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UNITED STATES
FORM 10-Q
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2000
[ ] | 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.
DELAWARE (State or other jurisdiction of incorporation or organization) |
38-3214743 (I.R.S. Employer identification number) |
1305 Stephenson Highway
Telephone: (248) 597-5800
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 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 [ ]
As of May 11, 2000, 19,480,058 shares of Common Stock, $.01 par value were outstanding.
Page No. | ||||||
Part I. | Financial Information | |||||
Item 1. Financial Statements | ||||||
Condensed Consolidated Balance Sheets as of March 31, 2000 (Unaudited) and December 31, 1999 | 2 | |||||
Condensed Consolidated Statements of Operations and Comprehensive Income, Three Months Ended March 31, 2000 and 1999, (Unaudited) | 3 | |||||
Condensed Consolidated Statements of Cash Flows, Three Months Ended March 31, 2000 and 1999, (Unaudited) | 4 | |||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 5 | |||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations | 10 | |||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 13 | |||||
Part II. | Other Information | |||||
Item 1. Legal Proceedings | 14 | |||||
Item 2. Changes in Securities and Use of Proceeds | 14 | |||||
Item 3. Defaults upon Senior Securities | 14 | |||||
Item 5. Other Information | 14 | |||||
Item 6. Exhibits and Reports on Form 8-K | 15 | |||||
Signatures | 17 |
1
LASON, INC.
March 31, | December 31, | ||||||||
2000 | 1999 | ||||||||
(Unaudited) | |||||||||
ASSETS | |||||||||
Cash and cash equivalents | $ | 7,172 | $ | 9,753 | |||||
Accounts receivable (net) | 119,525 | 117,760 | |||||||
Supplies | 13,216 | 13,181 | |||||||
Deferred income taxes | 5,726 | 5,861 | |||||||
Net assets of discontinued operations | 18,682 | 18,682 | |||||||
Prepaid expenses and other | 29,409 | 27,541 | |||||||
Total current assets | 193,730 | 192,778 | |||||||
Property and equipment (net) | 108,914 | 106,102 | |||||||
Intangible assets (net) | 556,207 | 529,146 | |||||||
Employee loans receivable | 3,168 | 3,168 | |||||||
Deferred income taxes | 1,534 | 207 | |||||||
Other | 4,704 | 5,031 | |||||||
Total assets | $ | 868,257 | $ | 836,432 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY | |||||||||
Accrued expenses | $ | 35,399 | $ | 47,575 | |||||
Accounts payable | 29,892 | 27,816 | |||||||
Notes payable | 281 | 294 | |||||||
Acquisition-related obligations | 15,202 | 16,580 | |||||||
Accrued restructuring expenses | 12,174 | 13,310 | |||||||
Customer deposits | 6,672 | 6,079 | |||||||
Revolving credit line borrowings | 170,000 | | |||||||
Term loan | 150,000 | | |||||||
Current portion of term loan | | 11,250 | |||||||
Other | 13,404 | 9,013 | |||||||
Total current liabilities | 433,024 | 131,917 | |||||||
Revolving credit line borrowings | | 134,000 | |||||||
Term loan | | 138,750 | |||||||
Deferred income taxes | 3,574 | 1,299 | |||||||
Convertible debentures | 3,034 | 3,034 | |||||||
Other | 6,464 | 7,910 | |||||||
Total liabilities | 446,096 | 416,910 | |||||||
STOCKHOLDERS EQUITY | |||||||||
Common stock, $.01 par value; 100,000,000 shares authorized, 19,316,614 and 18,986,910 shares issued and outstanding, 569,330 and 698,712 shares held in escrow | 186 | 182 | |||||||
Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued and outstanding | | | |||||||
Additional paid-in capital | 431,703 | 421,544 | |||||||
Retained deficit | (9,831 | ) | (3,977 | ) | |||||
Treasury stock (at cost) | (5,541 | ) | (5,541 | ) | |||||
Accumulated other comprehensive income | 5,644 | 7,314 | |||||||
Total stockholders equity | 422,161 | 419,522 | |||||||
Total liabilities and stockholders equity | $ | 868,257 | $ | 836,432 | |||||
The accompanying Notes are an integral part of the condensed consolidated financial statements.
2
LASON, INC.
