ITEM 2. PROPERTIES
The Company has 67 locations in 24 states containing in the aggregate approximately 805,000 square feet. These facilities are used to provide records management, document management and business
communications services. Some are used for certain administrative functions. All of these facilities are leased by the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Various claims have been made against the Company in the normal course of business. Management believes that none of these legal proceedings will have a material adverse effect on the Company's business, financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders during the fourth quarter of 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq Stock Market under the symbol "LSON". As of March 20, 1998, there were approximately 2,550 holders of the Company's common stock, including 50 shareholders of record and approximately 2,500 in street name.
The quarterly trading range for shares of the Company's common stock during 1997 and 1996 is presented below:
The Company intends to retain any earnings to finance operations and expansion and, therefore, does not anticipate paying any cash dividends on the common stock in the foreseeable future. Cash dividends, if any, would be determined by the Board of Directors and would be based on the Company's earnings, capital requirements, financial condition and other factors deemed relevant by the Board of Directors. Except for certain constructive dividends related to partial forgiveness of certain shareholder loans in connection with the IPO, the Company has not paid any dividends on its capital stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the Company and its predecessor. The selected consolidated financial data presented below for the Company for the years ended December 31, 1997, 1996 and 1995 and for its predecessor for the years ended December 31, 1994 and 1993, have been derived from the Company's and its predecessor's, respectively, consolidated financial statements which have been audited by Coopers & Lybrand, L.L.P. and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in this Form 10-K.
- ------------------------- (1) From its inception to January 17, 1995, the Company was an S corporation and, accordingly, was not subject to Federal income tax.
(2) Earnings per share amounts for years prior to 1997 have been restated in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Earnings per share amounts are not presented for the Predecessor as such information is not representative of the capital structure of the Company.
(3) Includes the net proceeds from an initial public offering and redemption of shares of common stock during the fourth quarter of 1996 and the net proceeds from a secondary offering of common stock in the third quarter of 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management believes is relevant to an understanding of the Company's consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and notes thereto and "Item 6. Selected Financial Data" appearing elsewhere in this report.
OVERVIEW
Lason Systems, Inc., a Michigan corporation and the predecessor (the "Predecessor") to Lason, Inc., (together with its subsidiaries, the "Company"), was formed in 1985 as a result of a management buyout of the direct mail division of McKesson Corporation's 3PM subsidiary. In January 1995, the founders and principal shareholders of the Predecessor recapitalized it (the "Recapitalization") by selling substantially all of its assets to Lason Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Lason, Inc., which was then named Lason Holdings, Inc. In August 1996, Lason Holdings, Inc. changed its name to Lason, Inc. After the acquisition, Lason Acquisition Corp. changed its name to Lason Systems, Inc. ("Lason"), and continued the business operations of the Predecessor.
From June 1995 through December 31, 1997, the Company, through certain of its subsidiaries, completed the acquisition of either substantially all of the assets or a controlling stock ownership interest in a substantial number of companies, several of which were completed during the year ended December 31, 1997. Each of the acquisitions was accounted for as a purchase. The excess of the aggregate purchase price over the fair value of the net assets acquired has been allocated to goodwill.
The consolidated results of operations for the year ended December 31, 1997 include the results of operations of the acquisitions since the date of each such acquisition and, therefore, are not directly comparable to the results of operations for 1996 and 1995.
One of the Company's principal strategies is to increase its revenues and the markets it serves through the continued acquisition of complementary businesses. Toward that end, the Company has completed the acquisition of either substantially all of the assets or a 100% stock ownership interest in several additional companies during the first quarter of 1998. Included in the 1998 acquisitions are Racom Corporation and its affiliates (the Company's largest acquisition to date), and API Systems, Inc. Although management anticipates that the Company will continue to acquire complementary businesses in the future, there can be no assurance that the Company will be able to identify and acquire attractive acquisition candidates, profitably manage such acquired companies or successfully integrate such acquired companies into the Company without substantial costs, delays or other problems. In addition, there can be no assurance that any companies acquired in the future will be profitable at the time of acquisition or will achieve sales and profitability justifying the Company's investment therein or that the Company will recognize the synergies expected from such acquisitions.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Consolidated net revenues increased 72% to $120.3 million for the year ended December 31, 1997 from $69.9 million in 1996. Approximately $39.3 million of the increase was due to acquisitions and approximately $11.1 million was due to growth in the Company's existing businesses. The internal growth was primarily the result of an $8.5 million increase in output processing revenues, a $2.0 million increase in Visions COLD services and a $3.0 million increase in Lason Document Express(TM) print on demand services. Those increases were partially offset by lower revenue related to the effects of certain discontinued services.
