ITEM 2. PROPERTIES
As of March 20, 1997, including Churchill and Alpha, the Company conducted operations through 22 leased facilities in ten states containing in the aggregate approximately 333,360 square feet. The Company's principal facilities are summarized as follows:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Various claims have been made against the Company in the normal course of business. Management believes that none of these legal proceedings will have a material adverse effect on the Company's business, financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders during the fourth quarter of 1996.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq Stock Market under the symbol "LSON". The high and low quoted prices as reported on the Nasdaq National Market System during the fourth quarter of 1996 were $24.125 and $14.0, respectively.
The Company intends to retain any earnings to finance operations and expansion and, therefore, does not anticipate paying any cash dividends on the common stock in the foreseeable future. Cash dividends, if any, would be determined by the Board and would be based on the Company's earnings, capital requirements, financial condition and other factors deemed relevant by the Board. Except for certain constructive dividends related to partial forgiveness of certain shareholder loans in connection with the IPO, the Company has not paid any dividends on its capital stock.
As of March 20, 1997, there were approximately 2,300 holders of the Company's common stock, including 40 shareholders of record and approximately 2,260 in street name.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below have been derived from the Company's consolidated financial statements which have been audited by Coopers & Lybrand, L.L.P. and should be read in conjunction with the consolidated financial statements and notes thereto.
(1) From its inception to January 17, 1995, the Company was an S corporation and, accordingly, was not subject to Federal income tax. (2) Represents the minority shareholders' portion of the net income of Micro-Pro, Inc. and Delaware Legal Copy, Inc. in which the Company acquired an 80% and 65% equity interest, respectively, during 1996. (3) Earnings per share are not presented for the Predecessor as such information is not representative of the capital structure of the Comapny. (4) Includes the net proceeds from the Initial Public Offering and redemption of shares of common stock during the fourth quarter of 1996.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Lason Systems, Inc., a Michigan corporation and the predecessor to the Company (the "Predecessor"), was formed in 1985 as a result of a management buyout of the direct mail division of McKesson Corporation's 3PM subsidiary. In January 1995, the founders and principal shareholders of the Predecessor recapitalized it (the "Recapitalization") by selling substantially all of its assets to Lason Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Lason, Inc., which was then named Lason Holdings, Inc. In August 1996, Lason Holdings, Inc. changed its name to Lason, Inc. (together with its subsidiaries, the "Company"). After the acquisition, Lason Acquisition Corp. changed its name to Lason Systems, Inc. ("Lason"), and continued the business operations of the Predecessor.
From June 1995 through December 31, 1996, Lason completed the acquisition of either substantially all of the assets or a controlling stock ownership interest in eight companies. The stock acquisitions included acquiring 65% of the outstanding common stock of Delaware Legal Copy, Inc. in April 1996, 100% of the outstanding common stock of Information & Image Technology of America, Inc. and Great Lakes Micrographics Corporation in July 1996, 80% of the outstanding common stock of Micro-Pro, Inc. and MP Services, Inc. (two affiliated companies, "Micro-Pro") in July 1996, and 100% of the outstanding common stock of National Reproductions Corp. ("NRC") in August 1996. Each of the acquisitions was accounted for as a purchase. The excess of the aggregate purchase price over the fair value of the net assets acquired has been allocated to goodwill.
The consolidated results of operations for the year ended December 31, 1996 include the results of operations of the acquisitions since the date of acquisition and, therefore, are not directly comparable to the results of operations for 1995 and 1994.
In the fourth quarter of 1996, the Company completed an initial public offering ("IPO") of 3,450,000 shares of common stock , including the underwriter's over-allotment option, at $17.00 per share for net proceeds to the Company of approximately $53.0 million, after deducting underwriting discounts and other offering expenses. Approximately $41.2 million of the net proceeds was used to repay debt outstanding under the Company's credit agreement and approximately $11.8 million was used to redeem 692,047 shares of common stock held by the Company's largest shareholder.
One of the Company's principal strategies is to increase its revenues and the markets it serves through the continued acquisition of complementary businesses. Toward that end, in January 1997, Lason acquired 100% of the outstanding common stock of Churchill Communications Corporation ("Churchill") and 100% of the outstanding common stock of Alpha Imaging, Inc. and Alpha Micro Graphics, Inc., (together "Alpha"). In addition, in March 1997, Lason acquired 100% of the outstanding common stock of Automated Enterprises Inc. ("AEI") and 100% of the outstanding common stock of Premier Copy Group, Inc. ("Premier"). Although management anticipates that the Company will continue to acquire complementary businesses in the future, there can be no assurance that the Company will be able to identify and acquire attractive acquisition candidates, profitably manage such acquired companies or successfully integrate such acquired companies into the Company without substantial costs, delays or other problems. In addition, there can be no assurance that any companies acquired in the future will be profitable at the time of acquisition or will achieve sales and profitability justifying the Company's investment therein or that the Company will recognize the synergies expected from such acquisitions.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net revenues increased 50% to $69.9 million for the year ended December 31, 1996 from $46.6 million in 1995. The $23.3 million increase in net revenues includes approximately $14.8 million of net revenues related to businesses acquired during 1996 and approximately $8.5 million principally due to sales growth in the Company's business communications, digital imaging and collection letter processing revenues of approximately $5.0 million (71%) , $2.2 million (53%) and $1.3 million (24%), respectively.
