-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TaQyOIgqxcdFPmJMbXbl1yKn/Oxv8ZD+XIrkUuT1S8ambKVHVtnKAV5+7iiAjwOK lFIolzlXn5ZkSEt7iF0HSg== 0000914317-96-000460.txt : 19961227 0000914317-96-000460.hdr.sgml : 19961227 ACCESSION NUMBER: 0000914317-96-000460 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961226 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LCS INDUSTRIES INC CENTRAL INDEX KEY: 0000058151 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DIRECT MAIL ADVERTISING SERVICES [7331] IRS NUMBER: 132648333 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12329 FILM NUMBER: 96686060 BUSINESS ADDRESS: STREET 1: 120 BRIGHTON RD CITY: CLIFTON STATE: NJ ZIP: 07012 BUSINESS PHONE: 2017785588 MAIL ADDRESS: STREET 1: 120 BRIGHTON RD STREET 2: 120 BRIGHTON RD CITY: CLIFTON STATE: NJ ZIP: 07012-1694 FORMER COMPANY: FORMER CONFORMED NAME: LISTFAX COMPUTER SERVICES INC DATE OF NAME CHANGE: 19711013 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended September 30, 1996 Commission File No. 0-12329 LCS INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 13-2648333 (State of incorporation) (I.R.S. employer identification number) 120 Brighton Road Clifton, New Jersey 07012 (Address of principal executive offices) (zip code) Registrant's telephone number: (201) 778-5588 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.01 par value) (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the registrant, based on the average of high and low sales prices for November 29, 1996: $45,424,002. The number of shares of Common Stock ($.01 par value) outstanding as of November 29, 1996: 4,603,206. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement in respect of the 1997 Annual Meeting of Stockholders is incorporated by reference into Part III hereof to the extent indicated in that Part. The Form 10Q/A-1 dated August 8, 1996 is incorporated by reference into Part IV hereof to the extent indicated in that Part. This Form 10-K consists of 46 pages. Index to exhibits is located at page 37. Part I Item 1. Business. LCS Industries, Inc. ("LCS" or the "Company"), a Delaware corporation, provides outsourced direct marketing services and specializes in fulfillment, list marketing and computer services. LCS was incorporated in November, 1969. Contribution to total sales for the three most recent fiscal years by the type of service described above is as follows:
Fiscal Year Ended September 30, ------------------------------- 1996 1995 1994 ---- ---- ---- Fulfillment services ....................... 37% 39% 30% Computer services .......................... 19% 13% 15% List marketing services .................... 44% 48% 55%
On September 6, 1995, the Company announced that it had entered into an agreement to provide computer services through the building of a marketing database for a major non-U.S. communications company. The total expected revenues through June, 1998 will approximate $40 million, subject to early termination provisions. Revenues and earnings under the contract were recorded during the fourth quarter of the fiscal year ended September 30, 1995. Revenues recognized under the contract amounted to 14% of consolidated sales for the fiscal year ended September 30, 1996. On September 11, 1995, the Company announced that its wholly-owned subsidiary, Catalog Resources, Inc. (CRI), had reached an agreement to continue to provide fulfillment services to a major consumer products corporation. The new agreement provides for approximately $4.4 million in guaranteed revenues over a two year period for base processing levels. Additional revenues will be derived over and above that amount based upon the volume of transactions processed and other services provided. On April 1, 1993, the Company acquired all the outstanding stock of CRI. The initial purchase price was $3,500,000 and, in addition, certain additional payments could have been earned by the former CRI shareholders if CRI's pretax income, as defined, reached certain amounts during the next five years. Of this amount, $1,500,000 was paid at the closing, consisting of $750,000 in cash and 267,378 shares of the Company's common stock and the balance payable in amounts of $400,000 on April 1 of each of the next five years with payments to be 50 percent in cash and 50 percent in stock. On April 1, 1994, $400,000 was paid, consisting of $200,000 in cash and 57,578 shares of the Company's common stock. Effective August 1, 1994, the purchase agreement was amended to limit to $8,100,000 the aggregate amount of additional purchase consideration to be paid in addition to the $1,900,000 paid at such date. The additional amount to be paid is based upon the operating performance of CRI over the eight year period beginning October 1, 1993. Based upon CRI's earnings for each fiscal year ending on September 30, a maximum annual payment of $1,012,500 will be paid in January of the following year, which amount is subject to a dollar for dollar reduction based on operating results. Such payments are calculated separately for each year. Each payment will consist of 50 percent in cash and 50 percent in common stock of the Company with the maximum number of shares to be delivered under the purchase agreement, as amended, not to exceed 660,000 shares. The portion of the above payments not made in stock is payable in cash. The number of shares to be issued will be based on the market value, as defined, of the common stock at the future payment dates. Based on the terms of the amended agreement and the achievement of the required operating results for the preceding fiscal year, payments of $1,012,500, one half in cash and one half in stock, were made on January 1, 1995 and 1996. As of September 30, 1996, 499,525 shares had been delivered under the provisions of the purchase agreement, as amended. As a result of the operating results achieved for the fiscal year ended September 30, 1995, the September, 1995 signing of a two year extension of a contract to provide fulfillment services to a major customer, forecasted operating results for the 1996 fiscal year and the evaluation of anticipated future operating results beyond fiscal 1996, it was considered probable that future CRI earnings levels would be attained which would require the maximum future payments of $6,075,000 to be made. As a result, the present value (interest at 8.75%) of those payments was recorded at September 30, 1995; $2,532,108 as long-term debt and $1,945,983 as common stock issuable, with a corresponding increase in goodwill. The common stock issuable amount reflects the maximum number of shares (660,000 less those shares issued and delivered prior to September 30, 1995) issuable under the terms of the purchase agreement, as amended, based on the market price of the Company's common stock at September 30, 1995. This amount is subject to adjustment, based on the future movements in the market price of the Company's common stock. No adjustment was recorded during the current fiscal year. Based on the operating results for the fiscal year ended September 30, 1996, the January 1, 1997 scheduled payment of $1,012,000 will be paid. The numbers of shares indicated above have been adjusted to give effect to the 10% stock dividend paid in January, 1995 and the 2 for 1 stock split paid as a 100% stock dividend on October 24, 1995. Fulfillment Services Continuity/Order Entry LCS' continuity/order entry services provide computer-based support to the membership activities of book clubs, similar continuity (mail order) clubs and catalog companies. Continuity clubs and catalog companies, a large part of the direct-response industry, make repetitive mailings and periodic product offerings to their members or customers. The LCS system supports these efforts by processing and providing information with regard to orders, shipments, billings, returns and credit criteria, cashiering (receiving and depositing customer payments and related updating of customer files) and providing personnel to respond to inquiries from club members. The Company also provides computer-generated reports which clients use in measuring profitability and in evaluating and controlling marketing efforts. During the current fiscal year, the outbound telemarketing operation has been integrated into the customer service function within continuity fulfillment. Lead/Inquiry Fulfillment Leads and/or inquiries are generated by clients' advertisements which require a mailed or telephoned (to toll-free "800" numbers) customer response. These leads are received by LCS and are computer-processed using its proprietary system which accommodates clients of varying sizes from any industry and with differing volumes of activity. Processing begins by converting the lead into machine-readable form. Then, depending on the criteria supplied by the client, the Company processes the lead in a variety of ways, including the elimination of non-productive leads and the mailing, usually within 24 hours, of fulfillment packages containing the client's literature or product. At the same time, a lead form generated by computer is sent to the client's local sales office, warehouse, branch or retail outlet so that a salesperson can directly contact the prospective customer. Using codes identifying the sources of the lead, the LCS computer system produces reports allowing the client to evaluate the effectiveness of the advertising. In addition, upon return of the lead form containing the client's disposition of the lead, LCS is able to produce reports evaluating the performance of the client's sales force in handling the lead. The system may also be customized in response to unique customer requirements. Catalog Fulfillment CRI provides fulfillment services to the catalog industry. This service encompasses the maintaining of its clients' inventory, receiving its clients' customer orders and payments by mail as well as by dedicated telemarketing personnel via toll-free "800" numbers which are open twenty-four hours a day, year-round, and the subsequent shipping of the merchandise. Orders received are entered into CRI's computer system with appropriate validations being performed prior to processing. This includes receiving payment, whether in the form of check, money order or credit card. The CRI system includes various features which are intended to minimize credit losses to its clients. The order is then picked, packed and shipped. CRI also handles inventory returns for its clients as well as providing dedicated customer service representatives to handle customer inquiries, complaints, etc. Various reports are developed and provided to CRI's clients to enable them to properly analyze their marketing efforts. Computer Services Direct-response marketing consists of selective and analytical methods of reaching a specific audience for the sale of clients' goods and services. These methods, applied singly or in combination, can accurately determine the most responsive audience for a particular direct marketing effort. The Company's computer systems tabulate, store and process this information for future use by clients, resulting in the more efficient and cost-effective use of their sales and advertising budgets. Communications Database Development The Company is also involved in the design, development and implementation of marketing databases for communications companies both within and outside the United States. This entails conversion of raw data on customer billings and control data into marketing tools, the objective being retention of customer base, increasing market share or win back of previously lost market share. List Maintenance List maintenance involves the