which was recorded in other income in the first
quarter of fiscal 1998. On October 6, 1997, the Company announced the recording
of a non-recurring charge of $1.0 million ($0.6 million 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 did not anticipate realizing
sufficient capital gains during the tax carryforward period to offset this
capital loss and, accordingly, a full valuation allowance has been recorded for
the tax benefit.
Net income for 1997 decreased $0.9 million (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 $0.6
million or 7%.
Liquidity and Capital Resources
Working capital at September 30, 1998 increased to $34.9 million from $26.8
million at the prior year end. Current assets increased $0.8 million principally
from an increase in cash partially offset by a decrease in investments -
held-to-maturity and in accounts receivable. Current liabilities decreased $7.4
million primarily as a result of decreases in accounts payable, deferred revenue
and accrued salaries and commissions and other accrued expenses. At September
30, 1998, the ratio of long-term debt to equity was .06 to 1.
For the fiscal year ended September 30, 1998, cash generated by operations
decreased $3.8 million over such amounts generated in 1997. The decrease was
primarily attributable to a decrease in adjustments to net income and changes to
operating assets and liabilities of $4.7 million offset by an increase in net
income of $0.9 million. The decrease in adjustments to net income and changes in
operating assets was primarily the result of a decrease in accounts payable and
accrued expenses of $5.1 million, increases in prepaid expenses and other
current assets of $0.5 million, accounts receivable and security deposits of
$0.2 million each partially offset by increases in income taxes payable of $0.6
million and adjustments to net income of $0.9 million. The $0.9 million included
increases in deferred income taxes of $0.5 million, deferred compensation of
$0.3 million and depreciation of $0.1 million.
During the current fiscal year, funds used by financing activities increased
$0.9 million, primarily as a result of reduced funds from the exercise of stock
options of $0.5 million combined with increased repayments of debt of $0.3
million and dividend payments of $0.1 million.
11
<PAGE>
Cash provided by investing activities increased $7.1 million over the prior
year. This increase was primarily attributed to a maturing of investments of
$7.0 million and a reduction in additions to property and equipment of $0.1
million.
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 million. Under such purchase agreement, the Company will pay $1
million on January 1, 1999 bringing the total payments to that date to $6.7
million. As outlined in Note 2 to the accompanying consolidated financial
statements, the present value of the remaining obligation of $6.1 million, at
September 30, 1995 was recorded at that time resulting in an increase in
goodwill at that date of $4.5 million.
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 1999 fiscal year, including the payment to former CRI
shareholders due January 1, 1999.
Recently Issued Accounting Standards
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 is planning to adopt the provisions of SFAS No. 131 for
its fiscal year beginning October 1, 1998 but has not yet fully determined what
additional disclosures may be required to complete its implementation.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires that an entity recognize all derivatives as either an asset or
liability and measure those instruments at fair value, as well as identify the
conditions for which a derivative may be specifically designed as a hedge. The
Company does not have any derivative instruments.
Year 2000 Issues
Certain of the Company's operational computer programs use two digits to
identify a year in the date field which does not consider the impact, if any, of
the upcoming change in the century. Since internal personnel are being utilized,
the Company anticipates, at a cost not material to its business, results of
operations or financial condition, the timely completion of any programming
needed to address this issue and result in successful computer processing in the
year 2000 and beyond. Expenditures for equipment is currently estimated as not
exceeding $250,000, primarily for upgrading and replacing personal computers and
related software. The current program anticipates completion of this process by
June, 1999.
The Company has not, however, fully completed its review of the Year 2000
issues, particularly, but not limited to, non-operational computer programs and
third party vendor and customer issues. The Company is in the process of
completing that review.
12
<PAGE>
Management cannot provide assurance that the result of its Year 2000 compliance
efforts or the cost of such efforts will not differ materially from estimates.
Accordingly, business continuity and contingency plans are currently being
developed to address high risk areas as they are identified.
The above discussion contains statements that are "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995. Although the
Company believes that its estimates are based on reasonable assumptions, there
can be no assurance that actual results will not differ materially from these
estimates.