Gross profit increased $7.0 million to $22.4 million for the year ended December 31, 1996 from $15.4 million reported in 1995, primarily due to an increase in net revenues, partially offset by lower gross profit
margins for businesses acquired in 1996. Gross profit as a percentage of net revenues was 32% for the year ended December 31, 1996 versus 33% in 1995.
Selling, general and administrative expenses increased to $12.6 million in 1996 from $9.4 million in 1995. Approximately $2.4 million of the increase was attributable to businesses acquired during 1996. Approximately $.4 million was due to an increase in administrative expenses primarily resulting from the hiring of several key executives in late 1995 and in the first three quarters of 1996, and approximately $.5 million was due to an increase in advertising, sales commissions and other selling expenses, related to the higher sales volumes. Selling, general and administrative expenses as a percentage of net revenues was 18.0% in 1996 versus 20.2% in 1995.
Compensatory stock option expense increased to $936,000 for the year ended December 31, 1996 from $308,000 in 1995. The provisions of certain stock option agreements included the immediate vesting of those options on the effective date of the IPO. Accordingly, the Company recorded a non-cash expense of $653,000 during the fourth quarter of 1996 to record the compensation associated with the immediate vesting of those stock options.
Amortization of intangibles increased to $1.1 million in 1996 versus $817,000 in 1995 primarily due to amortization of goodwill recorded as a result of businesses acquired during 1996.
Minority interest of $71,000 for the year ended December 31, 1996 represents the minority shareholders' portion of the net income of Micro-Pro and Delaware Legal Copy, Inc. in which the Company acquired an 80% and 65% equity interest, respectively, during 1996.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Net revenues increased 13.1% to $46.6 million for the year ended December 31, 1995 from $41.2 million reported in 1994. The increase resulted principally from growth in the Company's collection letter processing, facilities management and document conversion revenues of approximately $2.0 million (58%), $1.2 million (10%) and $1.0 million (33%), respectively.
Gross profit increased to $15.4 million in 1995 from $14.0 million in 1994. Gross profit as a percentage of net revenues decreased to 33.0% in 1995 from 33.8% in 1994. The decrease in gross profit as a percentage of net revenues primarily resulted from an increase of approximately $1.0 million in the cost of paper and related products, partially offset by increased operating efficiencies.
Selling, general and administrative expenses increased to $9.4 million for the year ended December 31, 1995 from $8.4 million in 1994. In connection with the Recapitalization, the Company recorded approximately $275,000 in non-recurring professional services and other expenses. Also in 1995, several key executives were hired resulting in an increase of approximately $300,000 in administrative expenses. As a percentage of revenues, selling, general and administrative expenses decreased to 20.2% in 1995 from 20.4% in 1994.
Amortization of intangibles increased to $817,000 in 1995 from $266,000 in 1994 primarily due to the amortization of intangibles recorded as a result of the Recapitalization.
Interest expense increased to $1.8 million in 1995 from $185,000 in 1994 primarily due to increased borrowings incurred as part of the Recapitalization and growth in the Company's business.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and acquisitions through a combination of cash flow from operations, bank borrowings and the issuance of common stock.
Cash used in operating activities was $2.1 million for the year ended December 31, 1996 compared to cash provided by operating activities of $1.3 million in 1995 and $5.7 million in 1994. The decrease in operating cash flows in 1996 was primarily due to an increase in accounts receivable and prepaid expenses partially offset by higher net income and an increase in customer deposits. The decrease in operating cash flows from 1994 to 1995 was primarily due to lower net income and higher accounts receivable.
Cash flows used in investing activities totaled $21.7 million, $1.8 million and $1.8 million for the years ended December 31, 1996, 1995 and 1994, respectively, and has primarily been used to fund payments for the net assets of acquired businesses and investments in capital equipment to improve the Company's reprographic capability and capacity. Cash used to acquire businesses was $17.1 million, $1.4 million and $1.0 million for the years ended December 31, 1996, 1995 and 1994, respectively. Cash used to invest in capital equipment totaled $4.6 million in 1996, compared to $1.1 million and $800,000 in 1995 and 1994, respectively. The 1996 investment in capital equipment includes approximately $1.3 million of previously leased copiers that were purchased during the fourth quarter.
Cash flows provided by financing activities largely consisted of proceeds from the IPO, partially offset by repayments of long-term debt and payments to redeem shares of the Company's common stock during 1996. Net proceeds from the issuance of common stock totaled approximately $53.0 million for the year ended December 31, 1996, after deducting underwriting discounts and other offering expenses. The net proceeds from the IPO were primarily used to redeem 692,047 shares of common stock which were held by the Company's largest shareholder and to repay amounts which were then outstanding under the Company's credit agreement.
