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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number 000-21407
LASON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3214743
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
1305 Stephenson Highway, Troy Michigan 48083
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (810) 597-5800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(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 Par III of this Form 10-K or any
amendment to this Form
10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of March 20, 1997, computed by reference to
the last sale price for such stock on that date as reported on the Nasdaq
National Market System, was $83,476,497.
As of March 20, 1997, 8,787,570 shares of Common Stock, par value $.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Notice of 1997 Annual Meeting of Shareholders and
Proxy Statement (Part III)
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PART I
ITEM I. BUSINESS.
GENERAL
Lason Systems, Inc., a Michigan corporation and the predecessor to the
Company (the "Predecessor"), 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. (together
with its subsidiaries, the "Company"). 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, 1996, Lason completed the acquisition
of either substantially all of the assets or a controlling stock ownership
interest in eight companies. The stock acquisitions included acquiring 65% of
the outstanding common stock of Delaware Legal Copy, Inc. in April 1996, 100%
of the outstanding common stock of Information & Image Technology of America,
Inc. and Great Lakes Micrographics Corporation in July 1996, 80% of the
outstanding common stock of Micro-Pro, Inc. and MP Services, Inc. (two
affiliated companies) in July 1996, and 100% of the outstanding common stock
of National Reproductions Corp. in August 1996.
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, in January 1997, Lason acquired 100% of the
outstanding common stock of Churchill Communications Corporation ("Churchill")
and 100% of the outstanding common stock of Alpha Imaging, Inc. and Alpha Micro
Graphics Supply, Inc., (together "Alpha"). In addition, in March 1997, Lason
acquired 100% of the outstanding common stock of Automated Enterprises Inc. and
100% of the outstanding common stock of Premier Copy Group, 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.
In the fourth quarter of 1996, the Company completed an initial public
offering ("IPO") of 3,450,000 shares of common stock , including the
underwriter's over-allotment option, at $17.00 per share for net proceeds to
the Company 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 debt outstanding 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 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.
OPERATIONS
The Company provides integrated outsourcing services for document
management, records management and business communications. The investments
the Company has made in imaging and communications technology, personnel,
equipment and systems over the past decade have given it the capabilities and
expertise to meet the growing and increasingly complex document management
requirements of its customers. The Company primarily serves customers in the
automotive, healthcare, financial services and professional services
industries. The Company's core competencies in input processing, data
management and output processing enable it to provide a broad range of services
across a wide range of media types and allow customers to fulfill their
document
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management outsourcing needs with a single vendor. For the years ended
December 31, 1996, 1995 and 1994, the Company reported consolidated net
revenues of $69.9 million, $46.6 million and $41.2 million, respectively.
Income from operations was $7.7 million, $4.8 million and $5.3 million for the
years ended December 31, 1996, 1995 and 1994, respectively. As of March 20,
1997, the Company employed over 1,250 people, has operations in ten states
and provides services to over 2,400 customers at 17 multi-functional imaging
centers and at over 40 facility management sites located on customers'
premises.
The Company's service offerings generally can be divided into the areas of
document management, records management and business communications.
Document Management
The Company provides a broad range of services that enable it to meet
customers' document management needs. The Company offers on-site facilities
management services to manage those document management services which are most
efficiently provided at a customers facility. Higher volume and / or more
complex document management services are performed at the Company's centralized
imaging centers. The Company's service centers process over six million pages
a month and some operate 24 hours a day, seven days a week, to provide
customers with quick-turn electronic and traditional printing services.
Lason Document Express is a print-on-demand system with on-line order
entry capabilities that enables customers to produce and distribute large
volumes of a document on 24 hours notice. The service is ideally suited for
documents that require frequent revisions or have unpredictable demand - and it
is a cost effective alternative to offset printing which requires large
production runs. The system's electronic interface allows the Company's
customers the flexibility to make last minute changes to their documents and
place a print order, including production amount, distribution method and
locations for next-day delivery.
Document management represented approximately 38.4%, 36.9% and 38.3% of
the Company's consolidated net revenues for the years ended December 31, 1996,
1995 and 1994, respectively.
Records Management
Companies are increasingly utilizing electronic document storage and
retrieval (DSR) systems to manage their business records as the cost of such
technology declines and the benefits become more apparent. The Company
possesses the capability to convert documents from a wide variety of input
media or formats to a wide variety of output media formats , including
traditional micrographic conversion services. The Company also offers DSR
system services that a customer can use as an alternative to developing and
purchasing its own DSR system.
Electronic storage of documents enables customers to immediately access
large volumes of documents that would be impossible using conventional filing
systems. DSR systems also provide rapid distribution of archived information
to multiple destinations and remove the logistical burden and cost of archiving
paper documents.
The Company's expertise in records management is based on years of
experience in converting millions of documents to digital and film formats.
Demand for new digital imaging formats including CD-ROM, optical disk, magnetic
disk and magnetic tape, now outpace imaging on traditional film-based formats
because of significant advances in electronic document storage and retrieval
systems.
Records management services represented approximately 24.1%, 19.5% and
20.1% of the Company's consolidated net revenues for the years ended December
31, 1996, 1995 and 1994, respectively.
Business Communications
The Company offers a variety of personalized messaging and database
management services to its customers. The direct response services are
characterized by quick turn-around, large volume, and highly personalized
business correspondence utilizing a variety of formats.
The Company is a major provider of collection letter processing and
generates over 20 million letters per month on behalf of its customers. In
addition, the Company develops customized programs for its customers to
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support event-driven response requirements, such as product recall and credit
card solicitation campaigns. All of the mailings are processed through the
Company's mail centers which presort letters to achieve significant postal
discounts for its customers.
Business communications activity represented approximately 37.5%, 43.6%
and 41.6% of the Company's consolidated net revenues for the years ended
December 31, 1996, 1995 and 1994, respectively.
CUSTOMERS
Including Churchill and Alpha, the Company has over 2,400 customers
primarily in the manufacturing, healthcare, financial services and professional
services industries. The Company services accounts of all sizes, from small
business and professional groups to Fortune 100 companies.
Historically, a majority of the Company's revenues have come from sales to
the major domestic automobile manufacturers. The three major domestic
automobile manufactures accounted for approximately 57%, 65% and 71% of the
Company's consolidated net revenues for the years ended December 31, 1996, 1995
and 1994, respectively. No single customer accounted for more than 10% of the
Company's total consolidated net revenues for the years ended December 31,
1996, 1995, and 1994 except for General Motors Corporation and Ford Motor
Company as summarized in the following table:
Percent of Consolidated Net Revenues
Year Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
General Motors Corporation 32% 49% 55%
Ford Motor Company 19 12 12
Chrysler Corporation 6 4 4
----- ----- -----
Totals 57% 65% 71%
===== ===== =====
COMPETITION
The Company's businesses are highly competitive. A significant source of
competition is the in-house document handling capability of the Company's
target customer base. In addition, with respect to those services that are
outsourced, the Company has a variety of competitors, including large
national or multinational companies, which have greater financial resources
than the Company, and smaller regional or local companies. The Company's major
competitors, in addition to various regional competitors, include IKON Office
Solutions, Inc., Pitney Bowes Management Services, Inc. (a subsidiary of Pitney
Bowes, Inc.) and Xerox Business Services with respect to its document
management services; Dataplex Corp., F.Y.I. Incorporated and IKON Office
Solutions, Inc., with respect to its records management services; and First
Financial Management Corp. (First Image), Sun Guard Mailing Services and
Diversified Data & Communications with respect to its business communications
services.
The Company believes that the principal competitive factors in document
management, records management and business communication services include
quality and accuracy, reliability and security of service, reputation, ease of
use, customer support and service, customer segment specific knowledge, speed,
capacity and price.
PROPRIETARY RIGHTS AND PROCESSES
The Company regards the systems, information and know-how underlying its
services as proprietary and relies primarily on a combination of contract,
trade secrets, confidentiality agreements and contractual provisions to protect
its proprietary rights. The Company's business is not materially dependent on
any patents. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to obtain and use information that the Company
regards as proprietary, and policing unauthorized use of the Company's
proprietary information is difficult. Litigation may be necessary for the
Company to protect its proprietary information and could result in substantial
cost to , and diversion by, the Company.