13
<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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended September 30, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Parsippany, NJ
November 3, 1998
(December 17, 1998, as to Note 18)
14
<PAGE>
<TABLE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Years Ended September 30, 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales ............................. $ 94,209,365 $ 100,627,292 $ 95,570,436
Cost of sales ......................... 65,973,405 69,383,846 66,120,153
------------- ------------- -------------
Gross profit .......................... 28,235,960 31,243,446 29,450,283
Selling and administrative expenses ... 16,533,318 17,905,852 16,678,548
Other (income) expense:
Dividend and interest income ....... (1,631,706) (1,442,707) (990,108)
Interest expense ................... 332,874 443,642 437,198
Other (income) expense ............. (210,000) 1,914,000 --
------------- ------------- -------------
Income before income taxes ............ 13,211,474 12,422,659 13,324,645
Provision for income taxes ............ 5,376,000 5,436,000 5,487,000
------------- ------------- -------------
Net income ............................ $ 7,835,474 $ 6,986,659 $ 7,837,645
============= ============= =============
Per common and common equivalent share:
Basic earnings ........................ $ 1.63 $ 1.51 $ 1.81
============= ============= =============
Diluted earnings ...................... $ 1.52 $ 1.37 $ 1.53
============= ============= =============
Dividends ............................. $ .15 $ .138 $ .094
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
<TABLE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, 1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 19,702,803 $ 14,619,271
Investments - held-to-maturity .................................................... 11,479,120 14,410,101
Accounts receivable (less allowance for doubtful
accounts: 1998 - $502,000 and 1997 - $496,000) ............................... 22,020,995 23,163,774
Prepaid expenses and other current assets ......................................... 1,623,264 1,460,990
Deferred taxes .................................................................... 295,000 684,000
------------ ------------
Total current assets ............................................................ 55,121,182 54,338,136
------------ ------------
Investments - available-for-sale, net ................................................ -- 123,708
Property and equipment, net .......................................................... 6,452,529 7,093,790
Goodwill (net of accumulated amortization:
1998 - $1,092,553 and 1997 - $806,204) ........................................... 6,994,628 7,280,977
Other assets ......................................................................... 811,022 672,656
------------ ------------
$ 69,379,361 $ 69,509,267
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 13,691,193 $ 14,798,326
Accrued salaries and commissions .................................................. 2,311,796 3,127,141
Other accrued expenses ............................................................ 2,993,400 3,899,876
Income taxes payable .............................................................. 151,210 290,407
Current portion of long-term debt ................................................. 1,026,147 1,087,511
Current portion of capital lease obligations ...................................... -- 211,580
Deferred revenue .................................................................. -- 4,124,699
------------ ------------
Total current liabilities ....................................................... 20,173,746 27,539,540
------------ ------------
Long-term debt, net of current portion ............................................... 2,574,598 3,444,533
Deferred taxes ....................................................................... 107,000 249,000
Deferred compensation ................................................................ 313,922 --
Commitments and contingencies ........................................................
<PAGE>
<CAPTION>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 1997
------------ ------------
<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 1998 - 5,111,899
shares and 1997 - 4,854,847 shares ............................................ 51,119 48,548
Common stock issuable ............................................................. 1,071,532 1,490,431
Additional paid-in capital ........................................................ 10,424,048 8,702,971
Retained earnings ................................................................. 35,368,901 28,245,206
------------ ------------
46,915,600 38,487,156
Less: Treasury stock, at cost, 1998 - 214,663 shares
and 1997 - 187,766 shares ............................................. (705,505) (207,953)
Available-for-sale securities valuation adjustment,
net of deferred income taxes .......................................... -- (3,009)
------------ ------------
Total stockholders' equity ...................................................... 46,210,095 38,276,194
------------ ------------
$ 69,379,361 $ 69,509,267
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE>
<TABLE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Common Stock
$.01 Par Value Common Additional
--------------------------- Stock Paid-in Retained
Balance Shares Amount Issuable Capital Earnings
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
October 1, 1995 ................. 4,347,886 $ 43,479 $ 2,407,521 $ 5,431,455 $ 14,451,854
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 ...................... -- -- -- -- 7,837,645
------------ ------------ ------------ ------------ ------------
September 30, 1996 .............. 4,611,487 46,115 1,945,983 7,223,263 21,887,737
------------ ------------ ------------ ------------ ------------
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 .................. -- -- -- -- (629,190)
Valuation adjustment, net ....... -- -- -- -- --
Tax benefit of exercise of
stock options ................. -- -- -- 400,000 --
Net income ...................... -- -- -- -- 6,986,659
------------ ------------ ------------ ------------ ------------
September 30, 1997 .............. 4,854,847 48,548 1,490,431 8,702,971 28,245,206
------------ ------------ ------------ ------------ ------------
Acquisition of Catalog
Resources, Inc. ...............
Common stock issuable
exchanged for long-term debt .. -- -- (418,899) (87,351) --
Exercise of stock options ....... 249,600 2,496 -- 938,080 --
Stock dividend - converted shares 716 8 -- 494 --
Stock purchased through
Employee Stock Purchase Plan
and employment agreements ..... 6,736 67 -- 89,854 --
Treasury stock acquired ......... -- -- -- -- --
Dividends paid .................. -- -- -- -- (711,779)
Valuation adjustment, net ....... -- -- -- -- --
Tax benefit of exercise of
stock options ................. -- -- -- 780,000 --
Net income ...................... -- -- -- -- 7,835,474
------------ ------------ ------------ ------------ ------------
September 30, 1998 .............. 5,111,899 $ 51,119 $ 1,071,532 $ 10,424,048 $ 35,368,901
============ ============ ============ ============ ============
<PAGE>
<CAPTION>
Treasury Stock - Available-for-
at Cost Sale Securities
-------------------------- Valuation
Balance Shares Amount Adjustment Total
-----------------------------------------------------------
<S> <C> <C> <C> <C>
October 1, 1995 ................. 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)
Valuation adjustment, net ....... -- -- 44,245 44,245
Tax benefit of exercise of
stock options ................. -- -- -- 559,000
Net income ...................... -- -- -- 7,837,645
------------ ------------ ------------ ------------
September 30, 1996 .............. 187,766 (207,953) (34,592) 30,860,553
------------ ------------ ------------ ------------
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)
Valuation adjustment, net ....... -- -- 31,583 31,583
Tax benefit of exercise of
stock options ................. -- -- -- 400,000
Net income ...................... -- -- -- 6,986,659
------------ ------------ ------------ ------------
September 30, 1997 .............. 187,766 (207,953) (3,009) 38,276,194
------------ ------------ ------------ ------------
Acquisition of Catalog
Resources, Inc. ...............