Credit Agreement and Borrowings
On January 17, 1995 Lason and First Union National Bank of North Carolina (the "Bank") entered into a Credit Agreement, pursuant to which the Bank provided for an aggregate of $15 million of term loans payable in 26 quarterly installments ending June 30, 2001 and a $10 million revolving credit facility, subject to a borrowing base limitation, expiring on June 30, 2001. In July 1996, the Credit Agreement was amended to include an additional $10 million acquisition credit facility, expiring on the earlier of June 30, 2001 or an initial public offering by the Company. In addition, in August 1996, the Credit Agreement was amended to provide for up to an additional $8.5 million of interim term loans, payable upon the earlier of March 31, 1997 or an initial public offering by the Company. Approximately $8.2 million was borrowed under the interim term loan facility in connection with the acquisition of NRC. In August 1996, the Credit Agreement was further amended increasing the then existing $10 million revolving credit facility to $13 million. As of December 31, 1996, there was approximately $4.1 million outstanding under the Credit Agreement.
On February 20, 1997, the Credit Agreement was amended and restated to provide revolving credit loans in the initial amount of $40 million , which may be increased to $60 million at Lason's request , and after payment of a commitment fee and Bank review and approval. The increased borrowing capacity will be used to finance additional acquisitions of businesses, working capital, capital expenditures and for other corporate purposes. Borrowings, if any, under the Credit Agreement will be collateralized by substantially all of Lason's assets. Lason will not be required to make principal payments prior to 2001, the term of the loan. Interest on amounts outstanding will be calculated based on interest rates determined at the time of borrowing. Borrowings will bear interest at rates ranging from a base percentage rate plus a maximum of 1.25% ( a weighted average rate of 9.50% as of March 19, 1997) to LIBOR plus a maximum of 2.25% ( a weighted average rate of 7.75% as of March 19, 1997), depending on the Company's leverage ratio. The Credit Agreement contains restrictions on the acquisition of stock or assets, disposal of assets, incurrence of other liabilities, minimum requirements for cash flow and certain financial ratios.
In January 1997, Lason borrowed approximately $9.6 million under the Credit Agreement to fund the acquisitions of Churchill and Alpha, and in March Lason borrowed an additional $7.9 million to fund the acquisitions of AEI and Premier. The Company expects that amounts available under the Credit Agreement will be used in the future to continue its acquisition program. The Company also expects to use shares of its common stock in the future to continue its acquisition program. Accordingly, the Company may register additional shares of common stock in 1997 for use as consideration in acquisitions.
Recent Acquisitions
The Company's liquidity and capital resources have been significantly affected by acquisitions of businesses and, given the Company's acquisition strategy, may be significantly affected for the foreseeable future. To date, the Company has financed its acquisitions with borrowings under the Credit Agreement, with shares of its common stock and with cash from operations. Borrowings for acquisitions for the years ended December 31, 1996 and 1995 totaled approximately $17.1 million and $1.4 million, respectively.
Future Capital Needs
The Company's ability to obtain cash adequate to fund its needs depends generally on the results of its operations and the availability of financing. Management believes that cash flow from operations, in conjunction with borrowings from its existing and any future credit agreements and possible issuance of shares of its common stock, will be sufficient to meet debt service requirements, make possible future acquisitions and fund capital expenditures in the future. However, there can be no assurance in this regard or that the terms available for any future financing, if required, would be favorable to the Company.
Inflation
Certain of the Company's expenses, such as wages and benefits, occupancy costs, and equipment repair and replacement, are subject to normal inflation. Supplies, such as paper and related products, can be subject to significant price fluctuations. Although the Company to date has been able to substantially offset any such cost increases through increased operating efficiencies, there can be no assurance that the Company will be able to offset any future cost increases through similar efficiencies or increased charges for its products and services.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplemental finanical information included in this report are set forth on the Index to Financial Statements and Financial Statement Schedules shown on page 13 of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
A. DIRECTORS
Reported under the caption "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1997 Proxy Statement, herein incorporated by reference.
b. EXECUTIVE OFFICERS
Reported in Part I pursuant to General Instruction G to Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reported under the caption "Executive Compensation" in the Company's 1997 Proxy Statement, herein incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reported under the captions "Record Date and Outstanding Shares" and "Security Ownership of Management" in the Company's 1997 Proxy Statement, herein incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reported under the caption "Certain Transactions With Management" in the Company's 1997 Proxy Statement, herein incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. (1) FINANCIAL STATEMENTS
The Financial statements applicable to the Company and its consolidated affiliates filed with this report are set forth on the Index to Financial Statements and Financial Statement Schedules of this report.
(2) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and report of independent accountants have been filed as part of this Annual Report on Form 10-K as indicated in the Index to Financial Statements and Financial Statement Schedules of this report.
(3) EXHIBITS
The exhibits filed with this report are listed on the Exhibit Index on page E-1.
B. REPORTS ON FORM 8-K
None.
