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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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: (248) 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 Part 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, 1998, computed by reference to
the last sale price for such stock on that date as reported on the Nasdaq
National Market System, was $380,565,809.
As of March 20, 1998, 12,031,224 shares of Common Stock, par value $.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Notice of 1998 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 (the
"Predecessor") to Lason, Inc., (together with its subsidiaries, the "Company"),
was formed in 1985 as a result of a management buyout of the direct mail
division of McKesson Corporation's 3PM subsidiary. In January 1995, the founders
and principal shareholders of the Predecessor recapitalized it (the
"Recapitalization") by selling substantially all of its assets to Lason
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Lason, Inc., which was then named Lason Holdings, Inc. In August 1996, Lason
Holdings, Inc. changed its name to Lason, Inc. After the acquisition, Lason
Acquisition Corp. changed its name to Lason Systems, Inc. ("Lason"), and
continued the business operations of the Predecessor.
From June 1995 through December 31, 1997, the Company, through certain of
its subsidiaries, completed the acquisition of either substantially all of the
assets or a controlling stock ownership interest in a substantial number of
companies, several of which were completed during the year ended December 31,
1997.
One of the Company's principal strategies is to increase its revenues and
the markets it serves through the continued acquisition of complementary
businesses. Toward that end, the Company has completed the acquisition of either
substantially all of the assets or a 100% stock ownership interest in several
additional companies during the first quarter of 1998. Included in the 1998
acquisitions are Racom Corporation and its affiliates (the Company's largest
acquisition to date), and API Systems, Inc. Although management anticipates that
the Company will continue to acquire complementary businesses in the future,
there can be no assurance that the Company will be able to identify and acquire
attractive acquisition candidates, profitably manage such acquired companies or
successfully integrate such acquired companies into the Company without
substantial costs, delays or other problems. In addition, there can be no
assurance that any companies acquired in the future will be profitable at the
time of acquisition or will achieve sales and profitability justifying the
Company's investment therein or that the Company will recognize the synergies
expected from such acquisitions.
In the fourth quarter of 1996, the Company completed an initial public
offering ("IPO") of 3,450,000 shares of common stock, for net proceeds of
approximately $53.0 million, after deducting underwriting discounts and other
offering expenses. Approximately $41.2 million of the net proceeds was used to
repay 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 August 1997, the Company completed a secondary offering of 2,457,620
shares of common stock for net proceeds of approximately $58.0 million, after
deducting underwriting discounts and other offering expenses. The net proceeds
were used to repay debt outstanding under the Company's credit agreement and for
general corporate purposes.
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 manufacturing,
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 management outsourcing
needs with a single vendor. For the years ended December 31, 1997, 1996 and
1995, the Company reported consolidated net revenues of $120.3 million, $69.9
million and $46.6 million, respectively. Income from operations was $15.6
million, $7.7 million and $4.8 million for the years ended December 31, 1997,
1996 and 1995, respectively. As of March 20, 1998, the
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Company employed over 2,900 people, has operations in 24 states and provides
services to over 3,200 customers at 67 multi-functional imaging centers and at
over 60 facility management sites located on customers' premises.
The Company's service offerings can generally 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 its
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 customer's facility. Higher volume and/ or more
complex document management services are performed at the Company's imaging
centers.
- PRINT ON DEMAND SOLUTIONS
The Lason Document Express (print on demand) system enables customers
to cost-effectively produce and distribute large volumes of a document on
24-hour notice. The customer supplies the Company with either an electronic
copy of a document or a hard copy of the document, which the Company
converts to an electronic copy, which is then stored on the Lason Document
Express system. The customer can then use its own computer system to place
a print order, including production amount and distribution method and
location, and the Company completes the print and distribution process.
The Lason Document Express system offers an alternative to traditional
printing methods for companies which produce documents that are subject to
frequent revision or unpredictable demand. Since conventional offset
printing requires large production runs to produce high quality documents
in a cost-effective manner, a company which utilizes offset printing to
print such documents runs the risk that it will find itself with a costly
inventory of outdated and useless documents. In addition, the flexibility
of the Lason Document Express system provides customers with an ability to
increase the quality of their product offerings by enabling them to make
document enhancements (such as corrections or improvements to product
manuals) which would otherwise be prohibitively expensive. The Company
believes that the demand for print on demand services by manufacturers and
financial and insurance institutions will continue to increase as
technological advances create shorter product life cycles and increased
product variation.
Customers frequently use the Lason Document Express system to print
and distribute documents such as product manuals, training manuals,
technical documentation and employee benefit books. For example, a customer
which operates computer training centers nationwide uses the Lason Document
Express system to print training manuals for its classes. When a training
class is scheduled, the customer places an order for the manuals to be used
in the class the day before the class begins, thereby ensuring that the
number of manuals printed matches closely the number of students enrolled
in the class. Another customer, which manufactures robotics systems, uses
the Lason Document Express system to produce the customized product manuals
and technical documentation that accompany each of its customized robotics
applications.
- ON-SITE FACILITIES MANAGEMENT
The Company can equip, staff and manage most aspects of a customer's
document management needs at a customer's facility. In addition to copying
and printing, the Company's employees perform file room maintenance,
engineering drawing and record retention, decentralized copier management,
facility mail and courier services and address list maintenance. Typically,
the Company will operate its own satellite production center (called a
Lason Servicenter) on the customer's premises. By working in partnership
with a customer at the customer's facility, the Company and the customer
frequently identify additional ways the Company can help meet the
customer's document management needs both on-site and at the Company's
centralized imaging centers. The Company established its first Lason
Servicenter in 1992 and currently provides on-site services at over 60
facilities.
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- DIGITAL GRAPHICS
A staff of computer graphics design and printing professionals use
advanced computer technology to provide digital graphics services,
including design and printing of high resolution full color graphics,
electronic publishing and production of camera-ready art for offset
printing. Applications range from document covers and graphics to courtroom
exhibits and promotional signage of any size. Digital graphics services are
an important component of the Company's single source strategy.
The Company's experience in working with customers at their facilities to
manage all aspects of the customer's on-site document management needs and its
capability to fulfill almost any document copying, printing or distribution need
at its imaging centers position the Company to be a single source provider of
document management services for its current and potential customers. The
Company's continuing investment in and development of advanced high-speed
document production hardware and software and three-shift operation of its
imaging centers enables the Company to produce high quality documents while
leveraging economies of scale and 24-hour utilization of equipment. The Company
plans to continue to develop and market products such as the Lason Document
Express system which make it easier for customers to access and use the
Company's document printing and distribution capabilities and the economies of
scale the Company possesses at its imaging centers.
Document management services represented approximately 32.0%, 38.4% and
36.9% of the Company's consolidated net revenues for the years ended December
31, 1997, 1996 and 1995, respectively.
RECORDS MANAGEMENT
Companies are increasingly using 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 DOCUMENT STORAGE AND RETRIEVAL
A company implementing a document storage and retrieval program
frequently faces the challenge of converting hundreds of thousands to
millions of paper and/or microfilm documents to digital format. These paper
and microfilm documents can be converted to indexed digital images or,
using optical character recognition technology, into electronically
recognizable text. The Company's investment in advanced document scanners
and imaging software combined with its experience in scanning and
converting documents typically enables the Company to perform this document
conversion process more efficiently and in significantly less time than a
potential customer. The Company's technical support staff is skilled at
assisting customers in developing customized indexing systems and selecting
optimal file formats and naming conventions.
- DOCUMENT CONVERSION SERVICES
The Company's experience and capabilities enable it to provide a broad
range of document conversion services with respect to a wide variety of
input and output formats, including digital, film, CD-ROM, optical disk,
magnetic disk, aperture card and hardcopy, including engineering drawings.
Electronic Conversion Services. The Company also performs traditional
micrographic conversions including the conversion of paper documents into
microfilm images, film processing and computer-based indexing and
formatting of microfilm images. Micrographic services often are selected as
a cost competitive technology to paper-based systems in order to reduce the
physical size of stored records, for their long term (typically over 100
years) archival capabilities and as an intermediate step in certain imaging
or reprographic applications.
Micrographic Conversion Services. The Company has developed a flexible
electronic DSR system that enables the Company's customers to obtain the
benefits of electronic document storage and retrieval
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without developing and purchasing their 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 paper documents. The
Company's DSR system enables it to store and index a customer's digital
documents whether the document was converted to digital format or was
originally produced in digital format. The system used to index and store
documents produced by computers on a laser disk is commonly referred to as
a computer output to laser disk (COLD) system. A COLD system is
particularly useful for companies which need to rapidly locate documents
produced on disparate computer systems and programs, such as are found in
very large companies with multiple independently functioning departments or
companies with a high level of customer service activity. Because stored
documents can be indexed by several criteria, a customer can use simple but
exacting computer search techniques to rapidly access individual documents
or groups of documents.
The Company's capability to convert documents from a wide variety of input
media or formats to a wide variety of output media or formats and its electronic
document storage and retrieval capabilities position the Company to be a single
source provider of records management services for it's customers. The Company
plans to continue investing in and developing the capabilities and flexibility
of its DSR system in an effort to make it increasingly attractive to potential
customers to outsource their records management needs to the Company instead of
developing and purchasing their own DSR system.