processing, updating and storing of mailing lists and other demographic information on the Company's computers for clients' promotional and list rental activities. Mailing lists may be combined and enhanced with demographic information to form databases, which can be used as the basis of additional client promotions or marketed to other list users (see "Enhancement" below). The Company maintains lists and databases for its clients who use them for marketing their own products and services as well as for rental to other marketers. The lists and databases maintained by LCS presently range in size from several thousand to approximately four million names. Certain clients have on-line access to lists and databases maintained for them by LCS. Each list or database may be used to produce a variety of end-use formats, such as labels, listings, index cards, computer letters and magnetic tapes, cartridges or disks. Demographic information can be customized for the client and used as the selection criteria for a list or database rental. In addition, lists can be presorted for maximum postal cost efficiencies. "Fastfax," the Company's proprietary list fulfillment order processing system, provides clients with on-line database list segment counting and order selection capabilities using their own personal computer terminals. List orders entered using this system can be fulfilled within 24-48 hours after authorization. Merge/Purge Merge/purge is a computerized system which recognizes and eliminates duplicate names when combining large numbers of lists or databases for mailing programs. It can also be used to identify names with high response potential by identifying duplications between lists with similar demographics. Identification of these multiple prospects enables the direct-response client to plan marketing strategy, including follow-up promotions. Because clients may wish to target a promotion to a highly segmented audience, merge/purge can be applied to attributes (such as location or gender) in addition to names in a number of lists and databases and, based upon the clients' criteria, can generate refined lists identifying the target audience. LCS' software can also remove (suppress) the names of persons who the client deems inappropriate or who have a low probability of ordering based on past experience. Enhancement Enhancement is the overlay of demographic information to computer lists and databases to facilitate targeted mailing programs, sometimes in combination with the list maintenance and merge/purge services. This information added by LCS can include profiles of time in present residence, dwelling unit size, occupation, income estimate, age, gender, presence and number of children, telephone number and other information. The Company has been selected by the U.S. Postal Service as one of 24 licensees for its National Change of Address System. As part of this program to reduce the return rate of domestic mail, the Postal Service is furnishing licensees every two weeks with changes of address on all recent U.S. business and household moves. Utilizing this data, LCS is able to offer its clients the ability to enhance existing lists to reflect the Postal Service's most current change of address information, thereby increasing the cost-effectiveness of mailings using such updated lists. Computer Personalization Computer personalization is the use of computerized lists to personalize mass mailings of various forms including labels, computer letters, complex insurance applications and many other forms. The Company subcontracts this process. List Marketing Services The Company, through its consolidated subsidiary The SpeciaLISTS Ltd., provides consumer list marketing services. These services include: -- List brokerage -- the recommendation of lists or segments of lists for specific mailing campaigns and the securing of names from various list owners for mailings. The Company consults with clients to determine the best direct-mail strategy and optimal targeted markets. -- List management -- rental and promotion of proprietary and client-owned lists for direct-mail promotions. -- List compilation -- creation of proprietary lists drawn from numerous sources, such as directories and attendance rosters. Marketing The Company currently markets its products and services throughout the United States using in-house sales expertise. Leads are generated by personal calls, print advertising in trade media, referrals, industry meetings and trade shows and seminars. LCS uses its own direct-response and fulfillment services to generate leads, support sales and facilitate follow-up. The generally close working relationship between LCS and its clients offers opportunities for the sale of additional related services. The Company makes a practice of identifying and designing services to meet special needs of clients. The sales staff is compensated by salary plus commissions or bonuses. Although, during fiscal 1996, revenues recognized in connection with the contract to provide computer services to a non-U.S. communications company amounted to 14% of consolidated sales, management does not believe that the loss of any single customer would have a severe impact (as defined in Statement of Position 94-6 "Disclosure of Certain Significant Risks and Uncertainties" issued by the American Institute of Certified Public Accountants in December, 1994) on the Company and its subsidiaries taken as a whole. This contract contributes significantly to the profits of the Company. Historically, the Company has been successful in replacing completed contracts. While the current contract extends through June, 1998, subject to early termination, there is no assurance that a replacement project will be obtained. Customer Trade Terms As the Company is in a service business, a large proportion of its consolidated current assets and a significant portion of its consolidated total assets are represented by trade accounts receivable. Invoices for service to clients of the Company and its subsidiaries are customarily rendered monthly for recurring matters and at the completion of special projects. For financial statement purposes, revenues and related costs are recognized when services are performed. Revenues under long-term consulting contracts are recognized on the percentage-of-completion method of accounting measured by the percentage of labor hours incurred to date to the estimated total labor hours required for each contract. In the case of approximately 36% of the consolidated trade accounts receivable of the Company and its subsidiaries as of September 30, 1996, various payment terms exist ranging from payable upon receipt of invoice to 60 days from date of invoice, and in the case of substantially all of the balance (primarily those of SpeciaLISTS), payment terms are 60 days after the client's mailing date. Management believes that the consolidated trade accounts receivable of the Company and its subsidiaries as of September 30, 1996, net of the allowance for doubtful accounts reflected on the consolidated balance sheet as at such date included in the Consolidated Financial Statements, are collectable in the ordinary course of business. Product Protection and Proprietary Rights LCS uses several methods to ensure the protection of confidential client data and its proprietary systems. The Company's computer tapes, cartridges and disks are accessible only to authorized personnel. LCS protects on-line access to data by restricting access to on-line terminals and by utilizing a periodically changing, segmented password system. To enhance safety in case of fire or other natural disasters, duplicate tapes containing client data are stored at an off-site location. The Company considers certain of its software to be proprietary. It currently relies upon trade secret laws and internal non-disclosure agreements to protect the software. LCS has no patents or copyrights. In management's opinion, no such patent or copyright protection is customary or necessary. Competition The segment of the computer services industry that serves the direct-response marketing industry is highly competitive. Competition is related primarily to technical capability and expertise, pricing, quality of work and ability to meet deadlines and is not confined to specific geographic areas. The industry in which LCS operates is subject to rapid client marketing changes requiring constant adaptation to provide competitive services. Reliable data on LCS's relative position in its market is not available. The Company competes not only with other independent specialized computer service companies but also with in-house computer service departments of companies in the direct-response marketing industry. Some of the companies with which LCS competes have access to substantially greater financial and other resources and offer a wider range of non-computer services than the Company. Employees As of November 29, 1996, the Company employed 1,630 persons, of whom 872 were employed on a full-time basis. LCS does not have any collective bargaining agreements with its employees and believes its relations with its employees to be good. Item 2. Properties. The Company and its subsidiaries lease or sublease facilities at the locations and under leases or subleases summarized as follows and in Note 12 of Notes to Consolidated Financial Statements:
Square Expiration Location Feet Date -------- ---- ---- 120 Brighton Road, Clifton, NJ (1) ........ 78,645 Sept. 2000 1200 Harbor Blvd., Weehawken, NJ (2) ...... 18,100 June 2003 100 Enterprise Place, Dover, DE (1)(5) .... 55,000 Month to Month 97 Commerce Way, Dover, DE (1) ............ 124,000 Oct. 2005 155 Commerce Way, Dover, DE (1) (3) ....... 35,530 July 1999 2 McKee Road, Dover, DE (4) ............... 29,000 Month to Month 155 Commerce Way, Dover, DE (4) ........... 56,762 April 1999 ------- TOTAL 397,037 (1) Office, warehouse, production (2) Office (3) Five year renewal option available (4) Warehouse (5) Sublease
Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders. None. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Quarterly Stock Price Information The Company's common stock is traded on the Nasdaq National Market tier of The Nasdaq Stock Market(SM) under the symbol LCSI.The following table sets forth the quarterly high and low sales prices of the common stock, as quoted on Nasdaq. Such quotations represent prices between dealers and do not include retail mark-ups, mark-downs or commissions. In the first quarter of fiscal 1993, an initial cash dividend of $.10 per share was paid. Regular quarterly dividends of $.025 share were paid from the second quarter of fiscal 1993 through the first quarter of fiscal 1995 and $.0375 per share were paid through the first quarter of fiscal 1996. Commencing in the second quarter of fiscal 1996, subsequent to the 2 for 1 stock split paid as a 100% stock dividend on October 24, 1995, regular quarterly dividends of $.025 were paid. As of December 2, 1996, there were 144 registered holders and an estimated 2,800 beneficial holders of record of the Company's common stock.
Fiscal Year Ended Fiscal Year Ended September 30, 1996 September 30, 1995 ------------------ ------------------ Price Price High Low High Low ---- --- ---- --- 1st Quarter................... $ 19 3/4 $ 13 $ 4 1/4 $ 3 3/8 2nd Quarter................... 28 12 3/8 6 3/8 3 7/8 3rd Quarter................... 27 10 1/4 12 1/8 5 1/4 4th Quarter................... 15 3/4 9 1/2 16 1/2 10 3/8
The prices above, for 1995, reflect retroactively the 2 for 1 stock split paid as a 100% stock dividend on October 24, 1995. Item 6. Selected Financial Data.