EXHBIT INDEX
E-1
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- --------------------- * filed herewith
(1) Incorporated herein by reference to registrant's Form S-1 dated October 7, 1996, Commission File No. 333-09799.
(2) Incorporated herein by reference to registrant's Form 8-K filed on February 18, 1997, Commission File No. 0-21407.
(3) Incorporated herein by reference to registrant's Form S-8 filed with the Commission on December 23, 1996, Commission File No. 333-18551.
E-1
Lason, Inc. Index To Financial Statements and Financial Statement Schedules
FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated statements of income for each of the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity for each of the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for each of the years ended December 31, 1996, 1995 and 1994 Notes to consolidated financial statements to
OTHER FINANCIAL INFORMATION: Reports of independent accountants to
FINANCIAL STATEMENT SCHEDULES: 1. Condensed financial information of registrant S-1 to S-3
All other schedules are omitted as not applicable or the information required is included in the consolidated financial statements or notes thereto.
Lason, Inc. Consolidated Balance Sheets (In thousands, except for shares)
The accompanying Notes are an integral part of the consolidated financial statements.
Lason, Inc. Consolidated Statements of Income (In thousands, except for per share amounts)
The accompanying Notes are an integral part of the consolidated financial statements.
Lason, Inc. Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1996, 1995 and 1994
The accompanying Notes are an integral part of the consolidated financial statements
Lason, Inc. Consolidated Statements of Cash Flows (In thousands)
The accompanying Notes are an integral part of the consolidated financial statements.
LASON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND CAPITALIZATION
Lason, Inc. (formerly Lason Holdings, Inc. the "Company"), a Delaware corporation, was incorporated on January 5, 1995. The Company's equity was comprised of $10 million of Class B common stock and approximately $1 million of Class A-1 common stock. The Company contributed the funds to Lason Acquisition Corporation, a non-operating subsidiary. On January 17, 1995 the cash, in addition to $21 million of bank borrowings, was used to acquire the assets and assume certain liabilities of Lason Systems, Inc. ("Predecessor") and provide working capital. Subsequent to the acquisition, Lason Acquisition Corporation changed its name to Lason Systems, Inc. ("Lason") and continued the business operations of the Predecessor. Prior to the acquisition, three shareholders owned 93.8 percent of the common stock of the Predecessor. As part of the acquisition, the same three shareholders ("continuing shareholders") collectively acquired 93.8 percent of the Class A-1 common stock which represented a 46.9 percent aggregate interest of all outstanding classes of common stock in Lason at the time.
The acquisition was accounted for as a purchase and, accordingly, at such date the Company recorded the assets and liabilities assumed at their estimated fair values. The excess of the purchase price over the fair value of net assets acquired totaling $16.8 million was allocated to goodwill and is being amortized over 30 years.
Pursuant to the consensus of the Emerging Issues Task Force Issue Number 88-16, "Basis in Leveraged Buyout Transactions," goodwill was reduced by approximately $8.6 million representing the continuing shareholders' residual interest in the Company with a corresponding charge against shareholders' equity. The reduction in stockholders' equity represents a temporary difference between the tax basis and assigned book value of goodwill that will result in future tax deductions. A deferred Federal income tax asset was recorded and was credited to stockholders equity (see Note 7).
The aggregate purchase price and its allocation to the historical assets and liabilities of the Company as of January 17, 1995 were as follows:
Cost to acquire net assets of the Predecessor $31,445 Adjustment to value continuing shareholders' interest at predecessor basis (8,652) ------ $22,79 ====== Allocation of purchase price: Net assets acquired $5,96 Goodwill 16,82 ------ Total purchase price allocated $22,79 ======
2. OPERATIONS AND CUSTOMER CONCENTRATION
The Company provides integrated outsourcing services for document management, records management and business communications. These services include high-volume optical and digital printing, facility management operations at customer sites, converting inputs into digital formats and direct mailing, among others. The Company primarily serves customers in the automotive, financial services, healthcare and professional services industries.
Transactions with various divisions of one domestic automotive manufacturer accounted for approximately 32 percent, 49 percent and 55 percent of the Company's consolidated net revenues for the years ended December 31, 1996, 1995 and 1994, respectively. Receivables from that customer were approximately $7.2 million, and $3.4 million as of December 31, 1996 and 1995, respectively. Transactions with various divisions of another domestic automotive manufacturer totaled approximately 19 percent, 12 percent and 12 percent of the Company's consolidated net revenues for the years ended December 31, 1996, 1995 and 1994, respectively. In addition, the Company had receivables outstanding from this second customer of approximately $3.8 million and $1.7 million as of December 31, 1996 and 1995, respectively. The Company also had various transactions with a third domestic automotive manufacturer which were not a significant percentage of total consolidated net revenues for each of the three years ended December 31, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Certain amounts in the prior year consolidated financial statements have been reclassified to conform with the current year presentation.
Revenue Recognition
Revenues are recorded when the services are rendered. Revenues are presented in the consolidated statements of income net of postage because the cost of postage is passed through to the customer.