Gross profit increased to $39.5 million for the year ended December 31, 1997 from $22.4 million in 1996 primarily due to an increase in consolidated net revenues and the Company's product mix. Gross profit as a percentage of net consolidated revenues was 33% for the year ended December 31, 1997 compared to 32% in 1996.
Selling, general and administrative expenses increased $8.6 million to $21.2 million for the year ended December 31, 1997 compared to $12.6 million in 1996. The increase was primarily due to expenses incurred by acquired companies. Selling, general and administrative expenses as a percentage of consolidated net revenues was 17.6% in 1997 versus 18.0% in 1996.
Compensatory stock option expense decreased to $221,000 in 1997 from $936,000 in 1996. The provisions of certain stock option agreements included the immediate vesting of those options on the effective date of the Company's IPO. Accordingly, the Company recorded a non-cash expense of $653,000 during the fourth quarter of 1996 to record the compensation associated with the immediate vesting of those stock options.
Amortization of intangibles increased to $2.5 million for the year ended December 31, 1997 from $1.1 million in 1996 primarily due to the increase in goodwill related to business acquisitions.
Interest expense was $1.2 million for the year ended December 31, 1997 compared to $1.8 million in 1996 primarily due to lower average borrowings in 1997 compared to 1996.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Consolidated net revenues increased 50% to $69.9 million for the year ended December 31, 1996 from $46.6 million in 1995. The $23.3 million increase in consolidated net revenues includes approximately $14.8 million of net revenues related to businesses acquired during 1996 and approximately $8.5 million principally due to sales growth in the Company's business communications, digital imaging and collection letter processing revenues of approximately $5.0 million , $2.2 million and $1.3 million, respectively.
Gross profit increased $7.0 million to $22.4 million for the year ended December 31, 1996 from $15.4 million reported in 1995, primarily due to an increase in net revenues, partially offset by lower gross profit margins for businesses acquired in 1996. Gross profit as a percentage of consolidated net revenues was 32% for the year ended December 31, 1996 versus 33% in 1995.
Selling, general and administrative expenses increased to $12.6 million in 1996 from $9.4 million in 1995. Approximately $2.4 million of the increase was attributable to businesses acquired during 1996. Approximately $.4 million was due to an increase in administrative expenses primarily resulting from the hiring of several key executives in late 1995 and in the first three quarters of 1996, and approximately $.5 million was due to an increase in advertising, sales commissions and other selling expenses, related to the higher sales volumes. Selling, general and administrative expenses as a percentage of consolidated net revenues was 18.0% in 1996 versus 20.2% in 1995.
Compensatory stock option expense increased to $936,000 for the year ended December 31, 1996 from $308,000 in 1995. The provisions of certain stock option agreements included the immediate vesting of those options on the effective date of the Company's IPO. Accordingly, the Company recorded a non-cash expense of $653,000 during the fourth quarter of 1996 to record the compensation associated with the immediate vesting of those stock options.
Amortization of intangibles increased to $1.1 million in 1996 versus $817,000 in 1995 primarily due to amortization of goodwill recorded as a result of businesses acquired during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and acquisitions through a combination of cash flow from operations, bank borrowings and the issuance of shares of common stock.
Cash provided by operating activities was $3.4 million for the year ended December 31, 1997 compared to cash used in operating activities of $2.1 million for the year ended December 31, 1996 and cash provided by operating activities of $1.3 million in 1995. The increase in operating cash flows in 1997 versus 1996 is primarily the result of higher consolidated net income, an increase in consolidated net revenue without a corresponding increase in accounts receivable, and an increase in accrued expenses and other liabilities.
Cash used in investing activities totaled $68.3 million, $21.7 million and $1.8 million for the years ended December 31, 1997, 1996 and 1995, respectively, and has primarily been used to fund the acquisition of businesses and to invest in capital equipment. Cash used for acquisitions totaled $57.3 million in 1997 compared to $17.1 million and $1.4 million in 1996 and 1995, respectively. Cash used to invest in capital equipment totaled $10.4 million in 1997 compared to $4.6 million in 1996 and $1.1 million in 1995. The 1997
and 1996 investments in capital equipment included the purchase for approximately $3.5 million and $1.3 million, respectively, of previously leased equipment. During 1997, the Company invested approximately $1.4 million in the development of technological systems to meet the needs of its customers and invested in expanding and enhancing the technical infrastructure to support the Company's national information processing needs. These projects and related costs will continue as the Company pursues its acquisition strategy.