Five Year Review Income Statement Data (In thousands, except per share amounts) Years Ended September 30, 1996 1995 1994 1993 1992 - ------------------------- ---- ---- ---- ---- ---- Sales ....................................... $ 95,570 $ 78,863 $ 62,690 $ 53,002 $ 46,786 Cost of sales ............................... 66,120 54,717 46,986 39,433 34,130 Gross profit ................................ 29,450 24,146 15,704 13,569 12,656 Selling and administrative expenses ......... 16,679 13,653 13,270 12,094 10,491 Dividend and interest (income) expense, net . (553) (167) 65 (3) (125) Other expense ............................... -- -- -- 385 -- Income before income taxes .................. 13,324 10,660 2,369 1,093 2,290 Net income .................................. 7,838 6,329 1,375 626 1,326 Per common and common equivalent share (Note) Primary earnings ............................ 1.53 1.33 .32 .16 .37 Weighted average number of shares outstanding 5,118 4,755 4,306 3,841 3,560 Fully diluted earnings ...................... 1.53 1.25 .32 .16 .37 Weighted average number of shares outstanding 5,125 5,050 4,307 3,847 3,560 Dividends per share ......................... .094 .066 .045 .08 -- Note - 1995 and prior years have been retroactively restated to reflect the 10% stock dividend paid in January, 1995 and the 2 for 1 stock split paid as a 100% stock dividend on October 24, 1995. Balance Sheet Data (In thousands) September 30, 1995 1994 1993 1992 1991 - ------------- ---- ---- ---- ---- ---- Working capital ................ $19,359 $10,569 $ 4,673 $ 3,460 $ 6,351 Total assets ................... 64,970 49,737 31,815 28,983 20,708 Long-term debt and capital lease obligations - net of current portion ......... 4,583 3,436 1,805 1,983 411 Stockholders' equity ........... 30,861 22,048 12,865 11,339 9,410
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations The following table sets forth, for the periods indicated, the percentage of sales represented by data derived from the Company's Consolidated Statements of Income:
Year Ended September 30, 1996 1995 1994 - ------------------------ ---- ---- ---- Sales .......................................... 100.0% 100.0% 100.0% Cost of sales .................................. 69.2 69.4 74.9 ----- ----- ----- Gross profit ................................... 30.8 30.6 25.1 Selling and administrative ..................... 17.4 17.3 21.2 Dividend and interest (income) expense, net .... (.6) (.2) .1 ----- ----- ----- Income before income taxes ..................... 14.0 13. 5 3.8 Provision for income taxes ..................... 5.8 5.5 1.6 ----- ----- ----- Net income ..................................... 8.2% 8.0% 2.2%
Fiscal Year 1996 Compared to Fiscal Year 1995 Sales in 1996 increased $16.7 million (21%) compared to 1995 principally as a result of a $7.4 million (72%) increase in computer services, a $5.0 million (17%) increase in fulfillment services and a $4.2 million (11%) increase in list marketing. Computer services' increase reflects the revenues related to the $40 million contract to provide computer services through the building of a marketing database for a major non-U.S. communications company. The contract extends through June, 1998, subject to termination under certain circumstances. Revenue is recognized on the percentage-of-completion method of accounting measured by the percentage of labor hours incurred to date to the estimated total labor hours required for the contract. Initial revenues from this contract were recorded in the last quarter of fiscal 1995. The increase in fulfillment services' sales reflects a 43% increase in continuity services, a 60% increase in outbound telemarketing services partially offset by decreases of 43% in inbound telemarketing revenues and 3% in the catalog fulfillment operation. Full year billings in fiscal 1996 to new customers in fiscal 1995 and increased billings to existing customers contributed to the continuity fulfillment increase. The outbound telemarketing increase primarily resulted from billings under a contract to provide business-to-consumer services for a telecommunications company. Going forward, this service will be provided as an integral part of the customer service function within continuity fulfillment. The decrease in inbound telemarketing is part of the Company's strategic plan to de-emphasize this service. The catalog fulfillment operation decrease includes a 24% decrease in revenues from an existing significant customer. The list marketing increase resulted generally from an expanded customer base and increased volumes with continuing customers. Gross profit in 1996 increased $5.3 million (22%) compared to 1995. Gross profit, as percentage of sales, was 31% in both fiscal 1996 and 1995. The current year's margin includes the favorable impact from the margin associated with the increased computer services revenues, as described above, offset by the lower margins derived from the catalog fulfillment operation. Selling and administrative expenses in 1996 increased $3 million (22%) compared to 1995. Selling and administrative expenses, as a percentage of sales, were 17% in both fiscal years. The increase in the amount of these expenses reflects increased expenses associated with the facility expansion at the catalog fulfillment operation, the expenses associated with both the continuity fulfillment and list marketing services' incremental revenues partially offset by the minimal incremental selling and administrative costs associated with the increase in computer services' revenues. Net dividend and interest income in 1996 increased $386,000 from 1995. Dividend and interest income in 1996 increased $636,000 (180%) from 1995 as a result of a higher level of funds available for reinvestment, partially offset by lower interest rates for much of the current year. Interest expense increased $250,000 in fiscal 1996 compared to 1995 primarily as a result of the $2,532,000 in long-term debt recorded at September 30, 1995 for the future payments required in connection with the acquisition of Catalog Resources, Inc. (CRI) and the $2,500,000 proceeds received in March and June, 1996 in conjunction with a five year term loan entered into by CRI to fund expansion of its warehouse and office facilities. The available line of credit was not used during either fiscal year. The effective tax rate in 1996 and 1995 was 41%. The provisions for taxes for the two fiscal years reflect relatively normal relationships between book income and taxes thereon. Net income for 1996 increased 24% compared to 1995 primarily as a result of the profit derived from computer services' increased revenues, improved contribution of the continuity fulfillment operation partially offset by reduced contribution from the catalog fulfillment operation. Fiscal Year 1995 Compared to Fiscal Year 1994 Sales in 1995 increased $16.2 million (26%) compared to 1994 principally as a result of a $11.5 million (61%) increase in fulfillment services, a $3.9 million (11%) increase in list marketing services and a $.7 million (8%) increase in computer services. The increase in fulfillment services' sales reflects a 150% increase in the catalog fulfillment operation, a 50% increase in the continuity fulfillment operation partially offset by a 64% decline in inbound telemarketing revenues. Increased transaction volume from an existing significant customer was the primary reason for the catalog fulfillment increase. Billings to new customers were the primary reason for the continuity fulfillment increase. The decrease in inbound telemarketing is part of the Company's plan to de-emphasize this service. The list marketing increase resulted generally from an expanded customer base and increased volumes with continuing customers. The computer services' increase reflects the revenues of a new contract, announced September 6, 1995, to provide computer services through the building of a marketing database for a major non-U.S. communications company offset by lower revenues in other areas of computer services. Initial revenues from the new contract were recorded in the last quarter of fiscal 1995. Gross profit was 31% of sales in 1995 compared to 25% in 1994. The improvement in gross profit margin resulted primarily from the increased catalog fulfillment revenues, described above, which have a higher gross profit margin than the margins derived from the other fulfillment operations of the Company, the effect of the new marketing database contract and the increased revenues and improved profit margins of the continuity fulfillment operation. Selling and administrative expenses in 1995 increased $.4 million ( 3%) compared to 1994. The increase in selling and administrative expenses is not proportionate to the 26% revenue gain for the year due primarily to minor selling and administrative expenses associated with the incremental revenues at the catalog fulfillment operation and the new marketing database contract and the reassignment of selling personnel to operating units of the Company. Net dividend and interest income in 1995 increased $233,000 from 1994. Dividend and interest income in 1995 increased $176,000 (98%) from 1994. During the current fiscal year, interest earned on invested funds coupled with higher interest rates more than offset interest expense incurred on both long-term debt and capital lease obligations. The line of credit was not used during the year. In 1994, net interest expense was incurred due to utilizing the line of credit for varying amounts and periods and higher levels of long-term debt and capital lease obligations outstanding. The effective tax rate in 1995 was 41% compared to 42% in 1994. The provisions for taxes for the two fiscal years reflect relatively normal relationships between book income and taxes thereon. Effective October 1, 1993, the Company adopted the provisions of Statement of Financial Standards No. 109, "Accounting for Income Taxes". The cumulative effect of adopting this statement was immaterial. Net income for 1995 increased 360% compared to 1994 primarily as a result of the profitability of the catalog fulfillment operation, the increased revenues and improved profit margin of the continuity fulfillment operation and the initial profit derived from the new marketing database contract. Liquidity and Capital Resources Working capital at September 30, 1996 increased to $19,359,000 from $10,569,000 at the prior year end. Current assets increased $13,981,000 principally from increases in cash and investments - held-to-maturity. Current liabilities increased $5,191,000 primarily as a result of an increase in deferred revenue and current portion of long-term debt. At September 30, 1996, the ratio of long-term debt and long-term capital lease obligations to equity was .15 to 1. For the fiscal year ended September 30, 1996, cash generated by operations increased $7,055,000 over such amounts generated in 1995. The increase was primarily attributable to increases in net income of $1,509,000 and in adjustments to net income and changes in operating assets and liabilities of $5,546,000. This increase in adjustments to net income and changes in operating assets was primarily the result of increased depreciation and amortization of $460,000, a decrease in accounts receivable of $5,253,000, a decrease in prepaid expenses and other current assets of $956,000, an increase in income taxes payable of $369,000, an increase in deferred revenue of $911,000 and a decrease in security deposits of $913,000 offset by a decrease in accounts payable of $3,431,000. Cash used in investing activities increased $13,141,000 over the prior year. This increase was primarily attributed to an increase in investments-held-to-maturity of $10,268,000 and an increase in additions to property and equipment of $2,773,000 primarily for the expansion of warehouse and office facilities at CRI. During the current fiscal year, funds provided by financing activities increased $2,398,000, primarily as a result of $2,500,000 borrowed under the terms of a five-year term loan to substantially fund the expansion of warehouse and office facilities at CRI. Also contributing to the increase in financing funds were higher receipts from the exercise of stock options and purchases through the Employee Stock Purchase Plan and employment agreements of $174,000 partially offset by higher dividend payments of $141,000. Pursuant to the purchase agreement, as amended, with CRI, the Company is obligated to pay to CRI's selling shareholders in cash or stock up to an aggregate of $10,000,000. Under such purchase agreement, the Company will pay $1,012,500 (one-half in cash and one-half in stock) on January 1, 1997 bringing the total payments to that date to $4,937,500. As outlined in Note 2 to the accompanying consolidated financial statements, the present value of the remaining obligation of $6,075,000 was recorded at September 30, 1995 resulting in an increase in goodwill at that date of $4,478,000. Management believes cash generated from current operations and other liquid assets combined with the available bank credit line and the five-year term loan mentioned above will be sufficient to meet cash flow needs during the 1997 fiscal year, including the payment to former CRI shareholders due January 1, 1997. Recently Issued Accounting Standards In March, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which requires the adoption of the standard for fiscal years beginning after December 15, 1995. This new accounting standard establishes the recognition and measurement of such long lived assets and certain identifiable intangibles to be held and used by the Company which must be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company has not yet determined the effect, if any, this new standard will have on the balance sheet, net income and earnings per share upon its adoption. Adoption of the new standard will have no effect on the Company's cash flows. In October, 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which requires adoption of the disclosure provisions no later than fiscal years beginning after December 15, 1995 and adoption of the recognition and measurement provisions for nonemployee transactions no later than after December 15, 1995. Companies are permitted to continue to account for such transactions under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," but would be required to disclose in a note to the financial statements pro forma net income and, if presented, earnings per share as if the company had applied the new method of accounting, as outlined in SFAS No. 123. The Company has not yet determined if it will elect to change to the method outlined in SFAS No. 123, nor has it determined the effect the new standard will have on net income and earnings per share should it elect to make such a change. Adoption of the new standard will have no effect on the Company's cash flows. Item 8. Financial Statements and Supplementary Data. INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders of LCS Industries, Inc. Clifton, New Jersey We have audited the accompanying consolidated balance sheets of LCS Industries, Inc. and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of LCS Industries, Inc. and its subsidiaries as of September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. /s/Deloitte & Touche LLP ------------------------ Deloitte & Touche LLP Parsippany, NJ November 4, 1996