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REGULATION
The Company's customers involved in debt collection and certain of the
Company's services as used by those customers, such as collection letter
processing, are subject to various consumer protection laws, including the
Federal Fair Debt Collection Practices Act ("FDCPA"). The FDCPA in general
prohibits harassment, false representations and unfair practices, including
limitations on the acceptable format and wording of letters, envelopes and
other communications from debt collectors to debtors. The FDCPA provides for
civil liability for the violation of its provisions. The maximum liability
exposure in a class action would be $1,000 for each named individual and such
amount as the court may allow for other class members, not to exceed the lesser
of $500,000 or 1% of the net worth of the debt collector plus costs and
reasonable attorney's fees. In addition to the FDCPA, the Company's debt
collector customers may be subject to various state statutes and regulations.
Such regulations may afford greater protection to consumers than the FDCPA.
Although the Company believes that it is not subject to the FDCPA because
it is not a debt collector and although there are no contractual rights to
indemnification from the Company to its debt collection customers with respect
to such actions, a customer of the Company subject to, and in violation of, the
FDCPA or similar laws in connection with services provided by the Company to
such customer may ask the Company for indemnification for any losses the
customer may incur in connection with such violation. If such indemnification
is required or the Company is determined to be liable for any violation of such
laws, it could have a material adverse effect on the Company's business,
financial condition or results of operations.
ENVIRONMENTAL MATTERS
The Company is subject to Federal, state and local laws, regulations and
ordinances that: (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes; or (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposal or other releases of solid wastes and hazardous substances.
The Company is not aware of any environmental conditions relating to
present or past waste generation at or from these facilities that would be
likely to have a material adverse effect on the business, financial condition
or results of operations of the Company. However, there can be no assurance
that environmental liabilities in the future will not have a material adverse
effect on the business, financial condition or results of operations of the
Company.
EMPLOYEES
As of March 20, 1997, including Churchill and Alpha, the Company had
approximately 1,250 employees, 108 of which were employed primarily in
management and administration. Included in the total number of employees are
approximately 96 part-time and 27 temporary employees No employees of the
Company are represented by a labor union. The Company considers its relations
with its employees to be good.
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EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 20, 1997):
Executive
Officer
Name Position Age Since
--------------------- --------------------------- --- ---------
Robert A. Yanover Chairman and Director 60 1985
Gary L. Monroe Chief Executive Officer,
and Director 42 1995
Allen J. Nesbitt President and Director 50 1985
William J. Rauwerdink Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary 47 1996
Brian E. Jablonski Executive Vice President of
Marketing and Sales 40 1996
Robert A. Yanover has served as Chairman of the Board and as a Director of
the Company and its predecessor since their inception. Mr. Yanover also serves
as president of Computer Leasing Company of Michigan, Inc. Mr. Yanover is
founder and former president of 3PM. Mr. Yanover holds a B.S. degree in
Physics from Harvard College.
Gary L. Monroe has served as Chief Executive Officer of the Company since
February 1996 and as a Director of the Company since he joined the Company in
September 1995. From September 1995 to February 1996, Mr. Monroe served as
President of Kodak Imaging Services, Inc., a subsidiary of Eastman Kodak Co.
From August 1990 to May 1992, Mr. Monroe served as Director of Finance and
Strategic Planning of the Health Sciences Division of Eastman Kodak Co. Mr.
Monroe holds a B.A. degree from William Paterson College and an M.B.A. degree
from Rutgers University.
Allen J. Nesbitt has served as President and a Director of the Company and
its predecessor since their inception. From 1977 to 1985 Mr. Nesbitt served as
Vice President of 3PM.
William J. Rauwerdink has served as Executive Vice President, Chief
Financial Officer, Treasurer and Secretary of the Company since he joined the
Company in May 1996. From February 1993 to April 1995, Mr. Rauwerdink served
as Executive Vice President, Chief Financial Officer and Treasurer of The
MEDSTAT Group, Inc., a publicly traded company in the healthcare information
industry. Mr. Rauwerdink was a Partner with the Detroit office of the
international accounting and consulting firm of Deloitte & Touche from 1983 to
1993. He is a certified public accountant. Mr. Rauwerdink holds a B.B.A..
degree from the University of Wisconsin - Madison and an M..B.A. degree from
Harvard University.
On December 11, 1995, Mr. Rauwerdink consented to the entry of an order
enjoining him from violating certain antifraud and tender offer provisions of
the federal securities laws. The order required him to give up profits and
pay penalties and interest totaling approximately $225,000. He neither
admitted nor denied the allegations made in the proceeding.
The proceeding involved the rollover of certain funds from a former
employer's profit sharing plan. The investement directions made in connection
with the rollover into Mr. Rauwerdinks 401(k) account at his new employer
specified that the investment of such funds be made 50% in the stock of his
employer and 50% in other investments in his 401(k) account) and resulted in
the purchase of shares of common stock of the new employer at the time when it
was alleged that the employer was engaged in merger negotiations. The shares
purchased in the rollover transaction constituted approximately 8% of Mr.
Rauwerdink's total holdings in his new employer's common stock.
Brian E. Jablonski has served as Executive Vice President of Marketing and
Sales since he joined the Company in July 1996. From 1992 until June 1996, Mr.
Jablonski served as Vice President, Sales and Marketing of Kodak Imaging
Services, Inc., a subsidiary of Eastman Kodak Co. From 1979 to 1992, Mr.
Jablonski held various positions at Eastman Kodak Co., including Branch
Business Manager, District Sales Manager and Director - Markets Development
Electronic Printing and Publishing. Mr. Jablonski holds a B.S. degree in
Business Management from St. John Fisher College.
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ITEM 2. PROPERTIES
As of March 20, 1997, including Churchill and Alpha, the Company conducted
operations through 22 leased facilities in ten states containing in the
aggregate approximately 333,360 square feet. The Company's principal
facilities are summarized as follows:
Approximate
Location Square Footage Use
------------------- -------------- -------------------------------
Livonia, MI 72,000 Business communications
Madison Heights, MI 49,900 Document and records management
Troy, MI 47,050 Document and records management,
principal executive offices
Livonia, MI 27,460 Business communications
Jacksonville, FL 26,505 Document and records management
Detroit, MI 20,000 Document and records management
St. Clair Shores, MI 16,345 Document and records management
Lincoln Park, MI 13,000 Document and records management
New York, NY 10,500 Business communications
Rochester, NY 8,200 Document and records management
Livonia, MI 5,700 Item processing and item research
Chicago, IL 5,200 Document and records management
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. 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 1996.
PART II.
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". The high and low quoted prices as reported on the Nasdaq
National Market System during the fourth quarter of 1996 were $24.125 and
$14.0, respectively.
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 and would be based on the Company's earnings, capital
requirements, financial condition and other factors deemed relevant by the
Board. 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.
As of March 20, 1997, there were approximately 2,300 holders of the
Company's common stock, including 40 shareholders of record and approximately
2,260 in street name.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below have been derived
from the Company's consolidated financial statements which have been audited by
Coopers & Lybrand, L.L.P. and should be read in conjunction with the
consolidated financial statements and notes thereto.
COMPANY PREDECESSOR
--------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ------------
INCOME STATEMENT DATA
Revenues, net of postage $69,937 $46,605 $41,151 $31,151 $18,852
Cost of revenues 47,587 31,227 27,238 20,684 13,176
----------- ----------- ----------- ----------- ------------
Gross profit 22,350 15,378 13,913 10,467 5,676
Selling, general and administrative expenses 12,628 9,406 8,377 6,980 3,139
Compensatory stock option expense 936 308 - - -
Amortization of intangibles 1,121 817 266 163 87
----------- ----------- ----------- ----------- ------------
Income from operations 7,665 4,847 5,270 3,324 2,450
Interest expense 1,831 1,760 185 126 83
Other (income) expense, net (71) (66) (21) (21) 93
----------- ----------- ----------- ----------- ------------
Income before income taxes and minority
interest 5,905 3,153 5,106 3,219 2,274
Provision for income taxes (1) 2,103 1,139 - - -
Minority interest in net income of
subsidiaries (2) 71 - - - -
----------- ----------- ----------- ----------- ------------
Net income $ 3,731 $ 2,014 $ 5,106 $ 3,219 $ 2,274
=========== =========== =========== =========== =======
Earnings per share (3) $ 0.55 $ 0.33
=========== ===========
ENDING BALANCE SHEET DATA
Working capital $16,926 $ 5,141 $ 3,218 $ 3,307 $ 2,444
Total assets 78,546 37,309 15,692 13,877 10,814
Long-term debt, less current portion - 11,500 261 320 65
Revolving credit line borrowings 4,101 7,277 - - -
Total stockholders' equity (4) 57,006 9,214 6,623 6,567 4,934
(1) From its inception to January 17, 1995, the Company was an S corporation
and, accordingly, was not subject to Federal income tax.
