-----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, TGSYsz+pCh8QTgOLMA4wJ/EXGEhbAvYzLu1NcnQEIU/XKgGj2b+df2Vxz5mEUlFe m0A+8LOZIQ62mLvzaEPfSA== 0000914317-97-000618.txt : 19971224 0000914317-97-000618.hdr.sgml : 19971224 ACCESSION NUMBER: 0000914317-97-000618 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971223 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: SEC FILE NUMBER: 000-12329 FILM NUMBER: 97743714 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: (FEE REQUIRED) For the fiscal year ended September 30, 1997 Commission File No. 0-12329 LCS INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 13-2648333 (State of incorporation) (I.R.S. employer identification number) 120 Brighton Road Clifton, New Jersey 07012 (Address of principal executive offices) (zip code) Registrant's telephone number: (973) 778-5588 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.01 par value) (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting and non-voting Common Stock held by non-affiliates of the registrant, based on the average of high and low sales prices for December 1, 1997: $70,719,894. The number of shares of Common Stock ($.01 par value) outstanding as of December 1, 1997: 4,810,714. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement in respect of the 1998 Annual Meeting of Stockholders is incorporated by reference into Part III hereof to the extent indicated in that Part. This Form 10-K consists of 47 pages. Index to exhibits is located at page 38. 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, -------------------------------- 1997 1996 1995 ---- ---- ---- Fulfillment services ................. 38% 37% 39% Computer services .................... 18% 19% 13% List marketing services .............. 44% 44% 48%
On September 6, 1995, the Company announced that it had entered into an agreement to provide computer services through the building of a marketing database for a major non-U.S. communications company. The total expected revenues through June, 1998 will approximate $40 million. Initial revenues under the contract were recorded during the fourth quarter of the fiscal year ended September 30, 1995. Revenues recognized under the contract amounted to 15% of consolidated sales for the fiscal year ended September 30, 1997. In June, 1997, the Company recorded a loss on investment of $954,000 (currently $863,000 net of taxes) representing a non-recurring charge for the write-off of the Company's investment in McIntyre & King, Ltd. ("M&K"). This charge represented $.17 per share in the current fiscal year. The Company's Board of Directors decided to sever the relationship with M&K due to unexpected operating losses that would have required unacceptable demands on management's time and financial support required to attempt to return M&K to profitability. As a result, effective April 5, 1997, the Company agreed to rescind its acquisition of M&K. The rescission agreement, dated June 30, 1997, provides for the return of a portion of the down payment in one year. However, recovery was uncertain and, therefore, the Company expensed all payments, advances and all related costs. On November 28, 1997, the Company received a payment from M&K of approximately $210,000 in final settlement of a portion of the down payment, which will be recorded in other income in the quarter ended December 31, 1997. On October 6, 1997, the Company announced the recording of a non-recurring charge of $960,000 ($570,000 net of taxes or $.11 per share) in the period ended September 30, 1997 relating to death benefits payable under employment agreements and other severance amounts due the Company's former Chairman, the late Arnold J. Scheine who passed away on September 22, 1997. Fulfillment Services Continuity/Order Entry LCS' continuity/order entry services provide computer-based support to the membership activities of book clubs, similar continuity (mail order) clubs and catalog companies. Continuity clubs and catalog companies, a large part of the direct-response industry, make repetitive mailings and periodic product offerings to their members or customers. The LCS system supports these efforts by processing and providing information with regard to orders, shipments, billings, returns and credit criteria, cashiering (receiving and depositing customer payments and related updating of customer files) and providing personnel to respond to inquiries from club members. The Company also provides computer-generated reports which clients use in measuring profitability and in evaluating and controlling marketing efforts. During the 1996 fiscal year, the outbound telemarketing operation was integrated into the customer service function within continuity fulfillment. Lead/Inquiry Fulfillment Leads and/or inquiries are generated by clients' advertisements which require a mailed or telephoned (to toll-free "800" numbers) customer response. These leads are received by LCS and are computer-processed using its proprietary system which accommodates clients of varying sizes from any industry and with differing volumes of activity. Processing begins by converting the lead into machine-readable form. Then, depending on the criteria supplied by the client, the Company processes the lead in a variety of ways, including the elimination of non-productive leads and the mailing, usually within 24 hours, of fulfillment packages containing the client's literature or product. At the same time, a lead form generated by computer is sent to the client's local sales office, warehouse, branch or retail outlet so that a salesperson can directly contact the prospective customer. Using codes identifying the sources of the lead, the LCS computer system produces reports allowing the client to evaluate the effectiveness of the advertising. In addition, upon return of the lead form containing the client's disposition of the lead, LCS is able to produce reports evaluating the performance of the client's sales force in handling the lead. The system may also be customized in response to unique customer requirements. Catalog Fulfillment CRI provides fulfillment services to the catalog industry. This service encompasses the maintaining of its clients' inventory, receiving its clients' customer orders and payments by mail as well as by dedicated telemarketing personnel via toll-free "800" numbers which are open twenty-four hours a day, year-round, and the subsequent shipping of the merchandise. Orders received are entered into CRI's computer system with appropriate validations being performed prior to processing. This includes receiving payment, whether in the form of check, money order or credit card. The CRI system includes various features which are intended to minimize credit losses to its clients. The order is then picked, packed and shipped. CRI also handles inventory returns for its clients as well as providing dedicated customer service representatives to handle customer inquiries, complaints, etc. Various reports are developed and provided to CRI's clients to enable them to properly analyze their marketing efforts. Computer Services Direct-response marketing consists of selective and analytical methods of reaching a specific audience for the sale of clients' goods and services. These methods, applied singly or in combination, can accurately determine the most responsive audience for a particular direct marketing effort. The Company's computer systems tabulate, store and process this information for future use by clients, resulting in the more efficient and cost-effective use of their sales and advertising budgets. International Telecommunications The Company is also involved in the design, development and implementation of marketing databases for communications companies both within and outside the United States. This entails conversion of raw data on customer billings and control data into marketing tools, the objective being retention of customer base, increasing market share or win back of previously lost market share. List Maintenance List maintenance involves the processing, updating and storing of mailing lists and other demographic information on the Company's computers for clients' promotional and list rental activities. Mailing lists may be combined and enhanced with demographic information to form databases, which can be used as the basis of additional client promotions or marketed to other list users (see "Enhancement" below). The Company maintains lists and databases for its clients who use them for marketing their own products and services as well as for rental to other marketers. The lists and databases maintained by LCS presently range in size from several thousand to approximately four million names. Certain clients have on-line access to lists and databases maintained for them by LCS. Each list or database may be used to produce a variety of end-use formats, such as labels, listings, index cards, computer letters and magnetic tapes, cartridges or disks. Demographic information can be customized for the client and used as the selection criteria for a list or database rental. In addition, lists can be presorted for maximum postal cost efficiencies. "Fastfax," the Company's proprietary list fulfillment order processing system, provides clients with on-line database list segment counting and order selection capabilities using their own personal computer terminals. List orders entered using this system can be fulfilled within 24-48 hours after authorization. Merge/Purge Merge/purge is a computerized system which recognizes and eliminates duplicate names when combining large numbers of lists or databases for mailing programs. It can also be used to identify names with high response potential by identifying duplications between lists with similar demographics. Identification of these multiple prospects enables the direct-response client to plan marketing strategy, including follow-up promotions. Because clients may wish to target a promotion to a highly segmented audience, merge/purge can be applied to attributes (such as location or gender) in addition to names in a number of lists and databases and, based upon the clients' criteria, can generate refined lists identifying the target audience. LCS' software can also remove (suppress) the names of persons who the client deems inappropriate or who have a low probability of ordering based on past experience. 