Records management services represented approximately 29.3%, 24.1% and
19.5% of the Company's consolidated net revenues for the years ended December
31, 1997, 1996 and 1995, respectively.
BUSINESS COMMUNICATIONS
The Company offers a variety of personalized direct response services to
its customers. These services are characterized by quick turn-around, large
volume and highly personalized business correspondence.
- DIGITAL COMMUNICATIONS SERVICES
The Company's customers benefit from outsourcing their high volume
communications needs to the Company through improved turn-around, reduced
production constraints and the flexibility and benefits provided by using
the latest software and mail handling processes.
Priority Gram. The Company's Priority Gram is a nationally recognized
product that numerous large volume mailers have found to be an effective
mode of communication in a variety of applications. Among these customers
are firms involved in debt collection. The Company works with leading
software vendors to provide credit institutions with an effective system of
debt collection communications.
PROXYGRAM. The Company's market-leading PROXYGRAM serves the time
sensitive proxy solicitation sector of the financial services market.
PROXYGRAMs solicit, collect, report and validate shareholders' proxy votes
while providing flexibility to shareholders, and cost savings and greater
shareholder participation to customers. Outgoing messages to shareholders
contain instructions on how to vote shares by a toll-free telephone call
using a confidential identification number to assure shareholder
verification and validity.
Fax, Electronic Distribution, Print and Mail. The Company develops
customized programs for its customers to support event-driven response
requirements, such as product recall and credit card solicitation
campaigns. By combining volumes of mail from all of its customers and
presorting such mail to United States Postal Service specifications, the
Company is able to generate significant postal discounts for its customers.
Over 95% of the Company's mail is sorted to the lowest postal discount
category available through the United States Postal Service. Each customer
enjoys the maximum postal discounts allowed for First Class Mail regardless
of the volume of mail sent by such customer.
- DATABASE MANAGEMENT SERVICES
The Company's sophisticated database management systems support data
manipulation, item sorting and information search solutions so that
customers' lists can be customized and updated for
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specific target markets and targeted mailings. These database capabilities
save customers money while increasing response rates.
The Company's experience and capabilities in letter creation and
handling communications across a broad array of media position it for
continued leadership in business communications. The Company plans to make
additional investments in and develop such capabilities in the future as
well as identify new markets which demand these specialized services.
Business communication services represented approximately 38.7%, 37.5%
and 43.6% of the Company's consolidated net revenues for the years ended
December 31, 1997, 1996 and 1995, respectively.
CUSTOMERS
The Company has over 3,200 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 sized 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 33%, 57%, and 65% of the Company's
consolidated net revenues for the years ended December 31, 1997, 1996 and 1995
respectively. No single customer accounted for more than 10% of the Company's
total consolidated net revenues for the years ended December 31, 1997, 1996 and
1995 except for General Motors Corporation and Ford Motor Company as summarized
in the following table:
PERCENT OF
CONSOLIDATED NET REVENUES
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
General Motors Corporation........................... 17% 32% 49%
Ford Motor Company................................... 14 19 12
Chrysler Corporation................................. 2 6 4
-- -- --
Totals............................................. 33% 57% 65%
== == ==
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
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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.
REGULATION
The Company's customers involved in debt collection and certain of the
Company's services 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.
From time to time, certain of the Company's customers and the Company are
subject to claims or are parties to litigation under the FDCPA involving
services supplied by the Company to such customers, such as collection letter
processing. These actions sometimes relate to the form and content of the
collection letters distributed by the Company. Although the Company believes
that it is not subject to the FDCPA because its is not a debt collector, there
can be no assurance that the Company will not be determined to be liable under
the FDCPA. In addition, 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 indemnification for
material amounts is required or the Company is determined to be liable for
multiple violations of such laws, it could have a material adverse effect on the
Company's business, financial condition and 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, 1998, the Company had approximately 2,900 employees,
approximately 490 of which were employed primarily in management and
administration. Included in the total number of employees are approximately 245
part-time 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, 1998):
EXECUTIVE
OFFICER
NAME POSITION AGE SINCE
---- -------- --- ---------
Robert A. Yanover...................... Chairman and Director 61 1985
Gary L. Monroe......................... President, Chief Executive Officer, and 43 1995
Director
William J. Rauwerdink.................. Executive Vice President, Chief Financial 48 1996
officer, Treasurer and Secretary
Brian E. Jablonski..................... Executive Vice President of Marketing and 41 1996
Sales
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, President since April, 1997 and as a Director since he joined the
Company in September, 1995. From September 1995 to February 1996, Mr. Monroe
served as Executive Vice President of the Company. From May, 1992 to September,
1995, 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.
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 investment directions made in connection
with the rollover into Mr. Rauwerdink's 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.
ITEM 2. PROPERTIES
The Company has 67 locations in 24 states containing in the aggregate
approximately 805,000 square feet. These facilities are used to provide records
management, document management and business
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communications services. Some are used for certain administrative functions. All
of these facilities are leased by the Company.
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 1997.
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". As of March 20, 1998, there were approximately 2,550 holders of
the Company's common stock, including 50 shareholders of record and
approximately 2,500 in street name.
The quarterly trading range for shares of the Company's common stock during
1997 and 1996 is presented below:
1997 1996
------------ -----------
HIGH LOW HIGH LOW
---- --- ---- ---
QUARTER ENDED:
December 31........................................ $30 1/8 $23 1/8 $241/8 $14
September 30....................................... 29 3/8 23 3/8 -- --
June 30............................................ 28 1/8 16 -- --
March 31........................................... 25 1/2 17 3/4 -- --
The Company intends to retain any earnings to finance operations and
expansion and, therefore, does not anticipate paying any cash dividends on the
common stock in the foreseeable future. Cash dividends, if any, would be
determined by the Board of Directors and would be based on the Company's
earnings, capital requirements, financial condition and other factors deemed
relevant by the Board of Directors. Except for certain constructive dividends
related to partial forgiveness of certain shareholder loans in connection with
the IPO, the Company has not paid any dividends on its capital stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company and its predecessor. The selected consolidated financial data presented
below for the Company for the years ended December 31, 1997, 1996 and 1995 and
for its predecessor for the years ended December 31, 1994 and 1993, have been
derived from the Company's and its predecessor's, respectively, consolidated
financial statements which have been audited by Coopers & Lybrand, L.L.P. and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial
statements and notes thereto included in this Form 10-K.
COMPANY PREDECESSOR
---------------------------- -----------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Revenue, net of postage....................... $120,337 $69,937 $46,605 $41,151 $31,151
Cost of Revenues.............................. 80,846 47,587 31,227 27,238 20,684
-------- ------- ------- ------- -------
Gross Profit.................................. 39,491 22,350 15,378 13,913 10,467
Selling, general and administrative
expenses.................................... 21,243 12,628 9,406 8,377 6,980
Compensatory stock option expense............. 221 936 308 -- --
Amortization of intangibles................... 2,477 1,121 817 266 163
-------- ------- ------- ------- -------
Income from operations........................ 15,550 7,665 4,847 5,270 3,324
Interest expense (net)........................ 1,249 1,760 1,694 164 105
-------- ------- ------- ------- -------
Income before income taxes and minority
interest.................................... 14,301 5,905 3,153 5,106 3,219
Provision for income taxes(1)................. 5,110 2,103 1,139 -- --
Minority interest in net income of
subsidiaries................................ 121 71 -- -- --
-------- ------- ------- ------- -------
Net income.................................... $ 9,070 $ 3,731 $ 2,014 $ 5,106 $ 3,219
======== ======= ======= ======= =======
Earnings per share(2):
Basic....................................... $ 0.93 $ 0.59 $ 0.35 -- --
-------- ------- -------
Diluted..................................... $ 0.90 $ 0.55 $ 0.33 -- --
======== ======= =======
ENDING BALANCE SHEET DATA
Working capital............................... $ 31,337 $16,653 $ 5,141 $ 3,218 $ 3,307
Total assets.................................. 177,899 78,546 37,309 15,692 13,877
Long term debt, less current portion.......... -- -- 11,500 261 320
Revolving credit line borrowings.............. 13,550 4,101 7,277 -- --
Total stockholders' equity(3)................. 131,545 57,006 9,214 6,623 6,567
- -------------------------
(1) From its inception to January 17, 1995, the Company was an S corporation
and, accordingly, was not subject to Federal income tax.
(2) Earnings per share amounts for years prior to 1997 have been restated in
accordance with the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share". Earnings per share amounts are not
presented for the Predecessor as such information is not representative of
the capital structure of the Company.
(3) Includes the net proceeds from an initial public offering and redemption of
shares of common stock during the fourth quarter of 1996 and the net
proceeds from a secondary offering of common stock in the third quarter of
1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an understanding of the Company's consolidated results
of operations and financial condition. The discussion
9
11
should be read in conjunction with the consolidated financial statements and
notes thereto and "Item 6. Selected Financial Data" appearing elsewhere in this
report.