Cash provided by financing activities was $67.7 million in 1997 compared to $23.8 million in 1996. In August 1997, the Company completed a secondary offering of 2,457,620 shares of common stock for net proceeds of approximately $58.0 million, after deducting underwriting discounts and other offering expenses. The net proceeds were used to repay debt outstanding under the Company's credit agreement and for general corporate purposes. In the fourth quarter of 1996, the Company completed an initial public offering of 3,450,000 shares of common stock for net proceeds of approximately $53.0 million, after deducting underwriting discounts and other offering expenses. The net proceeds were primarily used to repay amounts then outstanding under the Company's credit agreement and to redeem shares of common stock held by the Company's largest shareholder.
CREDIT AGREEMENT AND BORROWINGS
Lason has a credit agreement with a bank group providing for revolving credit loans up to $80 million. Borrowings will be used to finance additional acquisitions of businesses, working capital, capital expenditures and for other corporate purposes. Borrowings under the credit agreement are collateralized by substantially all of Lason's assets. Lason is not required to make principal payments prior to 2001, the term of the loan. Interest on amounts outstanding is calculated based on interest rates determined at the time of borrowing. Borrowings bear interest at rates ranging from LIBOR plus a maximum of 2.25% (6.68% as of March 17, 1998) to a base percentage rate plus a maximum of 1.25% (8.50% as of March 17, 1998), depending on the Company's leverage ratio. The credit agreement contains restrictions on the acquisition of stock or assets, disposal of assets, incurrence of other liabilities, minimum requirements for cash flow and certain financial ratios. As of March 17, 1998, $69.8 million is outstanding under the credit agreement.
FUTURE CAPITAL NEEDS
The Company's liquidity and capital resources have been significantly affected by acquisitions of businesses and, given the Company's acquisition strategy, may be significantly affected for the foreseeable future. To date, the Company has financed its acquisitions with borrowings under its credit agreement, with shares of its common stock and with cash from operations.
The Company's ability to obtain cash adequate to fund its needs depends generally on the results of its operations and the availability of financing. Management believes that cash flow from operations, in conjunction with borrowings from its existing and any future credit agreements and possible issuance of shares of its common stock, will be sufficient to meet debt service requirements, make possible future acquisitions and fund capital expenditures in the future. However, there can be no assurance in this regard or that the terms available for any future financing, if required, would be favorable to the Company.
YEAR 2000
The Company is addressing the need to achieve year 2000 date conversion with no effect on customers or disruption to business operations. The Company is communicating with suppliers, customers, and others with which it does business to coordinate year 2000 conversion issues. The cost of compliance, which is not yet completely determined, is not expected to be material in relation to the Company's future results of operations due to the nature of the Company's operating systems.
INFLATION
Certain of the Company's expenses, such as wages and benefits, occupancy costs, and equipment repair and replacement, are subject to normal inflation. Supplies, such as paper and related products, can be subject
to significant price fluctuations. Although the Company to date has been able to substantially offset any such cost increases through increased operating efficiencies, there can be no assurance that the Company will be able to offset any future cost increases through similar efficiencies or increased charges for its products and services.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplemental financial information included in this report are set forth on the Index to Financial Statements and Financial Statement Schedules included in this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
A. DIRECTORS
Reported under the caption "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1998 Proxy Statement, herein incorporated by reference.
B. EXECUTIVE OFFICERS
Reported in Part I pursuant to General Instruction G to Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reported under the caption "Executive Compensation" in the Company's 1998 Proxy Statement, herein incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reported under the captions "Record Date and Outstanding Shares" and "Security Ownership of Management" in the Company's 1998 Proxy Statement, herein incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reported under the caption "Certain Transactions With Management" in the Company's 1998 Proxy Statement, herein incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. (1) FINANCIAL STATEMENTS
The Financial statements applicable to the Company and its consolidated affiliates filed with this report are set forth on the Index to Financial Statements and Financial Statement Schedules of this report.
(2) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and report of independent accountants have been filed as part of this Annual Report on Form 10-K as indicated in the Index to Financial Statements and Financial Statement Schedules of this report.
(3) EXHIBITS
The exhibits filed with this report are listed on the Exhibit Index on pages E-1 through E-5.
B. REPORTS ON FORM 8-K
October 14, 1997 the registrant filed Form 8-K announcing that it had completed the acquisition of Image Conversion Systems, Inc. ("ICS"). In connection therewith, the following financial information was also filed pursuant to "Item 7" of such Form 8-K:
(a) Financial Statements of ICS:
Audited balance sheet as of October 31, 1996, and the related statements of operations, shareholders' equity and cash flows for the year then ended and the report of Arthur Andersen L.L.P. thereon, and the balance sheet as of April 30, 1997 (unaudited), the statement of operations for the six months ended April 30, 1997 and 1996, (unaudited), the statement of changes in shareholders'
equity as of April 30, 1997 (unaudited), the statement of cash flows for the six months ended April 30, 1997 and 1996 (unaudited), and the Notes to the Financial Statements.