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended September 30, 1996 1995 1994 ------------ ------------ ------------ Net sales ............................. $ 95,570,436 $ 78,863,443 $ 62,690,115 Cost of sales ......................... 66,120,153 54,717,497 46,985,698 ------------ ------------ ------------ Gross profit .......................... 29,450,283 24,145,946 15,704,417 Selling and administrative expenses ... 16,678,548 13,653,493 13,270,090 Other (income) expense: Dividend and interest income ....... (990,108) (354,600) (178,900) Interest expense ................... 437,198 187,461 244,457 ------------ ------------ ------------ Income before income taxes ............ 13,324,645 10,659,592 2,368,770 Provision for income taxes ............ 5,487,000 4,331,000 994,000 ------------ ------------ ------------ Net income ............................ $ 7,837,645 $ 6,328,592 $ 1,374,770 ============ ============ ============ Per common and common equivalent share: Primary earnings ...................... $ 1.53 $ 1.33 $ .32 ============ ============ ============ Fully diluted earnings ................ $ 1.53 $ 1.25 $ .32 ============ ============ ============ Dividends ............................. $ .094 $ .066 $ .045 ============ ============ ============
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1996 1995 ------------- ------------ ASSETS Current assets: Cash and cash equivalents ................................... $ 11,893,982 $ 8,630,831 Investments - held-to-maturity .............................. 10,435,026 199,859 Accounts receivable (less allowance for doubtful accounts: 1996 - $627,000 and 1995 - $624,000) .................................... 24,519,050 23,815,919 Prepaid expenses and other current assets ................... 1,596,819 1,891,837 Deferred taxes .............................................. 338,000 263,250 ------------ ------------ Total current assets ...................................... 48,782,877 34,801,696 ------------ ------------ Investments - available-for-sale, net .......................... 369,722 797,583 Property and equipment, net .................................... 7,549,229 5,222,513 Goodwill (net of accumulated amortization: 1996 - $519,855 and 1995 - $233,500) ....................... 7,567,326 7,853,675 Other assets ................................................... 700,793 1,061,166 ------------ ------------ $ 64,969,947 $ 49,736,633 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................ $ 14,726,387 $ 15,105,009 Accrued salaries and commissions ............................ 2,389,837 2,076,999 Other accrued expenses ...................................... 2,513,841 2,352,477 Income taxes payable ........................................ 215,635 -- Current portion of long-term debt ........................... 1,047,989 567,294 Current portion of capital lease obligations ................ 390,399 516,989 Deferred revenue ............................................ 8,139,767 3,614,331 ------------ ------------ Total current liabilities ................................. 29,423,855 24,233,099 ------------ ------------ September 30, 1996 1995 ------------- ------------ Long-term debt, net of current portion ......................... 4,331,542 2,804,790 Capital lease obligations, net of current portion .............. 250,997 631,475 Deferred taxes ................................................. 103,000 19,750 Stockholders' equity: Preferred stock $.01 par value; authorized 1,000,000 shares; issued - none Common stock $.01 par value; authorized 15,000,000 shares; issued 1996 - 4,611,487 shares and 1995 - 4,347,886 shares ...................... 46,115 43,479 Common stock issuable ....................................... 1,945,983 2,407,521 Additional paid-in capital .................................. 7,223,263 5,431,455 Retained earnings ........................................... 21,887,737 14,451,854 ------------ ------------ 31,103,098 22,334,309 Less: treasury stock, at cost, 187,766 shares .............. (207,953) (207,953) available-for-sale securities valuation adjustment, net of deferred income taxes ...................... (34,592) (78,837) ------------ ------------ Total stockholders' equity ................................ 30,860,553 22,047,519 ------------ ------------ $ 64,969,947 $ 49,736,633 ============ ============
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Common Stock $.01 Par Value Common Additional Treasury Stock- ------------------------ Stock Paid-In Retained at Cost Balance Shares Amount Issuable Capital Earnings Shares Amount ------------------------ ------------ ------------ ------------ ------------------- October 1, 1993 ......... 1,863,555 $ 18,635 $ 831,136 $ 1,991,957 $ 8,704,995 187,766 ($207,953) Acquisition of Catalog Resources, Inc. ....... Common stock issued ... 26,172 262 (187,793) 187,531 -- -- -- Change in present value of future stock distributions, net .. -- -- 324,445 -- -- -- -- Exercise of stock options 19,250 193 -- 79,870 -- -- -- Stock purchased through Employee Stock ........ 360 3 -- 2,139 -- -- -- Purchase Plan Dividends paid .......... -- -- -- -- (166,829) -- -- Valuation adjustment .... -- -- -- -- -- -- -- Net income .............. -- -- -- -- 1,374,770 -- -- --------- ------------ ------------ ------------ ------------ ------- --------- September 30, 1994 ...... 1,909,337 19,093 967,788 2,261,497 9,912,936 187,766 (207,953) --------- ------------ ------------ ------------ ------------ ------- --------- Acquisition of Catalog Resources, Inc. ....... Common stock issued ... 63,613 636 (506,250) 505,614 -- -- -- Present value of future stock distributions . -- -- 1,945,983 -- -- -- -- Exercise of stock options 127,230 1,273 -- 651,260 -- -- -- Stock dividend - 10% .... 179,929 1,799 -- 1,527,597 (1,529,396) -- -- Stock dividend - 100% ... 2,061,087 20,611 -- (20,611) -- -- -- Stock purchased through Employee Stock Purchase Plan and employment ........ 6,690 67 -- 80,098 -- -- -- agreements Dividends paid .......... -- -- -- -- (260,278) -- -- Valuation adjustment .... -- -- -- -- -- -- -- Tax benefit of exercise of stock options ......... -- -- -- 426,000 -- -- -- Net income .............. -- -- -- -- 6,328,592 -- -- --------- ------------ ------------ ------------ ------------ ------- --------- September 30, 1995 ...... 4,347,886 43,479 2,407,521 5,431,455 14,451,854 187,766 (207,953) --------- ------------ ------------ ------------ ------------ ------- ---------
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) Available-for- Sale Securities Valuation Adjustment Total ---------- ----- October 1, 1993 ........................ $ 0 $ 11,338,770 Acquisition of Catalog Resources, Inc. ...................... Common stock issued .................. -- -- Change in present value of future stock distributions, net ................. -- 324,445 Exercise of stock options .............. -- 80,063 Stock purchased through Employee Stock ....................... -- 2,142 Purchase Plan Dividends paid ......................... -- (166,829) Valuation adjustment ................... (87,969) (87,969) Net income ............................. -- 1,374,770 ------------- ------------ September 30, 1994 ..................... (87,969) 12,865,392 ------------- ------------ Acquisition of Catalog Resources, Inc. ...................... Common stock issued .................. -- -- Present value of future stock distributions ................ -- 1,945,983 Exercise of stock options .............. -- 652,533 Stock dividend - 10% ................... -- -- Stock dividend - 100% .................. -- -- Stock purchased through Employee Stock Purchase Plan and employment ....................... -- 80,165 agreements Dividends paid ......................... -- (260,278) Valuation adjustment ................... 9,132 9,132 Tax benefit of exercise of stock options ........................ -- 426,000 Net income ............................. -- 6,328,592 ------------- ------------ September 30, 1995 ..................... (78,837) 22,047,519 ------------- ------------
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) Common Stock $.01 Par Value Common Additional Treasury Stock- ------------------------ Stock Paid-In Retained at Cost Balance Shares Amount Issuable Capital Earnings Shares Amount ------------------------ ------------ ------------ ------------ ------------------- September 30, 1995 ...... 4,347,886 43,479 2,407,521 5,431,455 14,451,854 187,766 (207,953) --------- ------------ ------------ ------------ ------------ ------- --------- Acquisition of Catalog Resources, Inc. ....... Common stock issued ... 34,621 346 (461,538) 461,192 -- -- -- Exercise of stock options 216,903 2,169 -- 617,504 -- -- -- Stock Dividend - ........ 360 4 -- 251 -- -- -- converted shares Stock purchased through Employee Stock Purchase Plan and employment ........ 11,717 117 -- 153,861 -- -- -- agreements Dividends paid .......... -- (401,762) -- -- Valuation adjustment, net -- -- -- -- -- -- -- Tax benefit of exercise of stock options ......... -- -- -- 559,000 -- -- -- Net income .............. -- -- -- -- 7,837,645 -- -- --------- ------------ ------------ ------------ ------------ ------- --------- September 30, 1996 ...... 4,611,487 $ 46,115 $ 1,945,983 $ 7,223,263 $ 21,887,737 187,766 ($207,953) --------- ------------ ------------ ------------ ------------ ------- ---------
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) Available-for- Sale Securities Valuation Adjustment Total ---------- ----- September 30, 1995 ..................... (78,837) 22,047,519 Acquisition of Catalog Resources, Inc. ...................... Common stock issued .................. -- -- Exercise of stock options .............. -- 619,673 Stock Dividend - ....................... -- 255 converted shares Stock purchased through Employee Stock Purchase Plan and employment ....................... -- 153,978 agreements Dividends paid ......................... -- (401,762) Valuation adjustment, net .............. 44,245 44,245 Tax benefit of exercise of stock options ........................ -- 559,000 Net income ............................. -- 7,837,645 ------------- ------------ September 30, 1996 ..................... ($ 34,592) $ 30,860,553 ------------- ------------ See Notes to Consolidated Financial Statements
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended September 30, 1996 1995 1994 ------------ ------------ ------------- Increase (Decrease) in cash and cash equivalents Cash flows from operating activities: Net income .......................................................... $ 7,837,645 $ 6,328,592 $ 1,374,770 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................... 2,321,718 1,861,883 1,598,746 Deferred income taxes ........................................... (21,000) (95,000) 194,000 Provision for doubtful accounts receivable ...................... 65,000 121,625 160,487 Gains on sales of equipment ..................................... -- (9,750) -- Gain on sale of available-for-sale securities, net .............. (1,046) -- -- ------------ ------------ ------------ Total adjustments ............................................... 2,364,672 1,878,758 1,953,233 Changes in operating assets and liabilities: Accounts receivable ............................................. (768,131) (6,021,005) (2,285,043) Prepaid expenses and other current assets ....................... 295,018 (660,616) 157,678 Accounts payable and accrued expenses ........................... 347,847 3,778,404 3,126,932 Income taxes payable ............................................ 215,635 (153,803) 147,737 Deferred revenue ................................................ 4,525,436 3,614,331 -- Security deposits ............................................... 331,262 (581,846) 36,700 Other, net ...................................................... 29,111 (58,976) 24,503 ------------ ------------ ------------ Total adjustments and changes ................................... 7,340,850 1,795,247 3,161,740 ------------ ------------ ------------ Net cash provided by operating activities ...................... 15,178,495 8,123,839 4,536,510 ------------ ------------ ------------ Cash flows from financing activities: Changes in note payable, long-term debt and capital leases (including current portion): Borrowings ...................................................... 2,500,000 -- 1,350,000 Repayments ...................................................... (1,251,888) (1,117,273) (3,802,210) Dividends paid ...................................................... (401,507) (260,278) (166,829) Exercise of stock options ........................................... 1,178,673 1,078,533 80,063 Employee Stock Purchase Plan and employment agreement proceeds .............................................. 153,978 80,165 2,142 ------------ ------------ ------------ Net cash (used in) provided by financing activities ................. 2,179,256 (218,853) (2,536,834) ------------ ------------ ------------ Cash flows from investing activities: Additions to property and equipment ................................. (4,362,085) (1,589,400) (1,500,548) Net (purchases) sales of investments-held-to-maturity ............... (9,732,515) 535,068 125,823 Proceeds from sales of equipment .................................... -- 100,688 -- ------------ ------------ ------------ Net cash used in investing activities ............................... (14,094,600) (953,644) (1,374,725) ------------ ------------ ------------ Continued on next page.