(2) Represents the minority shareholders' portion of the net income of
Micro-Pro, Inc. and Delaware Legal Copy, Inc. in which the Company
acquired an 80% and 65% equity interest, respectively, during 1996.
(3) Earnings per share are not presented for the Predecessor as such
information is not representative of the capital structure of the Comapny.
(4) Includes the net proceeds from the Initial Public Offering and redemption
of shares of common stock during the fourth quarter of 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Lason Systems, Inc., a Michigan corporation and the predecessor to the
Company (the "Predecessor"), 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. (together
with its subsidiaries, the "Company"). 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, 1996, Lason completed the acquisition
of either substantially all of the assets or a controlling stock ownership
interest in eight companies. The stock acquisitions included acquiring 65% of
the outstanding common stock of Delaware Legal Copy, Inc. in April 1996, 100%
of the outstanding common stock of Information & Image Technology of America,
Inc. and Great Lakes Micrographics Corporation in July 1996, 80% of the
outstanding common stock of Micro-Pro, Inc. and MP Services, Inc. (two
affiliated companies, "Micro-Pro") in July 1996, and 100% of the outstanding
common stock of National Reproductions Corp. ("NRC") in August 1996. 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,
1996 include the results of operations of the acquisitions since the date of
acquisition and, therefore, are not directly comparable to the results of
operations for 1995 and 1994.
In the fourth quarter of 1996, the Company completed an initial public
offering ("IPO") of 3,450,000 shares of common stock , including the
underwriter's over-allotment option, at $17.00 per share for net proceeds to
the Company 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 debt outstanding 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.
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, in January 1997, Lason acquired 100% of the
outstanding common stock of Churchill Communications Corporation ("Churchill")
and 100% of the outstanding common stock of Alpha Imaging, Inc. and Alpha Micro
Graphics, Inc., (together "Alpha"). In addition, in March 1997, Lason acquired
100% of the outstanding common stock of Automated Enterprises Inc. ("AEI") and
100% of the outstanding common stock of Premier Copy Group, Inc. ("Premier").
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, 1996 COMPARED WITH YEAR ENDED
DECEMBER 31, 1995
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 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 (71%) ,
$2.2 million (53%) and $1.3 million (24%), 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
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margins for businesses acquired in 1996. Gross profit as a percentage of
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 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 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.
Minority interest of $71,000 for the year ended December 31, 1996
represents the minority shareholders' portion of the net income of Micro-Pro
and Delaware Legal Copy, Inc. in which the Company acquired an 80% and 65%
equity interest, respectively, during 1996.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED
DECEMBER 31, 1994
Net revenues increased 13.1% to $46.6 million for the year ended December
31, 1995 from $41.2 million reported in 1994. The increase resulted
principally from growth in the Company's collection letter processing,
facilities management and document conversion revenues of approximately $2.0
million (58%), $1.2 million (10%) and $1.0 million (33%), respectively.
Gross profit increased to $15.4 million in 1995 from $14.0 million in
1994. Gross profit as a percentage of net revenues decreased to 33.0% in 1995
from 33.8% in 1994. The decrease in gross profit as a percentage of net
revenues primarily resulted from an increase of approximately $1.0 million in
the cost of paper and related products, partially offset by increased operating
efficiencies.
Selling, general and administrative expenses increased to $9.4 million for
the year ended December 31, 1995 from $8.4 million in 1994. In connection with
the Recapitalization, the Company recorded approximately $275,000 in
non-recurring professional services and other expenses. Also in 1995, several
key executives were hired resulting in an increase of approximately $300,000 in
administrative expenses. As a percentage of revenues, selling, general and
administrative expenses decreased to 20.2% in 1995 from 20.4% in 1994.
Amortization of intangibles increased to $817,000 in 1995 from $266,000 in
1994 primarily due to the amortization of intangibles recorded as a result of
the Recapitalization.
Interest expense increased to $1.8 million in 1995 from $185,000 in 1994
primarily due to increased borrowings incurred as part of the Recapitalization
and growth in the Company's business.
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
common stock.
Cash used in operating activities was $2.1 million for the year ended
December 31, 1996 compared to cash provided by operating activities of $1.3
million in 1995 and $5.7 million in 1994. The decrease in operating cash flows
in 1996 was primarily due to an increase in accounts receivable and prepaid
expenses partially offset by higher net income and an increase in customer
deposits. The decrease in operating cash flows from 1994 to 1995 was primarily
due to lower net income and higher accounts receivable.
9
11
Cash flows used in investing activities totaled $21.7 million, $1.8
million and $1.8 million for the years ended December 31, 1996, 1995 and 1994,
respectively, and has primarily been used to fund payments for the net assets
of acquired businesses and investments in capital equipment to improve the
Company's reprographic capability and capacity. Cash used to acquire
businesses was $17.1 million, $1.4 million and $1.0 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Cash used to invest in
capital equipment totaled $4.6 million in 1996, compared to $1.1 million and
$800,000 in 1995 and 1994, respectively. The 1996 investment in capital
equipment includes approximately $1.3 million of previously leased copiers that
were purchased during the fourth quarter.
Cash flows provided by financing activities largely consisted of proceeds
from the IPO, partially offset by repayments of long-term debt and payments to
redeem shares of the Company's common stock during 1996. Net proceeds from the
issuance of common stock totaled approximately $53.0 million for the year ended
December 31, 1996, after deducting underwriting discounts and other offering
expenses. The net proceeds from the IPO were primarily used to redeem 692,047
shares of common stock which were held by the Company's largest shareholder and
to repay amounts which were then outstanding under the Company's credit
agreement.
Credit Agreement and Borrowings
On January 17, 1995 Lason and First Union National Bank of North Carolina
(the "Bank") entered into a Credit Agreement, pursuant to which the Bank
provided for an aggregate of $15 million of term loans payable in 26 quarterly
installments ending June 30, 2001 and a $10 million revolving credit facility,
subject to a borrowing base limitation, expiring on June 30, 2001. In July
1996, the Credit Agreement was amended to include an additional $10 million
acquisition credit facility, expiring on the earlier of June 30, 2001 or an
initial public offering by the Company. In addition, in August 1996, the
Credit Agreement was amended to provide for up to an additional $8.5 million of
interim term loans, payable upon the earlier of March 31, 1997 or an initial
public offering by the Company. Approximately $8.2 million was borrowed under
the interim term loan facility in connection with the acquisition of NRC. In
August 1996, the Credit Agreement was further amended increasing the then
existing $10 million revolving credit facility to $13 million. As of December
31, 1996, there was approximately $4.1 million outstanding under the Credit
Agreement.
On February 20, 1997, the Credit Agreement was amended and restated to
provide revolving credit loans in the initial amount of $40 million , which may
be increased to $60 million at Lason's request , and after payment of a
commitment fee and Bank review and approval. The increased borrowing capacity
will be used to finance additional acquisitions of businesses, working capital,
capital expenditures and for other corporate purposes. Borrowings, if any,
under the Credit Agreement will be collateralized by substantially all of
Lason's assets. Lason will not be required to make principal payments prior to
2001, the term of the loan. Interest on amounts outstanding will be calculated
based on interest rates determined at the time of borrowing. Borrowings will
bear interest at rates ranging from a base percentage rate plus a maximum of
1.25% ( a weighted average rate of 9.50% as of March 19, 1997) to LIBOR plus a
maximum of 2.25% ( a weighted average rate of 7.75% as of March 19, 1997),
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.