(b) Pro Forma Financial Information:
Pro Forma condensed consolidated balance sheets as of June 30, 1997 (unaudited)
Pro Forma condensed consolidated statements of income for the six months ended June 30, 1997 (unaudited)
Pro Forma condensed consolidated statements of income for the year ended December 31, 1996 (unaudited)
Notes to Pro Forma condensed consolidated financial information (unaudited)
On November 18, 1997, the registrant filed Form 8-K announcing that it had signed a definitive agreement to acquire substantially all of the assets of VIP Imaging Inc.
On December 10, 1997 the registrant filed Form 8-K announcing that it had completed the acquisition of VIP Imaging Inc.
LASON, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
All other schedules are omitted as not applicable or the information required is included in the consolidated financial statements or notes thereto.
LASON, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARES)
The accompanying Notes are an integral part of the consolidated financial statements.
LASON, INC.
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
The accompanying Notes are an integral part of the consolidated financial statements.
LASON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT FOR SHARES)
The accompanying Notes are an integral part of the consolidated financial statements.
LASON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying Notes are an integral part of the consolidated financial statements.
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND CAPITALIZATION
Lason, Inc. (together with it's subsidiaries, the "Company"), a Delaware corporation, was incorporated on January 5, 1995. The Company's initial equity was comprised of $10 million of Class B common stock and approximately $1 million of Class A-1 common stock. The Company contributed the capital to Lason Acquisition Corporation, a non-operating wholly-owned subsidiary. On January 17, 1995 the cash, in addition to $21 million of bank borrowings, was used to acquire the assets and assume certain liabilities of Lason Systems, Inc. ("Predecessor") and provide working capital. Subsequent to the acquisition, Lason Acquisition Corporation changed its name to Lason Systems, Inc. ("Lason") and continued the business operations of the Predecessor. Prior to the acquisition, three shareholders collectively acquired 93.8 percent of the Class A-1 common stock which represented a 46.9 percent aggregate interest of all outstanding classes of common stock in Lason at the time. The continuing shareholders' residual interest in the Company was recorded at historical cost resulting in an $8.6 million reduction in goodwill and stockholders' equity.
In the fourth quarter of 1996, the Company completed an initial public offering ("IPO") of 3,450,000 shares of common stock, for net proceeds of approximately $53.0 million, after deducting underwriting discounts and other offering expenses. Approximately $41.2 million of the net proceeds was used to repay outstanding debt under the Company's credit agreement and approximately $11.8 million was used to redeem 692,047 shares of common stock held by the Company's largest shareholder. In August 1997, the Company completed a secondary offering of shares of common stock. See Note 5.
In connection with and immediately prior to the consummation of the IPO, each share of Class A common stock was converted into one share of common stock, each share of Class B common stock was converted into approximately 1.3 shares of common stock, and the Company's Board of Directors approved a 2.5 for 1 common stock split. The Company's 1995 consolidated financial statements have been restated for this recapitalization. The authorized capital stock of the Company now consists of 20,000,000 shares of common stock, par value $0.01 per share and 5,000,000 shares of preferred stock, par value $0.01 per share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND CUSTOMER CONCENTRATION
The Company provides integrated outsourcing services for document management, records management and business communications. These services include high-volume optical and digital printing, facility management operations at customer sites, converting inputs into digital formats, data base management, and direct mailing, among others. The Company primarily serves customers in the manufacturing, financial services, healthcare and professional services industries.
Transactions with various divisions of one domestic automotive manufacturer accounted for approximately 17 percent, 32 percent and 49 percent of the Company's consolidated net revenues for the years ended December 31, 1997, 1996 and 1995, respectively. Receivables from that customer were approximately $2.6 million, and $7.2 million as of December 31, 1997 and 1996, respectively. Transactions with various divisions of another domestic automotive manufacturer totaled approximately 14 percent, 19 percent and 12 percent of the Company's consolidated net revenues for the years ended December 31, 1997, 1996 and 1995, respectively. In addition, the Company had receivables outstanding from this second customer of approximately $7.1 million and $3.8 million as of December 31, 1997 and 1996, respectively.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. 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 at the date of the
LASON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Certain amounts in the prior year consolidated financial statements have been reclassified to conform with the current year presentation.
REVENUE RECOGNITION
Revenues are recorded when the services are provided. Revenues are presented in the consolidated statements of income net of postage because the cost of such postage is passed through to the customer.