Supplies
Supplies are valued at cost, which approximates market, with cost determined using the first-in, first-out method.
Property and Equipment
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of", was issued in March, 1995 and was effective for fiscal years beginning after December 15, 1995. That statement established standards for measuring impairment losses of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and those to be disposed of. The adoption of SFAS No. 121 had no impact on the Company's financial condition, results of operations or cash flow for the year ended December 31, 1996.
Property and equipment, including significant improvements, are recorded at cost. Expenditures for normal repairs and maintenance are charged to operations as incurred. Adjustments of the asset and related accumulated depreciation accounts are made for retirements of property and equipment with the resulting gain or loss included in operations.
Assets placed in service prior to January 1, 1996, are depreciated using an accelerated method over the estimated useful lives of the assets which range from 5 to 7 years. Assets placed in service after December 31, 1995, are depreciated using a straight-line method over the estimated lives of the related assets which range from 5 to 15 years. The change in depreciation methods did not have a material impact on the Company's results of operations, financial condition or cash flow for the year ended December 31, 1996.
Intangible Assets
Goodwill is amortized using a straight-line method over 30 years. Other intangible assets generally consist of covenants-not-to-compete and deferred financing costs. Covenants-not-to-compete are being amortized using a straight-line method over the term of the agreement, generally 4 years. Deferred financing costs are amortized using the interest method over the term of the associated credit agreement.
Annually, the Company evaluates the carrying value of goodwill to determine if there has been any impairment in value. The methodology used for this evaluation includes a review of annual operating performance along with anticipated results for future years. The Company determined that there had been no impairment in the net carrying amount of goodwill as of December 31, 1996.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosures about the fair value of financial instruments whether or not such instruments are recognized in the balance sheet. Due to the short-term nature of the Company's financial instruments, other than debt, fair values are not materially different from their carrying values. Based on the borrowing rates available to the Company, the carrying value of debt approximated fair value as of December 31, 1996 and 1995.
Earnings Per Share
For purposes of computing earnings per share, common stock equivalents include outstanding stock options. Earnings per share are based on the weighted average number of common shares and common share equivalents outstanding, retroactively adjusted for the effect of a 2.5 for 1 common stock split effective October 15, 1996 (see Note 5).
The weighted average common shares and common share equivalents outstanding include as outstanding to the date of redemption (October 15, 1996), 692,047 shares of common stock which would have been sold at the initial offering price of $17.00 per share to fund the redemption of such common stock owned by the former Class B shareholders.
The weighted average common shares and common share equivalents outstanding were 6,764,249 and 6,192,292 for the years ended December 31, 1996 and 1995, respectively.
Earnings per share are not presented for the Predecessor for the year ended December 31, 1994 as such information is not representative of the capital structure of the Company.
4. ACQUISITIONS
From June 1995 through December 31, 1996, Lason completed the acquisition of either substantially all of the assets or a controlling stock ownership interest in eight companies. The stock acquisitions included acquiring 65% of the outstanding common stock of Delaware Legal Copy, Inc. in April 1996, 100% of the outstanding common stock of Information & Image Technology of America, Inc. and Great Lakes Micrographics Corporation in July 1996, 80% of the outstanding common stock of Micro-Pro, Inc. and MP Services, Inc. (two affiliated companies, "Micro-Pro") in July 1996, and 100% of the outstanding common stock of National Reproductions Corp. ("NRC") in August 1996. Each of the acquisitions was accounted for as a purchase. Accordingly, the results of operations of the acquired companies are included in the consolidated results of operations from the respective date of acquisition.
The selling shareholders of Micro-Pro have retained 20% of the capital stock of Micro-Pro. Under certain conditions, the Company may purchase the remaining 20%, or the selling shareholders may compel the Company to purchase the remaining 20% of the capital stock of Micro-Pro at a future date. The Company's call option will expire in January, 1998 and the selling shareholders put option will expire in January, 1999. The acquisition of the remaining 20% of Micro-Pro, either through the Company's call option or the selling shareholders put option, will be accounted for as the acquisition of a minority interest using the purchase method of accounting on the date the shares are acquired.
The selling shareholders of Delaware Legal Copy, Inc. ("Delaware") have retained 35% of the capital stock of Delaware. Under certain conditions, the Company may purchase the remaining 35%, or the selling shareholders may compel the Company to purchase the remaining 35% of the capital stock of Delaware at a future date. The Company's call option will expire in September, 1997 and the selling shareholders put option will expire in September, 1998. The acquisition of the remaining 35% of Delaware, either through the Company's call option or the selling shareholders put option, will be accounted for as the acquisition of a minority interest using the purchase method of accounting on the date the shares are acquired.