In January 1997, Lason borrowed approximately $9.6 million under the
Credit Agreement to fund the acquisitions of Churchill and Alpha, and in March
Lason borrowed an additional $7.9 million to fund the acquisitions of AEI and
Premier. The Company expects that amounts available under the Credit Agreement
will be used in the future to continue its acquisition program. The Company
also expects to use shares of its common stock in the future to continue its
acquisition program. Accordingly, the Company may register additional shares
of common stock in 1997 for use as consideration in acquisitions.
Recent Acquisitions
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 the Credit
Agreement, with shares of its common stock and with cash from operations.
Borrowings for acquisitions for the years ended December 31, 1996 and 1995
totaled approximately $17.1 million and $1.4 million, respectively.
10
12
Future Capital Needs
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.
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. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplemental finanical information included
in this report are set forth on the Index to Financial Statements and Financial
Statement Schedules shown on page 13 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
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 1997 Proxy
Statement, herein incorporated by reference.
b. EXECUTIVE OFFICERS
Reported in Part I pursuant to General Instruction G to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Reported under the caption "Executive Compensation" in the Company's 1997
Proxy Statement, herein incorporated by reference.
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 1997 Proxy Statement,
herein incorporated by reference.
11
13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reported under the caption "Certain Transactions With Management" in the
Company's 1997 Proxy Statement, herein incorporated by reference.
PART IV
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
page E-1.
B. REPORTS ON FORM 8-K
None.
12
14
EXHBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ---------- -----------
2.1 Asset Purchase Agreement and Equipment Purchase Agreement dated May 29,
1995 by and among Lason Systems, Inc., Adcom Mailers, Inc. and its
affiliated company, Linkster Leasing.(1)
2.2 Asset Purchase Agreement dated December 28, 1995 by and among Lason
Systems, Inc. and Mail-Away Corporation.(1)
2.3 Asset Purchase Agreement dated February 1, 1996 by and among Lason Systems,
Inc. and Diversified Support Services, Inc.(1)
2.4 Stock Purchase Agreement with respect to the acquisition of Delaware Legal
Copy, Inc. dated March 25, 1996 by and among Lason Systems, Inc. and the
Shareholders (as defined therein).(1)
2.5 Stock Purchase Agreement with respect to the acquisition of Information &
Image Technology of America, Inc. dated July 16, 1996 by and among Lason
Systems, Inc. and the Shareholders (as defined therein).(1)
2.6 Stock Purchase Agreement with respect to the acquisition of Great Lakes
Micrographics Corporation dated July 17, 1996 by and among Lason Systems,
Inc. and the Shareholders (as defined therein).(1)
2.7 Stock Purchase Agreement with respect to the acquisition of Micro-Pro, Inc.
and MP Services, Inc. dated July 24, 1996 by and among Lason Systems, Inc.
and the Shareholders (as defined therein).(1)
2.8 Stock Purchase Agreement with respect to the acquisition of National
Reproductions Corp. dated August 6, 1996 by and among Lason Systems, Inc.
and the Shareholders (as defined therein).(1)
3.1 Form of Amended and Restated Certificate of Incorporation of the Company.(1)
3.2 Form of Amended and Restated By-Laws of the Company.(1)
4.1 Form of certificate representing Common Stock of the Company.(1)
E-1
15
Page 2 of 5
10.1 Asset Purchase Agreement dated January 17, 1995 by and among Lason
Acquisition Corp., Lason Systems, Inc. and the J. Yanover Trust, the R.
Yanover Trust and Messrs. Nesbitt, Kowalski, Elland and Carey.(1)
10.2 Purchase Agreement dated January 17, 1995 by and between the Company and
GTCR Fund IV.(1)
10.3 Executive Stock Agreement dated January 17, 1995 by and among the Company
and the J. Yanover Trust, the R. Yanover Trust, the Nesbitt Trust and
Messrs. Kowalski, Elland and Carey.(1)
10.4 Stockholders Agreement dated January 17, 1995 by and among the Company and
certain of its stockholders.(1)
10.5 Registration Agreement dated January 17, 1995 by and among the Company and
the 1995 Stockholders.(1)
10.6 Credit Agreement dated January 17, 1995 by and among Lason Acquisition
Corp. and the J. Yanover Trust, the R. Yanover Trust and Mr. Yanover.(1)
10.7 Credit Agreement dated January 17, 1995 by and among Lason Acquisition
Corp. and the Nesbitt Trust and Mr. Nesbitt.(1)
10.8 Employment Agreement between Lason Systems, Inc. and Gary Monroe.(1)
10.9 Offer of employment dated April 30, 1996 from Lason Systems, Inc. to Mr.
Rauwerdink.(1)
10.10 Offer of employment dated June 12, 1996 from Lason Systems, Inc. to Mr.
Jablonski.(1)
10.11 1995 Stock Option Plan of the Company.(1)
10.12 Employee Stock Option Agreements dated January 17, 1995 by and among the
Company and each of Mr. Elland, Mr. Kowalski, Mr. Carey, Karl H. Hartig,
James J. Dewan, Lawrence C. Jones, Scott L. Christensen, Daniel J. Buckley,
Paul G. Dugan, John H. Wallanse and David J. Malosh.(1)
10.13 Employee Stock Option Agreement dated December 21, 1995 by and between the
Company and Mr. Monroe.(1)
10.14 Stock Option Agreement dated August 7, 1995 by and between the Company and
Mr. Gleklen.(1)
E-1
16
Page 3 of 5
10.15 Employee Stock Option Agreement by and between the Company and Mr.
Rauwerdink.(1)
10.16 Employee Stock Option Agreement by and between the Company and Mr.
Jablonski.(1)
10.17 1996 Lason Management Bonus Plan.(1)
10.18 Lason Systems, Inc. 401(k) Profit Sharing Plan & Trust.(1)
10.19 Amendments to Lason Systems, Inc. 401(k) Profit Sharing Plan & Trust.(1)
10.20 Loan Agreement dated January 17, 1995 by and among Lason Systems, Inc.,
First Union National Bank of North Carolina, as lender and as agent, and
each other lender party thereto, including Term Note and Revolving Credit
Note.(1)
10.21 Security Agreement dated as of January 17, 1995 by and among Lason
Systems, Inc. and First Union National Bank of North Carolina, as agent
for the Lenders (as defined in the Loan Agreement).(1)
10.22 Guaranty Agreement dated as of January 17, 1995 given by the Company and
extended to First Union National Bank of North Carolina, as agent for the
Lenders (as defined in the Loan Agreement), and the Lenders for the
benefit of Lason Systems.(1)
10.23 Guarantor Pledge Agreement dated as of January 17, 1995 made by the
Company for the benefit of First Union National Bank of North Carolina, as
agent for the Lenders (as defined in the Loan Agreement).(1)
10.24 First Amendment to Loan Agreement dated as of March 25, 1996 between Lason
Systems, Inc. and First Union National Bank of North Carolina, as agent.(1)
10.25 Second Amendment to Loan Agreement dated as of May 15, 1996 between Lason
Systems, Inc. and First Union National Bank of North Carolina, as agent.(1)
10.26 Third Amendment to Loan Agreement dated July 10, 1996 between Lason
Systems, Inc. and First Union National Bank of North Carolina, as agent.(1)
10.27 Lease Agreement dated as of September 3, 1985 by and between Lason
Systems, Inc. and Mart Associates as amended.(1)
10.28 Lease Agreement dated August 3, 1995 by and between Lason Systems, Inc.
and Kensington Center, Inc.(1)
E-1
17
Page 4 of 5
10.29 Lease Agreement by and between Lason Systems, Inc. and The Prudential
Insurance Company of America.(1)
10.30 Fourth Amendment to Loan Agreement dated as of August 16, 1996 between
Lason Systems, Inc. and First Union National Bank of North Carolina, as
agent, including Amended and Restated Revolving Credit Note and Interim
Term Note.(1)
10.31 First Amendment to Lease dated as of July 26, 1996, by and between
Kensington Center, Inc. and Lason Systems, Inc.(1)
10.32 Form of Recapitalization Agreement among the Company and certain of its
stockholders, including Plan of Recapitalization.(1)
10.33 Form of Voting Agreement among the Company and certain of its
stockholders.(1)
10.34 Form of Termination Agreement between Lason Systems, Inc. and each of the
Borrowers.(1)
10.35 Form of Redemption Agreement between the Company and Golder Thoma,
Cressey, Rauner Fund IV, L.P.(1)
10.36 Amendment to Employee Stock Option Agreement by and between the Company
and Mr. Gleklen.(1)
10.37 Agreement of Purchase and Sale of Stock with respect to Churchill
Acquisition.(2)