CASH EQUIVALENTS
The company classifies as cash and cash equivalents amounts on deposit with banks and cash invested temporarily in various instruments with maturities of three months or less at the time of purchase.
SUPPLIES
Supplies are valued at cost, which approximates market, with cost determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, are recorded at cost. Expenditures for normal repairs and maintenance are charged to operations as incurred. Adjustments of the asset and related accumulated depreciation accounts are made for retirements of property and equipment with the resulting gain or loss included in operations.
Assets placed in service prior to January 1, 1996, are depreciated using an accelerated method over the estimated useful lives of the assets which range from 5 to 7 years. Assets placed in service after December 31, 1995, are depreciated using a straight-line method over the estimated lives of the related assets which range from 5 to 15 years.
INTANGIBLE ASSETS
Goodwill is amortized using a straight-line method over 30 years. Covenants-not-to-compete are amortized using a straight-line method over the term of the agreement, generally 4 years. Deferred financing costs are amortized using the interest method over the term of the associated credit agreement.
The Company capitalizes direct internal and external costs associated with the development of technological systems, primarily computer software, to meet the needs of its customers. Such costs, which are included in other intangible assets, are amortized using a straight-line method over the lesser of five years or the economic life of the related services. In addition, the Company capitalizes certain direct internal and external costs associated with upgrading and enhancing its information systems to support its national information processing needs. Capitalization of such costs begins when the preliminary planning stage for each project is completed and management has formally authorized its funding, and ends when the project is substantially complete. These costs are amortized using a straight-line method over five years. Research and development costs and other computer software and hardware maintenance costs are charged to expense as incurred.
Annually, the Company evaluates the carrying value of intangibles to determine if there has been an impairment in value. The methodology used for this evaluation includes a review of annual operating performance, along with a review of anticipated results for future years. The Company determined that there had been no impairment in the net carrying amount of intangibles as of December 31, 1997.
LASON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosures about the fair value of financial instruments whether or not such instruments are recognized in the balance sheet. Due to the short-term nature of the Company's financial instruments, other than debt, fair values are not materially different from their carrying values. Based on the borrowing rates available to the Company, the carrying value of debt approximated fair value as of December 31, 1997 and 1996.
EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share", was issued in March 1997 and is effective for financial statements issued after December 15, 1997. This Statement establishes standards for computing and presenting earnings per share ("EPS") and supersedes Accounting Principles Board Opinion No. 15 and its related interpretations. The Statement replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes dilution, whereas diluted EPS includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were to be exercised or converted into shares of common stock. All prior period EPS amounts have been restated to reflect the provisions of SFAS No. 128.
Basic earnings per share are computed by dividing net income available to common shareholders by the weighted average common shares outstanding. The 1996 and 1995 basic earnings per share amounts are based on the weighted average number of common shares outstanding, retroactively adjusted for the effect of a 2.5 for 1 common stock split effective October 15, 1996 (see Note 1).
The following table presents a reconciliation of the numerator (income applicable to common shareholders) and denominator (weighted average common shares outstanding) for the basic and diluted earnings per share calculations for the years ended December 31, 1997, 1996 and 1995 (in thousands, except per share amounts).
The weighted average common shares and common share equivalents outstanding used to compute the dilutive effect of common stock options outstanding was computed using the treasury stock method prescribed by SFAS No. 128. EPS calculations include, as outstanding to the date of redemption (October 15, 1996), 692,047 shares of common stock which would have been sold at the initial offering price of $17.00 per share to fund the redemption of such common stock owned by the former Class B shareholders.
LASON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. ACQUISITIONS
From June 1995 through December 31, 1997, the Company, through certain of its subsidiaries, completed the acquisition of either substantially all of the assets or a controlling stock ownership interest in a substantial number of companies. Acquisitions completed in 1997 included the following:
In January 1997, Lason acquired all of the outstanding common stock of Churchill Communications Corporation for $7.5 million in cash and 72,499 shares of the Company's common stock valued at approximately $1.5 million.
In March 1997, Lason acquired all of the outstanding common stock of Automated Enterprises, Inc. ("AEI") for $5.9 million in cash and 31,008 shares of the Company's common stock valued at approximately $655,000. The stock purchase agreement provides for an additional payment to the selling shareholder if AEI's financial performance for the year ended December 31, 1997 and the year ending December 31, 1998 exceed specified targets. Under terms of the agreement, the selling shareholder can require the Company to accelerate the payment of $1.6 million in full payment of the Company's additional payment obligation.