The purchase price for the acquisition of Information and Image Technology of America, Inc. ("IITA") may be adjusted based on IITA's financial performance for the period March 1, 1996 through February 28, 1997. If IITA's financial performance exceeds a specified target, the purchase price will be increased by a percentage equal to the percentage by which IITA's actual performance exceeded the target, but not more than $945,000. If the financial performance is below the target, the purchase price will be decreased by a percentage equal to the percentage by which IITA's actual performance was below the target, but not more than $472,000. The purchase price contingency will be recorded as an adjustment to the purchase price when the contingency is resolved. A portion of the consideration paid to the selling shareholders for the capital stock of IITA was 74,114 shares of the Company's common stock valued at $1,259,938.
A portion of the consideration paid to the two selling shareholders for the capital stock of Great Lakes Micrographics Corporation ("Great Lakes") was 62,352 shares of the Company's common stock valued at $1,060,000. Each of the selling shareholders have the right, until January 17, 1999, to require the Company to purchase all of the stock issued in connection with the acquisition for up to $1,060,000 ($17.00 per share). The resulting put option has been recorded as common stock issued with a put option and is not included in stockholders' equity in the consolidated balance sheet as of December 31, 1996.
In connection with acquisition of NRC, the Company issued a $400,000 promissory note as partial consideration for the capital stock acquired. The note was convertible, at any time up to October 1, 1997, into 23,529 shares of the Company's common stock. The holder of the note converted it in February, 1997.
The aggregate purchase price for the acquisitions completed for the year ended December 31, 1996, excluding liabilities assumed, was approximately $19.9 million. The purchase price was allocated to the assets acquired and liabilities assumed based on the related fair values at the date of acquisition. The excess of the aggregate purchase price over the fair values of assets acquired and liabilities assumed has been allocated to goodwill and is being amortized on a straight-line method over 30 years.
In conjunction with these acquisitions, liabilities assumed and other non-cash consideration was as follows (in thousands):
Fair value of assets acquired $ 6,213 Goodwill 19,980 Covenant not-to-compete 200 Cash paid in consideration for companies acquired (17,137) Stock issued in consideration for companies acquired (2,320) Promissory note issued in consideration for company acquired (400) ------- Liabilities assumed $ 6,536 =======
The following table summarizes pro forma unaudited results of operations as if each of the acquisitions completed during 1996 had occurred at the beginning of each period presented (in thousands):
Year Ended December 31, ------------------------- 1996 1995 --------- -------- (unaudited)
Revenues $84,525 $75,052
Income before income taxes 6,667 3,841 Net income 4,156 2,408
Earnings per share $0.61 $0.39
5. STOCKHOLDERS' EQUITY
In the fourth quarter of 1996, the Company completed an initial public offering ("IPO") of 3,450,000 shares of common stock , including the underwriter's over-allotment option, at $17.00 per share for net proceeds to the Company of approximately $53.0 million, after deducting underwriting discounts and other offering expenses. Approximately $41.2 million of the net proceeds was used to repay outstanding debt under the Company's credit agreement and approximately $11.8 million was used to redeem 692,047 shares of common stock held by the Company's largest shareholder.
In connection with and immediately prior to the consummation of the IPO, each share of Class A common stock was converted into one share of common stock , each share of Class B common stock was converted into approximately 1.3 shares of common stock, and the Company's Board of Directors approved a 2.5 for 1 common stock split. The Company's 1995 consolidated financial statements have been restated for this recapitalization. The authorized capital stock of the Company now consists of 20,000, 000 shares of common stock, par value $.01 per share and 5,000,000 shares of preferred stock, par value $0.01 per share.
In connection with the acquisition described above, Lason entered into a Credit Agreement dated January 17, 1995 with certain shareholders who were also shareholders in the Predecessor, pursuant to which Lason loaned the shareholders $1.3 million which was used to pay their tax liability resulting from the sale of the assets of the Predecessor. In conjunction with the completion of the IPO in 1996, 50 percent of the then outstanding amounts of the shareholder loans were forgiven by the Company and charged to retained earnings. At the same time, the remaining 50 percent of shareholder loans outstanding were repaid to the Company, along with the related accrued interest to the date of settlement.
6. LONG-TERM DEBT
On January 17, 1995, Lason entered into a credit agreement with a bank which included a $10 million revolving line of credit and a $15 million term loan. Interest on amounts outstanding under the agreement is calculated using rates determined at the time of borrowing. The Company chooses the applicable interest rate on each borrowing. Borrowings on the revolving line of credit bear interest at either the bank's prime rate plus .75 percent or LIBOR plus 2.25 percent. Borrowings on the term loan are collateralized by substantially all of Lason's assets and bear interest at either the bank's prime rate plus 1.0 percent or LIBOR plus 2.50 percent. Interest payment due dates vary depending on the rate chosen. Revolving credit availability is based on 85 percent of eligible accounts receivable.
In July 1996, the credit agreement was amended to include an additional $10 million acquisition credit facility, expiring on the earlier of June 30, 2001 or an initial public offering by the Company. In addition, in August 1996, Lason amended the credit agreement to provide for up to an additional $8.5 million of interim loans, payable upon the earlier of March 31, 1997 or an initial public offering by the Company. In August 1996, Lason also amended the credit agreement to increase the existing $10 million revolving credit facility to $13 million.