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 1997, revenues recognized in connection with the contract to provide computer services to a non-U.S. communications company amounted to 15% of consolidated sales, management does not believe that the loss of any single customer would have a severe impact (as defined in Statement of Position 94-6 "Disclosure of Certain Significant Risks and Uncertainties" issued by the American Institute of Certified Public Accountants in December, 1994) on the Company and its subsidiaries taken as a whole. This contract contributes significantly to the profits of the Company. Historically, the Company has been successful in replacing completed contracts. While the current contract extends through June, 1998, there is no assurance that a replacement project will be obtained. Customer Trade Terms As the Company is in a service business, a large proportion of its consolidated current assets and a significant portion of its consolidated total assets are represented by trade accounts receivable. Invoices for service to clients of the Company and its subsidiaries are customarily rendered monthly for recurring matters and at the completion of special projects. For financial statement purposes, revenues and related costs are recognized when services are performed. Revenues under long-term consulting contracts are recognized on the percentage-of-completion method of accounting measured by the percentage of labor hours incurred to date to the estimated total labor hours required for each contract. In the case of approximately 34% of the consolidated trade accounts receivable of the Company and its subsidiaries as of September 30, 1997, various payment terms exist ranging from payable upon receipt of invoice to 60 days from date of invoice, and in the case of substantially all of the balance (primarily those of SpeciaLISTS), payment terms are 60 days after the client's mailing date. Management believes that the consolidated trade accounts receivable of the Company and its subsidiaries as of September 30, 1997, net of the allowance for doubtful accounts reflected on the consolidated balance sheet as at such date included in the Consolidated Financial Statements, are collectable in the ordinary course of business. Product Protection and Proprietary Rights LCS uses several methods to ensure the protection of confidential client data and its proprietary systems. The Company's computer tapes, cartridges and disks are accessible only to authorized personnel. LCS protects on-line access to data by restricting access to on-line terminals and by utilizing a periodically changing, segmented password system. To enhance safety in case of fire or other natural disasters, duplicate tapes containing client data are stored at an off-site location. The Company considers certain of its software to be proprietary. It currently relies upon trade secret laws and internal non-disclosure agreements to protect the software. LCS has no patents or copyrights. In management's opinion, no such patent or copyright protection is customary or necessary. Competition The segment of the computer services industry that serves the direct-response marketing industry is highly competitive. Competition is related primarily to technical capability and expertise, pricing, quality of work and ability to meet deadlines and is not confined to specific geographic areas. The industry in which LCS operates is subject to rapid client marketing changes requiring constant adaptation to provide competitive services. Reliable data on LCS's relative position in its market is not available. The Company competes not only with other independent specialized computer service companies but also with in-house computer service departments of companies in the direct-response marketing industry. Some of the companies with which LCS competes have access to substantially greater financial and other resources and offer a wider range of non-computer services than the Company. Employees As of December 1, 1997, the Company employed 1,346 persons, of whom 953 were employed on a full-time basis. LCS does not have any collective bargaining agreements with its employees and believes its relations with its employees to be good. 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 September 2000 1200 Harbor Blvd., Weehawken, NJ (2) 18,100 June 2003 Jonathan's Landing, Magnolia, DE (4) 17,000 Month to Month 100 Enterprise Place, Dover, DE (1)(5) 55,000 Month to Month 97 Commerce Way, Dover, DE (1) 124,000 October 2005 155 Commerce Way, Dover, DE (1) (3) 35,530 July 1999 2 McKee Road, Dover, DE (4) 29,000 Month to Month 155 Commerce Way, Dover, DE (4) 56,762 April 1999 5725 S. University Dr., Davie, FL (2) 11,550 April 2002 555 Grove Street, Herndon, VA (2) 1,495 December 1998 European Economic Community (2) 8,000 June 1998 -------- TOTAL 435,082
- --------------- (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 MarketSM under the symbol LCSI. The following table sets forth the quarterly high and low sales prices of the common stock, as quoted on Nasdaq. Such quotations represent prices between dealers and do not include retail mark-ups, mark-downs or commissions. In the first quarter of fiscal 1993, an initial cash dividend of $.10 per share was paid. Regular quarterly dividends of $.025 share were paid from the second quarter of fiscal 1993 through the first quarter of fiscal 1995 and $.0375 per share were paid through the first quarter of fiscal 1996. Commencing in the second quarter of fiscal 1996, subsequent to the 2 for 1 stock split paid as a 100% stock dividend on October 24, 1995, regular quarterly dividends of $.025 per share were paid. Effective with the second quarter of fiscal 1997, regular quarterly dividends of $.0375 per share were paid. As of December 1, 1997, there were 124 registered holders and an estimated 2,400 beneficial holders of record of the Company's common stock.
Price Price - ------------------------------------------------------------------------------------------------------------------------------------ High Low High Low - ------------------------------------------------------------------------------------------------------------------------------------ Fiscal Year Ended Fiscal Year Ended September 30, 1997 September 30, 1996 1st Quarter................... $15 1/2 $12 1/2 1st Quarter........................ $19 3/4 $13 2nd Quarter................... 16 1/8 13 1/2 2nd Quarter........................ 28 12 3/8 3rd Quarter................... 17 1/4 13 3/4 3rd Quarter........................ 27 10 1/4 4th Quarter................... 20 14 4th Quarter........................ 15 3/4 9 1/2
Item 6. Selected Financial Data.
Five Year Review Income Statement Data (In thousands, except per share amounts) - ------------------------------------------------------------------------------------------------------------------------- Years Ended September 30, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- Sales ......................................... $ 100,627 $ 95,570 $ 78,863 $ 62,690 $ 53,002 Cost of sales ................................. 69,384 66,120 54,717 46,986 39,433 Gross profit .................................. 31,243 29,450 24,146 15,704 13,569 Selling and administrative expenses ........... 17,906 16,679 13,653 13,270 12,094 Dividend and interest (income) expense, net ... (1,000) (553) (167) 65 (3) Other expense (Note 1) ........................ 1,914 -- -- -- 385 Income before income taxes .................... 12,423 13,324 10,660 2,369 1,093 Net income .................................... 6,987 7,838 6,329 1,375 626 Per common and common equivalent share (Note 2) Primary earnings (Note 1) ..................... 1.37 1.53 1.33 .32 .16 Weighted average number of shares outstanding . 5,104 5,118 4,755 4,306 3,841 Fully diluted earnings (Note 1) ............... 1.35 1.53 1.25 .32 .16 Weighted average number of shares outstanding . 5,180 5,125 5,050 4,307 3,847 Dividends per share ........................... .138 .094 .066 .045 .08 - -------------------
Note 1 - For 1997, includes write-off of the Company's investment in McIntyre and King, Ltd of $954,000 (currently $863,000 net of taxes or $.17 per share) and a non-recurring charge of $960,000 ($570,000 net of taxes or $.11 per share) related to the death benefits under employment agreements and other severance amounts due the Company's former Chairman. Note 2 - 1995 and prior years have been retroactively restated to reflect the 10% stock dividend paid in January, 1995 and the 2 for 1 stock split paid as a 100% stock dividend on October 24, 1995.
Balance Sheet Data (In thousands) - -------------------------------------------------------------------------------------------- September 30, 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------- Working capital ................ $26,799 $19,359 $10,569 $ 4,673 $ 3,460 Total assets ................... 69,509 64,970 49,737 31,815 28,983 Long-term debt and capital lease obligations - net of current portion ......... 3,445 4,583 3,436 1,805 1,983 Stockholders' equity ........... 38,276 30,861 22,048 12,865 11,339 - -------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth, for the periods indicated, the percentage of sales represented by data derived from the Company's Consolidated Statements of Income:
- --------------------------------------------------------------------------------- Year Ended September 30, 1997 1996 1995 - --------------------------------------------------------------------------------- Sales ...................................... 100.0% 100.0% 100.0% Cost of sales .............................. 69.0 69.2 69.4 ----- ----- ----- Gross profit ............................... 31.0 30.8 30.6 Selling and administrative ................. 17.8 17.4 17.3 Dividend and interest (income) expense, net (1.0) (.6) (.2) Other expense .............................. 1.9 -- -- ----- ----- ----- Income before income taxes ................. 12.3 14.0 13.5 Provision for income taxes ................. 5.4 5.8 5.5 ----- ----- ----- Net income ................................. 6.9% 8.2% 8.0% ===== ===== =====
Fiscal Year 1997 Compared to Fiscal Year 1996 Sales in 1997 increased $5.1 million (5%) compared to 1996 principally as a result of a $2.9 million (8%) increase in fulfillment services and a $2.1 million (5%) increase in list marketing. The increase in fulfillment services sales reflects 16% increases in both continuity and catalog fulfillment services partially offset by a decrease of 82% in inbound telemarketing revenues, which is in line with the Company's program to de-emphasize this activity. The continuity increase was primarily the result of increased billings to existing customers while the catalog increase resulted from billings to new customers, increased billings to existing customers partially offset by the loss of billings to several customers upon their acquisition by third parties. Computer services revenues were comparable to the prior year and continue to benefit from the revenues related to the previously announced $40 million contract to build a marketing database for a major non-U.S. communications company. The contract extends through June, 1998. Revenue is recognized on the percentage-of-completion method of accounting measured by the percentage of labor hours incurred to date to the estimated total labor hours required for the contract. Initial revenues from this contract were recorded in the last quarter of fiscal 1995. The list marketing increase resulted generally from an expanded customer base and increased volume with continuing customers. Gross profit in 1997 increased $1.8 million (6%) compared to 1996. Gross profit, as percentage of sales, was 31% in both fiscal 1997 and 1996. Both fiscal years include the favorable impact from the margin associated with the computer services revenues, as described above. Selling and administrative expenses in 1997 increased $1.2 million (7%) compared to 1996. Selling and administrative expenses, as a percentage of sales, were 18% in the current year compared to 17% in the comparable prior period. The increase in the amount of these expenses reflects increased expenses associated with incremental revenues and higher outlays for professional fees primarily related to investment banking, financial public relations and expansion activities. Net dividend and interest income in 1997 increased $445,000 from 1996. Dividend and interest income in 1997 increased $453,000 (46%) from 1996 as a result of a higher level of funds available for reinvestment and marginally higher interest rates. Interest expense was comparable in both fiscal years. The unsecured line of credit held available for the Company was not used during either fiscal year. Other expense during the current fiscal year includes the June, 1997 recorded loss on investment of $954,000 (currently $863,000 net of taxes) representing a non-recurring charge for the write-off of the Company's investment in McIntyre & King, Ltd. ("M&K"). This charge represented $.17 per share in the current fiscal year. The Company's Board of Directors decided to sever the relationship with M&K due to unexpected operating losses that would have required unacceptable demands on management's time and financial support required to attempt to return M&K to profitability. As a result, effective April 5, 1997, the Company agreed to rescind its acquisition of M&K. The rescission