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Continued from previous page. For the Years Ended September 30, 1996 1995 1994 ------------ ------------ ------------- Cash and cash equivalents: Net increase in cash and cash equivalents ........................... 3,263,151 6,951,342 624,951 Cash and cash equivalents at beginning of year ...................... 8,630,831 1,679,489 1,054,538 ------------ ------------ ------------ Cash and cash equivalents at end of year ............................ $ 11,893,982 $ 8,630,831 $ 1,679,489 ============ ============ ============ Supplementary disclosures of cash flow information: Cash paid during the period for: Interest $ 219,000 $ 153,000 $ 264,000 Income taxes $ 4,261,000 $ 4,637,000 $ 652,000 Supplemental disclosures of non-cash investing and financing activities: Acquisition of business: Fair value of assets acquired $ --- $ 4,478,091 $ 648,890 Issuance of debt --- (2,532,108) (324,445) Common stock issuable --- (1,945,983) (324,445) ------------ ------------ ------------ Liabilities assumed $ --- $ --- $ --- ============ ============ ============
For the years ended September 30, 1996, 1995 and 1994, $461,538, $506,250 and $187,793 of common stock issuable was converted into 34,621, 139,948 and 57,578 shares, respectively, of the Company's common stock in accordance with the terms of the Catalog Resources, Inc. purchase agreement, as amended. Capital lease obligations: For the year ended September 30, 1995 and 1994, capital lease obligations of $216,000, and $162,000, respectively, were incurred for the leasing of equipment. There were no capital lease obligations entered into during the year ended September 30, 1996. Valuation adjustment: For the year ended September 30, 1996, the account was adjusted to reflect an increase in market values of the available-for-sale securities portfolio of $44,245, net of deferred income taxes. A similiar adjustment of $9,132, net of deferred income taxes, was made at September 30, 1995. Stock Dividends: On January 5, 1996, 360 shares of the Company's common stock were paid as dividends upon exchange of 150 shares of the Company's "old" common stock. On January 31, 1995, 179,929 shares of the Company's common stock were paid as a 10% stock dividend. On October 24, 1995, 2,061,087 shares of the Company's common stock were issued as a result of a 2 for 1 stock split paid as a 100% stock dividend. The September 30, 1995 financial statements reflect this stock split. See Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies A - Business and Consolidation - The consolidated financial statements include the accounts of LCS Industries, Inc. (the "Company") and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. The Company provides outsourced direct marketing services and specializes in fulfillment, list marketing and computer services. The Company's services are performed within the United States and Canada except for a computer services contract with a non-U.S. communications company. B - Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are made when accounting for allowance for doubtful accounts, sales adjustments, depreciation and amortization, carrying value of goodwill, costs to complete long-term contracts which are accounted for using the percentage-of-completion method of accounting, taxes and contingencies. C - Cash and cash equivalents - Cash and cash equivalents include short-term cash investments with maturities of three months or less at date of acquisition. Such investments are carried at cost, which approximates market, and amounted to $9,835,000 and $7,606,000 at September 30, 1996 and 1995, respectively. D - Investments - The Company records its investments based on the provisions of Statement of Financial Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In accordance with the provisions of this Statement, the Company has classified its investments in debt securities into held-to-maturity, trading or available-for-sale based upon management's intent with respect to such investments and the Company's ability to so hold. Equity securities are classified as available-for-sale or trading depending on management's intent. Market values are based on publicly quoted market prices. E - Property and equipment - Property and equipment are stated at cost. Depreciation and amortization, which includes the amortization of assets recorded under capital leases, are computed using the straight-line method over the estimated serviceable lives of the respective assets or the initial or remaining terms of leases. Leasehold improvements are amortized, using the straight-line method, over the shorter of the estimated useful life of the asset or the life of the lease. F - Goodwill - Represents the unamortized excess cost of acquiring Catalog Resources, Inc. over the fair value of the net assets received at the acquisition date. This asset is being amortized on the straight-line basis over 30 years. The consolidated statements of operations for the fiscal years ended September 30, 1996, 1995 and 1994 include goodwill amortization of $286,355, $123,500 and $51,000, respectively. The Company regularly assesses the recoverability of goodwill. G - Revenue recognition - Sales and related cost of sales are recognized when services are performed. Revenues under long-term consulting contracts are recognized based on the percentage-of-completion method of accounting measured by the percentage of labor hours incurred to date to the estimated total labor hours required for each contract. Deferred revenue represents billings in excess of revenues recognized as sales. H - Income taxes - The Company records income taxes based on the provisions of Statement of Financial Standards No. 109, "Accounting for Income Taxes". This statement required a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. I - Earnings Per Common Share - Earnings per common share are based on the weighted average number of common and common equivalent shares outstanding during the year. Stock options are common stock equivalents. For the years ended September 30, 1996, 1995 and 1994, the weighted average number of shares used in determining primary earnings per common share was 5,118,085, 4,755,365 and 4,306,009, respectively. For the same periods, the weighted average number of shares used in determining fully diluted earnings per common share was 5,124,568, 5,049,958 and 4,307,184, respectively. Fully diluted earnings per common share is presented due to the effect of dilution resulting from outstanding options calculated using the year end stock market price (such market price is higher than the average quarterly price used in computing primary earnings per common share). The weighted average shares used in the computations of fiscal years 1996, 1995 and 1994 primary and fully diluted earnings per share include the shares issuable in accordance with the agreement, as amended, relating to the acquisition of Catalog Resources, Inc. The weighted average shares used in the computations of fiscal 1995 and 1994 primary and fully diluted earnings per share have been restated to reflect the 10% stock dividend paid January 31, 1995 and the 2 for 1 stock split paid as a 100% stock dividend on October 24, 1995. Other references to shares and per share data, as appropriate, reflect the effects of these stock dividends. J - Reclassifications - Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. Note 2 - Acquisition On April 1, 1993, the Company completed the purchase of all the outstanding stock of Catalog Resources, Inc. (CRI). CRI's results of operations are included in the Company's Consolidated Statements of Income from that date. The initial purchase price was $3,500,000. In addition, certain additional payments could have been earned by the former CRI shareholders if CRI's pretax income, as defined by the agreement, reached certain amounts during the next five years. Of the initial purchase price, $1,500,000 was paid at the closing, consisting of $750,000 in cash and 267,378 shares of the Company's common stock and the balance payable in amounts of $400,000 on April 1 of each of the next five years, with payments to be 50 percent in cash and 50 percent in stock. On April 1, 1994, $400,000 was paid, consisting of $200,000 in cash and 57,578 shares of the Company's common stock. Effective August 1, 1994, the purchase agreement was amended to limit to $8,100,000 the aggregate amount of additional purchase consideration to be paid in addition to the $1,900,000 paid at such date. The additional amount to be paid is based upon the operating performance of CRI over the eight year period beginning October 1, 1993. Based upon CRI's earnings for each fiscal year ending on September 30, a maximum annual payment of $1,012,500 is payable in January of the following year, which amount is subject to a dollar-for-dollar reduction based on CRI's operating results. Such payments are calculated separately for each year. Each payment will consist of 50 percent in cash and 50 percent in common stock of the Company with the maximum number of shares to be delivered under the purchase agreement, as amended, not to exceed 660,000 shares. The portion of these payments not made in stock is payable in cash. The number of shares to be issued will be based on the market value, as defined, of the common stock at the future payment dates. Based on the terms of the amended agreement and the achievement of the required operating results for the preceding fiscal year, payments of $1,012,500, one half in cash and one half in stock, were made on January 1, 1995 and 1996. As of September 30, 1996, 499,525 shares had been delivered under the provisions of the purchase agreement, as amended. As a result of the operating results achieved for the fiscal year ended September 30, 1995, the September, 1995 signing of a two year extension of a contract to provide fulfillment services to a significant customer, forecasted operating results for the 1996 fiscal year and the evaluation of anticipated future operating results beyond fiscal 1996, it was considered probable at September 30, 1995 that future CRI earnings levels would be attained which would require the maximum future payments of $6,075,000 to be made. As a result, the present value (interest at 8.75%) of those payments was recorded at September 30, 1995; $2,532,108 as long-term debt and $1,945,983 as common stock issuable, with a corresponding increase in goodwill. The common stock issuable amount reflects the maximum number of shares (660,000 less those shares issued and delivered prior to September 30, 1995) issuable under the terms of the purchase agreement, as amended, based on the market price of the Company's common stock at September 30, 1995. This amount is subject to adjustment, based on the future movements in the market price of the Company's common stock. No adjustment was recorded during the current fiscal year. Based on the operating results for the fiscal year ended September 30, 1996, the January 1, 1997 scheduled payment of $1,012,000 will be paid. Note 3 - Investments During the years ended September 30, 1996 and 1995, the valuation account related to the available-for-sale marketable securities portfolio was adjusted to reflect increases in market values of $44,245 and $9,132, respectively, net of deferred taxes. The following table sets forth the components of investments held at September 30, 1996:
Unrealized Market Holding Available-for-sale: Cost Value Loss - ------------------- ---- ----- ---- U.S. Government due January 31, 1999 $ 24,996 $ 24,375 $ (621) Equity securities ................... 402,318 345,347 (59,971) ----------- ----------- ----------- Total ............................... $ 427,314 $ 369,722 $ (57,592) =========== =========== =========== Held-to-maturity: Commercial paper-various issues ..... $10,435,026 $10,435,026 $ 0 ----------- ----------- -----------
During the year ended September 30, 1996, proceeds from redemptions of investments were $702,511 resulting in a realized gain of $1,046. The Company uses specific identification for securities sold. The following table sets forth the components of investments held at September 30, 1995:
Unrealized Market Holding Available-for-sale: Cost Value Loss - ------------------- ---- ----- ---- U.S. Government due January 31, 1999 ...... $ 24,996 $ 24,260 $ (736) Equity securities ......................... 903,924 773,323 (130,601) --------- --------- --------- Total ..................................... $ 928,920 $ 797,583 $(131,337) ========= ========= ========= Held-to-maturity: U.S. Government due May 15, 1996 .......... $ 199,859 $ 199,020 $ (839) --------- --------- ---------
During the year ended September 30, 1995, proceeds from redemptions of investments were $540,000. No realized gains or losses resulted from the redemption of these securities. Note 4 - Allowance for Doubtful Accounts Activity in the Allowance for Doubtful Accounts for the three years ended September 30, 1996 includes:
Year Ended September 30, 1996 1995 1994 - ------------------------ ---- ---- ---- Balance at beginning of year ......... $ 624,000 $ 585,000 $ 560,000 Additions - charged to expense ....... 65,000 121,625 160,467 Deductions ........................... (62,000) (82,625) (135,467) --------- --------- --------- Balance at end of year ............... $ 627,000 $ 624,000 $ 585,000 --------- --------- ---------
Note 5 - Property and Equipment The components of property and equipment include:
September 30, 1996 1995 - ------------- ---- ---- Furniture and fixtures ............................. $ 2,845,137 $ 1,979,289 Leasehold improvements ............................. 2,093,435 1,619,583 Computer equipment ................................. 6,828,373 5,792,492 Computer equipment under capital leases ............ 1,915,567 1,915,567 Other equipment .................................... 3,616,807 1,629,411 ----------- ----------- 17,299,319 12,936,342 Less: Accumulated depreciation and amortization ... 9,750,090 7,713,829 ----------- ----------- $ 7,549,229 $ 5,222,513 ----------- -----------
Depreciation and amortization charged to operations was $ 2,035,000, $1,738,000, and $1,547,000 for 1996, 1995 and 1994, respectively. Note 6 - Unsecured Line of Credit The Company has available a $3,000,000 unsecured bank line of credit bearing interest at the bank's base rate (8.25% at September 30, 1996). The line of credit expires March 31, 1997. During fiscal years 1996 and 1995, the line of credit was not used. Note 7 - Long-Term Debt Long-term debt consists of:
September 30, 1996 1995 - ------------- ---- ---- Payable to former shareholders of CRI .......... $2,784,375 $2,993,646 Notes payable to banks ......................... 2,595,156 378,438 ---------- ---------- 5,379,531 3,372,084 Less: Current portion .......................... 1,047,989 567,294 ---------- ---------- $4,331,542 $2,804,790 ---------- ----------
See Note 2 for a description of the amounts due to the former shareholders of CRI. Notes payable to banks consist of one note for a five year term loan payable through December 15, 1998 with interest at 6.9%. The loan is secured by certain equipment located at CRI with a net book value of $261,604 as of September 30, 1996. A second note is for a five year term loan payable through June 27, 2001 with interest at 7.99%. This loan is secured by certain equipment located at CRI with a net book value at September 30, 1996 of $2,417,997. CRI must continue to meet a financial ratio test and maintain net worth of at least $5,000,000 after September 30, 1996. The Company has guaranteed the repayment of this loan.
Maturities of long-term debt include: Fiscal Year Ended September 30, Amount ------------- ------ 1997 $ 1,047,989 1998 1,054,143 1999 974,205 2000 946,717 2001 698,454 Thereafter 658,023 ----------- Total long-term debt $ 5,379,531 ===========
Note 8 - Provision for Income Taxes The provision for income taxes is comprised of the following:
Year Ended September 30, 1996 1995 1994 - ------------------------ ---- ---- ---- Current Federal ................................... $ 4,292,000 $ 3,471,000 $ 636,000 State ..................................... 1,216,000 955,000 164,000 ----------- ----------- ----------- Total provision for current income taxes 5,508,000 4,426,000 800,000 ----------- ----------- ----------- Deferred Federal ................................... (22,000) (85,000) 146,000 State ..................................... 1,000 (10,000) 48,000 ----------- ----------- ----------- Total provision for deferred income taxes (21,000) (95,000) 194,000 =========== =========== =========== Total provision for income taxes ........ $ 5,487,000 $ 4,331,000 $ 994,000 =========== =========== ===========
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:
Year Ended September 30, 1996 1995 1994 - ------------------------ ---- ---- ---- Federal income tax at statutory rate .......... $ 4,564,000 $ 3,624,000 $ 806,000 State income taxes - net of federal tax benefit 791,000 619,000 134,000 Non-deductible expenses ....................... 148,000 85,000 39,000 Non-taxable income ............................ (16,000) (15,000) (21,000) Other ......................................... -- 18,000 36,000 ----------- ----------- ----------- Total provision for income taxes ...... $ 5,487,000 $ 4,331,000 $ 994,000 =========== =========== ===========
The components of deferred income tax assets and liabilities include:
September 30, 1996 1995 - ------------- -------------------------------- ------------------------------- Net Current Net Non-current Net Current Net Non-current Asset Liability Asset Liability -------------------------------- ------------------------------- Property and equipment .............................. $ -- $ 127,000 $ -- $ 72,250 Allowance for doubtful accounts ..................... 256,000 -- 249,000 -- Unrealized holding loss on marketable securities ......................... -- (24,000) -- (52,500) Vacation accrual .................................... 82,000 -- 48,000 -- Change to accrual accounting for CRI ................ -- -- (33,750) -- --------- --------- --------- --------- Total ....................................... $ 338,000 $ 103,000 $ 263,250 $ 19,750
Note 9 - Stock Options The Company has an Incentive Stock Option Plan which was adopted and became effective in May, 1993. The Plan calls for granting incentive stock options to certain officers and other employees, as defined, under current tax laws to purchase shares of the Company's common stock. The stock options are exercisable at prices not less than the fair market value of the common stock on the date the options are granted. The aggregate number of shares which may be issued under the Plan is 2,200,000. The Company also has a non-qualified Non-Employee Directors Stock Option Plan. The aggregate number of shares which may be issued under the Directors Plan is 220,000. Each non-employee director, who has been a non-employee director at all times during the fiscal year, shall be granted an option to purchase 5,000 shares of the common stock on the fifth business day following the public release of the Company's annual earnings for any fiscal year in which sales and net income per share of common stock increase by more than 5% over the prior fiscal year. Options granted under this Plan are based on the market value on the date of grant. At September 30, 1996, 32,000 options have been granted under this plan at prices of $3.525 and $16.00 per share. During fiscal 1996, 9,800 options were exercised, 10,600 options were cancelled and, at September 30, 1996, 1,000 options were exercisable. Based on 1996's results, options covering 5,000 shares are issuable. Non-employee directors have been granted non-qualified options, at fair market value on the date of grant, to purchase 65,000 shares of the Company's common stock at prices of $2.045 to $5.375 per share. At September 30, 1996, 4,400 options were exercisable. During the current year, 9,500 options were exercised and 5,500 options were cancelled. During the year ended September 30, 1995, certain officers of the Company were issued non-qualified options to purchase 75,000 shares of the Company's common stock at a price of $5.75 per share (100% of fair market value). Of the total options granted, options covering 35,400 shares represent the excess over 1% of the voting outstanding shares at the date of grant. In March, 1996, the Company was advised that, in accordance with Schedule D of The Nasdaq Stock Market(sm) bylaws, the granting of such options in excess of 1% of the Company's outstanding shares of common stock requires shareholder approval. The Company has restricted the exercisability of these options until shareholder approval can be obtained at the 1997 stockholders' meeting. The following schedule sets forth the activity under the 1983 Incentive Stock Option Plan for the years ended September 30, 1996, 1995 and 1994. Granting of options under this plan ceased in May, 1994.