OVERVIEW
Lason Systems, Inc., a Michigan corporation and the predecessor (the
"Predecessor") to Lason, Inc., (together with its subsidiaries, the "Company"),
was formed in 1985 as a result of a management buyout of the direct mail
division of McKesson Corporation's 3PM subsidiary. In January 1995, the founders
and principal shareholders of the Predecessor recapitalized it (the
"Recapitalization") by selling substantially all of its assets to Lason
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Lason, Inc., which was then named Lason Holdings, Inc. In August 1996, Lason
Holdings, Inc. changed its name to Lason, Inc. After the acquisition, Lason
Acquisition Corp. changed its name to Lason Systems, Inc. ("Lason"), and
continued the business operations of the Predecessor.
From June 1995 through December 31, 1997, the Company, through certain of
its subsidiaries, completed the acquisition of either substantially all of the
assets or a controlling stock ownership interest in a substantial number of
companies, several of which were completed during the year ended December 31,
1997. Each of the acquisitions was accounted for as a purchase. The excess of
the aggregate purchase price over the fair value of the net assets acquired has
been allocated to goodwill.
The consolidated results of operations for the year ended December 31, 1997
include the results of operations of the acquisitions since the date of each
such acquisition and, therefore, are not directly comparable to the results of
operations for 1996 and 1995.
One of the Company's principal strategies is to increase its revenues and
the markets it serves through the continued acquisition of complementary
businesses. Toward that end, the Company has completed the acquisition of either
substantially all of the assets or a 100% stock ownership interest in several
additional companies during the first quarter of 1998. Included in the 1998
acquisitions are Racom Corporation and its affiliates (the Company's largest
acquisition to date), and API Systems, Inc. Although management anticipates that
the Company will continue to acquire complementary businesses in the future,
there can be no assurance that the Company will be able to identify and acquire
attractive acquisition candidates, profitably manage such acquired companies or
successfully integrate such acquired companies into the Company without
substantial costs, delays or other problems. In addition, there can be no
assurance that any companies acquired in the future will be profitable at the
time of acquisition or will achieve sales and profitability justifying the
Company's investment therein or that the Company will recognize the synergies
expected from such acquisitions.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED
DECEMBER 31, 1996
Consolidated net revenues increased 72% to $120.3 million for the year
ended December 31, 1997 from $69.9 million in 1996. Approximately $39.3 million
of the increase was due to acquisitions and approximately $11.1 million was due
to growth in the Company's existing businesses. The internal growth was
primarily the result of an $8.5 million increase in output processing revenues,
a $2.0 million increase in Visions COLD services and a $3.0 million increase in
Lason Document Express(TM) print on demand services. Those increases were
partially offset by lower revenue related to the effects of certain discontinued
services.
Gross profit increased to $39.5 million for the year ended December 31,
1997 from $22.4 million in 1996 primarily due to an increase in consolidated net
revenues and the Company's product mix. Gross profit as a percentage of net
consolidated revenues was 33% for the year ended December 31, 1997 compared to
32% in 1996.
Selling, general and administrative expenses increased $8.6 million to
$21.2 million for the year ended December 31, 1997 compared to $12.6 million in
1996. The increase was primarily due to expenses incurred by acquired companies.
Selling, general and administrative expenses as a percentage of consolidated net
revenues was 17.6% in 1997 versus 18.0% in 1996.
10
12
Compensatory stock option expense decreased to $221,000 in 1997 from
$936,000 in 1996. The provisions of certain stock option agreements included the
immediate vesting of those options on the effective date of the Company's IPO.
Accordingly, the Company recorded a non-cash expense of $653,000 during the
fourth quarter of 1996 to record the compensation associated with the immediate
vesting of those stock options.
Amortization of intangibles increased to $2.5 million for the year ended
December 31, 1997 from $1.1 million in 1996 primarily due to the increase in
goodwill related to business acquisitions.
Interest expense was $1.2 million for the year ended December 31, 1997
compared to $1.8 million in 1996 primarily due to lower average borrowings in
1997 compared to 1996.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED
DECEMBER 31, 1995
Consolidated net revenues increased 50% to $69.9 million for the year ended
December 31, 1996 from $46.6 million in 1995. The $23.3 million increase in
consolidated net revenues includes approximately $14.8 million of net revenues
related to businesses acquired during 1996 and approximately $8.5 million
principally due to sales growth in the Company's business communications,
digital imaging and collection letter processing revenues of approximately $5.0
million , $2.2 million and $1.3 million, respectively.
Gross profit increased $7.0 million to $22.4 million for the year ended
December 31, 1996 from $15.4 million reported in 1995, primarily due to an
increase in net revenues, partially offset by lower gross profit margins for
businesses acquired in 1996. Gross profit as a percentage of consolidated net
revenues was 32% for the year ended December 31, 1996 versus 33% in 1995.
Selling, general and administrative expenses increased to $12.6 million in
1996 from $9.4 million in 1995. Approximately $2.4 million of the increase was
attributable to businesses acquired during 1996. Approximately $.4 million was
due to an increase in administrative expenses primarily resulting from the
hiring of several key executives in late 1995 and in the first three quarters of
1996, and approximately $.5 million was due to an increase in advertising, sales
commissions and other selling expenses, related to the higher sales volumes.
Selling, general and administrative expenses as a percentage of consolidated net
revenues was 18.0% in 1996 versus 20.2% in 1995.
Compensatory stock option expense increased to $936,000 for the year ended
December 31, 1996 from $308,000 in 1995. The provisions of certain stock option
agreements included the immediate vesting of those options on the effective date
of the Company's IPO. Accordingly, the Company recorded a non-cash expense of
$653,000 during the fourth quarter of 1996 to record the compensation associated
with the immediate vesting of those stock options.
Amortization of intangibles increased to $1.1 million in 1996 versus
$817,000 in 1995 primarily due to amortization of goodwill recorded as a result
of businesses acquired during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and acquisitions through a
combination of cash flow from operations, bank borrowings and the issuance of
shares of common stock.
Cash provided by operating activities was $3.4 million for the year ended
December 31, 1997 compared to cash used in operating activities of $2.1 million
for the year ended December 31, 1996 and cash provided by operating activities
of $1.3 million in 1995. The increase in operating cash flows in 1997 versus
1996 is primarily the result of higher consolidated net income, an increase in
consolidated net revenue without a corresponding increase in accounts
receivable, and an increase in accrued expenses and other liabilities.
Cash used in investing activities totaled $68.3 million, $21.7 million and
$1.8 million for the years ended December 31, 1997, 1996 and 1995, respectively,
and has primarily been used to fund the acquisition of businesses and to invest
in capital equipment. Cash used for acquisitions totaled $57.3 million in 1997
compared to $17.1 million and $1.4 million in 1996 and 1995, respectively. Cash
used to invest in capital equipment totaled $10.4 million in 1997 compared to
$4.6 million in 1996 and $1.1 million in 1995. The 1997
11
13
and 1996 investments in capital equipment included the purchase for
approximately $3.5 million and $1.3 million, respectively, of previously leased
equipment. During 1997, the Company invested approximately $1.4 million in the
development of technological systems to meet the needs of its customers and
invested in expanding and enhancing the technical infrastructure to support the
Company's national information processing needs. These projects and related
costs will continue as the Company pursues its acquisition strategy.
Cash provided by financing activities was $67.7 million in 1997 compared to
$23.8 million in 1996. In August 1997, the Company completed a secondary
offering of 2,457,620 shares of common stock for net proceeds of approximately
$58.0 million, after deducting underwriting discounts and other offering
expenses. The net proceeds were used to repay debt outstanding under the
Company's credit agreement and for general corporate purposes. In the fourth
quarter of 1996, the Company completed an initial public offering of 3,450,000
shares of common stock for net proceeds of approximately $53.0 million, after
deducting underwriting discounts and other offering expenses. The net proceeds
were primarily used to repay amounts then outstanding under the Company's credit
agreement and to redeem shares of common stock held by the Company's largest
shareholder.
CREDIT AGREEMENT AND BORROWINGS
Lason has a credit agreement with a bank group providing for revolving
credit loans up to $80 million. Borrowings will be used to finance additional
acquisitions of businesses, working capital, capital expenditures and for other
corporate purposes. Borrowings under the credit agreement are collateralized by
substantially all of Lason's assets. Lason is not required to make principal
payments prior to 2001, the term of the loan. Interest on amounts outstanding is
calculated based on interest rates determined at the time of borrowing.
Borrowings bear interest at rates ranging from LIBOR plus a maximum of 2.25%
(6.68% as of March 17, 1998) to a base percentage rate plus a maximum of 1.25%
(8.50% as of March 17, 1998), depending on the Company's leverage ratio. The
credit agreement contains restrictions on the acquisition of stock or assets,
disposal of assets, incurrence of other liabilities, minimum requirements for
cash flow and certain financial ratios. As of March 17, 1998, $69.8 million is
outstanding under the credit agreement.
FUTURE CAPITAL NEEDS
The Company's liquidity and capital resources have been significantly
affected by acquisitions of businesses and, given the Company's acquisition
strategy, may be significantly affected for the foreseeable future. To date, the
Company has financed its acquisitions with borrowings under its credit
agreement, with shares of its common stock and with cash from operations.
The Company's ability to obtain cash adequate to fund its needs depends
generally on the results of its operations and the availability of financing.