agreement, dated June 30, 1997, provides for the return of a portion of the down payment in one year. However, recovery was uncertain and, therefore, the Company expensed all payments, advances and all related costs. On November 28, 1997, the Company received a payment from M&K of approximately $210,000 in final settlement of a portion of the down payment, which will be recorded in other income in the quarter ended December 31, 1997. On October 6, 1997, the Company announced the recording of a non-recurring charge of $960,000 ($570,000 net of taxes or $.11 per share) in the period ended September 30, 1997 relating to death benefits payable under employment agreements and other severance amounts due the Company's former Chairman, the late Arnold J. Scheine who passed away on September 22, 1997. The effective tax rate in 1997 was 44% compared to 41% in 1996. The provisions for taxes for the two fiscal years reflect relatively normal relationships between book income and taxes thereon with the exception of the loss on investment in M&K, as described above. The Company currently does not anticipate realizing sufficient capital gains during the tax carryforward period to offset this capital loss and, accordingly, no tax benefit has been recorded. Net income for 1997 decreased $851,000 (11%) compared to 1996 primarily as a result of the other expense charges, described above, partially offset by higher contribution levels for the continuity and catalog operations. Excluding the impact of the other expense charges, net income would have increased $587,000 or 7%. Fiscal Year 1996 Compared to Fiscal Year 1995 Sales in 1996 increased $16.7 million (21%) compared to 1995 principally as a result of a $7.4 million (72%) increase in computer services, a $5.0 million (17%) increase in fulfillment services and a $4.2 million (11%) increase in list marketing. Computer services increase reflects the revenues related to the $40 million contract to provide computer services through the building of a marketing database for a major non-U.S. communications company. The contract extends through June, 1998, subject to termination under certain circumstances. 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. Liquidity and Capital Resources Working capital at September 30, 1997 increased to $26,799,000 from $19,359,000 at the prior year end. Current assets increased $5,555,000 principally from increases in cash and investments - held-to-maturity partially offset by a decrease in accounts receivable. Current liabilities decreased $1,884,000 primarily as a result of a decrease in deferred revenue partially offset by increases in accrued salaries and commissions and other accrued expenses. At September 30, 1997, the ratio of long-term debt to equity was .09 to 1. For the fiscal year ended September 30, 1997, cash generated by operations decreased $6,526,000 over such amounts generated in 1996. The decrease was primarily attributable to decreases in net income of $851,000 and in adjustments to net income and changes in operating assets and liabilities of $5,675,000. This decrease in adjustments to net income and changes in operating assets was primarily the result of a decrease in deferred revenue of $8,541,000 and an increase in prepaid expenses of $722,000 partially offset by a decrease in accounts receivable of $2,004,000 and increases in accounts payable and accrued expenses of $2,019,000. Cash used in investing activities decreased $9,218,000 over the prior year. This decrease was primarily attributed to a decline in additions to investments of $6,619,000 and a reduction in additions to property and equipment of $2,599,000. During the current fiscal year, funds used by financing activities increased $3,230,000, primarily as a result of lower borrowings of $2,500,000, reduced funds from the exercise of stock options of $260,000 and lower proceeds from Employee Stock Purchase Plan and employment agreement purchases of $47,000 combined with increased repayments of debt of $197,000 and dividend payments of $227,000. Pursuant to the purchase agreement, as amended, with CRI, the Company is obligated to pay to CRI's selling shareholders in cash or stock up to an aggregate of $10,000,000. Under such purchase agreement, the Company will pay $1,012,500 on January 1, 1998 bringing the total payments to that date to $5,950,000. As outlined in Note 2 to the accompanying consolidated financial statements, the present value of the remaining obligation of $6,075,000, at September 30, 1995 was recorded at that time resulting in an increase in goodwill at that date of $4,478,000. Management believes cash generated from current operations and other liquid assets combined with the available bank credit line will be sufficient to meet cash flow needs during the 1998 fiscal year, including the payment to former CRI shareholders due January 1, 1998. Recently Issued Accounting Standards In March, 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per share", which supersedes Accounting Principles Board Opinion No. 15. SFAS 128 is effective for Financial Statements issued for periods ending after December 15, 1997 and simplifies the computation of earnings per share by replacing the presentation of primary earnings per share with a presentation of basic earnings per share. The Statement requires dual presentation of basic and diluted earnings per share by entities with complex capital structures. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. Management of the Company does not believe that there will be any material effect from adopting SFAS No. 128. In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires a reconciliation of net income to comprehensive income in the financial statements. Comprehensive income includes items that are excluded from net income and reported as components of stockholders' equity, such as unrealized gains and losses on certain investments in debt and equity securities, foreign currency items and minimum pension liability adjustments. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Management of the Company does not believe there will be any material effect from adopting SFAS No. 130. In June, 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 requires the reporting of profit and loss, specific revenue and expense items and assets for reportable segments. It also requires the reconciliation of total segment revenues, total segment profit or loss, total segment assets and other amounts disclosed for segments to the corresponding amounts in the general purpose financial statements. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company has not yet fully determined what additional disclosures may be required in connection with adopting SFAS No. 131. Item 8. Financial Statements and Supplementary Data. INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders of LCS Industries, Inc. Clifton, New Jersey We have audited the accompanying consolidated balance sheets of LCS Industries, Inc. and Subsidiaries (the "Company") as of September 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of LCS Industries, Inc. and its subsidiaries as of September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997 in conformity with generally accepted accounting principles. /s/Deloitte & Touche LLP - ------------------------ Deloitte & Touche LLP Parsippany, NJ November 4, 1997 (November 28, 1997 as to Note 13)
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended September 30, ..... 1997 1996 1995 ------------- ------------- ------------- Net sales ............................. $ 100,627,292 $ 95,570,436 $ 78,863,443 Cost of sales ......................... 69,383,846 66,120,153 54,717,497 ------------- ------------- ------------- Gross profit .......................... 31,243,446 29,450,283 24,145,946 Selling and administrative expenses ... 17,905,852 16,678,548 13,653,493 Other (income) expense: Dividend and interest income ....... (1,442,707) (990,108) (354,600) Interest expense ................... 443,642 437,198 187,461 Other expense ...................... 1,914,000 -- -- ------------- ------------- ------------- Income before income taxes ............ 12,422,659 13,324,645 10,659,592 Provision for income taxes ............ 5,436,000 5,487,000 4,331,000 ------------- ------------- ------------- Net income ............................ $ 6,986,659 $ 7,837,645 $ 6,328,592 ============= ============= ============= Per common and common equivalent share: Primary earnings ...................... $ 1.37 $ 1.53 $ 1.33 ============= ============= ============= Fully diluted earnings ................ $ 1.35 $ 1.53 $ 1.25 ============= ============= ============= Dividends ............................. $ .138 $ .094 $ .066 ============= ============= =============
See Notes to Consolidated Financial Statements.
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ................................... $ 14,619,271 $ 11,893,982 Investments - held-to-maturity .............................. 14,410,101 10,435,026 Accounts receivable (less allowance for doubtful accounts: 1997 - $496,000 and 1996 - $627,000) .................................... 23,163,774 24,519,050 Prepaid expenses and other current assets ................... 1,460,990 1,596,819 Deferred taxes .............................................. 684,000 338,000 ------------ ------------ Total current assets ...................................... 54,338,136 48,782,877 ------------ ------------ Investments - available-for-sale, net .......................... 123,708 369,722 Property and equipment, net .................................... 7,093,790 7,549,229 Goodwill (net of accumulated amortization: 1997 - $806,204 and 1996 - $519,855) .............................. 7,280,977 7,567,326 Other assets ................................................... 672,656 700,793 ------------ ------------ $ 69,509,267 $ 64,969,947 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................ $ 14,798,326 $ 14,726,387 Accrued salaries and commissions ............................ 3,127,141 2,389,837 Other accrued expenses ...................................... 3,899,876 2,513,841 Income taxes payable ........................................ 290,407 215,635 Current portion of long-term debt ........................... 1,087,511 1,047,989 Current portion of capital lease obligations ................ 211,580 390,399 Deferred revenue ............................................ 4,124,699 8,139,767 ------------ ------------ Total current liabilities ................................. 27,539,540 29,423,855 ------------ ------------ Long-term debt, net of current portion ......................... 3,444,533 4,331,542 Capital lease obligations, net of current portion .............. -- 250,997 Deferred taxes ................................................. 249,000 103,000
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) September 30, 1997 1996 ------------ ------------ Stockholders' equity: Preferred stock $.01 par value; authorized 1,000,000 shares; issued - none Common stock $.01 par value; authorized 15,000,000 shares; issued 1997 - 4,854,847 shares and 1996 - 4,611,487 shares ...................... 48,548 46,115 Common stock issuable ....................................... 1,490,431 1,945,983 Additional paid-in capital .................................. 8,702,971 7,223,263 Retained earnings ........................................... 28,245,206 21,887,737 ------------ ------------ 38,487,156 31,103,098 Less: Treasury stock, at cost, 187,766 shares .............. (207,953) (207,953) Available-for-sale securities valuation adjustment, net of deferred income taxes .................... (3,009) (34,592) ------------ ------------ Total stockholders' equity ................................ 38,276,194 30,860,553 ------------ ------------ $ 69,509,267 $ 64,969,947 ============ ============
See Notes to Consolidated Financial Statements.