Incentive options Number Option Price - ----------------- ------ ------------ September 30, 1993 ..................... 397,810 $ 2.75 - $ 8.25 Exercised .............................. (19,250) $ 3.25 - $ 4.50 Expired or cancelled ................... (3,500) $ 7.50 - $ 9.25 -------- ------------------- Outstanding September 30, 1994 ......... 375,060 $ 2.75 - $ 8.25 Exercised .............................. (120,767) $ 3.46 - $ 7.50 Expired or cancelled ................... (3,849) Stock dividend - 10% ................... 32,506 $ 2.50 - $ 7.50 Stock dividend - 100% .................. 282,950 $ 1.25 - $ 3.75 -------- ------------------- Outstanding September 30, 1995 ......... 565,900 $ 1.25 - $ 3.75 Exercised .............................. (165,200) $ 2.05 - $ 3.41 -------- ------------------- Outstanding September 30, 1996 ......... 400,700 $ 1.25 - $ 3.41 -------- ------------------- Exercisable September 30, 1996 ......... 356,700 $ 1.25 - $ 3.41 -------- -------------------
The following schedule sets forth the activity of the 1993 Incentive Stock Option Plan for the years ended September 30, 1996, 1995 and 1994.
Incentive options Number Option Price - ----------------- ------ ------------ Granted in 1994 ...................... 83,000 $ 5.00- $ 7.75 --------- ------------------- Outstanding September 30, 1994 ....... 83,000 $ 5.00- $ 7.75 Granted .............................. 211,600 $ 7.36- $ 33.69 Exercised ............................ (6,463) $ 4.55- $ 5.91 Expired or cancelled ................. (19,250) $ 4.55- $ 5.91 Stock dividend - 10% ................. 8,300 $ 4.55- $ 7.05 Stock dividend - 100% ................ 277,187 $ 2.88- $ 16.85 --------- ------------------- Outstanding September 30, 1995 ....... 554,374 $ 2.88- $ 16.85 Granted .............................. 110,000 $ 15.50 Exercised ............................ (32,403) $ 2.88- $ 5.75 Expired or Cancelled ................. (23,998) $ 2.96- $ 5.75 --------- ------------------- Outstanding September 30, 1996 ....... 607,973 $ 2.88- $ 16.85 --------- ------------------- Exercisable September 30, 1996 ....... 337,775 $ 2.96- $ 16.85 --------- ------------------- Available for grant September 30, 1996 1,539,198 ---------
Note 10 - 1994 Employee Stock Purchase Plan and Employment Agreements At the annual meeting of stockholders in March, 1994, the 1994 Employee Stock Purchase Plan was adopted. The Plan provides eligible employees of the Company and its subsidiaries the opportunity to acquire up to 300,000 shares of common stock. Purchases are made on a monthly basis through payroll deductions of 1% to 10% of eligible compensation. Shares are offered at a 15% discount from the closing price on the last trading date of each month with no brokerage commissions. Participation in the Plan began September 1, 1994. For the years ended September 30, 1996, 1995 and 1994, share purchased total 9,968, 13,552 and 792, respectively. Employment agreements with officers of a subsidiary include the provision for the quarterly purchase of the Company's common stock to the extent of 5% of any bonus earned, as defined. Shares are offered at a discount from the quarter end closing market price of the common stock. During fiscal years 1996 and 1995, a total of 1,749 and 143 shares, respectively, were purchased under these agreements. Note 11 - Employee Retirement Savings Plan (401K) The Company sponsors a tax deferred retirement savings plan which permits eligible employees to contribute varying percentages of their compensation up to the limit allowed by the Internal Revenue Service. The plan also provides for discretionary Company contributions. No discretionary contributions were made for the years ended September 30, 1996, 1995 and 1994. The Company matches employees' contributions to a maximum of 25% of the employee's first 6% contributed. During the period January 1, 1996 to June 30, 1996, the Company's matching contributions were temporarily increased to 35% of eligible employee contributions. Matching contributions charged to expense were $196,000, $154,000 and $128,000 for the fiscal years ended September 30, 1996, 1995 and 1994, respectively. Note 12 - Operating and Capital Lease Commitments The Company and its subsidiaries lease certain properties, equipment and software under noncancellable long-term leases, both operating and capital, which expire at various dates. Certain of the leases on real estate require the payment of real estate taxes. Minimum rentals under the leases are as follows:
Fiscal Year Capital Leases Operating Leases ----------- -------------- ---------------- 1997 $ 427,091 $ 2,602,130 1998 256,071 2,367,622 1999 126 1,961,075 2000 1,608,752 2001 1,171,788 Thereafter 3,990,101 --------- ------------ 683,288 $ 13,701,468 Less: Imputed interest 41,892 --------- Present value of capital lease obligations $ 641,396 ---------
Real estate, equipment and software operating lease costs include:
Year Ended September 30, 1996 1995 1994 - ------------------------ ---- ---- ---- Real estate .................... $2,324,323 $1,227,000 $1,120,000 Equipment and software ......... 788,173 774,000 1,159,000 ---------- ---------- ---------- Total ...................... $3,112,496 $2,001,000 $2,279,000 ---------- ---------- ----------
Note 13 - Commitments and Contingencies The Company is involved in various legal claims and disputes that are normal and incidental to the Company's business. In the opinion of management, after consultation with legal counsel, the amount of losses that might be sustained, if any, from such claims and disputes would not have a material effect on the Company's financial statements. At September 30, 1996, the Company and its subsidiaries have employment agreements with certain of their officers with terms expiring at various times through September 30, 2002, which provide for aggregate future minimum compensation of $2,770,000. Certain of these agreements also provide for commissions and bonuses based on results of the respective subsidiary's operations. During the current fiscal year, one of the Company's subsidiaries had in effect a $500,000 standby letter of credit agreement securing the timely payments, by the subsidiary, of amounts owing to a customer. No claims were made against this agreement during the year. The fair value of the standby agreement approximates the cost of the agreement. Note 14 - Major Customers For the year ended September 30, 1996, revenues recognized under the contract to provide computer services to a non-U.S. communications company amounted to 14% of consolidated sales. For the year ended September 30, 1995, sales to another significant customer amounted to 11% of consolidated sales. * * * * * * Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Part III Item 10. Directors, Executive Officers and Significant Employees of the Registrant. The information appearing in the Company's Proxy Statement with respect to its 1997 Annual Meeting of Stockholders (the "Proxy Statement") under the caption "Election of Directors" is incorporated herein by reference. The following is a list as of November 29,1996, showing the names and ages of all principal executive officers and significant employees of the Company and its subsidiaries, all positions and offices with the Company held by each of them and the year from which each said office has been continuously held. All executive officers are elected annually and hold office at the pleasure of the Company's Board of Directors.