10.38 Employee Stock Option Agreement by and between the company and Mr.
Rauwerdink dated December 17, 1996.(3)
10.39 Employee Stock Option Agreement by and between the Company and Mr.
Jablonski dated December 17, 1996.(3)
10.40 Employee Stock Option Agreement by and between the Company and Mr. Monroe
dated December 17, 1996.*
10.41 Employee Stock Option Agreement by and between the Company and Mr. Ghadar
dated January 15, 1997.*
10.42 Amended and Restated Loan Agreement dated February 20, 1997, between Lason
Systems, Inc., First Union National Bank of North Carolina, as lender and
as agent and each other lender party thereto, including, Revolving Credit
Note and Swingline Note.*
E-1
18
Page 5 of 5
10.43 Amended and Restated Security Agreement dated February 20, 1997 by and
among Lason Systems, Inc., First Union National Bank of North Carolina, as
lender and as agent for the Lenders.*
10.44 Amended and Restated Guaranty Agreement dated February 20, 1997 given by
the Company and extended to First Union National Bank of North Carolina,
as agent for the Lenders, and the Lenders for the benefit of Lason
Systems.*
10.45 Amended and Restated Guarantor Pledge Agreement dated February 20, 1997
made by the Company for the benefit of First Union National Bank of North
Carolina, as agent for the Lenders.*
11.1 Statement regarding computation of per share earnings.*
13.1 1996 Annual Report to Stockholders (only with respect to those parts which
are expressly incorporated by reference in this filing; the other parts
are not deemed files as part of this filing).*
21.1 Subsidiaries of the Company.*
23.1 Consent of Coopers & Lybrand L.L.P.*
27.1 Financial Data Schedule.*
- ---------------------
* filed herewith
(1) Incorporated herein by reference to registrant's Form S-1 dated October
7, 1996, Commission File No. 333-09799.
(2) Incorporated herein by reference to registrant's Form 8-K filed on
February 18, 1997, Commission File No. 0-21407.
(3) Incorporated herein by reference to registrant's Form S-8 filed with the
Commission on December 23, 1996, Commission File No. 333-18551.
E-1
19
Lason, Inc.
Index To Financial Statements and Financial Statement Schedules
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-1
Consolidated statements of income for each of the years ended
December 31, 1996, 1995 and 1994 F-2
Consolidated Statements of Stockholders' Equity for each of the
years ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1996, 1995 and 1994 F-4
Notes to consolidated financial statements F-5 to F-15
OTHER FINANCIAL INFORMATION:
Reports of independent accountants F-16 to F-17
FINANCIAL STATEMENT SCHEDULES:
1. Condensed financial information of registrant S-1 to S-3
All other schedules are omitted as not applicable or the information required
is included in the consolidated financial statements or notes thereto.
20
Lason, Inc.
Consolidated Balance Sheets
(In thousands, except for shares)
December 31,
------------------------------
1996 1995
------------- -------------
ASSETS
Cash $ 79 $ 103
Accounts receivable (net) 24,546 11,090
Supplies 2,273 1,245
Prepaid expenses and other 4,213 2,021
------------- -------------
Total current assets 31,111 14,459
Computer equipment and software 3,735 1,430
Production and office equipment 5,416 1,237
Leasehold improvements 1,010 695
Other 644 124
------------- -------------
9,805 3,486
Less: Accumulated depreciation (2,184) (978)
------------- -------------
Net property and equipment 7,621 2,508
Deferred income taxes 2,571 2,817
Goodwill (net of accumulated amortization of $1,482 and $572 at
December 31, 1996 and 1995, respectively) 35,911 16,848
Other intangibles (net of accumulated amortization of $274 and $105 at
December 31, 1996 and 1995, respectively) 1,332 677
------------- -------------
TOTAL ASSETS $ 78,546 $ 37,309
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 4,199 $ 3,004
Current portion of long-term debt - 2,000
Accounts payable 4,751 2,744
Customer deposits 3,706 914
Deferred income taxes 1,529 656
------------- -------------
Total current liabilities 14,185 9,318
Long-term debt, less current portion - 11,500
Revolving credit line borrowings 4,101 7,277
Minority interests 257 -
Other liabilities 1,937 -
------------- -------------
TOTAL LIABILITIES AND MINORITY INTERESTS 20,480 28,095
------------- -------------
Common stock with a put option 1,060 -
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; 20,000,000 shares authorized,
8,610,246 and 5,692,040 shares issued and outstanding at
December 31, 1996 and 1995, respectively 86 57
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued and outstanding at December 31, 1996;
1,000,000 shares authorized, none issued and outstanding
at December 31, 1995 - -
Additional paid-in capital 51,912 8,443
Loans to stockholders - (1,256)
Retained earnings 5,008 1,970
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 57,006 9,214
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 78,546 $ 37,309
============= =============
The accompanying Notes are an integral part of the consolidated financial
statements.
F-1
21
Lason, Inc.
Consolidated Statements of Income
(In thousands, except for per share amounts)
COMPANY PREDECESSOR
------------------- -----------
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Revenues, net of postage of $29,672, $20,672 and $15,276 for the
year ended December 31, 1996, 1995, and 1994, respectively. $ 69,937 $ 46,605 $ 41,151
Cost of revenues 47,587 31,227 27,238
-------- -------- --------
Gross profit 22,350 15,378 13,913
Selling, general and administrative expenses 12,628 9,406 8,377
Compensatory stock option expense 936 308 -
Amortization of intangibles 1,121 817 266
-------- -------- --------
Income from operations 7,665 4,847 5,270
Interest expense 1,831 1,760 185
Other income (71) (66) (21)
-------- -------- --------
Income before income taxes
and minority interest in net income of subsidiaries 5,905 3,153 5,106
Provision for income taxes 2,103 1,139 -
-------- -------- --------
Income before minority interest in net income of subsidiaries 3,802 2,014 5,106
Minority interest in net income of subsidiaries 71 - -
-------- -------- --------
Net income $ 3,731 $ 2,014 $ 5,106
======== ======== ========
Earnings per share $ 0.55 $ 0.33
======== ========
The accompanying Notes are an integral part of the consolidated financial
statements.
F-2
22
Lason, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994
Additional
Common Stock Paid-in Loans to Retained
Shares Amount Capital Stockholders Earnings Total
--------- ------ --------- ------------ ---------- -----
PREDECESSOR
- -----------------------------------------------
Balances January 1, 1994 605,000 $ 6 $ 163 $ - $ 6,398 $ 6,567
Distributions to shareholders - - - - (5,218) (5,218)
Issuance of shares of common stock 15,500 - 168 - - 168
Net income - - - - 5,106 5,106
--------- ------ --------- --------- --------- ----------
Balances at December 31, 1994 620,500 $ 6 $ 331 $ - $ 6,286 $ 6,623
========= ====== ========= ========= ========= ==========
COMPANY
- -----------------------------------------------
Balances January 1, 1995 (see Notes 1 and 5) 5,692,040 $ 57 $ 8,135 $ (1,300) $ - $ 6,892
Net income - - - - 2,014 2,014
Compensatory stock option expense - - 308 - - 308
Forgiveness of shareholder loans - - - 44 (44) -
--------- ------ --------- --------- --------- ----------
Balances at December 31, 1995 5,692,040 57 8,443 (1,256) 1,970 9,214
Net income - - - - 3,731 3,731
Increase in shareholder loans - - - (65) - (65)
Compensatory stock option expense - - 936 - - 936
Issuance of shares of common stock 3,610,253 36 54,291 54,327
Redemption of shares of common stock (692,047) (7) (11,758) - (11,765)
Repayment of shareholder loans - - - 628 628
Forgiveness of shareholder loans - - - 693 (693) 0
--------- ------ --------- --------- --------- ----------
Balances at December 31, 1996 8,610,246 $ 86 $ 51,912 $ - $ 5,008 $ 57,006
========= ====== ========= ========= ========= ==========
The accompanying Notes are an integral part of the consolidated financial
statements
F-3
23
Lason, Inc.