Three Months Ended | |||||||||
March 31, | |||||||||
2000 | 1999 | ||||||||
Revenues, net of postage | $ | 140,443 | $ | 98,458 | |||||
Cost of revenues | 101,050 | 63,700 | |||||||
Gross profit | 39,393 | 34,758 | |||||||
Selling, general and administrative expenses | 34,312 | 19,945 | |||||||
Compensatory stock option expense | | 72 | |||||||
Amortization of intangibles | 5,419 | 2,377 | |||||||
Income (loss) from operations | (338 | ) | 12,364 | ||||||
Net interest expense | 5,481 | 1,531 | |||||||
Income (loss) from continuing operations before income taxes | (5,819 | ) | 10,833 | ||||||
Provision (benefit) for income taxes | (1,063 | ) | 4,349 | ||||||
Net income (loss) from continuing operations | (4,756 | ) | 6,484 | ||||||
Income (loss) from discontinued operations, net of tax | (1,098 | ) | 304 | ||||||
Net income (loss) | (5,854 | ) | 6,788 | ||||||
Other comprehensive income: | |||||||||
Foreign currency translation adjustments | (1,670 | ) | | ||||||
Comprehensive income | $ | (7,524 | ) | $ | 6,788 | ||||
Basic earnings per share: | |||||||||
Net income (loss) from continuing operations | $ | (0.26 | ) | $ | 0.44 | ||||
Net income (loss) from discontinued operations | (0.06 | ) | 0.02 | ||||||
Net income (loss) | $ | (0.32 | ) | $ | 0.46 | ||||
Diluted earnings per share: | |||||||||
Net income (loss) from continuing operations | $ | (0.26 | ) | $ | 0.41 | ||||
Net income (loss) from discontinued operations | (0.06 | ) | 0.02 | ||||||
Net income (loss) | $ | (0.32 | ) | $ | 0.43 | ||||
The accompanying Notes are an integral part of the condensed consolidated financial statements.
3
LASON, INC.
Three Months Ended | |||||||||
March 31, | |||||||||
2000 | 1999 | ||||||||
Cash Flows Provided By Operating Activities | $ | 4,249 | $ | 3,395 | |||||
Cash Flows From Investing Activities: | |||||||||
Payments for the acquisition of businesses | (31,244 | ) | (54,368 | ) | |||||
Additions to fixed assets and software development costs | (9,443 | ) | (7,066 | ) | |||||
Other, net | (636 | ) | | ||||||
Net cash used in investing activities | (41,323 | ) | (61,434 | ) | |||||
Cash Flows From Financing Activities: | |||||||||
Borrowings on revolving line of credit | 98,350 | 109,400 | |||||||
Repayments on revolving line of credit | (62,350 | ) | (31,400 | ) | |||||
Repayment of notes payable | | (18,640 | ) | ||||||
Repayment on capital lease liabilities and other debt | (1,454 | ) | (800 | ) | |||||
Proceeds from exercise of employee stock options | | 408 | |||||||
Other, net | (29 | ) | (57 | ) | |||||
Net cash provided by financing activities | 34,517 | 58,911 | |||||||
Effect of foreign exchange rate changes on cash and cash equivalents | (24 | ) | | ||||||
Net (decrease) increase in cash and cash equivalents | (2,581 | ) | 872 | ||||||
Cash and cash equivalents at beginning of period | 9,753 | 1,315 | |||||||
Cash and cash equivalents at end of period | $ | 7,172 | $ | 2,187 | |||||
The accompanying Notes are an integral part of the condensed consolidated financial statements.
4
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Lason, Inc. (together with its subsidiaries, Lason or the Company) have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, such interim financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements.
In the opinion of management, all necessary adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The operating results for the three month period ended March 31, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000.
For further information, refer to the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 31, 2000.
Certain reclassifications have been made to the condensed consolidated financial statements for 1999 to conform to the 2000 presentation.
Note 2. Discontinued Operations
In December 1999, Lason announced its intention to discontinue, by sale or exit from the market, its activities providing traditional litigation support, software development and other services. Those services are no longer consistent with Lasons long-term growth strategy. The businesses to be discontinued consist of nine litigation copy businesses, an offset print business, a digital graphics business and the software development business that was acquired as part of the acquisition of M-R Group plc (M-R) in 1999. The results of operations of these businesses have been classified as discontinued operations in the accompanying condensed consolidated financial statements. Prior period financial statements have been restated accordingly.