In July 1997, Lason acquired all of the outstanding common stock of Image Conversion Systems, Inc. ("ICS") for approximately $18.9 million in cash and 47,441 shares of the Company's common stock valued at approximately $1.1 million. Of the total cash payment, approximately $10.5 million was used to repay the outstanding debt of ICS and approximately $8.4 million was paid to the selling shareholders.
The shares of common stock issued in connection with the acquisition of ICS are (i) being held in escrow as collateral to indemnify the Company if contingencies set forth in the purchase agreement occur within twelve months from the date of the acquisition, and (ii) subject to forfeiture if ICS does not achieve targeted operating income in 1997 and in 1998. Further, if the operating income of ICS for such periods exceeds a targeted level, the purchase price may be increased by up to approximately $3.0 million.
In November 1997, Lason acquired all of the common stock of Spectrum Document Services, Inc. ("Spectrum") for $481,000 in cash, a $2.7 million short-term promissory note due January 10, 1998 and a $300,000 promissory note, due January 10, 1999. The payment of the $300,000 promissory note is contingent on Spectrum generating a targeted operating cash flow for the twelve month period ending October 31, 1998.
Also in November 1997, Lason acquired substantially all of the assets of VIP Imaging Inc. ("VIP") for $14.5 million in cash and 147,260 shares of the Company's common stock valued at approximately $4.0 million. With respect to the cash portion of the purchase price, $250,000 is being held in escrow and will be increased or decreased on a dollar-for-dollar basis to the extent net working capital, as defined by the asset purchase agreement, as of the closing date exceeds or falls below $4.756 million. With respect to the shares of common stock issued in connection with the VIP acquisition, 36,815 of such shares are being held in escrow as collateral to indemnify the Company if contingencies set forth in the purchase agreement occur. In addition, the purchase price may be increased up to $1.0 million if certain earnings and sales targets are met in the first 13-month period and subsequent 12-month period following the closing date of the acquisition.
Also during 1997 the Company, through certain of its subsidiaries, acquired all of the common stock of Alpha Imaging, Inc.; Alpha Micro Graphics Supply, Inc.; Premier Copy Group, Inc.; Corporate Copies, Inc.; American Micro-Image, Inc.; Tri-City Micrographics, Inc.; Litigation Solutions, Inc.; and Data Reduction Inc.; and substantially all of the assets of Florida Data Bank, Inc. and Image Data Corporation, for an aggregate purchase price of approximately $13.0 million consisting of $8.7 million in cash, $3.4 million of short-term promissory notes due January 5, 1998 and 37,607 shares of the Company's common stock valued at approximately $891,000.
All purchase price contingencies, if any, will be recorded as an adjustment to the purchase price when the contingency is resolved.
LASON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Generally, shares of common stock issued or to be issued in connection with the acquisitions, are subject to lock-up agreements ranging from twelve to twenty-four months. The lock-up agreements restrict the owners' ability to sell the shares of common stock.
Each of the acquisitions was accounted for as a purchase. The results of operations for the year ended December 31, 1997 include the results of operations for each of the acquired companies since the date of their respective acquisition.
The aggregate purchase price for the acquisitions completed for the year ended December 31, 1997, excluding liabilities assumed and including common stock held in escrow, was approximately $71.0 million. The purchase price was allocated to the assets acquired and liabilities assumed based on the related fair values at the date of acquisition. The excess of the aggregate purchase price over the fair values of assets acquired and liabilities assumed has been allocated to goodwill and is being amortized on a straight-line method over 30 years.
In conjunction with these acquisitions, liabilities assumed and other non-cash consideration was as follows (in thousands):
The following table summarizes pro forma unaudited results of operations as if each of the acquisitions completed during 1997 had occurred at the beginning of each year presented (in thousands, except per share amounts):
4. LONG-TERM DEBT
Lason has a credit agreement with a bank group providing for revolving credit loans up to $80 million. Borrowings will be used to finance additional acquisitions of businesses, working capital, capital expenditures and for other corporate purposes. Borrowings under the credit agreement are collateralized by substantially all of Lason's assets. Lason is not required to make principal payments prior to 2001, the term of the loan. Interest on amounts outstanding is calculated based on interest rates determined at the time of borrowing. Borrowings bear interest at rates ranging from LIBOR plus a maximum of 2.25% to a base percentage rate plus a maximum of 1.25%, depending on the Company's leverage ratio. The credit agreement contains covenants which, among other things, place restrictions on the acquisition and disposal of assets, payment of dividends and incurrence of liabilities and sets minimum requirements for free cash flow and certain financial ratios. As of December 31, 1997, the loan agreement prohibits Lason from advancing funds or paying dividends to the Company. Borrowings outstanding under the credit agreement totaled $13.6 million and $4.1 million as of December 31, 1997 and 1996, respectively.