Consolidated Statements of Cash Flows
(In thousands)
COMPANY PREDECESSOR
------------------------------ -------------
Years Ended December 31,
------------------------------ -------------
1996 1995 1994
---------- --------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,731 $ 2,014 $ 5,106
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,327 1,817 1,238
Compensatory stock option expense 936 308 -
(Gain) loss on disposal of fixed assets (20) 23 12
Deferred income taxes 1,119 781 -
Changes in operating assets and liabilities
net of effects from acquisitions:
Accounts receivable (9,282) (2,695) (498)
Supplies (562) (384) (83)
Prepaid expenses and other (3,019) (698) (255)
Accounts payable (174) 397 (523)
Customer deposits 2,792 (31) 454
Accrued expenses 602 (277) 287
Minority interests 71 - -
Other liabilities (604) - -
---------- --------- ---------
Net cash (used in) provided by operating activities (2,083) 1,255 5,738
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for net assets of acquired businesses,
net of cash acquired (17,137) (1,430) (1,028)
Proceeds from sales of fixed assets 54 713 -
Purchase of fixed assets (4,611) (1,126) (758)
Other - - (33)
---------- --------- ---------
Net cash used in investing activities (21,694) (1,843) (1,819)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of credit 112,199 35,883 -
Repayments on revolving line of credit (115,375) (34,607) -
Net proceeds from issuance of shares of common stock 53,001 - -
Borrowings on acquisition credit facility 17,312 - -
Repayments on acquisition credit facility (17,312) - 168
Principal payments on long-term debt (13,500) (1,500) (243)
Redemption of shares of common stock (11,765) - -
Principal payments on lease liabilities and other debt (1,435) - -
Distributions to shareholders - - (5,218)
Proceeds from short-term borrowings, net - - 1,200
Proceeds from long-term debt - - 203
Proceeds from settlement of shareholder loans 628 - -
---------- --------- ---------
Net cash provided by (used in) financing activities 23,753 (224) (3,890)
---------- --------- ---------
Net (decrease) increase in cash (24) (812) 29
Cash at beginning of period 103 915 73
---------- --------- ---------
Cash at end of period $ 79 $ 103 $ 102
========== ========= =========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 2,141 $ 1,329 $ 181
========== ========= =========
Income taxes $ 1,617 $ 1,000 $ -
========== ========= =========
The accompanying Notes are an integral part of the consolidated financial
statements.
F-4
24
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND CAPITALIZATION
Lason, Inc. (formerly Lason Holdings, Inc. the "Company"), a Delaware
corporation, was incorporated on January 5, 1995. The Company's 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 funds to Lason
Acquisition Corporation, a non-operating 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 owned 93.8 percent of the common stock of the Predecessor. As
part of the acquisition, the same three shareholders ("continuing
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 acquisition was accounted for as a purchase and, accordingly, at such
date the Company recorded the assets and liabilities assumed at their estimated
fair values. The excess of the purchase price over the fair value of net
assets acquired totaling $16.8 million was allocated to goodwill and is being
amortized over 30 years.
Pursuant to the consensus of the Emerging Issues Task Force Issue Number
88-16, "Basis in Leveraged Buyout Transactions," goodwill was reduced by
approximately $8.6 million representing the continuing shareholders' residual
interest in the Company with a corresponding charge against shareholders'
equity. The reduction in stockholders' equity represents a temporary difference
between the tax basis and assigned book value of goodwill that will result in
future tax deductions. A deferred Federal income tax asset was recorded and
was credited to stockholders equity (see Note 7).
The aggregate purchase price and its allocation to the historical assets
and liabilities of the Company as of January 17, 1995 were as follows:
Cost to acquire net assets of the Predecessor $31,445
Adjustment to value continuing shareholders' interest at
predecessor basis (8,652)
------
$22,79
======
Allocation of purchase price:
Net assets acquired $5,96
Goodwill 16,82
------
Total purchase price allocated $22,79
======
2. OPERATIONS 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 and direct
mailing, among others. The Company primarily serves customers in the
automotive, financial services, healthcare and professional services
industries.
F-5
25
Transactions with various divisions of one domestic automotive
manufacturer accounted for approximately 32 percent, 49 percent and 55 percent
of the Company's consolidated net revenues for the
years ended December 31, 1996, 1995 and 1994, respectively. Receivables from
that customer were approximately $7.2 million, and $3.4 million as of
December 31, 1996 and 1995, respectively. Transactions with various divisions
of another domestic automotive manufacturer totaled approximately 19 percent,
12 percent and 12 percent of the Company's consolidated net revenues for the
years ended December 31, 1996, 1995 and 1994, respectively. In addition, the
Company had receivables outstanding from this second customer of approximately
$3.8 million and $1.7 million as of December 31, 1996 and 1995, respectively.
The Company also had various transactions with a third domestic automotive
manufacturer which were not a significant percentage of total consolidated net
revenues for each of the three years ended December 31, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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 rendered. Revenues are
presented in the consolidated statements of income net of postage because the
cost of postage is passed through to the customer.
Supplies
Supplies are valued at cost, which approximates market, with cost
determined using the first-in, first-out method.
Property and Equipment
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and Assets to be Disposed of", was
issued in March, 1995 and was effective for fiscal years beginning after
December 15, 1995. That statement established standards for measuring
impairment losses of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and those to be disposed of. The
adoption of SFAS No. 121 had no impact on the Company's financial condition,
results of operations or cash flow for the year ended December 31, 1996.
F-6
26
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. The change in depreciation
methods did not have a material impact on the Company's results of operations,
financial condition or cash flow for the year ended December 31, 1996.
Intangible Assets
Goodwill is amortized using a straight-line method over 30 years. Other
intangible assets generally consist of covenants-not-to-compete and deferred
financing costs. Covenants-not-to-compete are being 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.
Annually, the Company evaluates the carrying value of goodwill to
determine if there has been any impairment in value. The methodology used for
this evaluation includes a review of annual operating performance along with
anticipated results for future years. The Company determined that there had
been no impairment in the net carrying amount of goodwill as of December 31,
1996.
Fair Value of Financial Instruments
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, 1996 and 1995.
Earnings Per Share
For purposes of computing earnings per share, common stock equivalents
include outstanding stock options. Earnings per share are based on the weighted
average number of common shares and common share equivalents outstanding,
retroactively adjusted for the effect of a 2.5 for 1 common stock split
effective October 15, 1996 (see Note 5).
The weighted average common shares and common share equivalents
outstanding 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.
F-7
27
The weighted average common shares and common share equivalents
outstanding were 6,764,249 and 6,192,292 for the years ended December 31, 1996
and 1995, respectively.
Earnings per share are not presented for the Predecessor for the year
ended December 31, 1994 as such information is not representative of the
capital structure of the Company.
4. ACQUISITIONS
From June 1995 through December 31, 1996, Lason completed the acquisition
of either substantially all of the assets or a controlling stock ownership
interest in eight companies. The stock acquisitions included acquiring 65% of
the outstanding common stock of Delaware Legal Copy, Inc. in April 1996, 100%
of the outstanding common stock of Information & Image Technology of America,
Inc. and Great Lakes Micrographics Corporation in July 1996, 80% of the
outstanding common stock of Micro-Pro, Inc. and MP Services, Inc. (two
affiliated companies, "Micro-Pro") in July 1996, and 100% of the outstanding
common stock of National Reproductions Corp. ("NRC") in August 1996. Each of
the acquisitions was accounted for as a purchase. Accordingly, the results of
operations of the acquired companies are included in the consolidated results
of operations from the respective date of acquisition.
The selling shareholders of Micro-Pro have retained 20% of the capital
stock of Micro-Pro. Under certain conditions, the Company may purchase the
remaining 20%, or the selling shareholders may compel the Company to purchase
the remaining 20% of the capital stock of Micro-Pro at a future date. The
Company's call option will expire in January, 1998 and the selling shareholders
put option will expire in January, 1999. The acquisition of the remaining
20% of Micro-Pro, either through the Company's call option or the selling
shareholders put option, will be accounted for as the acquisition of a minority
interest using the purchase method of accounting on the date the shares are
acquired.