Position with the Company Name Age and Date from which Held - ---- --- ------------------------ Arnold J. Scheine.......... 58 President and Director-1969 Marvin Cohen................ 62 Senior Vice President and Secretary-1981, Director-1969 Pat R. Frustaci.............. 42 Vice President - Finance, Chief Financial Officer, Treasurer and Assistant Secretary - 1995 Charlotte Griffiths.......... 54 Vice President - Administration 1995 Vice President - 1985 James E. Quinlan......... 58 Controller-1988 William Rella................. 54 President - Fulfillment Services - 1994 Gerry King..................... 47 President - Catalog Resources, Inc. - 1993 Lon Mandel................... 41 President and Chief Operating Officer - The SpeciaLISTS Ltd. - 1987 Phyllis Stein................... 44 President - List Brokerage Division, The SpeciaLISTS Ltd. - 1987
All executive officers of the Company and other significant employees, other than Mr. King and Mr. Frustaci, have, as their principal occupations, been employed in positions as officers with the Company or its subsidiaries for more than the last five years. Prior to joining the company, Mr. King was President of Catalog Resources, Inc. prior to its acquisition by the Company from July 1, 1988 to March 31, 1993. Mr. Frustaci was Chief Executive Officer of Turn-Key Solutions, Inc. in 1991, an independent consultant providing financial and system consulting services during 1992 and 1993 and was Vice President and Chief Financial Officer for Image Business Systems, Inc. during 1994. Based solely upon a review of Forms 3 and 4 and amendments thereto, furnished to the Company pursuant to Rule 16a-3(e) during its fiscal year ended September 30, 1996, and Forms 5 and amendments thereto furnished to the Company with respect to such fiscal year, there was no officer, director or 10% stockholder of the Company who failed to file, on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Securities and Exchange Act of 1934, as amended, during such fiscal year or prior fiscal years, except for one officer. Such person was Kathryn Barber, former President of the Outbound Telemarketing Services Division, who filed, however, not on a timely basis, three Form 4's relating to her beneficial sale of 13,200 shares of Common Stock. Item 11. Executive Compensation The information appearing in the Proxy Statement under the caption "Executive Compensation" is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information appearing in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information appearing in the Proxy Statement under the caption "Election of Directors" is incorporated herein by reference. Part IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)1. Financial Statements Report of Deloitte & Touche LLP on Financial Statements Consolidated Statements of Income for the Years Ended September 30, 1996, 1995 and 1994 Consolidated Balance Sheets as of September 30, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (a)2. Financial Statement Schedules Schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Exhibits (a)3 3.1 Restated Certificate of Incorporation of the Company(1) 3.2 By-laws, as amended, of the Company (2) 10.1 Lease Agreement dated April 11, 1980, as amended, between the Company and Saul Rachmiel, with respect to premises located at 120 Brighton Road, Clifton, New Jersey (3) 10.2 1983 Stock Option Plan as Amended and Restated (4) 10.3 1993 Incentive Stock Option Plan as Amended and Restated (11) 10.4 1993 Non-Employee Directors Stock Option Plan (8) 10.5 The Bank of New York line of credit commitment letter dated July 15, 1996 10.6 Master Equipment Lease Agreement dated December 8, 1989 between the Company and Forsythe/McArthur Associates, Inc. (5) 10.7 Agreement of Purchase and Sale of Stock dated April 1, 1993 among the Company, Catalog Resources, Inc. and the sellers of all of the outstanding shares of Catalog Resources, Inc. (6) 10.8 1994 Employee Stock Purchase Plan (7) 10.9 Form of Software Development Agreement between LCS Industries, Inc. and a major non-U.S. communications company (9) 10.10 Amendment No.1 dated as of August 1, 1994, to Agreement of Purchase and Sale of Stock dated April 1, 1993, among LCS Industries, Inc., Catalog Resources, Inc., and the stockholders of Catalog Resources, Inc. (10) 10.11 Form of Marketing Database Agreement between LCS Industries, Inc. and a major non-U.S. communications company (12) 10.12 Employment agreement between Arnold J. Scheine and LCS Industries, Inc. (13) 10.13 Employment agreement between Arnold J. Scheine and LCS Industries, XXX (a group company). (14) 11 Computation of Earnings per Share and Common Equivalent Share 22 List of Subsidiaries 23 Consent of Deloitte & Touche LLP ------------------------ (1) Incorporated by reference to Exhibit filed with the Company's Registration Statement on Form 8-A, File No. 0-12329, filed with the Commission on June 27, 1983. (2) Incorporated by reference to Exhibit to the Company's Registration Statement on Form S-18, Registration No. 3-87557-N.Y. (3) Incorporated by reference to Exhibit to the Company's Registration Statement on Form S-18, Registration No. 2-79941-N.Y. (4) Incorporated by reference to Exhibit to the Company's Registration Statement on Form S-8, Registration No. 33-12508. (5) Incorporated by reference to Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1990, File No. 0-12329. (6) Incorporated by reference to Exhibit to the Company's Current Report on Form 8-K dated April 1, 1993, File No. 0-12329. (7) Incorporated by reference to Exhibit to the Company's Registration Statement on Form S-8, Registration No. 33-83058. (8) Incorporated by reference to Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993, File No. 0-12329. (9) Incorporated by reference to Exhibit to the Company's Current Report on Form 8-K dated January 18, 1994, File No. 0-12329. (10) Incorporated by reference to Exhibit to the Company's Current Report on Form 8-K dated September 13, 1994, File No. 0-12329. (11) Incorporated by Reference to Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994, File No. 0-12329. (12) Incorporated by Reference to Exhibit to the Company's Current Report on Form 8-K dated September 1, 1995, File No. 0-12329. (13) Incorporated by Reference to Exhibit to the Company's Current Report on Form 10Q/A-1 dated August 8, 1996, File No. 0-12329. (14) Incorporated by Reference to Exhibit to the Company's Current Report on Form 10Q/A-1 dated August 8, 1996, File No. 0-12329. (b) Reports on Form 8-K LCS Industries, Inc. did not file any Forms 8-K during the last quarter of its fiscal year ended September 30, 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LCS INDUSTRIES, INC. By:/s/Arnold J. Scheine -------------------- Arnold J. Scheine President Date: December 18, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 18, 1996. Signature Title - --------- ----- /s/Arnold J. Scheine President (Principal Executive Officer) and Director - -------------------- Arnold J. Scheine /s/Pat R. Frustaci Vice President - Finance, Chief Financial Officer, - ------------------ Treasurer and Assistant Secretary (Principal Pat R. Frustaci Accounting Officer) /s/Marvin Cohen Senior Vice President, Secretary and Director - --------------- Marvin Cohen /s/Joseph R. Barbaro Director - -------------------- Joseph R. Barbaro /s/Bernard Ouziel Director - ----------------- Bernard Ouziel LCS INDUSTRIES, INC. Commission File No. 0-12329 ------- Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1996 E X H I B I T S INDEX TO EXHIBITS Exhibit No. Description --- ----------- 10.5 The Bank of New York line of credit commitment letter dated July 15, 1996 11 Computation of Earnings Per Share and Common Equivalent Share 22 List of Subsidiaries 23 Consent of Deloitte & Touche LLP EX-10.5 2 (THE BANK OF NEW YORK, NA) National Community Division July 15, 1996 LCS Industries, Inc. 120 Brighton Road Clifton, NJ 07012-1694 Attn: Pat R. Frustaci Vice President-Finance Dear Pat: The Bank of New York National Association (the "Bank") is pleased to confirm that it holds available to LCS Industries, Inc. (the "Company") a $3,000,000 unsecured line of credit. Advances under this line of credit shall be evidenced by, shall be payable as provided in, and shall bear interest at the rate specified in, a promissory note of the Company in the form included with this letter. All obligations of the Company to the Bank with respect to this line of credit shall be guaranteed, jointly and severally, by Spec Holdings, Inc., The SpeciaLISTS, Ltd., Computer Marketing Systems, inc. and Catalog Resources, Inc. (collectively, the "Guarantors") pursuant to a guarantee in the form included with this letter. For so long as this line of credit is held available to the Company or the Company has any obligations outstanding under this line of credit, (i) neither the Company nor any of its Guarantors shall create, incur, assume or suffer to exist any pledge, lien, charge or other encumbrance upon or with respect to any of the accounts receivable of the Company and/or any of the Guarantors and (ii) the Company shall deliver to the Bank, within 15 days after the end of each calendar month, an aging schedule of the accounts receivable of the Company which is satisfactory to the Bank in the form and content. As you know lines of credit are cancelable at any time by either party, and any advance under this line of credit is subject to the Bank's satisfaction, at the time of such advance, with the condition (financial and otherwise), business, prospects and operations of the Company and each of the Guarantors. Unless cancelled earlier as provide din the first sentence of this paragraph, this line of credit shall be held available until March 31, 1997. Additionally, all advances under this line of credit will have to be reduced to zero for a period of thirty consecutive days during the period ending December 31, 1996. Very truly yours, THE BANK OF NEW YORK (NJ) By: /s/Brian J. Clark ----------------- Brian J. Clark Title: Vice President EX-11 3
EXHIBIT 11 LCS INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE AND COMMON EQUIVALENT SHARE For the Years Ended September 30, 1996 1995 (A) 1994 (A) ---------- ---------- ---------- Primary earnings per share: Weighted average shares outstanding ....... 4,329,663 4,019,576 3,870,261 Weighted average - dilutive stock options . 627,947 540,693 240,652 Shares issuable in connection with the acquisition of Catalog Resources, Inc. . 160,475 195,096 195,096 ---------- ---------- ---------- 5,118,085 4,755,365 4,306,009 ========== ========== ========== Net income ................................ $7,837,645 $6,328,592 $1,374,770 Primary earnings per share and common equivalent share ....................... $ 1.53 $ 1.33 $ .32 ========== ========== ========== Fully diluted earnings per share: Weighted average shares outstanding ....... 4,329,663 4,019,576 3,870,261 Fully diluted earnings per share: Weighted average - dilutive stock options . 634,430 835,286 241,827 Shares issuable in connection with the acquisition of Catalog Resources, Inc. . 160,475 195,096 195,096 ---------- ---------- ---------- 5,124,568 5,049,958 4,307,184 ========== ========== ========== Net income ................................ $7,837,645 $6,328,592 $1,374,770 Fully diluted earnings per share and common equivalent share ....................... $ 1.53 $ 1.25 $ .32 ========== ========== ========== (A) All shares and equivalent shares reflect the 10% stock dividend paid in January, 1995 and the 2 for 1 stock split paid as a 100% dividend on October 24, 1995.
EX-22 4 SUBSIDIARIES OF LCS INDUSTRIES, INC. Set forth below are the names of all subsidiaries of LCS as of November 29, 1996 required to be listed on Exhibit 22 to LCS's 1996 Annual Report on Form 10-K. Indented companies are direct subsidiaries of the company under which they are indented. Percentage Owned by State of Immediate Parent Incorporation ---------------- ------------- LCS INDUSTRIES, INC. (Parent) N/A Delaware LCS Canada, Inc. 100% Delaware LCS Industries, XXX 100% EEC Spec Holdings, Inc. 100% New York The SpeciaLISTS Ltd. 100% - Class A New York 80% - Class B Computer Marketing Systems, Inc. 51% New York Catalog Resources, Inc. 100% Delaware Catalog Liquidators, Inc. 100% Delaware EX-23 5 INDEPENDENT AUDITORS' CONSENT Board of Directors and Stockholders of LCS Industries, Inc. Clifton, New Jersey We consent to the incorporation by reference in Registration Statements No. 33-12508, No. 33-122552, No. 33-83058, No. 33-90036 and No. 33-59935 of LCS Industries, Inc. on Forms S-8, S-3, S-8, S-8 and S-3, respectively, of our report dated November 4, 1996, appearing in this Annual Report on Form 10-K of LCS Industries, Inc. for the year ended September 30, 1996. /s/Deloitte & Touche LLP - ----------------------- Deloitte & Touche LLP Parsippany, New Jersey December 18, 1996 EX-27 6
5 12-MOS SEP-30-1996 SEP-30-1996 11,893,982 10,435,026 25,146,050 627,000 225,616 48,782,877 17,299,319 9,750,090 64,969,947 29,423,855 0 0 0 46,115 30,814,438 64,969,947 0 95,570,436 0 66,120,153 16,678,548 65,000 437,198 13,324,645 5,487,000 7,837,645 0 0 0 7,837,645 1.53 1.53
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