Common stock issuable
exchanged for long-term debt .. -- -- -- (506,250)
Exercise of stock options ....... -- -- -- 940,576
Stock dividend - converted shares -- -- -- 502
Stock purchased through
Employee Stock Purchase Plan
and employment agreements ..... -- -- -- 89,921
Treasury stock acquired ......... 26,897 (497,552) -- (497,552)
Dividends paid .................. -- -- -- (711,779)
Valuation adjustment, net ....... -- -- 3,009 3,009
Tax benefit of exercise of
stock options ................. -- -- -- 780,000
Net income ...................... -- -- -- 7,835,474
------------ ------------ ------------ ------------
September 30, 1998 .............. 214,663 ($ 705,505) $ 0 $ 46,210,095
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Years Ended September 30, 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income ........................................... $ 7,835,474 $ 6,986,659 $ 7,837,645
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 2,610,430 2,504,699 2,321,718
Deferred income taxes ............................ 245,000 (220,600) (21,000)
Provision for doubtful accounts receivable ....... 134,168 119,000 65,000
Deferred compensation ............................ 313,922 -- --
Gain on sale of available-for-sale securities, net -- (474) (1,046)
------------ ------------ ------------
Total adjustments ................................ 3,303,520 2,402,625 2,364,672
Changes in operating assets and liabilities:
Accounts receivable .............................. 1,008,611 1,236,276 (768,131)
Prepaid expenses and other current assets ........ (968,626) (426,921) 295,018
Accounts payable and accrued expenses ............ (2,733,740) 2,366,400 347,847
Income taxes payable ............................. 640,725 74,450 215,635
Deferred revenue ................................. (4,124,699) (4,015,068) 4,525,436
Security deposits ................................ (188,701) 12,893 331,262
Other, net ....................................... 51,851 15,244 29,111
------------ ------------ ------------
Total adjustments and changes .................... (3,011,059) 1,665,899 7,340,850
------------ ------------ ------------
Net cash provided by operating activities ............ 4,824,415 8,652,558 15,178,495
------------ ------------ ------------
Cash flows from financing activities:
Changes in note payable, long-term debt and capital
leases (including current portion):
Borrowings ....................................... -- -- 2,500,000
Repayments ....................................... (1,744,343) (1,448,425) (1,251,888)
Dividends paid ....................................... (711,277) (628,969) (401,507)
Exercise of stock options ............................ 443,024 919,499 1,178,673
Employee Stock Purchase Plan and employment
agreement proceeds ............................... 89,921 106,869 153,978
------------ ------------ ------------
Net cash (used in) provided by financing activities .. (1,922,675) (1,051,026) 2,179,256
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment .................. (1,682,820) (1,762,911) (4,362,085)
Net sales (purchases) of investments ................. 3,864,612 (3,113,332) (9,732,515)
------------ ------------ ------------
Net cash provided by (used in) investing activities .. 2,181,792 (4,876,243) (14,094,600)
------------ ------------ ------------
Cash and cash equivalents:
Net increase in cash and cash equivalents ............ 5,083,532 2,725,289 3,263,151
Cash and cash equivalents at beginning of period ..... 14,619,271 11,893,982 8,630,831
------------ ------------ ------------
Cash and cash equivalents at end of period ........... $ 19,702,803 $ 14,619,271 $ 11,893,982
============ ============ ============
</TABLE>
Continued on next page.
<PAGE>
<TABLE>
LCS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued from previous page.
<CAPTION>
For the Years Ended September 30, 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................... $ 263,000 $ 273,000 $ 219,000
Income taxes .................................. $4,210,000 $5,337,000 $4,261,000
</TABLE>
Supplemental disclosures of non-cash investing
and financing activities:
Valuation adjustment:
For the year ended September 30, 1998, the valuation adjustment account
is no longer required as a result of selling the available-for-sale
securities portfolio to which the valuation adjustment related. For the
years ended September 30, 1997 and 1996, the account was adjusted to
reflect an increase in market values of the available-for-sale securities
portfolio of $31,583 and $44,245, respectively, net of deferred income
taxes.