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Common Stock $.01 Par Value Common Additional ----------------------------------- Stock Paid-in Balance Shares Amount Issuable Capital --------------------------------------------------------------- October 1, 1994 ................. 1,909,337 $ 19,093 $ 967,788 $ 2,261,497 Acquisition of Catalog Resources, Inc. ............... Common stock issued ........... 63,613 636 (506,250) 505,614 Present value of future stock distributions ......... -- -- 1,945,983 -- Exercise of stock options ....... 127,230 1,273 -- 651,260 Stock dividend - 10% ............ 179,929 1,799 -- 1,527,597 Stock dividend - 100% ........... 2,061,087 20,611 -- (20,611) Stock purchased through Employee Stock Purchase Plan and employment agreements ..... 6,690 67 -- 80,098 Dividends paid .................. -- -- -- -- Valuation adjustment ............ -- -- -- -- Tax benefit of exercise of stock options ................. -- -- -- 426,000 Net income ...................... -- -- -- -- --------- ------------ ----------- ----------- September 30, 1995 .............. 4,347,886 43,479 2,407,521 5,431,455 Acquisition of Catalog Resources, Inc. ............... Common stock issued ........... 34,621 346 (461,538) 461,192 Exercise of stock options ....... 216,903 2,169 -- 617,504 Stock Dividend - converted shares 360 4 -- 251 Stock purchased through Employee Stock Purchase Plan and employment agreements ..... 11,717 117 -- 153,861 Dividends paid .................. -- (401,762) -- -- Valuation adjustment, net ....... -- -- -- -- Tax benefit of exercise of stock options ................. -- -- -- 559,000 Net income ...................... -- -- -- -- --------- ------------ ----------- ----------- September 30, 1996 .............. 4,611,487 46,115 1,945,983 7,223,263
Treasury Stock - Available-for- at Cost Sale Securities Retained --------------------------- Valuation Balance Earnings Shares Amount Adjustment Total - ------- -------- ------ ------ ---------- ----- October 1, 1994 ................. $ 9,912,936 187,766 ($ 207,953) ($ 87,969) $ 12,865,392 Acquisition of Catalog Resources, Inc. ............... Common stock issued ........... -- -- -- -- -- Present value of future stock distributions ......... -- -- -- -- 1,945,983 Exercise of stock options ....... -- -- -- -- 652,533 Stock dividend - 10% ............ (1,529,396) -- -- -- -- Stock dividend - 100% ........... -- -- -- -- -- Stock purchased through Employee Stock Purchase Plan and employment agreements ..... -- -- -- -- 80,165 Dividends paid .................. (260,278) -- -- -- (260,278) Valuation adjustment ............ -- -- -- 9,132 9,132 Tax benefit of exercise of stock options ................. -- -- -- -- 426,000 Net income ...................... 6,328,592 -- -- -- 6,328,592 ------------ -------- ------------ ------------ ------------ September 30, 1995 .............. 14,451,854 187,766 (207,953) (78,837) 22,047,519 Acquisition of Catalog Resources, Inc. ............... Common stock issued ........... -- -- -- -- -- Exercise of stock options ....... -- -- -- -- 619,673 Stock Dividend - converted shares -- -- -- -- 255 Stock purchased through Employee Stock Purchase Plan and employment agreements ..... -- -- -- -- 153,978 Dividends paid .................. (401,762) -- -- -- (401,762) Valuation adjustment, net ....... -- -- -- 44,245 44,245 Tax benefit of exercise of stock options ................. -- -- -- -- 559,000 Net income ...................... 7,837,645 -- -- -- 7,837,645 ------------ -------- ------------ ------------ ------------ September 30, 1996 .............. 21,887,737 187,766 (207,953) (34,592) 30,860,553
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Common Stock $.01 Par Value Common Additional ----------------------------------- Stock Paid-in Balance Shares Amount Issuable Capital --------------------------------------------------------------- Acquisition of Catalog Resources, Inc. ............... Common stock issued ........... 38,762 388 (455,552) 455,164 Exercise of stock options ....... 195,675 1,956 -- 517,543 Stock Dividend - converted shares 318 3 -- 218 Stock purchased through Employee Stock Purchase Plan and employment agreements ..... 8,605 86 -- 106,783 Dividends paid .................. -- -- -- -- Valuation adjustment, net ....... -- -- -- -- Tax benefit of exercise of stock options ................. -- -- -- 400,000 Net income ...................... -- -- -- -- --------- ------------ ----------- ----------- September 30, 1997 .............. 4,854,847 $ 48,548 $ 1,490,431 $ 8,702,971 ========= ============ ============ ============ Treasury Stock - Available-for- at Cost Sale Securities Retained --------------------------- Valuation Balance Earnings Shares Amount Adjustment Total - ------- -------- ------ ------ ---------- ----- Acquisition of Catalog Resources, Inc. ............... Common stock issued ........... -- -- -- -- -- Exercise of stock options ....... -- -- -- -- 519,499 Stock Dividend - converted shares -- -- -- -- 221 Stock purchased through Employee Stock Purchase Plan and employment agreements ..... -- -- -- -- 106,869 Dividends paid .................. (629,190) -- -- -- 629,190 Valuation adjustment, net ....... -- -- -- 31,583 31,583 Tax benefit of exercise of stock options ................. -- -- -- -- 400,000 Net income ...................... 6,986,659 -- -- -- 6,986,659 ------------ -------- ------------ ------------ ------------ September 30, 1997 .............. $ 28,245,206 187,766 ($ 207,953) ($ 3,009) $ 38,276,194 ============ ======= ============ ============ ============
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended September 30, 1997 1996 1995 ------------ ------------ ------------ Increase (Decrease) in cash and cash equivalents Cash flows from operating activities: Net income ............................................ $ 6,986,659 $ 7,837,645 $ 6,328,592 ------------ ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ..................... 2,504,699 2,321,718 1,861,883 Deferred income taxes ............................. (220,600) (21,000) (95,000) Provision for doubtful accounts receivable ........ 119,000 65,000 121,625 Gains on sales of equipment ....................... -- -- (9,750) Gain on sale of available-for-sale securities, net (474) (1,046) -- ------------ ------------ ------------ Total adjustments ................................. 2,402,625 2,364,672 1,878,758 Changes in operating assets and liabilities: Accounts receivable ............................... 1,236,276 (768,131) (6,021,005) Prepaid expenses and other current assets ......... (426,921) 295,018 (660,616) Accounts payable and accrued expenses ............. 2,366,400 347,847 3,778,404 Income taxes payable .............................. 74,450 215,635 (153,803) Deferred revenue .................................. (4,015,068) 4,525,436 3,614,331 Security deposits ................................. 12,893 331,262 (581,846) Other, net ........................................ 15,244 29,111 (58,976) ------------ ------------ ------------ Total adjustments and changes ..................... 1,665,899 7,340,850 1,795,247 ------------ ------------ ------------ Net cash provided by operating activities ............. 8,652,558 15,178,495 8,123,839 ------------ ------------ ------------ Cash flows from financing activities: Changes in note payable, long-term debt and capital leases (including current portion): Borrowings ........................................ -- 2,500,000 -- Repayments ........................................ (1,448,425) (1,251,888) (1,117,273) Dividends paid ........................................ (628,969) (401,507) (260,278) Exercise of stock options ............................. 919,499 1,178,673 1,078,533 Employee Stock Purchase Plan and employment agreement proceeds ................................ 106,869 153,978 80,165 ------------ ------------ ------------ Net cash (used in) provided by financing activities ... (1,051,026) 2,179,256 (218,853) ------------ ------------ ------------ Cash flows from investing activities: Additions to property and equipment ................... (1,762,911) (4,362,085) (1,589,400) Net (purchases) sales of investments .................. (3,113,332) (9,732,515) 535,068 Proceeds from sales of equipment ...................... -- -- 100,688 ------------ ------------ ------------ Net cash used in investing activities ................. (4,876,243) (14,094,600) (953,644) ------------ ------------ ------------ Cash and cash equivalents: Net increase in cash and cash equivalents ............. 2,725,289 3,263,151 6,951,342 Cash and cash equivalents at beginning of year ........ 11,893,982 8,630,831 1,679,489 ------------ ------------ ------------ Cash and cash equivalents at end of year .............. $ 14,619,271 $ 11,893,982 $ 8,630,831 ============ ============ ============
LCS INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Continued from previous page. For the Years Ended September 30, 1997 1996 1995 ----------- ----------- ----------- Supplementary disclosures of cash flow information: Cash paid during the period for: Interest ......................................... $ 273,000 $ 219,000 $ 153,000 Income taxes ..................................... $ 5,337,000 $ 4,261,000 $ 4,637,000 Supplemental disclosures of non-cash investing and financing activities: Acquisition of business: Fair value of assets acquired .................... $ -- $ -- $ 4,478,091 Issuance of debt ................................. -- -- (2,532,108) Common stock issuable ............................ -- -- (1,945,983) ----------- ----------- ----------- Liabilities assumed .............................. $ -- $ -- $ -- =========== =========== ===========