Following is summary financial information for the Companys discontinued operations (in thousands):
Three Months Ended | |||||||||
March 31, | |||||||||
2000 | 1999 | ||||||||
Revenues, net | $ | 6,918 | $ | 7,704 | |||||
Cost of revenues | 5,559 | 4,578 | |||||||
Gross profit | 1,359 | 3,126 | |||||||
Selling, general and administrative expenses | 2,213 | 1,906 | |||||||
Amortization of intangibles | | 182 | |||||||
Income (loss) from operations | (854 | ) | 1,038 | ||||||
Net interest expense | 894 | 600 | |||||||
Income (loss) from discontinued operations before income taxes |
(1,748 | ) | 438 | ||||||
Provision (benefit) for income taxes | (650 | ) | 134 | ||||||
Net income (loss) from discontinued operations | $ | (1,098 | ) | $ | 304 | ||||
Net loss from discontinued operations includes interest costs totaling $894,000 and $600,000 for the three months ended March 31, 2000 and 1999, respectively, which was allocated based on the ratio of net assets to be discontinued to total consolidated net assets. The net assets of the discontinued businesses primarily consist of accounts receivable and goodwill, and have been segregated as net assets of discontinued operations, net of
5
Note 3. Restructuring
In the fourth quarter of 1999, management completed a thorough review of its operations and approved a restructuring plan to make the Company more efficient and to lower overall costs. These decisions resulted in the Company recording a one-time pre tax charge to operations of $14.9 million in the fourth quarter of 1999. The charge consisted of severance, facility closure and exit costs related primarily to discontinued leases and equipment write downs. The restructuring plan calls for the consolidation of facilities and operations, the closure of facilities, and streamlining of the administrative support functions.
A summary of the restructuring accrual for the three months ended March 31, 2000 follows (in thousands):
Accrual at | 2000 | Accrual at | |||||||||||
Jan. 1, 2000 | Activity | March 31, 2000 | |||||||||||
Severance | $ | 1,623 | $ | (496 | ) | $ | 1,127 | ||||||
Facility closure | 11,651 | (640 | ) | 11,011 | |||||||||
Other | 36 | | 36 | ||||||||||
Accrual | 13,310 | (1,136 | ) | 12,174 | |||||||||
Equipment write down to estimated recovery | 1,433 | (1,306 | ) | 127 | |||||||||
Total | $ | 14,743 | $ | (2,442 | ) | $ | 12,301 | ||||||
Note 4. Acquisitions
From June 1995 through December 31, 1999, the Company, through certain of its subsidiaries, completed the acquisition of either substantially all the assets or all the stock ownership interest in a substantial number of companies. The Company has not completed any acquisitions for the three months ended March 31, 2000.
Certain of the purchase agreements for acquisitions previously completed provide for an increase to the purchase price if operating income of the acquired business exceeds targeted levels. The maximum amount of additional purchase price which may be recorded over the next twenty-four months should such targets be achieved is approximately $188.6 million.
For the three months ended March 31, 2000, the Company has recorded additional purchase price related to previous acquisitions totaling approximately $31.2 million resulting from acquired businesses achieving their targeted operating income. These amounts have been recorded as an adjustment to the purchase price of the related acquisitions and charged to goodwill.
Note 5. Debt
The Company has a credit agreement with a bank group. Borrowings under the credit agreement are expected to be used to finance the additional purchase price for certain acquisitions, working capital, capital expenditures and other corporate purposes. Such borrowings are collateralized by a lien on all property of the Company, guarantees of certain of the Companys subsidiaries as well as pledges of the capital stock of certain subsidiaries. Interest on amounts outstanding is calculated based on interest rates determined at the time of borrowing. Borrowings bear interest at rates ranging from a Eurodollar rate plus a maximum of 2.75% (8.74% as of March 31, 2000) or a base percentage rate plus a maximum of 1.25% (10.25% at March 31, 2000) at the Companys election at the time of borrowing. The credit agreement contains restrictions on acquisitions, disposition of assets, and the incurrence of other liabilities and contains certain financial ratio covenants.