Long-term debt outstanding consisted of the following (in thousands):
December 31, ------------------ 1996 1995 ------ ------- Revolving line of credit due 2001 $4,101 $ 7,277 Term bank loan due 2001 - 13,500 Less: current portion - (2,000)
------ ------- Total long-term debt $4,101 $18,777 ====== =======
The loan agreement contains covenants which, among other things, restricts the acquisition and disposal of assets, payment of dividends and incurrence of liabilities and sets minimum requirements for free cash flow and certain financial ratios. As of December 31, 1996, the loan agreement prohibits Lason from advancing funds or paying dividends to the Company.
As of December 31, 1996, Lason was in violation of miscellaneous non-financial covenants. On February 27, 1997, Lason obtained waivers of such covenant violations.
On February 20, 1997, Lason's Credit Agreement was amended and restated to provide revolving credit loans in the initial amount of $40 million , which may be increased to $60 million at Lason's request , and after payment of a commitment fee and Bank review and approval. The increased borrowing capacity will be used to finance additional acquisitions of businesses, working capital, capital expenditures and for other corporate purposes. Borrowings, if any, under the Credit Agreement will be collaeralized by substantially all of Lason's assets. Lason will not be required to make principal payments prior to 2001, the term of the loan. Interest on amounts outstanding will be calculated based on interest rates determined at the time of borrowing. Borrowings will bear interest at rates ranging from a base percentage rate plus a maximum of 1.25% to LIBOR plus a maximum of 2.25%, depending on the Company's leverage ratio. The Credit Agreement contains restrictions on the acquisition of stock or assets, disposal of assets, incurrence of other liabilities, minimum requirements for cash flow and certain financial ratios.
7. INCOME TAXES
The Company and its qualifying subsidiaries file a consolidated Federal income tax return. The Federal income tax provision is computed on the consolidated taxable income of the Company and those subsidiaries.
The components of the income tax provision are as follows (in thousands):
Year Ended December 31, --------------------------- 1996 1995 ------- ------
Current provision $ 984 $ 358 Deferred provision 1,119 781 ------- ------ Total income tax provision $2,103 $1,139 ======= ======
Deferred income taxes represent the net tax effects of temporary differences between the carrying value amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax return purposes. Significant components of the Company's deferred Federal income tax assets and liabilities are as follows (in thousands):
December 31, ------------------- 1996 1995 ------ ------ Deferred tax assets related to:
Goodwill $2,624 $2,745 Depreciation 63 146 Compensatory stock option expense 435 111 Allowance for doubtful accounts 54 27 Covenant-not-to-compete amortization 30 9 ------ ------ Total deferred tax assets $3,206 $3,038 ====== ======
Deferred tax liabilities related to: $ 795 $ 423 Supplies 787 259 Prepaid expenses 486 194 Goodwill 96 - Other ------ ------ $2,164 $ 876 Total deferred tax liabilities ====== ======
The difference between the Company's statutory Federal income tax rate and its effective Federal income tax rate of 35.6 percent and 36.1 percent for the years ended December 31, 1996 and 1995, respectively, results primarily from travel and entertainment expenses and certain goodwill amortization that is not deductible for Federal income tax purposes.
The Predecessor elected to be taxed as an S-Corporation and, as such, did not pay corporate income tax. Therefore, no Federal income tax has been recorded in the consolidated statement of income for the year ended December 31, 1994.
8. STOCK OPTION PLAN
SFAS No. 123 "Accounting for Stock Based Compensation" was issued in October 1995 and was effective for fiscal years beginning after December 15, 1995. That standard requires significantly more disclosure regarding employee stock options and encourages companies to recognize compensation expense for stock-based awards based on the fair value of such awards on the date of grant. Alternatively, companies may continue to account for such transactions under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", provided that disclosures are made regarding the net income and earnings per share impact as if the value recognition and measurement criteria of SFAS No. 123 had been adopted. The Company has elected to continue to account for employee stock options under APB No. 25.
The Company's 1995 stock option plan was adopted by the Board of Directors and approved by the Company's shareholders in January 1995. A committee composed of non-employee members of the Board of Directors selects certain key employees to be participants in the Plan. Under the Plan, the Company may grant up to 1,000,000 shares of common stock.
For certain options granted during 1996 and 1995, the exercise price was less than the fair value of the Company's stock on the date of grant and, accordingly, compensation expense is recognized over the vesting period for such difference. For certain other options granted in 1996, the exercise price equaled the market price on the date of grant and, therefore, no compensation expenses was recognized. Options generally vest over a period which ranges from 3 to 5 years from the date of grant and each option's maximum term is generally 7 years from the grant date.
The provisions of certain stock option agreements provided for immediate vesting of those options on the effective date of the IPO. Accordingly, the Company recorded a non-cash expense of $653,000 during the fourth quarter of 1996 to record the compensation associated with the immediate vesting of those stock options. Total compensation expense recorded for the years ended December 31, 1996 and 1995 was approximately $936,000 and $308,000, respectively.