Stock dividends:
For the years ended September 30, 1998, 1997 and 1996, 716, 318 and 360
shares of the Company's common stock were paid as dividends upon exchange
of 299, 133 and 150 shares, respectively, of the Company's "old" common
stock.
Treasury stock:
For the year ended September 30, 1998, 26,897 shares of the Company's
outstanding Common Stock were received in exchange for options exercised
covering 176,000 shares of Common Stock.
Long-term debt and acquisition of business:
As a result of Amendment No. 2 of the Catalog Resources, Inc. purchase
agreement, (as explained in Note 2 to the Consolidated Financial
Statements), additional long-term debt of $506,250 was recorded, offset
by charges to common stock issuable of $418,899 and additional paid-in
capital of $87,351 during fiscal 1998. For the years ended September 30,
1997 and 1996, $455,552 and $461,538 of common stock issuable was
converted into 38,762 and 34,621 issued shares, respectively, of the
Company's common stock, in accordance with the terms of the Catalog
Resources, Inc. purchase agreement, as amended.
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 fulfillment, list and
computer services and international telecommunications database development and
management. The Company's services are performed within the United States and
Canada except for a computer services contract with a non-U.S.
telecommunications 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
$18,409,000 and $12,931,000 at September 30, 1998 and 1997, 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. Debt
securities are stated at amortized cost. 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. If the sum of the expected undiscounted future cash flows is less
than the carrying amount of the assets, the Company would recognize an
impairment loss. The impairment loss, if determined to be necessary, would be
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. The Company determined that as of September 30, 1998
and 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.
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, 1998, 1997 and 1996 include goodwill amortization of $286,300,
$286,300 and $286,400, 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
20
<PAGE>
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 - Effective October 1, 1997, the Company adopted
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share", issued in March, 1997. Basic earnings per share includes
no dilution and is computed by dividing income available to common shareholders
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 the Company. The prior years' earnings per share
amounts have been restated to reflect the provisions of SFAS No. 128.
The following is the reconciliation of the weighted average shares used in the
computations of basic and dilutive earnings per share:
<TABLE>
<CAPTION>
September 30, 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding
used for basic earnings per share .......... 4,808,274 4,624,702 4,329,663
Weighted average dilutive stock options .......... 259,633 371,985 627,947
Shares issuable in connection with the acquisition
of Catalog Resources, Inc. ................. 89,733 107,151 160,475
--------- --------- ---------
Weighted average common shares outstanding
for dilutive earnings per share ............ 5,157,640 5,103,838 5,118,085
========= ========= =========
</TABLE>
The weighted average shares used in the computations of fiscal years 1998, 1997
and 1996 diluted earnings per share include the shares issuable in accordance
with the agreement, as amended, related to the acquisition of Catalog Resources,
Inc.
K - Disclosure of Accounting Pronouncements - 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 is planning to adopt the provisions of SFAS No. 131 for
its fiscal year beginning October 1, 1998 but has not yet fully determined what
additional disclosures may be required to complete its implementation.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. Generally, it
requires that an entity recognized all derivatives as either an asset or
liability and measure those instruments at fair value, as well as identify the
conditions for which a derivative may be specifically designed as a hedge. The
Company does not have any derivative instruments.
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 with additional payments earned if CRI's
pretax income, as defined
21
<PAGE>
by the agreement, reached certain amounts during the next five years. Of the
initial purchase price, a total of $1,900,000 was paid consisting of $950,000 in
cash and 324,956 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, 50 percent in cash and 50 percent 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.
On December 30, 1997, the Company and former shareholders of Catalog Resources,
Inc. agreed to Amendment No. 2 of the purchase agreement dated April 1, 1993 and
amended August 1, 1994. This Amendment provided for the payment made January 2,
1998 of $1,012,500 to be 100 percent in cash compared to the previously agreed
50 percent in cash and 50 percent in Common Stock of the Company, subject to a
maximum number of shares to be issued of 660,000. Accordingly, the current
portion of long-time debt at December 31, 1997 was increased by $506,250 (50% of
the $1,012,500 payment). This was offset by a reduction in common stock issuable
of $418,899, representing the present value at September 30, 1995 of the
originally anticipated stock issuance, and a charge to additional paid-in
capital of $87,351.
As a result of Amendment No. 2, the parties agreed to reduce the maximum number
of shares issuable under the amended agreement by the shares which would have
been issued on January 2, 1998 based on the provisions of the original
agreement. The revised maximum number of shares issuable is 628,020 of which
538,287 shares have been previously issued.
The common stock issuable amount reflects the maximum number of shares (628,020,
as adjusted for Amendment No. 2 to the purchase agreement, 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, 1998, the January 1, 1999
scheduled payment of $1,012,000 will be paid.
Note 3 - Investments
During the year ended September 30, 1997, the valuation account related to the
available-for-sale marketable securities portfolio was adjusted to reflect an
increase in market values of $31,583, net of deferred taxes. The valuation
account was no longer required in fiscal year 1998 as a result of selling the
available-for-sale securities portfolio to which the valuation account related.