Management believes that cash flow from operations, in conjunction with
borrowings from its existing and any future credit agreements and possible
issuance of shares of its common stock, will be sufficient to meet debt service
requirements, make possible future acquisitions and fund capital expenditures in
the future. However, there can be no assurance in this regard or that the terms
available for any future financing, if required, would be favorable to the
Company.
YEAR 2000
The Company is addressing the need to achieve year 2000 date conversion
with no effect on customers or disruption to business operations. The Company is
communicating with suppliers, customers, and others with which it does business
to coordinate year 2000 conversion issues. The cost of compliance, which is not
yet completely determined, is not expected to be material in relation to the
Company's future results of operations due to the nature of the Company's
operating systems.
INFLATION
Certain of the Company's expenses, such as wages and benefits, occupancy
costs, and equipment repair and replacement, are subject to normal inflation.
Supplies, such as paper and related products, can be subject
12
14
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 financial information included in
this report are set forth on the Index to Financial Statements and Financial
Statement Schedules included in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
13
15
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 1998 Proxy
Statement, herein incorporated by reference.
B. EXECUTIVE OFFICERS
Reported in Part I pursuant to General Instruction G to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Reported under the caption "Executive Compensation" in the Company's 1998
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 1998 Proxy Statement, herein
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reported under the caption "Certain Transactions With Management" in the
Company's 1998 Proxy Statement, herein incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. (1) FINANCIAL STATEMENTS
The Financial statements applicable to the Company and its consolidated
affiliates filed with this report are set forth on the Index to Financial
Statements and Financial Statement Schedules of this report.
(2) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and report of independent accountants have
been filed as part of this Annual Report on Form 10-K as indicated in the Index
to Financial Statements and Financial Statement Schedules of this report.
(3) EXHIBITS
The exhibits filed with this report are listed on the Exhibit Index on
pages E-1 through E-5.
B. REPORTS ON FORM 8-K
October 14, 1997 the registrant filed Form 8-K announcing that it had
completed the acquisition of Image Conversion Systems, Inc. ("ICS"). In
connection therewith, the following financial information was also filed
pursuant to "Item 7" of such Form 8-K:
(a) Financial Statements of ICS:
Audited balance sheet as of October 31, 1996, and the related
statements of operations, shareholders' equity and cash flows for the
year then ended and the report of Arthur Andersen L.L.P. thereon, and
the balance sheet as of April 30, 1997 (unaudited), the statement of
operations for the six months ended April 30, 1997 and 1996,
(unaudited), the statement of changes in shareholders'
14
16
equity as of April 30, 1997 (unaudited), the statement of cash flows for the six
months ended April 30, 1997 and 1996 (unaudited), and the Notes to the Financial
Statements.
(b) Pro Forma Financial Information:
Pro Forma condensed consolidated balance sheets as of June 30, 1997
(unaudited)
Pro Forma condensed consolidated statements of income for the six
months ended June 30, 1997 (unaudited)
Pro Forma condensed consolidated statements of income for the year
ended December 31, 1996 (unaudited)
Notes to Pro Forma condensed consolidated financial information
(unaudited)
On November 18, 1997, the registrant filed Form 8-K announcing that it had
signed a definitive agreement to acquire substantially all of the assets of VIP
Imaging Inc.
On December 10, 1997 the registrant filed Form 8-K announcing that it had
completed the acquisition of VIP Imaging Inc.
15
17
LASON, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-1
Consolidated Statements of Income for each of the years
ended December 31, 1997, 1996 and 1995.................... F-2
Consolidated Statements of Stockholders' Equity for each of
the years ended December 31, 1997, 1996 and 1995.......... F-3
Consolidated Statements of Cash Flows for each of the years
ended December 31, 1997, 1996 and 1995.................... F-4
Notes to consolidated financial statements.................. F-5 to F-14
OTHER FINANCIAL INFORMATION:
Report of independent accountants........................... F-15
FINANCIAL STATEMENT SCHEDULE:
I. 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.
18
LASON, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARES)
DECEMBER 31,
------------------
1997 1996
---- ----
ASSETS
Cash and cash equivalents................................... $ 2,925 $ 79
Accounts receivable (net)................................... 43,815 24,546
Supplies.................................................... 3,964 2,273
Prepaid expenses and other.................................. 8,946 3,940
-------- -------
Total current assets...................................... 59,650 30,838
Computer equipment and software............................. 5,489 2,735
Production and office equipment............................. 18,171 5,416
Leasehold improvements...................................... 2,460 1,010
Other....................................................... 902 644
-------- -------
27,022 9,805
Less: Accumulated depreciation............................ (4,447) (2,184)
-------- -------
Net property and equipment................................ 22,575 7,621
Deferred income taxes....................................... 1,034 2,571
Goodwill (net of accumulated amortization of $3,660 and
$1,482 at December 31, 1997 and 1996, respectively)....... 89,895 35,911
Other intangibles (net of accumulated amortization of $573
and $274 at December 31, 1997 and 1996, respectively)..... 4,745 1,605
-------- -------
TOTAL ASSETS.............................................. $177,899 $78,546
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses............................................ $ 6,984 $ 4,199
Accounts payable............................................ 6,590 4,751
Notes payable............................................... 6,462 --
Customer deposits........................................... 2,810 3,706
Deferred income taxes....................................... 1,753 1,529
Other....................................................... 3,714 --
-------- -------
Total current liabilities................................. 28,313 14,185
Revolving credit line borrowings............................ 13,550 4,101
Other liabilities........................................... 3,431 2,194
-------- -------
TOTAL LIABILITIES......................................... 45,294 20,480
-------- -------
Common stock with a put option.............................. 1,060 1,060
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; 20,000,000 shares authorized,
11,637,640 shares issued, 11,550,949 shares outstanding at
December 31, 1997 and 8,610,246 shares issued and
outstanding at December 31, 1996.......................... 115 86
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued and outstanding at December 31,
1997 and December 31, 1996................................ -- --
Additional paid-in capital.................................. 117,352 51,912
Retained earnings........................................... 14,078 5,008
-------- -------
TOTAL STOCKHOLDERS' EQUITY................................ 131,545 57,006
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $177,899 $78,546
======== =======
The accompanying Notes are an integral part of the consolidated financial
statements.
F-1
19
LASON, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
Revenues, net of postage of $42,444, $29,672 and $20,672 for
the year ended December 31, 1997, 1996 and 1995,
respectively.............................................. $120,337 $69,937 $46,605
Cost of revenues............................................ 80,846 47,587 31,227
-------- ------- -------
Gross profit.............................................. 39,491 22,350 15,378
Selling, general and administrative expenses................ 21,243 12,628 9,406
Compensatory stock option expense........................... 221 936 308
Amortization of intangibles................................. 2,477 1,121 817
-------- ------- -------
Income from operations.................................... 15,550 7,665 4,847
Net interest expense........................................ 1,249 1,760 1,694
-------- ------- -------
Income before income taxes and minority interest in net
income of subsidiaries................................. 14,301 5,905 3,153
Provision for income taxes.................................. 5,110 2,103 1,139
-------- ------- -------
Income before minority interest in net income of
subsidiaries........................................... 9,191 3,802 2,014
Minority interest in net income of subsidiaries............. 121 71 --
-------- ------- -------
Net income................................................ $ 9,070 $ 3,731 $ 2,014
======== ======= =======
Basic earnings per share.................................... $ 0.93 $ 0.59 $ 0.35
======== ======= =======
Diluted earnings per share.................................. $ 0.90 $ 0.55 $ 0.33
======== ======= =======
The accompanying Notes are an integral part of the consolidated financial
statements.
F-2
20
LASON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT FOR SHARES)
COMMON STOCK ADDITIONAL
-------------------- PAID-IN LOANS TO RETAINED
SHARES AMOUNT CAPITAL STOCKHOLDERS EARNINGS TOTAL
------ ------ ---------- ------------ -------- -----
Balances January 1, 1995........ 5,692,040 $ 57 $ 8,135 $(1,300) $ -- 6,892
Net income...................... -- -- -- -- 2,014 2,014
Compensatory stock option
expense....................... -- -- 308 -- -- 308
Forgiveness of stockholder
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
Issuance of shares of common
stock......................... 3,450,000 35 52,979 -- -- 53,014
Redemption of shares of common
stock......................... (692,047) (7) (11,758) -- -- (11,765)
Issuance of shares of common
stock for acquisitions........ 136,465 1 1,260 -- -- 1,261
Employee stock options
exercised..................... 23,788 -- 52 -- -- 52
Increase in stockholder loans... -- -- -- (65) -- (65)
Compensatory stock option
expense....................... -- -- 936 -- -- 936
Repayment of stockholder
loans......................... -- -- -- 628 -- 628
Forgiveness of stockholder
loans......................... -- -- -- 693 (693) --
---------- ---- -------- ------- ------- --------
Balances at December 31, 1996... 8,610,246 86 51,912 -- 5,008 57,006
Net income...................... -- -- -- -- 9,070 9,070
Issuance of shares of common
stock......................... 2,457,620 25 58,044 -- -- 58,069
Compensatory stock option
expense....................... -- -- 221 -- -- 221
Issuance of shares of common
stock for acquisitions........ 251,559 2 6,046 -- -- 6,048
Employee stock options
exercised..................... 231,524 2 1,129 -- -- 1,131
---------- ---- -------- ------- ------- --------
Balances at December 31, 1997... 11,550,949 $115 $117,352 $ -- $14,078 $131,545
========== ==== ======== ======= ======= ========
The accompanying Notes are an integral part of the consolidated financial
statements.