Had compensation expense for the Company's stock option plan been determined based on the fair value at the grant dates for awards, consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts as follows (in thousands):
-------------------------- 1996 1995 ------------ ------------
Net income As reported $3,731 $2,014 Pro forma 3,582 1,957
Earnings per share As reported $ 0.55 $ 0.33 Pro forma 0.53 0.32
For purposes of computing the pro forma amounts above, the fair value of each option granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 0.0 percent in both years; expected volatility of 74 percent in both years; risk free interest rates of 5.98 percent and 6.39; and expected lives of 4.02 years and 2.43 years.
A summary of the status of the Company's stock option plan is as follows for each of the years ended December 31:
The following table summarizes information about stock options outstanding as of December 31, 1996:
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan and trust (the "Plan"). Each employee who is 21 years of age or older who has worked for the Company for twelve months and performed 1,000 hours of service or, has an adjusted service date with the equivalent or greater term of service, is eligible to participate in the Plan. Eligible participants may contribute not less than 2 percent and up to 15 percent of their pretax compensation to the Plan. The Plan is contributory and the Company at its discretion, can match up to 33 percent of eligible participant contributions not to exceed 9 percent of the participant's earnings. The Company's match contribution for the years ended December 31, 1996, 1995 and 1994 totaled approximately $201,000, $172,000 and $156,000, respectively.
10. LEASE COMMITMENTS
The Company has various operating lease agreements related primarily to equipment and buildings. As of December 31, 1996, future minimum rental payments required under noncancelable operating leases with initial or remaining lease terms in excess of one year are as follows (in thousands):
1997 $ 2,877 1998 2,797 2000 1,974 2001 1,422 ------- Total $11,687 =======
In addition, the Company has a number of equipment leases that are on a month-to-month basis.
Total rent expense for the years ended December 31, 1996, 1995 and 1994 was approximately $6.4 million, $5.2 million and $4.5 million, respectively.
11. RELATED PARTY TRANSACTIONS
The Company purchases printing services from a company owned by the wife of the former president and one of the principal shareholders of the Company. For the years ended December 31, 1996, 1995 and 1994, the Company paid approximately $1.4 million, $981,000 and $726,000, respectively, for such printing services. As of December 31, 1996 and 1995, $114,389 and $204,000 was due to that company, respectively, for printing services, and is included in accounts payable in the consolidated balance sheet.
The Company leases property and a building from a general partnership in which the Company's Chairman is the managing partner. Another principal shareholder of the Company owns 33.33 percent of such partnership and is one of its partners. For each of the three years ended December 31, 1996, the Company paid $191,100 in rent to that partnership.
The Company leases certain equipment from a company in which the Company's Chairman is a 50 percent owner and its president. For the years ended December 31, 1996, 1995 and 1994, the Company paid $184,390, $57,100 and $30,100, respectively, in rent for such operating leases.
The Company contracts temporary employment services from a company which is owned by the wife of a senior member of management. The Company paid $735,670 and $2,905 for the years ended December 31, 1996 and 1995, respectively, for such services. No amounts were paid to such company for the year ended December 31, 1994.
The Company believes that all the above transactions were on terms that were reasonable and competitive. Additional transactions of the nature described may take place in the ordinary course of business in the future.
12. COMMITMENTS AND CONTINGENCIES
Various claims have been made against the Company in the normal course of business. Management believes that none of these legal proceedings will have a material adverse effect on the Company's business, financial condition or results of operations.
13. SUBSEQUENT EVENTS
In January, 1997, Lason acquired 100 percent of the outstanding common stock of Churchill Communications Corporation and 100 percent of the outstanding common stock of Alpha Imaging, Inc. and Alpha Micro Graphics Supply, Inc. (affiliated companies). In March, 1997, Lason acquired 100 percent of the outstanding common stock of Automated Enterprises Inc. and 100 percent of the outstanding common stock of Premier Copy Group, Inc. The aggregate purchase price excluding liabilities assumed, was approximately $19.9 million of which approximately $17.5 million was funded by bank borrowings and approximately $2.4 million through the issuance of shares of the Company's common stock.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lason, Inc.
We have audited the accompanying consolidated balanced sheets of Lason, Inc. (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1996. We have also audited the accompanying statements of income, stockholders' equity and cash flows of Lason Systems, Inc. (the "Predecessor") for the year ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lason, Inc. as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Detroit, Michigan March 26, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Lason, Inc. is included on page of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule included on pages S-1 through S-3 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Detroit, Michigan March 26, 1997
SCHEDULE I
Lason, Inc. Condensed Financial Information of Registrant Balance Sheets (In thousands)
S-1
SCHEDULE I Lason, Inc. Condensed Financial Information of Registrant Income Statements (In thousands)
S-2
SCHEDULE I
Lason, Inc. Condensed Financial Information of Registrant Statements of Cash Flows (In Thousands)
S-3
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Lason, Inc.
By: William J. Rauwerdink ----------------------------- William J. Rauwerdink Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and the dates indicated:
EXHIBIT INDEX