The selling shareholders of Delaware Legal Copy, Inc. ("Delaware") have
retained 35% of the capital stock of Delaware. Under certain conditions, the
Company may purchase the remaining 35%, or the selling shareholders may compel
the Company to purchase the remaining 35% of the capital stock of Delaware at a
future date. The Company's call option will expire in September, 1997 and the
selling shareholders put option will expire in September, 1998. The
acquisition of the remaining 35% of Delaware, either through the Company's call
option or the selling shareholders put option, will be accounted for as the
acquisition of a minority interest using the purchase method of accounting on
the date the shares are acquired.
The purchase price for the acquisition of Information and Image Technology
of America, Inc. ("IITA") may be adjusted based on IITA's financial
performance for the period March 1, 1996 through February 28, 1997. If IITA's
financial performance exceeds a specified target, the purchase price will be
increased by a percentage equal to the percentage by which IITA's actual
performance exceeded the target, but not more than $945,000. If the financial
performance is below the target, the purchase price will be decreased by a
percentage equal to the percentage by which IITA's actual performance was below
the target, but not more than $472,000. The purchase price contingency will be
recorded as an adjustment to the purchase price when the contingency is
resolved. A portion of the consideration paid to the selling shareholders for
the capital stock of IITA was 74,114 shares of the Company's common stock valued
at $1,259,938.
F-8
28
A portion of the consideration paid to the two selling shareholders for
the capital stock of Great Lakes Micrographics Corporation ("Great Lakes") was
62,352 shares of the Company's common stock valued at $1,060,000. Each of the
selling shareholders have the right, until January 17, 1999, to require the
Company to purchase all of the stock issued in connection with the acquisition
for up to $1,060,000 ($17.00 per share). The resulting put option has been
recorded as common stock issued with a put option and is not included in
stockholders' equity in the consolidated balance sheet as of December 31, 1996.
In connection with acquisition of NRC, the Company issued a $400,000
promissory note as partial consideration for the capital stock acquired. The
note was convertible, at any time up to October 1, 1997, into 23,529 shares
of the Company's common stock. The holder of the note converted it in
February, 1997.
The aggregate purchase price for the acquisitions completed for the year
ended December 31, 1996, excluding liabilities assumed, was approximately
$19.9 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):
Fair value of assets acquired $ 6,213
Goodwill 19,980
Covenant not-to-compete 200
Cash paid in consideration for companies acquired (17,137)
Stock issued in consideration for companies acquired (2,320)
Promissory note issued in consideration for company acquired (400)
-------
Liabilities assumed $ 6,536
=======
The following table summarizes pro forma unaudited results of operations
as if each of the acquisitions completed during 1996 had occurred at the
beginning of each period presented (in thousands):
Year Ended December 31,
-------------------------
1996 1995
--------- --------
(unaudited)
Revenues $84,525 $75,052
Income before income taxes 6,667 3,841
Net income 4,156 2,408
Earnings per share $0.61 $0.39
F-9
29
5. STOCKHOLDERS' EQUITY
In the fourth quarter of 1996, the Company completed an initial public
offering ("IPO") of 3,450,000 shares of common stock , including the
underwriter's over-allotment option, at $17.00 per share for net proceeds to
the Company 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 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 $.01 per share and 5,000,000 shares of preferred stock, par
value $0.01 per share.
In connection with the acquisition described above, Lason entered into a
Credit Agreement dated January 17, 1995 with certain shareholders who were also
shareholders in the Predecessor, pursuant to which Lason loaned the
shareholders $1.3 million 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. LONG-TERM DEBT
On January 17, 1995, Lason entered into a credit agreement with a bank
which included a $10 million revolving line of credit and a $15 million term
loan. Interest on amounts outstanding under the agreement is calculated using
rates determined at the time of borrowing. The Company chooses the applicable
interest rate on each borrowing. Borrowings on the revolving line of credit
bear interest at either the bank's prime rate plus .75 percent or LIBOR plus
2.25 percent. Borrowings on the term loan are collateralized by substantially
all of Lason's assets and bear interest at either the bank's prime rate plus
1.0 percent or LIBOR plus 2.50 percent. Interest payment due dates vary
depending on the rate chosen. Revolving credit availability is based on 85
percent of eligible accounts receivable.
In July 1996, the credit agreement was amended to include an additional
$10 million acquisition credit facility, expiring on the earlier of June 30,
2001 or an initial public offering by the Company. In addition, in August
1996, Lason amended the credit agreement to provide for up to an
additional $8.5 million of interim loans, payable upon the earlier of March 31,
1997 or an initial public offering by the Company. In August 1996, Lason also
amended the credit agreement to increase the existing $10 million revolving
credit facility to $13 million.
F-10
30
Long-term debt outstanding consisted of the following (in thousands):
December 31,
------------------
1996 1995
------ -------
Revolving line of credit due 2001 $4,101 $ 7,277
Term bank loan due 2001 - 13,500
Less: current portion - (2,000)
------ -------
Total long-term debt $4,101 $18,777
====== =======
The loan agreement contains covenants which, among other things, restricts
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, 1996, the loan agreement prohibits Lason
from advancing funds or paying dividends to the Company.
As of December 31, 1996, Lason was in violation of miscellaneous
non-financial covenants. On February 27, 1997, Lason obtained waivers of such
covenant violations.
On February 20, 1997, Lason's Credit Agreement was amended and restated to
provide revolving credit loans in the initial amount of $40 million , which may
be increased to $60 million at Lason's request , and after payment of a
commitment fee and Bank review and approval. The increased borrowing capacity
will be used to finance additional acquisitions of businesses, working capital,
capital expenditures and for other corporate purposes. Borrowings, if any,
under the Credit Agreement will be collaeralized by substantially all of
Lason's assets. Lason will not be required to make principal payments prior to
2001, the term of the loan. Interest on amounts outstanding will be
calculated based on interest rates determined at the time of borrowing.
Borrowings will bear interest at rates ranging from a base percentage rate plus
a maximum of 1.25% to LIBOR plus a maximum of 2.25%, 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.
7. 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 income tax provision are as follows (in thousands):
Year Ended December 31,
---------------------------
1996 1995
------- ------
Current provision $ 984 $ 358
Deferred provision 1,119 781
------- ------
Total income tax provision $2,103 $1,139
======= ======
F-11
31
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):
December 31,
-------------------
1996 1995
------ ------
Deferred tax assets related to:
Goodwill $2,624 $2,745
Depreciation 63 146
Compensatory stock option expense 435 111
Allowance for doubtful accounts 54 27
Covenant-not-to-compete amortization 30 9
------ ------
Total deferred tax assets $3,206 $3,038
====== ======
Deferred tax liabilities related to: $ 795 $ 423
Supplies 787 259
Prepaid expenses 486 194
Goodwill 96 -
Other ------ ------
$2,164 $ 876
Total deferred tax liabilities ====== ======
The difference between the Company's statutory Federal income tax rate
and its effective Federal income tax rate of 35.6 percent and 36.1 percent for
the years ended December 31, 1996 and 1995, respectively, results primarily
from travel and entertainment expenses and certain goodwill amortization that
is not deductible for Federal income tax purposes.
The Predecessor elected to be taxed as an S-Corporation and, as such, did
not pay corporate income tax. Therefore, no Federal income tax has been
recorded in the consolidated statement of income for the year ended December 31,
1994.
8. 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 selects certain key
employees to be participants in the Plan. Under the Plan, the Company may grant
up to 1,000,000 shares of common stock.
F-12
32
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 1996, the exercise price
equaled the market price on the date of grant and, therefore, no compensation
expenses was recognized. Options generally 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 record the compensation associated with the immediate vesting of those
stock options. Total compensation expense recorded for the years ended
December 31, 1996 and 1995 was approximately $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):
--------------------------
1996 1995
------------ ------------
Net income As reported $3,731 $2,014
Pro forma 3,582 1,957
Earnings per share As reported $ 0.55 $ 0.33
Pro forma 0.53 0.32
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 1996 and
1995, respectively: dividend yield of 0.0 percent in both years; expected
volatility of 74 percent in both years; risk free interest rates of 5.98
percent and 6.39; and expected lives of 4.02 years and 2.43 years.