F-3
21
LASON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
Net income.................................................. $ 9,070 $ 3,731 $ 2,014
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 4,941 2,327 1,817
Compensatory stock option expense......................... 221 936 308
(Gain) loss on disposal of fixed assets................... (256) (20) 23
Deferred income taxes..................................... 1,761 1,119 781
Changes in operating assets and liabilities net of effects
from acquisitions:
Accounts receivable....................................... (7,120) (9,282) (2,695)
Supplies.................................................. (1,119) (562) (384)
Prepaid expenses and other................................ (3,571) (3,019) (698)
Accounts payable.......................................... (1,073) (174) 397
Customer deposits......................................... (896) 2,792 (31)
Accrued expenses and other liabilities.................... 1,478 69 (277)
--------- --------- --------
Cash flows provided (used) by operating activities.......... 3,436 (2,083) 1,255
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition of businesses, net of cash
acquired.................................................. (57,274) (17,137) (1,430)
Additions to fixed assets and software development costs.... (11,799) (4,611) (1,126)
Proceeds from sales of fixed assets......................... 820 54 713
--------- --------- --------
Net cash used in investing activities..................... (68,253) (21,694) (1,843)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving line of credit...................... 137,793 112,199 35,883
Repayments on revolving line of credit...................... (128,344) (115,375) (34,607)
Net proceeds from issuance of shares of common stock........ 58,069 53,014 --
Proceeds from exercise of employee stock options............ 145 -- --
Borrowings on acquisition credit facility................... -- 17,312 --
Repayments on acquisition credit facility................... -- (17,312) --
Principal payments on long-term debt........................ -- (13,500) (1,500)
Redemption of shares of common stock........................ -- (11,765) --
Proceeds from settlement of shareholder loans............... -- 628 --
Principal payments on lease liabilities and other debt...... -- (1,448) --
--------- --------- --------
Net cash provided (used) by financing activities.......... 67,663 23,753 (224)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents........ 2,846 (24) (812)
Cash and cash equivalents at beginning of year.............. 79 103 915
--------- --------- --------
Cash and cash equivalents at end of year.................... $ 2,925 $ 79 $ 103
========= ========= ========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest............................................... $ 1,139 $ 2,141 $ 1,329
Income taxes........................................... 3,693 1,617 1,000
The accompanying Notes are an integral part of the consolidated financial
statements.
F-4
22
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND CAPITALIZATION
Lason, Inc. (together with it's subsidiaries, the "Company"), a Delaware
corporation, was incorporated on January 5, 1995. The Company's initial equity
was comprised of $10 million of Class B common stock and approximately $1
million of Class A-1 common stock. The Company contributed the capital to Lason
Acquisition Corporation, a non-operating wholly-owned subsidiary. On January 17,
1995 the cash, in addition to $21 million of bank borrowings, was used to
acquire the assets and assume certain liabilities of Lason Systems, Inc.
("Predecessor") and provide working capital. Subsequent to the acquisition,
Lason Acquisition Corporation changed its name to Lason Systems, Inc. ("Lason")
and continued the business operations of the Predecessor. Prior to the
acquisition, three shareholders collectively acquired 93.8 percent of the Class
A-1 common stock which represented a 46.9 percent aggregate interest of all
outstanding classes of common stock in Lason at the time. The continuing
shareholders' residual interest in the Company was recorded at historical cost
resulting in an $8.6 million reduction in goodwill and stockholders' equity.
In the fourth quarter of 1996, the Company completed an initial public
offering ("IPO") of 3,450,000 shares of common stock, for net proceeds of
approximately $53.0 million, after deducting underwriting discounts and other
offering expenses. Approximately $41.2 million of the net proceeds was used to
repay outstanding debt under the Company's credit agreement and approximately
$11.8 million was used to redeem 692,047 shares of common stock held by the
Company's largest shareholder. In August 1997, the Company completed a secondary
offering of shares of common stock. See Note 5.
In connection with and immediately prior to the consummation of the IPO,
each share of Class A common stock was converted into one share of common stock,
each share of Class B common stock was converted into approximately 1.3 shares
of common stock, and the Company's Board of Directors approved a 2.5 for 1
common stock split. The Company's 1995 consolidated financial statements have
been restated for this recapitalization. The authorized capital stock of the
Company now consists of 20,000,000 shares of common stock, par value $0.01 per
share and 5,000,000 shares of preferred stock, par value $0.01 per share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND CUSTOMER CONCENTRATION
The Company provides integrated outsourcing services for document
management, records management and business communications. These services
include high-volume optical and digital printing, facility management operations
at customer sites, converting inputs into digital formats, data base management,
and direct mailing, among others. The Company primarily serves customers in the
manufacturing, financial services, healthcare and professional services
industries.
Transactions with various divisions of one domestic automotive manufacturer
accounted for approximately 17 percent, 32 percent and 49 percent of the
Company's consolidated net revenues for the years ended December 31, 1997, 1996
and 1995, respectively. Receivables from that customer were approximately $2.6
million, and $7.2 million as of December 31, 1997 and 1996, respectively.
Transactions with various divisions of another domestic automotive manufacturer
totaled approximately 14 percent, 19 percent and 12 percent of the Company's
consolidated net revenues for the years ended December 31, 1997, 1996 and 1995,
respectively. In addition, the Company had receivables outstanding from this
second customer of approximately $7.1 million and $3.8 million as of December
31, 1997 and 1996, respectively.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions have
been eliminated in consolidation. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the
F-5
23
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
consolidated financial statements and the reported amounts of revenues and
expenses during the periods presented. Actual results could differ from those
estimates. Certain amounts in the prior year consolidated financial statements
have been reclassified to conform with the current year presentation.
REVENUE RECOGNITION
Revenues are recorded when the services are provided. Revenues are
presented in the consolidated statements of income net of postage because the
cost of such postage is passed through to the customer.
CASH EQUIVALENTS
The company classifies as cash and cash equivalents amounts on deposit with
banks and cash invested temporarily in various instruments with maturities of
three months or less at the time of purchase.
SUPPLIES
Supplies are valued at cost, which approximates market, with cost
determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, are recorded at
cost. Expenditures for normal repairs and maintenance are charged to operations
as incurred. Adjustments of the asset and related accumulated depreciation
accounts are made for retirements of property and equipment with the resulting
gain or loss included in operations.
Assets placed in service prior to January 1, 1996, are depreciated using an
accelerated method over the estimated useful lives of the assets which range
from 5 to 7 years. Assets placed in service after December 31, 1995, are
depreciated using a straight-line method over the estimated lives of the related
assets which range from 5 to 15 years.
INTANGIBLE ASSETS
Goodwill is amortized using a straight-line method over 30 years.
Covenants-not-to-compete are amortized using a straight-line method over the
term of the agreement, generally 4 years. Deferred financing costs are amortized
using the interest method over the term of the associated credit agreement.
The Company capitalizes direct internal and external costs associated with
the development of technological systems, primarily computer software, to meet
the needs of its customers. Such costs, which are included in other intangible
assets, are amortized using a straight-line method over the lesser of five years
or the economic life of the related services. In addition, the Company
capitalizes certain direct internal and external costs associated with upgrading
and enhancing its information systems to support its national information
processing needs. Capitalization of such costs begins when the preliminary
planning stage for each project is completed and management has formally
authorized its funding, and ends when the project is substantially complete.
These costs are amortized using a straight-line method over five years. Research
and development costs and other computer software and hardware maintenance costs
are charged to expense as incurred.
Annually, the Company evaluates the carrying value of intangibles to
determine if there has been an impairment in value. The methodology used for
this evaluation includes a review of annual operating performance, along with a
review of anticipated results for future years. The Company determined that
there had been no impairment in the net carrying amount of intangibles as of
December 31, 1997.
F-6
24
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosures about the fair
value of financial instruments whether or not such instruments are recognized in
the balance sheet. Due to the short-term nature of the Company's financial
instruments, other than debt, fair values are not materially different from
their carrying values. Based on the borrowing rates available to the Company,
the carrying value of debt approximated fair value as of December 31, 1997 and
1996.
EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share", was issued in March 1997 and is
effective for financial statements issued after December 15, 1997. This
Statement establishes standards for computing and presenting earnings per share
("EPS") and supersedes Accounting Principles Board Opinion No. 15 and its
related interpretations. The Statement replaces the presentation of primary EPS
with a presentation of basic EPS. Basic EPS excludes dilution, whereas diluted
EPS includes the potential dilution that could occur if securities or other
contracts to issue shares of common stock were to be exercised or converted into
shares of common stock. All prior period EPS amounts have been restated to
reflect the provisions of SFAS No. 128.