For the years ended September 30, 1997, 1996 and 1995, $455,552, $461,538 and $506,250 of common stock issuable was converted into 38,762, 34,621 and 139,948 shares, respectively, of the Company's common stock in accordance with the terms of the Catalog Resources, Inc. purchase agreement, as amended. Capital lease obligations: For the year ended September 30, 1995, capital lease obligations of $216,000, were incurred for the leasing of equipment. There were no capital lease obligations entered into during the years ended September 30, 1997 and 1996. Valuation adjustment: For the years ended September 30, 1997, 1996, and 1995, the account was adjusted to reflect an increase in market values of the available-for-sale securities portfolio of $31,583, $44,245, and $9,132, net of deferred income taxes. Stock Dividends: During Fiscal 1997, 318 shares of the Company's common stock were paid as dividends upon exchange of 133 shares of the Company's "old" common stock. On January 5, 1996, 360 shares of the Company's common stock were paid as dividends upon exchange of 150 shares of the Company's "old" common stock. 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. and its Subsidiaries (the "Company"). The Company provides outsourcing services specializing in international telecommunications, fulfillment, list and computer services. The Company's services are performed within the United States and Canada except for a computer services contract with a non-U.S. communications company. All material intercompany transactions and balances have been eliminated in consolidation. B - Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are made when accounting for allowance for doubtful accounts, sales adjustments, depreciation and amortization, carrying value of goodwill, costs to complete long-term contracts which are accounted for using the percentage-of-completion method of accounting, taxes and contingencies. C - Cash and cash equivalents - Cash and cash equivalents include short-term cash investments with maturities of three months or less at date of acquisition. Such investments are carried at cost, which approximates market, and amounted to $12,931,369 and $9,835,000 at September 30, 1997 and 1996, respectively. D - Investments - The Company records its investments based on the provisions of Statement of Financial Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". In accordance with the provisions of this Statement, the Company has classified its investments in debt securities into held-to-maturity, trading or available-for-sale based upon management's intent with respect to such investments and the Company's ability to so hold. Equity securities are classified as available-for-sale or trading depending on management's intent. Market values are based on publicly quoted market prices. E - Long-Lived Assets - Effective October 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS 121") , "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of". Long-lived assets and identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from use of the assets and their eventual disposition. The Company determined that as of September 30, 1997, there had been no impairment in the carrying value of long-lived assets. F - Property and equipment - Property and equipment are stated at cost. Depreciation and amortization, which includes the amortization of assets recorded under capital leases, are computed using the straight-line method over the estimated serviceable lives of the respective assets or the initial or remaining terms of leases. Leasehold improvements are amortized, using the straight-line method, over the shorter of the estimated useful life of the asset or the life of the lease. G - Goodwill - Represents the unamortized excess cost of acquiring Catalog Resources, Inc. over the fair value of the net assets received at the acquisition date. This asset is being amortized on the straight-line basis over 30 years. The consolidated statements of operations for the fiscal years ended September 30, 1997, 1996 and 1995 include goodwill amortization of $286,300, $286,400 and $123,500, respectively. The Company regularly assesses the recoverability of goodwill in accordance with the provisions of SFAS No. 121. H - Revenue recognition - Sales and related cost of sales are recognized when services are performed. Revenues under long-term consulting contracts are recognized based on the percentage-of-completion method of accounting measured by the percentage of labor hours incurred to date to the estimated total labor hours required for each contract. Deferred revenue represents billings in excess of revenues recognized as sales. I - Income taxes - The Company records income taxes based on the provisions of Statement of Financial Standards No. 109, "Accounting for Income Taxes". Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. J - Earnings Per Common Share - Earnings per common share are based on the weighted average number of common and common equivalent shares outstanding during the year. Stock options are common stock equivalents. For the years ended September 30, 1997, 1996 and 1995, the weighted average number of shares used in determining primary earnings per common share was 5,103,838, 5,118,085 and 4,755,365, respectively. For the same periods, the weighted average number of shares used in determining fully diluted earnings per common share was 5,179,756, 5,124,568 and 5,049,958, respectively. Fully diluted earnings per common share is presented due to the effect of dilution resulting from outstanding options calculated using the year end stock market price (such market price is higher than the average quarterly price used in computing primary earnings per common share). The weighted average shares used in the computations of fiscal years 1997, 1996 and 1995 primary and fully diluted earnings per share include the shares issuable in accordance with the agreement, as amended, relating to the acquisition of Catalog Resources, Inc. The weighted average shares used in the computations of fiscal 1995 primary and fully diluted earnings per share have been restated to reflect the 10% stock dividend paid January 31, 1995 and the 2 for 1 stock split paid as a 100% stock dividend on October 24, 1995. Other references to shares and per share data, as appropriate, reflect the effects of these stock dividends. K - Reclassifications - Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 presentation. Note 2 - Acquisition On April 1, 1993, the Company completed the purchase of all the outstanding stock of Catalog Resources, Inc. ("CRI"). CRI's results of operations are included in the Company's Consolidated Statements of Income from that date. The initial purchase price was $3,500,000. In addition, certain additional payments could have been earned by the former CRI shareholders if CRI's pretax income, as defined by the agreement, reached certain amounts during the next five years. Of the initial purchase price, $1,500,000 was paid at the closing, consisting of $750,000 in cash and 267,378 shares of the Company's common stock and the balance payable in amounts of $400,000 on April 1 of each of the next five years, with payments to be 50 percent in cash and 50 percent in stock. On April 1, 1994, $400,000 was paid, consisting of $200,000 in cash and 57,578 shares of the Company's common stock. Effective August 1, 1994, the purchase agreement was amended to limit to $8,100,000 the aggregate amount of additional purchase consideration to be paid in addition to the $1,900,000 paid at such date. The additional amount to be paid is based upon the operating performance of CRI over the eight year period beginning October 1, 1993. Based upon CRI's earnings for each fiscal year ending on September 30, a maximum annual payment of $1,012,500 is payable in January of the following year, which amount is subject to a dollar-for-dollar reduction based on CRI's operating results. Such payments are calculated separately for each year. Each payment will consist of 50 percent in cash and 50 percent in common stock of the Company with the maximum number of shares to be delivered under the purchase agreement, as amended, not to exceed 660,000 shares. The portion of these payments not made in stock is payable in cash. The number of shares to be issued will be based on the market value, as defined, of the common stock at the future payment dates. Based on the terms of the amended agreement and the achievement of the required operating results for the preceding fiscal year, payments of $1,012,500, one half in cash and one half in stock, were made on January 1, 1995, 1996 and 1997. As of September 30, 1997, 538,287 shares had been delivered under the provisions of the purchase agreement, as amended. Based on an evaluation at September 30, 1995 of current operations and anticipated future operating results, it was considered probable at that date that future CRI earnings levels would be attained which would require the maximum future payments of $6,075,000 to be made. As a result, the present value (interest at 8.75%) of those payments was recorded at September 30, 1995; $2,532,108 as long-term debt and $1,945,983 as common stock issuable, with a corresponding increase in goodwill. The common stock issuable amount reflects the maximum number of shares (660,000 less those shares issued and delivered prior to September 30, 1995) issuable under the terms of the purchase agreement, as amended, based on the market price of the Company's common stock at September 30, 1995. This amount is subject to adjustment, based on the future movements in the market price of the Company's common stock. No adjustment was recorded during the current fiscal year. Based on the operating results for the fiscal year ended September 30, 1997, the January 1, 1998 scheduled payment of $1,012,000 will be paid. Note 3 - Investments During the years ended September 30, 1997 and 1996, the valuation account related to the available-for-sale marketable securities portfolio was adjusted to reflect increases in market values of $31,583 and $44,245, respectively, net of deferred taxes. The following table sets forth the components of investments held at September 30, 1997:
Market Unrealized Holding Available-for-sale: Cost Value Loss - ------------------------------------------------------------------------------------------- U.S. Government due January 31, 1999 $ 24,996 $ 24,695 $ (301) Equity securities 103,799 99,013 (4,786) - ------------------------------------------------------------------------------------------- Total $ 128,795 $ 123,708 $ (5,087) - ------------------------------------------------------------------------------------------- Held-to-maturity: - ------------------------------------------------------------------------------------------- Commercial paper-various issues $14,410,101 $14,410,101 $ 0 - -------------------------------------------------------------------------------------------
During the year ended September 30, 1997, proceeds from redemptions of investments were $24,445,993 resulting in a realized gain of $474. The Company uses specific identification for securities sold. The following table sets forth the components of investments held at September 30, 1996:
Market Unrealized 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 (56,971) - --------------------------------------------------------------------------------------------- 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. Note 4 - Allowance for Doubtful Accounts Activity in the Allowance for Doubtful Accounts for the three years ended September 30, 1997 includes:
- ------------------------------------------------------------------------------------------------- Year Ended September 30, 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Balance at beginning of year $627,000 $624,000 $585,000 Additions - charged to expense 119,000 65,000 121,625 Deductions (250,000) (62,000) (82,625) - ------------------------------------------------------------------------------------------------- Balance at end of year $496,000 $627,000 $624,000 - -------------------------------------------------------------------------------------------------
Note 5 - Property and Equipment The components of property and equipment include:
- -------------------------------------------------------------------------------- September 30, 1997 1996 - -------------------------------------------------------------------------------- Furniture and fixtures $ 3,094,284 $ 2,845,137 Leasehold improvements 2,207,228 2,093,435 Computer equipment 7,508,056 6,828,373 Computer equipment under capital leases 1,915,567 1,915,567 Other equipment 4,228,200 3,616,807 - -------------------------------------------------------------------------------- 18,953,335 17,299,319 Less: Accumulated depreciation and amortization 11,859,545 9,750,090 - -------------------------------------------------------------------------------- $ 7,093,790 $ 7,549,229 - --------------------------------------------------------------------------------
Depreciation and amortization charged to operations was $2,218,000, $2,035,000, and $1,738,000 for 1997, 1996 and 1995, respectively. Note 6 - Unsecured Line of Credit A bank holds available, until March 31, 1998, a $5,000,000 unsecured bank line of credit. The line of credit has been renewed annually. During fiscal years 1997 and 1996, the available line of credit was not used. Note 7 - Long-Term Debt
Long-term debt consists of: - -------------------------------------------------------------------------------- September 30, 1997 1996 - -------------------------------------------------------------------------------- Payable to former shareholders of CRI $2,499,945 $2,784,375 Notes payable to banks 2,032,099 2,595,156 - -------------------------------------------------------------------------------- 4,532,044 5,379,531 Less: Current portion 1,087,511 1,047,989 - -------------------------------------------------------------------------------- $3,444,533 $4,331,542 - --------------------------------------------------------------------------------
See Note 2 for a description of the amounts due to the former shareholders of CRI. Notes payable to banks consist of one note for a five year term loan payable through December 15, 1998 with interest at 6.9%. The loan is secured by certain equipment located at CRI with a net book value of $180,314 as of September 30, 1997. A second note is for a five year term loan payable through June 27, 2001 with interest at 7.99%. This loan is secured by certain equipment located at CRI with a net book value at September 30, 1997 of $2,024,905. CRI must continue to meet a financial ratio test and maintain net worth of at least $5,000,000 after September 30, 1996. The Company has guaranteed the repayment of this loan. Maturities of long-term debt include:
- -------------------------------------------------------------------------------- Fiscal Year Ended September 30, Amount - -------------------------------------------------------------------------------- 1998 $ 1,087,511 1999 1,005,597 2000 982,489 2001 732,976 2002 723,471 - -------------------------------------------------------------------------------- Total long-term debt $ 4,532,044 - --------------------------------------------------------------------------------
Note 8 - Provision for Income Taxes The provision for income taxes is comprised of the following:
- ---------------------------------------------------------------------------------------------------------- Year Ended September 30, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Current Federal $4,413,000 $4,292,000 $3,471,000 State 1,244,000 1,216,000 955,000 - ---------------------------------------------------------------------------------------------------------- Total provision for current income taxes 5,657,000 5,508,000 4,426,000 - ---------------------------------------------------------------------------------------------------------- Deferred Federal (179,000) (22,000) (85,000) State (42,000) 1,000 (10,000) --------------------------------------------------------------------------------------------------------- Total provision for deferred income taxes (221,000) (21,000) (95,000) - ---------------------------------------------------------------------------------------------------------- Total provision for income taxes $5,436,000 $5,487,000 $4,331,000 - ----------------------------------------------------------------------------------------------------------
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, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Federal income tax at statutory rate $4,248,000 $4,564,000 $3,624,000 State income taxes - net of federal tax benefit 740,000 791,000 619,000 Non-deductible expenses 149,000 148,000 85,000 Non-taxable income (5,000) (16,000) (15,000) Valuation allowance against capital loss carryforward 298,000 --- --- Other 6,000 --- 18,000 - ---------------------------------------------------------------------------------------------------------- Total provision for income taxes $5,436,000 $5,487,000 $4,331,000 - ----------------------------------------------------------------------------------------------------------
The components of deferred income tax assets and liabilities include:
- ------------------------------------------------------------------------------------------------------------------------------------ September 30, 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net Current Net Non-current Net Current Net Non-current Asset Liability Asset Liability - ------------------------------------------------------------------------------------------------------------------------------------ Property and equipment $ -- $251,000 $ -- $127,000 Allowance for doubtful accounts 201,000 -- 256,000 -- Non-deductible expenses 392,000 -- -- -- Unrealized holding loss on marketable securities -- (2,000) -- (24,000) Vacation accrual 91,000 -- 82,000 -- Capital loss carryforward 298,000 -- -- -- Valuation allowance against capital loss carryforward (298,000) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total $684,000 $249,000 $338,000 $103,000 - ------------------------------------------------------------------------------------------------------------------------------------
Note 9 - Stock Options The Company has an Incentive Stock Option Plan (the "Plan") which was adopted and became effective in May, 1993. The Plan calls for granting incentive stock options to certain officers and other employees, as defined, under current tax laws to purchase shares of the Company's common stock. The stock options are exercisable at prices not less than the fair market value of the common stock on the date the options are granted. The aggregate number of shares which may be issued under the Plan is 2,200,000. Stockholders at the 1997 annual meeting approved the 1996 non-qualified Non-Employee Directors Stock Option Plan ("1996 Plan"), which provides for the granting of options covering 250,000 shares. Each non-employee director, who is a non-employee director at the date of grant of the option and who was a non-employee at all times during the fiscal year preceding the date of grant, shall be granted an option to purchase 11,000 shares of the common stock on the date the 1996 Plan was approved by the stockholders and on each succeeding fifth business day following the public release of the Company's annual earnings for any fiscal year in which sales and net income per share of common stock increase by more than 5% over the prior fiscal year. Options granted under the 1996 Plan are based on the market value on the date of grant. During fiscal 1997, 22,000 shares were granted, based on fiscal year 1996 results, at a price of $15.00, all of which are outstanding. At September 30, 1997, 4,400 of these shares were exercisable. No options were granted for fiscal year 1997. The 1993 non-qualified Non-Employee Directors Stock Option Plan ("1993 Plan") was terminated as a result of the approval of the 1996 Plan. The 1993 Plan has 11,600 options which remain outstanding at prices of $3.53-$16.00. At September 30, 1997, 4,200 shares were exercisable at prices of $3.53- $16.00. There was no other activity in this plan during fiscal 1997. Non-employee directors have been granted non-qualified options, at the fair market value on the date of grant, to purchase 54,000 shares of the Company's common stock at prices of $2.05 to $5.38 per share. At September 30, 1997, 44,000 options were exercisable. During the current year, 2,000 options were exercised and no options were cancelled. During the year ended September 30, 1995, certain officers of the Company were issued non-qualified options to purchase 75,000 shares of the Company's common stock at a price of $5.75 per share (100% of fair market value). In accordance with Nasdaq Stock Market(sm) rules, the required stockholders' approval covering 35,400 of those shares was obtained at the 1997 annual meeting. The following schedule sets forth the activity under the 1983 Incentive Stock Option Plan for the years ended September 30, 1997, 1996 and 1995. Granting of options under this plan ceased in May, 1994.
- ---------------------------------------------------------------------------------- Incentive options Number Option Price - ---------------------------------------------------------------------------------- Outstanding September 30, 1994 375,060 $1.25 - $ 3.75 Exercised (120,767) $1.73 - $ 3.75 Expired or cancelled (3,849) $3.41 - $ 3.75 Stock dividend - 10% 32,506 $1.25 - $ 3.75 Stock dividend - 100% 282,950 $1.25 - $ 3.75 - ---------------------------------------------------------------------------------- Outstanding September 30, 1995 565,900 $1.25 - $ 3.75 Exercised (165,200) $2.05 - $ 3.41 - ---------------------------------------------------------------------------------- Outstanding September 30, 1996 400,700 $1.25 - $ 3.41 Exercised (176,300) $2.25 - $ 3.41 - ---------------------------------------------------------------------------------- Outstanding September 30, 1997 224,400 $1.25 - $ 2.69 - ---------------------------------------------------------------------------------- Exercisable September 30, 1997 224,400 $1.25 - $ 2.69 - ----------------------------------------------------------------------------------
The following schedule sets forth the activity of the 1993 Incentive Stock Option Plan for the years ended September 30, 1997, 1996 and 1995.