A summary of the status of the Company's stock option plan is as follows
for each of the years ended December 31:
1996 1995
-------------------------------- -----------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
-------------------------------- -----------------------------
Outstanding at beginning year 419,326 $ 0.40 - $ -
Granted:
Price = Fair Value 210,500 16.75 - -
Price < Fair Value 166,250 2.40 419,323 0.40
Exercised (23,788) 0.40 - -
Canceled (17,045) 0.40 -
------- -------
Outstanding at end of year 755,243 5.33 419,326 0.40
======= =======
Options exercisable at year-end 388,765 56,818
Weighted-average fair value
of options granted
during the year $8.95 $2.51
F-13
33
The following table summarizes information about stock options outstanding
as of December 31, 1996:
Options Outstanding Options Exerciseable
----------------------------------------------------- -----------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exerciseable Weighted-Average
Exercise Prices At 12/31/96 Contractual Life Exercise Price At 12/31/96 Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$0.40 - $ 3.19 436,993 5.73 $ 0.40 376,765 $0.40
3.20 - 16.74 107,750 6.36 3.20 12,000 3.20
16.75 - 16.75 210,500 6.96 16.75
------- ---- ------ ------- -----
755,243 6.16 $ 5.33 388,765 $0.56
======= ==== ====== ======= =====
9. 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, 1996, 1995 and 1994 totaled approximately $201,000, $172,000 and
$156,000, respectively.
10. LEASE COMMITMENTS
The Company has various operating lease agreements related primarily to
equipment and buildings. As of December 31, 1996, 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):
1997 $ 2,877
1998 2,797
2000 1,974
2001 1,422
-------
Total $11,687
=======
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, 1996, 1995 and 1994
was approximately $6.4 million, $5.2 million and $4.5 million, respectively.
11. RELATED PARTY TRANSACTIONS
The Company purchases printing services from a company owned by the wife
of the former president and one of the principal shareholders of the Company.
For the years ended December 31, 1996, 1995 and 1994, the Company paid
approximately $1.4 million, $981,000 and $726,000, respectively, for such
printing services. As of December 31, 1996 and 1995, $114,389 and $204,000
was due to that company, respectively, for printing services, and is included
in accounts payable in the consolidated balance sheet.
F-14
34
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 partnership and is one of
its partners. For each of the three years ended December 31, 1996, the Company
paid $191,100 in rent to that partnership.
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, 1996, 1995 and 1994, the Company paid $184,390, $57,100 and $30,100,
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 $735,670
and $2,905 for the years ended December 31, 1996 and 1995, respectively, for
such services. No amounts were paid to such company for the year ended December
31, 1994.
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.
12. 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.
13. SUBSEQUENT EVENTS
In January, 1997, Lason acquired 100 percent of the outstanding
common stock of Churchill Communications Corporation and 100 percent of the
outstanding common stock of Alpha Imaging, Inc. and Alpha Micro Graphics
Supply, Inc. (affiliated companies). In March, 1997, Lason acquired 100
percent of the outstanding common stock of Automated Enterprises Inc. and 100
percent of the outstanding common stock of Premier Copy Group, Inc. The
aggregate purchase price excluding liabilities assumed, was approximately
$19.9 million of which approximately $17.5 million was funded by bank
borrowings and approximately $2.4 million through the issuance of shares of
the Company's common stock.
F-15
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lason, Inc.
We have audited the accompanying consolidated balanced sheets of Lason, Inc.
(the "Company") as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the two
years in the period ended December 31, 1996. We have also audited the
accompanying statements of income, stockholders' equity and cash flows of Lason
Systems, Inc. (the "Predecessor") for the year ended December 31, 1994. These
financial statements 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 audit.
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. as of
December 31, 1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Detroit, Michigan
March 26, 1997
F-16
36
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Lason, Inc. is included
on page F-16 of this Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule
included on pages S-1 through S-3 of this Form 10-K.
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 26, 1997
F-17
37
SCHEDULE I
Lason, Inc.
Condensed Financial Information of Registrant
Balance Sheets
(In thousands)
DECEMBER 31,
--------------------
1996 1995
------ ------
ASSETS
Investment in subsidiaries $ 57,859 $ 12,914
Deferred tax asset 433 105
-------- --------
Total assets $ 58,292 $ 13,019
======== ========
LIABILITIES
Total liabilities - -
STOCKHOLDERS' EQUITY
Common stock $ 86 $ 57
Additional paid in capital 53,272 11,151
Retained earnings 4,934 1,811
-------- --------
Total stockholders' equity 58,292 13,019
Total liabilities and stockholders' equity $ 58,292 $ 13,019
======== ========
S-1
38
SCHEDULE I
Lason, Inc.
Condensed Financial Information of Registrant
Income Statements
(In thousands)
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
------ ------
REVENUE $ - $ -
OPERATING EXPENSES
Compensatory stock option expense 936 308
------- -------
Operating loss (936) (308)
Equity in net income of subsidiaries 3,731 2,014
------- -------
Income before income taxes 2,795 1,706
Income tax benefit (328) (105)
------- -------
NET INCOME $ 3,123 $ 1,811
======= =======
S-2
39
SCHEDULE I
Lason, Inc.
Condensed Financial Information of Registrant
Statements of Cash Flows
(In Thousands)
YEAR ENDED
DECEMBER 31,
--------------------
1996 1995
------ ------
NET CASH USED IN OPERATING ACTIVITIES $ - $ -
CASH FLOWS FROM INVESTING ACTIVITIES
INVESTMENT IN SUBSIDIARY (41,236) (10,900)
--------- ---------
Net cash used in investing activities (41,236) (10,900)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of shares of common stock 53,001 10,900
Redemption of shares of common stock (11,765) -
--------- ---------
Net cash provided by financing activities 41,236 10,900
--------- ---------
Change in cash - -
Cash at beginning of year - -
Cash at end of year $ - $ -
========= =========
S-3
40
SIGNATURES
Pursuant to the requirements of Section 13 of 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: 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:
Signature Title Date
--------- ----- ----
Robert A. Yanover* Chairman of the Board March 28, 1997
- ----------------------------------
Robert A. Yanover
Gary L. Monroe* Chief Executive Officer (principal
- ---------------------------------- executive officer) and Director March 28, 1997
Gary L. Monroe*
Allen J. Nesbitt* President and Director March 28, 1997
- ----------------------------------
/s/ William J. Rauwerdink* Executive Vice President, Chief Financial
- ---------------------------------- Officer, Treasurer and Secretary
William J. Rauwerdink* (principal financial and accounting officer) March 28, 1997
Fariborz Ghadar* Director March 28, 1997
- ----------------------------------
Donald M. Gleklen* Director March 28, 1997
- ----------------------------------
Donald M. Gleklen
Joseph P. Nolan*
- ---------------------------------- Director March 28, 1997
Joseph R. Nolan
Bruce V. Rauner* Director March 28, 1997
- ----------------------------------
Bruce V. Rauner
*By: /s/ William J. Rauwerdink
---------------------------------------------
William J. Rauwerdink, Attornery-in-Fact
41
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.40 Employee Stock Option Agreement by and between the Company and Mr.
Monroe dated December 17, 1996.
10.41 Employee Stock Option Agreement by and between the Company and Mr.
Ghadar dated January 15, 1997.
10.42 Amended and Restated Loan Agreement dated February 20, 1997, between
Lason Systems, Inc., First Union National Bank of North Carolina, as
lender and as agent and each other lender party thereto, including,
Revolving Credit Note and Swingline Note.
10.43 Amended and Restated Security Agreement dated February 20, 1997 by
and among Lason Systems, Inc., First Union National Bank of North
Carolina, as lender and as agent for the Lenders.
10.44 Amended and Restated Guaranty Agreement dated February 20, 1997
given by the Company and extended to First Union National Bank of
North Carolina, as agent for the Lenders, and the Lenders for the
benefit of Lason Systems.
10.45 Amended and Restated Guarantor Pledge Agreement dated February 20,
1997 made by the Company for the benefit of First Union National
Bank of North Carolina, as agent for the Lenders.
11.1 Statement regarding computation of per share earnings.
13.1 1996 Annual Report to Stockholders (only with respect to those parts
which are expressly incorporated by reference in this filing; the
other parts are not deemed files as part of this filing).
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.