Basic earnings per share are computed by dividing net income available to
common shareholders by the weighted average common shares outstanding. The 1996
and 1995 basic earnings per share amounts are based on the weighted average
number of common shares outstanding, retroactively adjusted for the effect of a
2.5 for 1 common stock split effective October 15, 1996 (see Note 1).
The following table presents a reconciliation of the numerator (income
applicable to common shareholders) and denominator (weighted average common
shares outstanding) for the basic and diluted earnings per share calculations
for the years ended December 31, 1997, 1996 and 1995 (in thousands, except per
share amounts).
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
NET PER NET PER NET PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
------ ------ ----- ------ ------ ----- ------ ------ -----
BASIC EPS........................ $9,070 9,704 $0.93 $3,731 6,361 $0.59 $2,014 5,692 $0.35
EFFECT OF DILUTIVE SECURITIES
Contingently issuable shares of
common stock................... -- 24 -- -- -- -- -- -- --
Potential shares of common stock
from stock options
outstanding.................... -- 307 -- -- 403 -- -- 500 --
------ ------ ----- ------ ----- ----- ------ ----- -----
DILUTED EPS...................... $9,070 10,035 $0.90 $3,731 6,764 $0.55 $2,014 6,192 $0.33
------ ------ ----- ------ ----- ----- ------ ----- -----
The weighted average common shares and common share equivalents outstanding
used to compute the dilutive effect of common stock options outstanding was
computed using the treasury stock method prescribed by SFAS No. 128. EPS
calculations include, as outstanding to the date of redemption (October 15,
1996), 692,047 shares of common stock which would have been sold at the initial
offering price of $17.00 per share to fund the redemption of such common stock
owned by the former Class B shareholders.
F-7
25
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. ACQUISITIONS
From June 1995 through December 31, 1997, the Company, through certain of
its subsidiaries, completed the acquisition of either substantially all of the
assets or a controlling stock ownership interest in a substantial number of
companies. Acquisitions completed in 1997 included the following:
In January 1997, Lason acquired all of the outstanding common stock of
Churchill Communications Corporation for $7.5 million in cash and 72,499 shares
of the Company's common stock valued at approximately $1.5 million.
In March 1997, Lason acquired all of the outstanding common stock of
Automated Enterprises, Inc. ("AEI") for $5.9 million in cash and 31,008 shares
of the Company's common stock valued at approximately $655,000. The stock
purchase agreement provides for an additional payment to the selling shareholder
if AEI's financial performance for the year ended December 31, 1997 and the year
ending December 31, 1998 exceed specified targets. Under terms of the agreement,
the selling shareholder can require the Company to accelerate the payment of
$1.6 million in full payment of the Company's additional payment obligation.
In July 1997, Lason acquired all of the outstanding common stock of Image
Conversion Systems, Inc. ("ICS") for approximately $18.9 million in cash and
47,441 shares of the Company's common stock valued at approximately $1.1
million. Of the total cash payment, approximately $10.5 million was used to
repay the outstanding debt of ICS and approximately $8.4 million was paid to the
selling shareholders.
The shares of common stock issued in connection with the acquisition of ICS
are (i) being held in escrow as collateral to indemnify the Company if
contingencies set forth in the purchase agreement occur within twelve months
from the date of the acquisition, and (ii) subject to forfeiture if ICS does not
achieve targeted operating income in 1997 and in 1998. Further, if the operating
income of ICS for such periods exceeds a targeted level, the purchase price may
be increased by up to approximately $3.0 million.
In November 1997, Lason acquired all of the common stock of Spectrum
Document Services, Inc. ("Spectrum") for $481,000 in cash, a $2.7 million
short-term promissory note due January 10, 1998 and a $300,000 promissory note,
due January 10, 1999. The payment of the $300,000 promissory note is contingent
on Spectrum generating a targeted operating cash flow for the twelve month
period ending October 31, 1998.
Also in November 1997, Lason acquired substantially all of the assets of
VIP Imaging Inc. ("VIP") for $14.5 million in cash and 147,260 shares of the
Company's common stock valued at approximately $4.0 million. With respect to the
cash portion of the purchase price, $250,000 is being held in escrow and will be
increased or decreased on a dollar-for-dollar basis to the extent net working
capital, as defined by the asset purchase agreement, as of the closing date
exceeds or falls below $4.756 million. With respect to the shares of common
stock issued in connection with the VIP acquisition, 36,815 of such shares are
being held in escrow as collateral to indemnify the Company if contingencies set
forth in the purchase agreement occur. In addition, the purchase price may be
increased up to $1.0 million if certain earnings and sales targets are met in
the first 13-month period and subsequent 12-month period following the closing
date of the acquisition.
Also during 1997 the Company, through certain of its subsidiaries, acquired
all of the common stock of Alpha Imaging, Inc.; Alpha Micro Graphics Supply,
Inc.; Premier Copy Group, Inc.; Corporate Copies, Inc.; American Micro-Image,
Inc.; Tri-City Micrographics, Inc.; Litigation Solutions, Inc.; and Data
Reduction Inc.; and substantially all of the assets of Florida Data Bank, Inc.
and Image Data Corporation, for an aggregate purchase price of approximately
$13.0 million consisting of $8.7 million in cash, $3.4 million of short-term
promissory notes due January 5, 1998 and 37,607 shares of the Company's common
stock valued at approximately $891,000.
All purchase price contingencies, if any, will be recorded as an adjustment
to the purchase price when the contingency is resolved.
F-8
26
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Generally, shares of common stock issued or to be issued in connection with
the acquisitions, are subject to lock-up agreements ranging from twelve to
twenty-four months. The lock-up agreements restrict the owners' ability to sell
the shares of common stock.
Each of the acquisitions was accounted for as a purchase. The results of
operations for the year ended December 31, 1997 include the results of
operations for each of the acquired companies since the date of their respective
acquisition.
The aggregate purchase price for the acquisitions completed for the year
ended December 31, 1997, excluding liabilities assumed and including common
stock held in escrow, was approximately $71.0 million. The purchase price was
allocated to the assets acquired and liabilities assumed based on the related
fair values at the date of acquisition. The excess of the aggregate purchase
price over the fair values of assets acquired and liabilities assumed has been
allocated to goodwill and is being amortized on a straight-line method over 30
years.
In conjunction with these acquisitions, liabilities assumed and other
non-cash consideration was as follows (in thousands):
Fair value of assets acquired............................... $ 23,500
Goodwill.................................................... 54,329
Cash paid in consideration for companies acquired........... (55,891)
Stock issued in consideration for companies acquired........ (6,048)
Promissory notes issued in consideration for companies
acquired.................................................. (6,085)
--------
Liabilities assumed......................................... $ 9,805
========
The following table summarizes pro forma unaudited results of operations as
if each of the acquisitions completed during 1997 had occurred at the beginning
of each year presented (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
---- ----
(UNAUDITED)
Revenues............................................ $159,374 $127,924
Income before income taxes.......................... 15,187 10,487
Net income.......................................... 9,486 6,280
Basic earnings per share............................ $ 0.96 $ 0.95
Diluted earnings per share.......................... 0.93 0.88
4. LONG-TERM DEBT
Lason has a credit agreement with a bank group providing for revolving
credit loans up to $80 million. Borrowings will be used to finance additional
acquisitions of businesses, working capital, capital expenditures and for other
corporate purposes. Borrowings under the credit agreement are collateralized by
substantially all of Lason's assets. Lason is not required to make principal
payments prior to 2001, the term of the loan. Interest on amounts outstanding is
calculated based on interest rates determined at the time of borrowing.
Borrowings bear interest at rates ranging from LIBOR plus a maximum of 2.25% to
a base percentage rate plus a maximum of 1.25%, depending on the Company's
leverage ratio. The credit agreement contains covenants which, among other
things, place restrictions on the acquisition and disposal of assets, payment of
dividends and incurrence of liabilities and sets minimum requirements for free
cash flow and certain financial ratios. As of December 31, 1997, the loan
agreement prohibits Lason from advancing funds or paying dividends to the
Company. Borrowings outstanding under the credit agreement totaled $13.6 million
and $4.1 million as of December 31, 1997 and 1996, respectively.
F-9
27
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
As of December 31, 1997, Lason was in violation of certain non-financial
covenants. In February 1998, Lason obtained waivers of such non-financial
covenant violations.
5. STOCKHOLDERS' EQUITY
In August 1997, the Company completed a secondary offering of 2,457,620
shares of common stock for net proceeds of approximately $58.0 million, after
deducting underwriting discounts and other offering expenses. The net proceeds
were used to repay debt outstanding under the Company's credit agreement and for
general corporate purposes.
In connection with the transaction described in Note 1, Lason loaned
certain shareholders, who were also shareholders in the Predecessor,
approximately $1.3 million in 1995 which was used to pay their tax liability
resulting from the sale of the assets of the Predecessor. In conjunction with
the completion of the IPO in 1996, 50 percent of the then outstanding amounts of
the shareholder loans were forgiven by the Company and charged to retained
earnings. At the same time, the remaining 50 percent of shareholder loans
outstanding were repaid to the Company, along with the related accrued interest
to the date of settlement.