LASON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
As of December 31, 1997, Lason was in violation of certain non-financial covenants. In February 1998, Lason obtained waivers of such non-financial covenant violations.
5. STOCKHOLDERS' EQUITY
In August 1997, the Company completed a secondary offering of 2,457,620 shares of common stock for net proceeds of approximately $58.0 million, after deducting underwriting discounts and other offering expenses. The net proceeds were used to repay debt outstanding under the Company's credit agreement and for general corporate purposes.
In connection with the transaction described in Note 1, Lason loaned certain shareholders, who were also shareholders in the Predecessor, approximately $1.3 million in 1995 which was used to pay their tax liability resulting from the sale of the assets of the Predecessor. In conjunction with the completion of the IPO in 1996, 50 percent of the then outstanding amounts of the shareholder loans were forgiven by the Company and charged to retained earnings. At the same time, the remaining 50 percent of shareholder loans outstanding were repaid to the Company, along with the related accrued interest to the date of settlement.
6. INCOME TAXES
The Company and its qualifying subsidiaries file a consolidated Federal income tax return. The Federal income tax provision is computed on the consolidated taxable income of the Company and those subsidiaries.
The components of the consolidated income tax provision are as follows (in thousands):
LASON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Deferred income taxes represent the net tax effects of temporary differences between the carrying value amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax return purposes. Significant components of the Company's deferred Federal income tax assets and liabilities are as follows (in thousands):
The difference between the Company's statutory Federal income tax rate and its effective Federal income tax rate of 35.7 percent, 35.6 percent and 36.1 percent for the years ended December 31, 1997, 1996 and 1995, respectively, results primarily from travel and entertainment expenses and certain goodwill amortization that is not deductible for Federal income tax purposes.
7. STOCK OPTION PLAN
SFAS No. 123 "Accounting for Stock Based Compensation" was issued in October 1995 and was effective for fiscal years beginning after December 15, 1995. That standard requires significantly more disclosure regarding employee stock options and encourages companies to recognize compensation expense for stock-based awards based on the fair value of such awards on the date of grant. Alternatively, companies may continue to account for such transactions under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", provided that disclosures are made regarding the net income and earnings per share impact as if the value recognition and measurement criteria of SFAS No. 123 had been adopted. The Company has elected to continue to account for employee stock options under APB No. 25.
The Company's 1995 stock option plan was adopted by the Board of Directors and approved by the Company's shareholders in January 1995. A committee composed of non-employee members of the Board of Directors determines which key employees will participate in the Plan. Under the Plan, the Company may grant up to 1,000,000 shares of common stock.
For certain options granted during 1996 and 1995, the exercise price was less than the fair value of the Company's stock on the date of grant and, accordingly, compensation expense is recognized over the vesting period for such difference. For certain other options granted in 1997 and 1996, the exercise price equaled the market price on the date of grant and, therefore, no compensation expense was recognized. Options generally
LASON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
vest over a period which ranges from 3 to 5 years from the date of grant and each option's maximum term is generally 7 years from the grant date.
The provisions of certain stock option agreements provided for immediate vesting of those options on the effective date of the IPO. Accordingly, the Company recorded a non-cash expense of $653,000 during the fourth quarter of 1996 to recognize the compensation associated with the immediate vesting of those stock options. Total compensation expense recorded for the years ended December 31, 1997, 1996 and 1995 was approximately $221,000, $936,000 and $308,000, respectively.
Had compensation expense for the Company's stock option plan been determined based on the fair value at the grant dates for awards, consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts as follows (in thousands, except per share amounts):
For purposes of computing the pro forma amounts above, the fair value of each option granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield of 0.0 percent for all three years; expected volatility of 59 percent for 1997 and 74 percent for 1996 and 1995; risk free interest rates of 6.12 percent, 5.98 percent and 6.39 percent, respectively; and expected lives of 4.17 years, 4.02 years and 2.43 years, respectively.
A summary of the status of the Company's stock option plan is as follows for each of the years ended December 31:
LASON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table summarizes information about stock options outstanding as of December 31, 1997:
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan and trust (the "Plan"). Each employee who is 21 years of age or older who has worked for the Company for twelve months and performed 1,000 hours of service or, has an adjusted service date with the equivalent or greater term of service, is eligible to participate in the Plan. Eligible participants may contribute not less than 2 percent and up to 15 percent of their pretax compensation to the Plan. The Plan is contributory and the Company, at its discretion, can match up to 33 percent of eligible participant contributions not to exceed 9 percent of the participant's earnings. The Company's match contribution for the years ended December 31, 1997, 1996, and 1995 totaled approximately $337,000, $201,000, $172,000, respectively.