22
<PAGE>
The following table sets forth the components of investments held at September
30, 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Market Unrealized Holding
Held-to-maturity: Cost Value Gain
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government due January 31, 1999 . $ 24,996 $ 25,016 $ 20
Commercial paper-various issues ...... 11,454,124 11,454,124 0
- -------------------------------------------------------------------------------------
Total ................................ $11,479,120 $11,479,140 $ 20
- -------------------------------------------------------------------------------------
</TABLE>
During the year ended September 30, 1998, proceeds from redemptions of
investments were $36,731,307. The Company uses specific identification for
securities sold.
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.
23
<PAGE>
Note 4 - Allowance for Doubtful Accounts
Activity in the Allowance for Doubtful Accounts for the three years ended
September 30, 1998 includes:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year ......... $ 496,000 $ 627,000 $ 624,000
Additions - charged to expense ....... 134,000 119,000 65,000
Deductions ........................... (128,000) (250,000) (62,000)
- --------------------------------------------------------------------------------
Balance at end of year ............... $ 502,000 $ 496,000 $ 627,000
- --------------------------------------------------------------------------------
</TABLE>
Note 5 - Property and Equipment
The components of property and equipment include:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures ............................. $ 3,267,647 $ 3,094,284
Leasehold improvements ............................. 2,231,127 2,207,228
Computer equipment ................................. 8,216,147 7,508,056
Computer equipment under capital leases ............ 1,915,567 1,915,567
Other equipment .................................... 4,984,534 4,228,200
- --------------------------------------------------------------------------------
20,615,022 18,953,335
Less: Accumulated depreciation and amortization ... 14,162,493 11,859,545
- --------------------------------------------------------------------------------
$ 6,452,529 $ 7,093,790
- --------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization charged to operations was approximately
$2,324,000, $2,218,000, and $2,035,000 for 1998, 1997 and 1996, respectively.
Note 6 - Unsecured Line of Credit
A bank holds available, until March 31, 1999, a $5,000,000 unsecured bank line
of credit. The line of credit has been renewed annually. During fiscal years
1998 and 1997, the available line of credit was not used.
<PAGE>
Note 7 - Long-Term Debt
Long-term debt consists of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
September 30, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Payable to former shareholders of CRI ...................$2,176,260 $2,499,945
Notes payable to banks .................................. 1,424,485 2,032,099
- --------------------------------------------------------------------------------
3,600,745 4,532,044
Less: Current portion ................................... 1,026,147 1,087,511
- --------------------------------------------------------------------------------
$2,574,598 $3,444,533
- --------------------------------------------------------------------------------
</TABLE>
See Note 2 for a description of the amounts due to the former shareholders of
CRI.
24
<PAGE>
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,
1998. 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, 1998 of $1,631,812. 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:
- --------------------------------------------------------------------------------
Fiscal Year Ended
September 30, Amount
- --------------------------------------------------------------------------------
1999 $ 1,026,147
2000 1,018,464
2001 767,215
2002 788,919
- --------------------------------------------------------------------------------
Total long-term debt $ 3,600,745
- --------------------------------------------------------------------------------
Note 8 - Provision for Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year Ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal ................................... $ 3,994,000 $ 4,413,000 $ 4,292,000
State ..................................... 1,137,000 1,244,000 1,216,000
- --------------------------------------------------------------------------------------------
Total provision for current income taxes 5,131,000 5,657,000 5,508,000
- --------------------------------------------------------------------------------------------
Deferred
Federal ................................... 175,000 (179,000) (22,000)
State ..................................... 70,000 (42,000) 1,000
- --------------------------------------------------------------------------------------------
Total provision for deferred income taxes 245,000 (221,000) (21,000)
- --------------------------------------------------------------------------------------------
Total provision for income taxes ........ $ 5,376,000 $ 5,436,000 $ 5,487,000
- --------------------------------------------------------------------------------------------
</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, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate ................ $ 4,524,000 $ 4,248,000 $ 4,564,000
State income taxes - net of federal tax benefit ..... 794,000 740,000 791,000
Non-deductible expenses ............................. 145,000 149,000 148,000
Non-taxable income .................................. (1,000) (5,000) (16,000)
Valuation allowance against capital loss carryforward (86,000) 298,000 --
Other ............................................... -- 6,000 --
- -------------------------------------------------------------------------------------------------
Total provision for income taxes ............ $ 5,376,000 $ 5,436,000 $ 5,487,000
- -------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
The components of deferred income tax assets and liabilities include:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net Current Net Non-current Net Current Net Non-current
Asset Liability Asset Liability
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property and equipment ............................. $ -- $ 235,000 $ -- $ 251,000
Allowance for doubtful accounts .................... 205,000 -- 201,000 --
Non-deductible expenses ............................ -- -- 392,000 --
Unrealized holding loss on
marketable securities ........................ -- -- -- (2,000)
Vacation accrual ................................... 90,000 -- 91,000 --
Deferred compensation .............................. -- (128,000) -- --
Capital loss carryforward .......................... 212,000 -- 298,000 --
Valuation allowance against capital
loss carryforward ............................ (212,000) -- (298,000) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total ...................................... $ 295,000 $ 107,000 $ 684,000 $ 249,000
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
The 1996 non-qualified Non-Employee Directors Stock Option Plan ("1996 Plan"),
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,
1998, 8,800 of these shares were exercisable. No options were granted for fiscal
years 1998 and 1997. The 1993 non-qualified Non-Employee Directors Stock Option
Plan ("1993 Plan") was terminated when the 1996 Plan was approved. The 1993 Plan
has 11,600 options which remain outstanding at prices of $3.53-$16.00. At
September 30, 1998, 7,400 shares were exercisable at prices of $3.53-$16.00.