6. INCOME TAXES
The Company and its qualifying subsidiaries file a consolidated Federal
income tax return. The Federal income tax provision is computed on the
consolidated taxable income of the Company and those subsidiaries.
The components of the consolidated income tax provision are as follows (in
thousands):
DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
Current provision
Federal.......................................... $3,011 $ 972 $ 358
State............................................ 338 12 --
------ ------ ------
Total current provision............................ $3,349 $ 984 $ 358
------ ------ ------
Deferred provision
Federal.......................................... $1,684 $1,092 $ 781
State............................................ 77 27 --
------ ------ ------
Total deferred provision........................... $1,761 $1,119 $ 781
------ ------ ------
Total income tax provision......................... $5,110 $2,103 $1,139
====== ====== ======
F-10
28
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Deferred income taxes represent the net tax effects of temporary
differences between the carrying value amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax return
purposes. Significant components of the Company's deferred Federal income tax
assets and liabilities are as follows (in thousands):
DECEMBER 31,
------------------
1997 1996
---- ----
Deferred tax assets related to:
Goodwill.................................................. $2,317 $2,624
Depreciation.............................................. -- 63
Compensatory stock option expense......................... 361 435
Allowance for doubtful accounts........................... 146 54
Covenant-not-to-compete amortization...................... 43 30
Other..................................................... 7 --
------ ------
Total deferred tax assets................................. $2,874 $3,206
====== ======
Deferred tax liabilities related to:
Prepaid expenses.......................................... $1,059 $ 787
Goodwill.................................................. 965 486
Supplies.................................................. 840 795
Depreciation.............................................. 418 --
Capitalized software development costs.................... 284 96
Other..................................................... 27 --
------ ------
Total deferred tax liabilities............................ $3,593 $2,164
====== ======
The difference between the Company's statutory Federal income tax rate and
its effective Federal income tax rate of 35.7 percent, 35.6 percent and 36.1
percent for the years ended December 31, 1997, 1996 and 1995, respectively,
results primarily from travel and entertainment expenses and certain goodwill
amortization that is not deductible for Federal income tax purposes.
7. STOCK OPTION PLAN
SFAS No. 123 "Accounting for Stock Based Compensation" was issued in
October 1995 and was effective for fiscal years beginning after December 15,
1995. That standard requires significantly more disclosure regarding employee
stock options and encourages companies to recognize compensation expense for
stock-based awards based on the fair value of such awards on the date of grant.
Alternatively, companies may continue to account for such transactions under
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees", provided that disclosures are made regarding the net income and
earnings per share impact as if the value recognition and measurement criteria
of SFAS No. 123 had been adopted. The Company has elected to continue to account
for employee stock options under APB No. 25.
The Company's 1995 stock option plan was adopted by the Board of Directors
and approved by the Company's shareholders in January 1995. A committee composed
of non-employee members of the Board of Directors determines which key employees
will participate in the Plan. Under the Plan, the Company may grant up to
1,000,000 shares of common stock.
For certain options granted during 1996 and 1995, the exercise price was
less than the fair value of the Company's stock on the date of grant and,
accordingly, compensation expense is recognized over the vesting period for such
difference. For certain other options granted in 1997 and 1996, the exercise
price equaled the market price on the date of grant and, therefore, no
compensation expense was recognized. Options generally
F-11
29
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
vest over a period which ranges from 3 to 5 years from the date of grant and
each option's maximum term is generally 7 years from the grant date.
The provisions of certain stock option agreements provided for immediate
vesting of those options on the effective date of the IPO. Accordingly, the
Company recorded a non-cash expense of $653,000 during the fourth quarter of
1996 to recognize the compensation associated with the immediate vesting of
those stock options. Total compensation expense recorded for the years ended
December 31, 1997, 1996 and 1995 was approximately $221,000, $936,000 and
$308,000, respectively.
Had compensation expense for the Company's stock option plan been
determined based on the fair value at the grant dates for awards, consistent
with the provisions of SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts as follows (in thousands,
except per share amounts):
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Net income
As reported......................................... $9,070 $3,731 $2,014
Pro forma........................................... 8,159 3,582 1,957
Basic earnings per share
As reported......................................... $ 0.93 $ 0.59 $ 0.35
Pro forma........................................... 0.84 0.56 0.32
Diluted earnings per share
As reported......................................... $ 0.90 $ 0.55 $ 0.33
Pro forma........................................... 0.81 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 1997, 1996
and 1995, respectively: dividend yield of 0.0 percent for all three years;
expected volatility of 59 percent for 1997 and 74 percent for 1996 and 1995;
risk free interest rates of 6.12 percent, 5.98 percent and 6.39 percent,
respectively; and expected lives of 4.17 years, 4.02 years and 2.43 years,
respectively.
A summary of the status of the Company's stock option plan is as follows
for each of the years ended December 31:
1997 1996 1995
--------------------------- -------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
Outstanding at
beginning of year... 755,243 $ 5.33 419,326 $ 0.40 -- $ --
Granted
Price = fair
value............ 167,996 23.66 210,500 16.75 -- --
Price < fair
value............ -- -- 166,250 2.40 419,326 0.40
Exercised............. (231,524) 0.66 (23,788) 0.40 -- --
Canceled.............. (28,397) 16.90 (17,045) 0.40 -- --
-------- ------- -------
Outstanding at end of
year................ 663,318 $11.14 755,243 $ 5.33 419,326 $0.40
======== ======= =======
Options exercisable at
end of year......... 262,413 388,765 56,818
Weighted-average fair
value of options
granted during
year................ $12.00 $8.95 $2.51
F-12
30
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table summarizes information about stock options outstanding
as of December 31, 1997:
NUMBER WEIGHTED-AVERAGE NUMBER
RANGES OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICE AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- --------------- ------------ ---------------- ---------------- ------------ ----------------
$ 0.40 - $ 3.19 212,672 5.16 $ 0.40 187,172 $ 0.40
3.20 - 16.74 112,950 5.48 4.37 33,241 4.00
16.75 - 17.74 182,500 5.96 16.75 36,500 16.75
17.75 - 28.25 155,196 6.53 24.18 5,500 19.85
------- -------
663,318 5.75 $11.14 262,413 $ 3.54
======= ==== ====== ======= ======
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan and trust (the "Plan"). Each
employee who is 21 years of age or older who has worked for the Company for
twelve months and performed 1,000 hours of service or, has an adjusted service
date with the equivalent or greater term of service, is eligible to participate
in the Plan. Eligible participants may contribute not less than 2 percent and up
to 15 percent of their pretax compensation to the Plan. The Plan is contributory
and the Company, at its discretion, can match up to 33 percent of eligible
participant contributions not to exceed 9 percent of the participant's earnings.
The Company's match contribution for the years ended December 31, 1997, 1996,
and 1995 totaled approximately $337,000, $201,000, $172,000, respectively.
9. LEASE COMMITMENTS
The Company has various operating lease agreements related primarily to
equipment and buildings. As of December 31, 1997, future minimum rental payments
required under noncancelable operating leases with initial or remaining lease
terms in excess of one year are as follows (in thousands):
1998........................................................ $ 6,418
1999........................................................ 4,914
2000........................................................ 3,681
2001........................................................ 2,283
2002........................................................ 1,141
-------
Total....................................................... $18,437
=======
In addition, the Company has a number of equipment leases that are on a
month-to-month basis.
Total rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $9.2 million, $6.4 million and $5.2 million, respectively.
10. RELATED PARTY TRANSACTIONS
The Company purchases printing services from a company owned by the wife of
it's former president and a principal shareholder of the Company. For the years
ended December 31, 1997, 1996 and 1995 the Company paid approximately $3.8
million, $1.4 million and $981,000, for such printing services. As of December
31, 1997 and 1996, $103,800 and $114,389 was due to that company, respectively,
for printing services, and is included in accounts payable in the consolidated
balance sheets. In December 1997, the Company sold certain assets to this
company and recognized a gain on the sale of approximately $183,000.
The Company leases property and a building from a general partnership in
which the Company's Chairman is the managing partner. Another principal
shareholder of the Company owns 33.33 percent of such
F-13
31
LASON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED
partnership and is one of its partners. The Company paid $150,150, $191,100 and
$191,100 in rent to that partnership for the years ended December 31, 1997, 1996
and 1995, respectively.
The Company leases certain equipment from a company in which the Company's
Chairman is a 50 percent owner and its president. For the years ended December
31, 1997, 1996 and 1995 the Company paid $258,000, $184,390 and $57,100,
respectively, in rent for such operating leases.
The Company contracts temporary employment services from a company which is
owned by the wife of a senior member of management. The Company paid $797,000,
$735,670 and $2,905 for the years ended December 31, 1997, 1996 and 1995,
respectively, for such services.
The Company believes that all the above transactions were on terms that
were reasonable and competitive. Additional transactions of the nature described
may take place in the ordinary course of business in the future.
11. COMMITMENTS AND CONTINGENCIES
Various claims have been made against the Company in the normal course of
business. Management believes that none of these legal proceedings will have a
material adverse effect on the Company's business, financial condition or
results of operations.