- -------------------------------------------------------------------------------- Incentive options Number Option Price - -------------------------------------------------------------------------------- Outstanding September 30, 1994 83,000 $ 2.27 - $ 3.53 Granted 211,600 $ 3.18 - $16.85 Exercised (6,463) $ 2.27 - $ 2.95 Expired or cancelled (19,250) $ 2.27 - $ 2.95 Stock dividend - 10% 8,300 $ 2.27 - $ 3.52 Stock dividend - 100% 277,187 $ 2.88 - $16.85 - -------------------------------------------------------------------------------- Outstanding September 30, 1995 554,374 $ 2.88 - $16.85 Granted 110,000 $15.50 Exercised (32,403) $ 2.88 - $ 5.75 Expired or Cancelled (23,998) $ 2.96 - $ 5.75 - -------------------------------------------------------------------------------- Outstanding September 30, 1996 607,973 $ 2.96 - $16.85 Granted 110,800 $12.75 - $15.00 Exercised (17,375) $ 2.96 - $15.50 Expired or Cancelled (117,448) $ 2.96 - $15.50 - -------------------------------------------------------------------------------- Outstanding September 30, 1997 583,950 $ 2.96 - $16.85 - -------------------------------------------------------------------------------- Exercisable September 30, 1997 358,475 $ 2.96 - $16.85 - -------------------------------------------------------------------------------- Available for grant September 30, 1997 1,553,346 - --------------------------------------------------------------------------------
The following schedule sets forth the status of the incentive stock options outstanding and exercisable at September 30, 1997:
- ------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------- Weighted-Average Weighted- Range of Average Exercise Number of Remaining Exercise Number of Exercise Prices Shares Life-Years Price Shares Price - ------------------------------------------------------------------------------------------------------- 1983 Incentive Plan $1.25 to $2.69 224,400 4.7 $ 2.63 224,400 $ 2.63 1993 Incentive Plan $2.96 to $5.50 120,000 6.7 3.54 87,725 3.45 $12.75 to $16.85 463,800 8.2 15.47 270,750 16.48 - ------------------------------------------------------------------------------------------------------- Total 1993 Plan 583,950 358,475 - ------------------------------------------------------------------------------------------------------- Total Plans 808,350 582,875 - -------------------------------------------------------------------------------------------------------
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," issued in October, 1995. In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the various grant dates, as prescribed by SFAS No. 123, net income and earnings per share would have been adjusted to the pro forma amounts indicated in the following table:
Year Ended September 30, 1997 1996 - -------------------------------------------------------------------------------- Net income - as reported $6,986,659 $7,837,645 Net income - pro forma 6,751,871 7,726,185 Earnings per share - as reported - fully diluted 1.35 1.53 Earnings per share - pro forma - fully diluted 1.30 1.51
The fair value of each option grant was estimated on the date of grant using the Binery Option Pricing Model with the following assumptions: Expected dividend yield - .80% Expected stock volatility - 59.65% Risk free interest rates - 5.84 - 6.13% Expected life of options - 5 - 10 Years The effects of applying SFAS No. 123 in this pro forma disclosure are not necessarily indicative of the effect on future amounts. SFAS No. 123 does not apply to awards granted prior to the Company's 1996 fiscal year. The Company's stock options are not transferrable, and the actual value of the stock options that an employee may realize, if any, will depend on the excess of the market price on the date of exercise over the exercise price. The Company has based its assumption for stock price volatility on the variance of weekly closing prices of the Company's stock for the last three years. The risk-free rate of return used equals the yield on zero-coupon U.S. Treasury issues on the grant date based on the grants estimated life. Note 10 - 1994 Employee Stock Purchase Plan and Employment Agreements At the annual meeting of stockholders in March, 1994, the 1994 Employee Stock Purchase Plan (the "Purchase Plan") was adopted. The Purchase Plan provides eligible employees of the Company and its subsidiaries the opportunity to acquire up to 300,000 shares of common stock. Purchases are made on a monthly basis through payroll deductions of 1% to 10% of eligible compensation. Shares are offered at a 15% discount from the closing price on the last trading date of each month with no brokerage commissions. Participation in the Purchase Plan began September 1, 1994. For the years ended September 30, 1997, 1996 and 1995, shares purchased totaled 6,892, 9,968 and 13,552, respectively. Employment agreements with officers of a subsidiary include the provision for the quarterly purchase of the Company's common stock to the extent of 5% of any bonus earned, as defined. Shares are offered at a discount from the quarter end closing market price of the common stock. During fiscal years 1997, 1996 and 1995, a total of 1,713, 1,749 and 143 shares, respectively, were purchased under these agreements. Note 11 - Employee Retirement Savings Plan (401K) The Company sponsors a tax deferred retirement savings plan ("401K Plan") which permits eligible employees to contribute varying percentages of their compensation up to the limit allowed by the Internal Revenue Service. The 401K Plan also provides for discretionary Company contributions. No discretionary contributions were made for the years ended September 30, 1997, 1996 and 1995. The Company matches employees' contributions to a maximum of 25% of the employee's first 6% contributed. The Company's matching contributions were temporarily increased to 35% of eligible employee contributions in fiscal years 1997 and 1996, during the period of January 1 to June 30. Matching contributions charged to expense were $189,000, $196,000 and $154,000 for the fiscal years ended September 30, 1997, 1996 and 1995, respectively. Note 12 - Operating and Capital Lease Commitments The Company and its subsidiaries lease certain properties, equipment and software under noncancellable long-term leases, both operating and capital, which expire at various dates. Certain of the leases on real estate require the payment of real estate taxes. Minimum rentals under the leases are as follows:
- --------------------------------------------------------------------------------------- Fiscal Year Capital Leases Operating Leases - --------------------------------------------------------------------------------------- 1998 $218,746 $ 2,279,000 1999 1,907,000 2000 1,495,000 2001 1,172,000 2002 1,172,000 Thereafter 2,818,000 - --------------------------------------------------------------------------------------- 218,746 $10,843,000 Less: Imputed interest 7,166 - --------------------------------------------------------------------------------------- Present value of capital lease obligations $211,580 - ---------------------------------------------------------------------------------------
Real estate, equipment and software operating lease costs include:
- ------------------------------------------------------------------------------------- Year Ended September 30, 1997 1996 1995 - ------------------------------------------------------------------------------------- Real estate $2,535,000 $2,324,000 $1,227,000 Equipment and software 740,000 788,000 774,000 - ------------------------------------------------------------------------------------- Total $3,275,000 $3,112,000 $2,001,000 - -------------------------------------------------------------------------------------
Note 13 - Other Expense In June, 1997, the Company recorded a loss on investment of $954,000 (currently $863,000 net of taxes) representing a non-recurring charge for the write-off of the Company's investment in McIntyre & King, Ltd. ("M&K"). This charge represented $.17 per share in the current fiscal year. The Company's Board of Directors decided to sever the relationship with M&K due to unexpected operating losses that would have required unacceptable demands on management's time and financial support required to attempt to return M&K to profitability. As a result, effective April 5, 1997, the Company agreed to rescind its acquisition of M&K. The rescission agreement, dated June 30, 1997, provides for the return of a portion of the down payment in one year. However, recovery was uncertain and, therefore, the Company expended all payments, advances and all related costs. On November 28, 1997, the Company received a payment from M&K of approximately $210,000 in final settlement of a portion of the down payment, which will be recorded in other income in the quarter ended December 31, 1997. On October 6, 1997, the Company announced the recording of a non-recurring charge of $960,000 ($570,000 net of taxes or $.11 per share) in the period ended September 30, 1997 related to death benefits payable under employment agreements and other severance amounts due the Company's former Chairman, the late Arnold J. Scheine who passed away on September 22, 1997. Note 14 - Fair Value of Financial Statements The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments". The carrying amounts of cash and cash equivalents, investments - held-to-maturity, trade receivables, other current assets, accounts payable and amounts included in investments and accruals meeting the definition of a financial instrument approximate fair value. The carrying values and related estimated fair values for the Company's long-term debt payable to banks is estimated based on the current rates offered to the Company for debt of the same maturities as follows:
September 30, 1997 1996 Carrying value $2,032,000 $2,595,000 Fair value 2,037,000 2,602,000
Note 15 - Commitments and Contingencies The Company is involved in various legal claims and disputes that are normal and incidental to the Company's business. In the opinion of management, after consultation with legal counsel, the amount of losses that might be sustained, if any, from such claims and disputes would not have a material effect on the Company's financial statements. At September 30, 1997, the Company and its subsidiaries have employment agreements with certain of their officers with terms expiring at various times through September 30, 2002, which provide for aggregate future minimum compensation of $1,050,000. Certain of these agreements also provide for commissions and bonuses based on results of the respective subsidiary's operations. During the current fiscal year, one of the Company's subsidiaries had in effect a $500,000 standby letter of credit agreement securing the timely payments, by the subsidiary, of amounts owing to a customer. No claims were made against this agreement during the year. The fair value of the standby agreement approximates the cost of the agreement. Note 16 - Major Customers For the years ended September 30, 1997 and 1996, revenues recognized under the contract to provide computer services to a non-U.S. communications company amounted to 15% and 14%, respectively, of consolidated sales. For the year ended September 30, 1995, sales to another significant customer amounted to 11% of consolidated sales. * * * * * * Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Part III Item 10. Directors, Executive Officers and Significant Employees of the Registrant. The information appearing in the Company's Proxy Statement with respect to its 1998 Annual Meeting of Stockholders (the "Proxy Statement") under the caption "Election of Directors" is incorporated herein by reference. The following is a list as of December 1, 1997, showing the names and ages of all principal executive officers and significant employees of the Company and its subsidiaries, all positions and offices with the Company held by each of them and the year from which each said office has been continuously held. All executive officers are elected annually and hold office at the pleasure of the Company's Board of Directors.