There was no other activity in this plan during fiscal years 1998 and 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, 1998,
46,000 options were exercisable. During the current year, no options were
exercised and no options were cancelled.
During the year ended September 30, 1995, certain officers of the Company were
issued non-qualified options to purchase 75,000 shares of the Company's common
stock at a price of $5.75 per share (100 percent of fair market value). During
fiscal year 1998, options to purchase 50,000 shares were exercised.
26
<PAGE>
The following schedule sets forth the activity under the 1983 Incentive Stock
Option Plan for the years ended September 30, 1998, 1997 and 1996. Granting of
options under this plan ceased in May, 1994.
- --------------------------------------------------------------------------------
Incentive options Number Option Price
- --------------------------------------------------------------------------------
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
Exercised (136,400) $1.25 - $ 2.69
- --------------------------------------------------------------------------------
Outstanding September 30, 1998 88,000 $ 2.61
- --------------------------------------------------------------------------------
Exercisable September 30, 1998 88,000 $ 2.61
- --------------------------------------------------------------------------------
The following schedule sets forth the activity of the 1993 Incentive Stock
Option Plan for the years ended September 30, 1998, 1997 and 1996.
- --------------------------------------------------------------------------------
Incentive options Number Option Price
- --------------------------------------------------------------------------------
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
Granted 159,200 $14.00 - $14.63
Exercised (63,200) $ 2.96 - $15.50
Expired or Cancelled (215,500) $ 2.96 - $16.85
- --------------------------------------------------------------------------------
Outstanding September 30, 1998 464,450 $ 2.96 - $16.85
- --------------------------------------------------------------------------------
Exercisable September 30, 1998 195,725 $ 2.96 - $16.85
- --------------------------------------------------------------------------------
Available for grant September 30, 1998 1,602,146
- --------------------------------------------------------------------------------
27
<PAGE>
The following schedule sets forth the status of the incentive stock options
outstanding and exercisable at September 30, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-Average
- ------------------------------------------------------------------------------------------------------------------------------------
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
$2.61 88,000 4.5 $ 2.61 88,000 $ 2.61
1993 Incentive Plan
$2.96 to $5.50 62,650 6.1 3.84 50,150 3.79
$12.75 to $16.85 401,800 8.2 14.49 145,575 15.19
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1993 Plan 464,450 195,725
- ------------------------------------------------------------------------------------------------------------------------------------
Total Plans 552,450 283,725
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1998 1997 1996
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Net income - as reported $ 7,835,474 $ 6,986,659 $ 7,837,645
Net income - pro forma 7,548,105 6,751,871 7,726,185
Diluted earnings per share - as reported 1.52 1.37 1.53
Diluted earnings per share - pro forma 1.46 1.32 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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield - 1.10% .80% .80%
Expected stock volatility - 48.83% 59.65% 59.65%
Risk free interest rates - 4.61-4.66% 5.86-6.13% 5.84-5.93%
Expected life of options - 7 Years 5-10 years 5-7 years
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of the effect on future amounts.
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.
28
<PAGE>
Note 10 - 1994 Employee Stock Purchase Plan and Employment Agreements
At the annual meeting of stockholders in March, 1994, the 1994 Employee Stock
Purchase Plan (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 percent to 10 percent of eligible
compensation. Shares are offered at a 15 percent 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, 1998, 1997 and 1996, shares purchased totaled 6,341, 6,892 and
9,968, respectively.
Employment agreements with current and former officers of a subsidiary include
the provision for the quarterly purchase of the Company's common stock to the
extent of 5 percent 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 1998, 1997 and 1996, a total of 395, 1,713 and 1,749 shares,
respectively, were purchased under these agreements. Effective December 31,
1997, the election for future purchases was terminated by the remaining
participant.
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, 1998, 1997 and 1996.
The Company matches employees' contributions to a maximum of 25 percent of the
employee's first 6 percent contributed. The Company's matching contributions
were temporarily increased to 35 percent of eligible employee contributions in
fiscal years 1998, 1997 and 1996, during the period of January 1 to June 30.
Matching contributions charged to expense were $233,000, $189,000 and $196,000
for the fiscal years ended September 30, 1998, 1997 and 1996, respectively.