9. LEASE COMMITMENTS
The Company has various operating lease agreements related primarily to equipment and buildings. As of December 31, 1997, future minimum rental payments required under noncancelable operating leases with initial or remaining lease terms in excess of one year are as follows (in thousands):
In addition, the Company has a number of equipment leases that are on a month-to-month basis.
Total rent expense for the years ended December 31, 1997, 1996 and 1995 was approximately $9.2 million, $6.4 million and $5.2 million, respectively.
10. RELATED PARTY TRANSACTIONS
The Company purchases printing services from a company owned by the wife of it's former president and a principal shareholder of the Company. For the years ended December 31, 1997, 1996 and 1995 the Company paid approximately $3.8 million, $1.4 million and $981,000, for such printing services. As of December 31, 1997 and 1996, $103,800 and $114,389 was due to that company, respectively, for printing services, and is included in accounts payable in the consolidated balance sheets. In December 1997, the Company sold certain assets to this company and recognized a gain on the sale of approximately $183,000.
The Company leases property and a building from a general partnership in which the Company's Chairman is the managing partner. Another principal shareholder of the Company owns 33.33 percent of such
LASON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED
partnership and is one of its partners. The Company paid $150,150, $191,100 and $191,100 in rent to that partnership for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company leases certain equipment from a company in which the Company's Chairman is a 50 percent owner and its president. For the years ended December 31, 1997, 1996 and 1995 the Company paid $258,000, $184,390 and $57,100, respectively, in rent for such operating leases.
The Company contracts temporary employment services from a company which is owned by the wife of a senior member of management. The Company paid $797,000, $735,670 and $2,905 for the years ended December 31, 1997, 1996 and 1995, respectively, for such services.
The Company believes that all the above transactions were on terms that were reasonable and competitive. Additional transactions of the nature described may take place in the ordinary course of business in the future.
11. COMMITMENTS AND CONTINGENCIES
Various claims have been made against the Company in the normal course of business. Management believes that none of these legal proceedings will have a material adverse effect on the Company's business, financial condition or results of operations.
12. SUBSEQUENT EVENTS
During the first quarter of 1998, the Company, through certain of its subsidiaries, acquired either substantially all of the assets or 100% of the common stock of several companies for an aggregate purchase price, excluding liabilities assumed, of approximately $54.7 million, consisting of $45.3 million in cash, funded by bank borrowings, and 320,359 shares of the Company's common stock valued at approximately $9.4 million.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lason, Inc.
We have audited the consolidated financial statements and the financial statement schedule of Lason, Inc. (the "Company") and subsidiaries listed in Item 14(A) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 misstatement. 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lason, Inc. and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Detroit, Michigan March 16, 1998
SCHEDULE I
LASON, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (IN THOUSANDS)
S-1
SCHEDULE I
LASON, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT INCOME STATEMENTS (IN THOUSANDS)
S-2
SCHEDULE I
LASON, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (IN THOUSANDS)
S-3
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.
Lason, Inc.
By: /s/ WILLIAM J. RAUWERDINK
------------------------------------ William J. Rauwerdink Executive Vice President and Chief Financial Officer
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 and the dates indicated:
EXHIBIT INDEX
E-1
E-2
E-3
E-4
+ filed herewith
(1) Incorporated herein by reference to registrant's Form S-1 filed on October 7, 1996, Commission File No. 333-09799.
(2) Incorporated herein by reference to registrant's Form 10-Q filed on May 15, 1997, Commission File No. 0-21407.
(3) Incorporated herein by reference to registrant's Form 8-K filed on February 18, 1997, Commission File No. 0-21407.
(4) Incorporated herein by reference to registrant's Form S-8 filed on December 23, 1996, Commission File No. 333-18551.
(5) Incorporated herein by reference to registrant's Form 10-K filed on March 31, 1997, Commission File No. 0-21407.
(6) Incorporated herein by reference to registrant's Form 8-K filed on August 4, 1997, Commission File No. 0-21407.
(7) Incorporated herein by reference to registrant's Amendment No. 1 to Form S-1 filed on August 15, 1997.
(8) Incorporated herein by reference to registrant's Form 10-Q filed on November 14, 1997, Commission File No. 0-21407.
(9) Incorporated herein by reference to registrant's Form 8-K filed on December 10, 1997, Commission File No. 0-21407.
(10) Incorporated herein by reference to registrant's Form 8-K filed on March 17, 1998, Commission File No. 0-21407.
(11) Incorporated herein by reference to registrant's Form 8-K filed on March 20, 1998, Commission File No. 0-21407.
E-5