Position with the Company Name Age and Date from which Held - ---- --- ------------------------ William Rella 55 President, Chief Operating Officer and Director - 1997 President - Fulfillment Services - 1994 Marvin Cohen 63 Senior Vice President and Secretary-1981, Director-1969-1997 Pat R. Frustaci 43 Vice President - Finance, Chief Financial Officer, Treasurer and Assistant Secretary - 1995 James E. Quinlan 59 Controller-1988 Gerry King 48 President - Catalog Resources, Inc. - 1993 Lon Mandel 42 President and Chief Operating Officer - The SpeciaLISTS Ltd. - 1987 Phyllis Stein 45 President - List Brokerage Division, The SpeciaLISTS Ltd. - 1987
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, 1997, and Forms 5 and amendments thereto furnished to the Company with respect to such fiscal year, there was no officer, director or 10% stockholder of the Company who failed to file, on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Securities and Exchange Act of 1934, as amended, during such fiscal year or prior fiscal years, except for two officers. These persons were Arnold J. Scheine, former President, who filed, however, not on a timely basis, two Forms 4 relating to the transfer of 80,162 shares of Common Stock, to Scheine Holdings, Inc. and William Rella, President, who filed, however, not on a timely basis, a Form 4 relating to the award of an incentive stock option covering 40,000 shares of Common Stock. Item 11. Executive Compensation The information appearing in the Proxy Statement under the caption "Executive Compensation" is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information appearing in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information appearing in the Proxy Statement under the caption "Election of Directors" is incorporated herein by reference. Part IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)1. Financial Statements Independent Auditors' Opinion................ Consolidated Statements of Income for the Years Ended September 30, 1997, 1996 and 1995................. Consolidated Balance Sheets as of September 30, 1997 and 1996...... Consolidated Statements of Changes in Stockholders' Equity for the Years Ended September 30, 1997, 1996 and 1995...................... Consolidated Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995................. Notes to Consolidated Financial Statements (a)2. Financial Statement Schedules Schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Exhibits (a) 3.1 Restated Certificate of Incorporation of the Company (1) 3.2 By-laws, as amended, of the Company (2) 10.1 Lease Agreement dated April 11, 1980, as amended, between the Company and Saul Rachmiel, with respect to premises located at 120 Brighton Road, Clifton, New Jersey (3) 10.2 1983 Stock Option Plan as Amended and Restated (4) 10.3 1993 Incentive Stock Option Plan as Amended and Restated (11) 10.4 1993 Non-Employee Directors Stock Option Plan (8) 10.5 The Bank of New York letter dated April 14, 1997 related to the holding available of a line of credit 10.6 Master Equipment Lease Agreement dated December 8, 1989 between the Company and Forsythe/McArthur Associates, Inc. (5) 10.7 Agreement of Purchase and Sale of Stock dated April 1, 1993 among the Company, Catalog Resources, Inc. and the sellers of all of the outstanding shares of Catalog Resources, Inc. (6) 10.8 1994 Employee Stock Purchase Plan (7) 10.9 Form of Software Development Agreement between LCS Industries, Inc. and a major non-U.S. communications company (9) 10.10 Amendment No.1 dated as of August 1, 1994, to Agreement of Purchase and Sale of Stock dated April 1, 1993, among LCS Industries, Inc., Catalog Resources, Inc., and the stockholders of Catalog Resources, Inc. (10) 10.11 Form of Marketing Database Agreement between LCS Industries, Inc. and a major non-U.S. communications company (12) 10.12 Employment agreement between Arnold J. Scheine and LCS Industries, Inc. (13) 10.13 Employment agreement between Arnold J. Scheine and LCS Industries, XXX (a group company). (13) 10.14 1996 Non-Employee Directors Stock Option Plan (14) 11 Computation of Earnings Per Share and Common Equivalent Share 22 List of Subsidiaries 23 Consent of Deloitte & Touche LLP ------------------------ (1) Incorporated by reference to Exhibit filed with the Company's Registration Statement on Form 8-A, File No. 0-12329, filed with the Commission on June 27, 1983. (2) Incorporated by reference to Exhibit to the Company's Registration Statement on Form S-18, Registration No. 3-87557-N.Y. (3) Incorporated by reference to Exhibit to the Company's Registration Statement on Form S-18, Registration No. 2-79941-N.Y. (4) Incorporated by reference to Exhibit to the Company's Registration Statement on Form S-8, Registration No. 33-12508. (5) Incorporated by reference to Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1990, File No. 0-12329. (6) Incorporated by reference to Exhibit to the Company's Current Report on Form 8-K dated April 1, 1993, File No. 0-12329. (7) Incorporated by reference to Exhibit to the Company's Registration Statement on Form S-8, Registration No. 33-83058. (8) Incorporated by reference to Exhibit to the Company's Annual Report on Form 10K for the fiscal year ended September 30, 1993, File No. 0-12329. (9) Incorporated by reference to Exhibit to the Company's Current Report on Form 8-K dated January 18, 1994, File No. 0-12329. (10) Incorporated by reference to Exhibit to the Company's Current Report on Form 8-K dated September 13, 1994, File No. 0-12329. (11) Incorporated by Reference to Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994, File No. 0-12329. (12) Incorporated by Reference to Exhibit to the Company's Current Report on Form 8-K dated September 1, 1995, File No. 0-12329. (13) Incorporated by Reference to Exhibit to the Company's Quarterly Report on Form 10Q/A-1 dated August 8, 1996, File No. 0-12329. (14) Incorporated by Reference to the Company's Proxy Statement dated December 30, 1996, File No. 0-12329. (b) Reports on Form 8-K LCS Industries, Inc. did not file any Forms 8-K during the last quarter of its fiscal year ended September 30, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LCS INDUSTRIES, INC. By: /s/William Pella ---------------- William Rella President Date: December 18, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 18, 1997. Signature Title --------- ----- /s/William Rella President (Principal Executive Officer) and Director - ----------------- William Rella /s/Pat R. Frustaci Vice President - Finance, Chief Financial Officer, - ------------------ Pat R. Frustaci Treasurer and Assistant Secretary (Principal Accounting Officer) /s/Marvin Cohen Senior Vice President and Secretary - --------------- Marvin Cohen /s/Joseph R. Barbaro Director - -------------------- Joseph R. Barbaro /s/Bernard Ouziel Director - ----------------- Bernard Ouziel LCS INDUSTRIES, INC. Commission File No. 0-12329 ------- Annual Report on Form 10-K for the Fiscal Year Ended September 30, 1997 E X H I B I T S INDEX TO EXHIBITS Exhibit No. Description 10.5 The Bank of New York letter dated April 14, 1997 related to the holding available of a line of credit 11 Computation of Earnings Per Share and Common Equivalent Share 22 List of Subsidiaries 23 Consent of Deloitte & Touche LLP EX-10.5 2 EXHIBIT 10.5 (THE BANK OF NEW YORK, NA) National Community Division April 14, 1997 LCS Industries, Inc. 120 Brighton Road Clifton, NJ 07012-1694 Attn: Pat R. Frustaci Vice President-Finance Dear Pat: The Bank of New York National Association (the "Bank") is pleased to confirm that it holds available to LCS Industries, Inc. (the "Company") a $5,000,000 unsecured line of credit. Advances under this line of credit shall be evidenced by, shall be payable as provided in, and shall bear interest at the rate specified in, a promissory note of the Company in the form included with this letter. All obligations of the Company to the Bank with respect to this line of credit shall be guaranteed, jointly and severally, by Spec Holdings, Inc., The SpeciaLISTS, Ltd., Computer Marketing Systems, inc. and Catalog Resources, Inc. (collectively, the "Guarantors") pursuant to a guarantee in the form included with this letter. For so long as this line of credit is held available to the Company or the Company has any obligations outstanding under this line of credit, neither the Company nor any of its Guarantors shall create, incur, assume or suffer to exist any pledge, lien, charge or other encumbrance upon or with respect to any of the accounts receivable of the Company and/or any of the Guarantors. As you know lines of credit are cancelable at any time by either party, and any advance under this line of credit is subject to the Bank's satisfaction, at the time of such advance, with the condition (financial and otherwise), business, prospects and operations of the Company and each of the Guarantors. Unless cancelled earlier as provided in the first sentence of this paragraph, this line of credit shall be held available until March 31, 1998. Additionally, all advances under this line of credit will have to be reduced to zero for a period of thirty consecutive days during the period this line of credit is held available. Very truly yours, THE BANK OF NEW YORK (NJ) By: /s/Brian J. Clark ----------------- Brian J. Clark Title: Vice President EX-11 3 EXHIBIT 11 EXHIBIT 11
LCS INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE AND COMMON EQUIVALENT SHARE For the Years Ended September 30, 1997 1996 1995 (A) ---------- ---------- ---------- Primary earnings per share: Weighted average shares outstanding ....... 4,624,702 4,329,663 4,019,576 Weighted average - dilutive stock options . 371,985 627,947 540,693 Shares issuable in connection with the acquisition of Catalog Resources, Inc. . 107,151 160,475 195,096 ---------- ---------- ---------- 5,103,838 5,118,085 4,755,365 ========== ========== ========== Net income ................................ $6,986,659 $7,837,645 $6,328,592 Primary earnings per share and common equivalent share ....................... $ 1.37 $ 1.53 $ 1.33 ========== ========== ========== Fully diluted earnings per share: Weighted average shares outstanding ....... 4,624,702 4,329,663 4,019,576 Weighted average - dilutive stock options . 447,903 634,430 835,286 Shares issuable in connection with the acquisition of Catalog Resources, Inc. . 107,151 160,475 195,096 ---------- ---------- ---------- 5,179,756 5,124,568 5,049,958 ========== ========== ========== Net income ................................ $6,986,659 $7,837,645 $6,328,592 Fully diluted earnings per share and common equivalent share ....................... $ 1.35 $ 1.53 $ 1.25 ========== ========== ==========
(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 EXHIBIT 22 SUBSIDIARIES OF LCS INDUSTRIES, INC. Set forth below are the names of all subsidiaries of LCS as of December 1, 1997 required to be listed on Exhibit 22 to LCS's 1997 Annual Report on Form 10-K. Indented companies are direct subsidiaries of the company under which they are indented. Percentage Owned by State of Immediate Parent Incorporation ---------------- ------------- LCS INDUSTRIES, INC. (Parent) N/A Delaware LCS Canada, Inc. 100% Delaware LCS Industries, XXX 100% EEC Spec Holdings, Inc. 100% New York The SpeciaLISTS Ltd. 100% - Class A New York 80% - Class B Computer Marketing Systems, Inc. 51% New York Catalog Resources, Inc. 100% Delaware Catalog Liquidators, Inc. 100% Delaware 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, 1997, November 28, 1997 as to Note 13, appearing in this Annual Report on Form 10-K of LCS Industries, Inc. for the year ended September 30, 1997. /s/Deloitte & Touche LLP - ------------------------ Deloitte & Touche LLP Parsippany, New Jersey December 16, 1997 EX-27 6
5 YEAR SEP-30-1997 SEP-30-1997 14,619,271 14,410,101 23,659,774 496,000 201,871 54,338,136 18,953,333 11,859,543 69,509,267 27,539,540 0 0 0 48,548 38,227,646 69,509,267 0 100,627,292 0 69,383,846 17,905,852 119,000 443,642 12,422,659 5,436,000 6,986,659 0 0 0 6,986,659 1.37 1.35
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