Note 12 - Non-Qualified Deferred Compensation Plans
During the current fiscal year, the Company established Plans providing senior
and other executives of the Company and its subsidiaries the opportunity to
participate in unfunded deferred compensation programs.
The Executive Non-Qualified Deferred Compensation Plan provides senior officers
retirement benefits through the deferring of compensation, as defined, on a
pre-tax basis to a maximum of $30,000 per year. The Company provides a 30
percent matching contribution of the amounts deferred. Participants fully vest
in the Company's matching contributions and related earnings/losses after three
years of service with the Company.
The Management Non-Qualified Deferred Compensation Plan provides certain
management employees retirement benefits through the deferring of compensation,
as defined, on a pre-tax basis to a maximum of $10,000 per year. The Company
provides a 20 percent matching contribution of the amounts deferred.
Participants fully vest in the Company's matching contribution and related
earnings/losses after five years of participation in the plan or attaining age
62.
The Plans are not qualified under Section 401 of the Internal Revenue Code and,
therefore, the participants are general creditors of the Company with respect to
these benefits. The Company has established irrevocable rabbi trusts to assist
in funding the Plan's benefits. Trust investments are recorded as assets of the
Company with the related earnings/losses passed on to the Plan participants.
Deferred compensation expense for the year, represented by the Company matching
contributions and net earnings/losses, was $77,000.
29
<PAGE>
Note 13 - Operating Lease Commitments
The Company and its subsidiaries lease certain properties, equipment and
software under noncancellable long-term operating leases, 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:
- --------------------------------------------------------------------------------
Fiscal Year Operating Leases
- --------------------------------------------------------------------------------
1999 $ 2,309,000
2000 1,594,000
2001 1,224,000
2002 1,204,000
2003 1,141,000
Thereafter 1,409,000
- --------------------------------------------------------------------------------
Total $8,881,000
- --------------------------------------------------------------------------------
Real estate, equipment and software operating lease costs include:
- --------------------------------------------------------------------------------
Year Ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------
Real estate $2,634,000 $2,535,000 $2,324,000
Equipment and software 719,000 740,000 788,000
- --------------------------------------------------------------------------------
Total $3,353,000 $3,275,000 $3,112,000
- --------------------------------------------------------------------------------
Note 14 - Other (Income) Expense
In June, 1997, the Company recorded a loss on investment of $954,000 ($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 diluted share. 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, provided 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 was 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 diluted 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 15 - 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:
30
<PAGE>
- --------------------------------------------------------------------------------
September 30, 1998 1997
- --------------------------------------------------------------------------------
Carrying value $1,424,000 $2,032,000
Fair value 1,439,000 2,037,000
- --------------------------------------------------------------------------------
Note 16 - 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.
The Company has entered into agreements with certain of its key management
employees providing for payments totalling $385,000 if there is a change in
control transaction signed by the Company.
At September 30, 1998, 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 $1,175,000. One of the agreements provides for a bonus based on
the results of the respective subsidiary's operations. Certain of the agreements
provide for severance payments equal to six months salary.
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 17 - Major Customers
For the years ended September 30, 1998, 1997 and 1996, revenues recognized under
the contract to provide computer services to a non-U.S. telecommunications
company amounted to 12 percent, 15 percent and 14 percent, respectively, of
consolidated sales.
Note 18 - Subsequent Event
On December 17, 1998, the Company and CustomerONE Holding Corporation, a
subsidiary of Onex Corporation announced that they have entered into a
definitive merger agreement pursuant to which CustomerONE will acquire all of
the outstanding shares of LCS common stock at a price of $17.50 per share in
cash, representing an aggregate transaction value of approximately $97.3
million. Onex Corporation is a diversified company with 1997 consolidated
revenues of $11 billion Canadian and consolidated assets of $6.4 billion
Canadian.
Pursuant to the merger agreement, CustomerONE will make a cash tender offer for
all of the outstanding common shares of LCS common stock. The tender offer is
expected to commence the week of December 21. Consummation of the tender offer
is subject to U.S. antitrust regulatory clearance and other customary closing
conditions.
The tender offer is not subject to financing. Onex has agreed to provide
CustomerONE with all necessary funds to effect the tender offer and merger.
The Board of Directors of LCS has unanimously approved the merger and has
recommended that LCS stockholders accept the tender offer and approve and adopt
the merger agreement.
31
<PAGE>
* * * * * *
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
32
<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 1999 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, 1998, 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................. 56 Chief Executive Officer - 1998
President, Chief Operating Officer and Director - 1997
President-Fulfillment Services - 1994
Marvin Cohen................ 64 Senior Vice President and Secretary-1981
Director-1969
Pat R. Frustaci.............. 44 Vice President - Finance, Chief Financial Officer,
Treasurer and Assistant Secretary - 1995
James E. Quinlan......... 60 Controller-1988
Lon Mandel................... 43 President and Chief Operating Officer - The SpeciaLISTS,
Ltd. - 1987
</TABLE>
All executive officers of the Company and other significant employees,
other than 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. Mr. Frustaci was Vice President and Chief Financial Officer for
Image Business Systems, Inc. during 1994.