12. SUBSEQUENT EVENTS
During the first quarter of 1998, the Company, through certain of its
subsidiaries, acquired either substantially all of the assets or 100% of the
common stock of several companies for an aggregate purchase price, excluding
liabilities assumed, of approximately $54.7 million, consisting of $45.3 million
in cash, funded by bank borrowings, and 320,359 shares of the Company's common
stock valued at approximately $9.4 million.
F-14
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lason, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Lason, Inc. (the "Company") and subsidiaries listed in
Item 14(A) of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lason, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand L.L.P.
Detroit, Michigan
March 16, 1998
F-15
33
SCHEDULE I
LASON, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------
1997 1996
---- ----
ASSETS
Investment in subsidiaries.................................. $131,184 $56,573
Deferred tax asset.......................................... 361 433
-------- -------
Total assets........................................... $131,545 $57,006
======== =======
LIABILITIES
Total liabilities........................................... -- --
STOCKHOLDERS' EQUITY
Common stock................................................ $ 115 $ 86
Additional paid in capital.................................. 117,498 51,986
Retained earnings........................................... 13,932 4,934
-------- -------
Total stockholders' equity............................. 131,545 57,006
-------- -------
Total liabilities and stockholders' equity............. $131,545 $57,006
======== =======
S-1
34
SCHEDULE I
LASON, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
INCOME STATEMENTS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
REVENUE..................................................... $ -- $ -- $ --
OPERATING EXPENSES
Compensatory stock option expense........................... 221 936 308
------ ------ ------
Operating loss.............................................. (221) (936) (308)
Equity in net income of subsidiaries........................ 9,219 4,339 2,217
------ ------ ------
Income before taxes......................................... 8,998 3,403 1,909
Income tax benefit.......................................... (72) (328) (105)
------ ------ ------
Net Income................................................ $9,070 $3,731 $2,014
====== ====== ======
S-2
35
SCHEDULE I
LASON, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
NET CASH USED IN OPERATING ACTIVITIES....................... $ -- $ -- $ --
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary.................................... (65,248) (41,236) (10,900)
-------- -------- --------
Net cash used in investing activities....................... (65,248) (41,236) (10,900)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of shares of common stock.......................... 65,248 53,001 10,900
Redemption of shares of common stock........................ -- (11,765) --
-------- -------- --------
Net cash provided by financing activities................... 65,248 41,236 10,900
-------- -------- --------
Change in cash.............................................. -- -- --
Cash at beginning of year................................... -- -- --
Cash at end of year......................................... $ -- $ -- $ --
======== ======== ========
S-3
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Lason, Inc.
By: /s/ WILLIAM J. RAUWERDINK
------------------------------------
William J. Rauwerdink
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board March 30, 1998
- ------------------------------------------
Robert A. Yanover*
/s/ GARY L. MONROE President, Chief Executive Officer March 30, 1998
- ------------------------------------------ (Principal Executive Officer) and
Gary L. Monroe Director
/s/ WILLIAM J. RAUWERDINK Executive Vice President, Chief March 30, 1998
- ------------------------------------------ Financial Officer, Treasurer and
William J. Rauwerdink Secretary (principal financial and
accounting officer)
* Director March 30, 1998
- ------------------------------------------
Fariborz Ghadar
* Director March 30, 1998
- ------------------------------------------
Donald M. Gleklen
* Director March 30, 1998
- ------------------------------------------
Allen J. Nesbitt
* Director March 30, 1998
- ------------------------------------------
Joseph R. Nolan
* Director March 30, 1998
- ------------------------------------------
Bruce V. Rauner
*By: /s/ WILLIAM J. RAUWERDINK
------------------------------------
William J. Rauwerdink,
Attorney-in-Fact
37
EXHIBIT INDEX
EXHIBIT PAGE
NO. DESCRIPTION NO.
___________________________________________________________________________________________________
2.1 Asset Purchase Agreement and Equipment Purchase 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
(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)
2.9 Agreement of Purchase and Sale of Stock with respect to the
acquisition of Image Conversion Systems, Inc. dated July 17,
1996.(6)
2.10 Asset Purchase Agreement with respect to the VIP Acquisition.
(9)
2.11 Stock Purchase Agreement with respect to the Racom Acquisition.
(10)
2.12 Asset Purchase Agreement with respect to the API Acquisition.
(11)
3.1 Form of Amended and Restated Certificate of Incorporation of
the Company.(1)
3.2 Form of Revised Amended and Restated By-Laws of the
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38
EXHIBIT PAGE
NO. DESCRIPTION NO.
______________________________________________________________________________________________
Company.(1)
3.3 Form of Revised Amended and Restated By-Laws.(2)
4.1 Form of certificate representing Common Stock of the
Company.(1)
10.1 Asset Purchase Agreement dated February 1, 1996 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., 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., 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 April 30, 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 Donald L. Elland, Richard C.
Kowalski, Gregory C. 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)
10.15 Employee Stock Option Agreement by and between the Company and
Mr. Rauwerdink.(1)
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39
EXHIBIT PAGE
NO. DESCRIPTION NO.
______________________________________________________________________________________________
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 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 Lenders (as defined in the Loan
Agreement), and as Lenders for the benefit of Lason Systems.(1)
10.23 Guarantor Pledge Agreement dated as of January 17, 1995 given
by the Company for the benefit of First Union National Bank of
North Carolina, as agent for 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 as of 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 as of August 3, 1995 by and between Lason
Lason Systems, Inc. and Kensington Center, Inc.(1)
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
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40
EXHIBIT PAGE
NO. DESCRIPTION NO.
______________________________________________________________________________________________
North Carolina, as agent, including the Amended and
Restated Revolving Credit Note and Interim Term
Note(1)
10.31 First Amendment to Lease Agreement dated as of July 26,
1996 by and between Lason Systems, Inc. and Kensington
Center, Inc.(1)
10.32 Form of Recapitalization Agreement among the Company
and certain of its stockholders, including Plan
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.(3)
10.38 Employee Stock Option Agreement by and between the
Company and Mr. Rauwerdink dated December 17, 1996.(4)
10.39 Employee Stock Option Agreement by and between the
Company and Mr. Jablonski dated December 17, 1996.(4)
10.40 Employee Stock Option Agreement by and between the
Company and Mr. Monroe dated December 17, 1996.(5)
10.41 Employee Stock Option Agreement by and between the
Company and Mr. Ghadar dated January 15, 1997.(5)
10.42 Amended and Restated Loan Agreement dated February 20,
1997 by and among Lason Systems, Inc., First Union
National Bank of North Carolina, as agent for the
Lenders, and each other lender party thereto,
including Term Note and Swingline Credit Note.(5)
10.43 Amended and Restated Security Agreement dated February
20, 1997 by and among Lason Systems, Inc. and First
Union National Bank of North Carolina, as lender and
as agent for Lenders.(5)
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
Lenders and as Lenders for the benefit of Lason
Systems.(5)
10.45 Amended and Restated Guarantor Pledge Agreement dated
February 20, 1997 made by the Company for the benefit
of
E-4
41
EXHIBIT PAGE
NO. DESCRIPTION NO.
_________________________________________________________________________________________
First Union National Bank of North Carolina, as agent
for Lenders.(5)
10.46 Lender Addition and Acknowledgment Agreement.(7)
10.47 First Amendment to Amended and Restated Loan
Agreement.(7)
10.48 Amendment to Stock Option Agreement between the
Company and William J. Rauwerdink dated October 7,
1997.(8)
10.49 Amendment to Stock Option Agreement between the
Company and Brian E. Jablonski dated October 7,
1997.(8)
21.1 Subsidiaries of the Company.+
23.1 Consent of Coopers & Lybrand L.L.P.+
24.1 Powers of Attorney.+
27.1 Financial Data Schedule.+
27.2 Financial Data Schedule.+
27.3 Financial Data Schedule.+
27.4 Financial Data Schedule.+
27.5 Financial Data Schedule.+
27.6 Financial Data Schedule.+
+ filed herewith
(1) Incorporated herein by reference to registrant's Form S-1 filed on October
7, 1996, Commission File No. 333-09799.
(2) Incorporated herein by reference to registrant's Form 10-Q filed on May
15, 1997, Commission File No. 0-21407.
(3) Incorporated herein by reference to registrant's Form 8-K filed on February
18, 1997, Commission File No. 0-21407.
(4) Incorporated herein by reference to registrant's Form S-8 filed on December
23, 1996, Commission File No. 333-18551.
(5) Incorporated herein by reference to registrant's Form 10-K filed on March
31, 1997, Commission File No. 0-21407.
(6) Incorporated herein by reference to registrant's Form 8-K filed on August
4, 1997, Commission File No. 0-21407.
(7) Incorporated herein by reference to registrant's Amendment No. 1 to Form
S-1 filed on August 15, 1997.
(8) Incorporated herein by reference to registrant's Form 10-Q filed on
November 14, 1997, Commission File No. 0-21407.
(9) Incorporated herein by reference to registrant's Form 8-K filed on December
10, 1997, Commission File No. 0-21407.
(10) Incorporated herein by reference to registrant's Form 8-K filed on March
17, 1998, Commission File No. 0-21407.
(11) Incorporated herein by reference to registrant's Form 8-K filed on March
20, 1998, Commission File No. 0-21407.
E-5