Based solely upon a review of Forms 3 and 4 and amendments thereto,
furnished to the Company pursuant to Rule 16a-3(e) during its fiscal year ended
September 30, 1998, 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.
33
<PAGE>
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.
34
<PAGE>
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)1. Financial Statements Page No.
-------------------- --------
Independent Auditors' Opinion....... 14
Consolidated Statements of Income
for the Years Ended September 30,
1998, 1997 and 1996................. 15
Consolidated Balance Sheets as
of September 30, 1998 and 1997...... 16
Consolidated Statements of Changes
in Stockholders' Equity for the
Years Ended September 30, 1998,
1997 and 1996...................... 17
Consolidated Statements of Cash Flows
for the Years Ended September 30,
1998, 1997 and 1996................. 18
Notes to Consolidated Financial Statements 20
(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.
35
<PAGE>
Exhibits
--------
(a) 2.1 Agreement and Plan of Merger by and among
LCS Industries, Inc., CustomerONE Holding
Corporation and Catalog Acquisition Co. dated
as of December 17, 1998 (15)
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 July 10, 1998 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)
36
<PAGE>
10.14 1996 Non-Employee Directors Stock Option Plan (14)
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.
(12) Incorporated by Reference to Exhibit to the
Company's Current Report on Form 8-K dated
September 1, 1995, File No. 0-12329.
37
<PAGE>
(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.
(15) Incorporated by Reference to Exhibit to the
Company's Current Report on Form 8-K dated
December 17, 1998, 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, 1998.
38
<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.
By: /s/William Rella
-------------------------
William Rella
President
Date: December 23, 1998
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 23, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/William Rella President (Principal Executive Officer) and Director
- -----------------------------
William Rella
/s/Pat R. Frustaci Vice President - Finance, Chief Financial Officer,
- ----------------------------- Treasurer and Assistant Secretary (Principal
Pat R. Frustaci Accounting Officer)
/s/Marvin Cohen Senior Vice President, Secretary and Director
- -----------------------------
Marvin Cohen
/s/Joseph R. Barbaro Director
- -----------------------------
Joseph R. Barbaro
/s/Bernard Ouziel Director
- -----------------------------
Bernard Ouziel
</TABLE>
39
<PAGE>
LCS INDUSTRIES, INC.
Commission File No. 0-12329
-------
Annual Report on Form 10-K
for the
Fiscal Year Ended September 30, 1998
E X H I B I T S
40
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
10.5 The Bank of New York letter dated
July 10, 1998 related to the
holding available of a line of credit
22 List of Subsidiaries
23 Consent of Deloitte & Touche LLP
41
EXHIBIT 10.5
(THE BANK OF NEW YORK, NA)
National Community Division
July 10, 1998
LCS Industries, Inc.
120 Brighton Road
Clifton, NJ 07012-1694
Attn: Pat R. Frustaci
Vice President-Finance and Treasurer
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. (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.
Unless cancelled earlier as provided in the first sentence of this paragraph,
this line of credit shall be held available until March 31, 1999. 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
Title: Vice President
SUBSIDIARIES OF LCS INDUSTRIES, INC.
Set forth below are the names of all subsidiaries of LCS as of December
1, 1998 required to be listed on Exhibit 22 to LCS's 1998 Annual Report on Form
10-K. Indented companies are direct subsidiaries of the company under which they
are indented.
Percentage Owned by State of
Immediate Parent Incorporation
---------------- -------------
LCS INDUSTRIES, INC.
(Parent) N/A Delaware
LCS Canada, Inc. 100% Delaware
LCS Industries, Ltd. 100% Delaware
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 3, 1997 (December 17, 1998 as to Note 18) appearing in
this Annual Report on Form 10-K of LCS Industries, Inc. for the year ended
September 30, 1998.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Parsippany, New Jersey
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,702,803
<SECURITIES> 11,479,120
<RECEIVABLES> 22,522,995
<ALLOWANCES> 502,000
<INVENTORY> 180,589
<CURRENT-ASSETS> 55,121,182
<PP&E> 20,615,022
<DEPRECIATION> 14,162,493
<TOTAL-ASSETS> 69,379,361
<CURRENT-LIABILITIES> 20,173,746
<BONDS> 0
0
0
<COMMON> 51,119
<OTHER-SE> 46,158,976
<TOTAL-LIABILITY-AND-EQUITY> 69,379,361
<SALES> 0
<TOTAL-REVENUES> 94,209,365
<CGS> 0
<TOTAL-COSTS> 65,973,405
<OTHER-EXPENSES> 16,533,318
<LOSS-PROVISION> 134,168
<INTEREST-EXPENSE> 332,874
<INCOME-PRETAX> 13,211,474
<INCOME-TAX> 5,376,000
<INCOME-CONTINUING> 7,835,474
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,835,474
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.52
</TABLE>