The credit agreement includes a revolving credit facility of $150 million, which the Company may increase up to $250 million subject to certain limitations. A portion of the revolving credit facility of up to
6
The credit agreement also has a term loan facility of $150 million. Quarterly principal payments commence May 2000, with final maturity August 2004, as follows (in thousands):
2000 | $ | 11,250 | ||
2001 | 20,625 | |||
2002 | 35,625 | |||
2003 | 52,500 | |||
2004 | 30,000 | |||
Total | $ | 150,000 | ||
On March 30, 2000, the Company amended its credit agreement with its lenders. The amendment increased the revolving credit facility from $150 million to $175 million, which may be further increased to $185 million.
As of May 15, 2000, the Company is not in compliance with certain covenants in its credit agreement. Under the terms of the credit agreement the lenders can, in addition to any other remedies available to them, declare all amounts outstanding under the credit agreement to be immediately due and payable and can commence enforcement and collection actions. Accordingly, the Company has classified all of the March 31, 2000 outstanding balance of bank debt as a current liability in the condensed consolidated balance sheet as of March 31, 2000.
The lenders have waived the covenant violations and related defaults through May 31, 2000.
Note 6. Comprehensive Income
The assets and liabilities of foreign subsidiaries are translated into United States dollars using period-end exchange rates, while the income statements are translated using average exchange rates during the periods. Differences arising from the translation of assets and liabilities in comparison with the translation of the previous periods are included as a separate component of stockholders equity. The net accumulated foreign currency translation adjustment is $5,644 at March 31, 2000.
Note 7. Earnings Per Share
The following table presents a reconciliation of the denominator (weighted average common shares outstanding) for the basic and diluted earnings per share calculations for the three months ended March 31, 2000 and 1999 (in thousands):
Three Months | ||||||||
Ended March 31, | ||||||||
2000 | 1999 | |||||||
Weighted average shares outstanding Basic | 18,488 | 14,705 | ||||||
Effect of Dilutive Securities | ||||||||
Contingently issuable shares of common stock | | 766 | ||||||
Potential shares of common stock from debentures and stock options outstanding | | 436 | ||||||
Weighted average shares outstanding Diluted | 18,488 | 15,907 | ||||||
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 Statement of Financial Accounting Standards (SFAS) No. 128. During the three months ended March 31, 2000, the effects of contingently issuable shares of common stock and potential shares of common
7
Note 8. Segment and Related Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information was issued in June 1997 and is effective for financial statements issued after December 15, 1998. The statement requires the Company to report certain information about its operating segments.
The Companys reportable segments consist of groups of business units that are organized geographically. Each of the Companys geographic regions has a separate management team and infrastructure and offers different combinations of the Companys services. Additionally, a group of business units in the United States providing certain data management services are managed as a separate segment with a separate management team, regardless of geographic location.
The Company evaluates the performance of its operating segments based on income before income taxes and net corporate interest expense. Intersegment sales and transfers are not significant.
The following table presents summarized financial information for the Companys reportable segments for the three months ended March 31, 2000 and 1999 (in thousands). The other balances include corporate related items, results of insignificant operations and, as it relates to segment profit (loss), income and expenses not allocated to reportable segments. Total other assets also include the investment in discontinued operations. The international and data management segments were previously included in other but are now shown separately as certain quantitative thresholds under SFAS No. 131 have now been met. The international segment includes the United Kingdom, Canada and Mexico. The prior period has been restated
8
Three Months Ended | ||||||||||
March 31, | ||||||||||
2000 | 1999 | |||||||||
Revenue | ||||||||||
Midwest | $ | 4,403 | $ | 676 | ||||||
Central | 29,976 | 23,532 | ||||||||
Northeast | 19,097 | 18,231 | ||||||||
Southeast | 18,517 | 11,156 | ||||||||
Southwest | 11,244 | 14,651 | ||||||||
West | 22,675 | 14,533 | ||||||||
Data Management | 18,195 | 11,144 | ||||||||
International | 22,305 | 4,785 | ||||||||
Other | (5,969 | ) | (250 | ) | ||||||
Total | $ | 140,443 | $ | 98,458 | ||||||
Segment profit (loss): | ||||||||||
Midwest | $ | 229 | $ | 112 | ||||||
Central | 428 | 1,344 | ||||||||
Northeast | (334 | ) | 2,830 | |||||||
Southeast | 197 | 1,826 | ||||||||
Southwest | 139 | 3,028 | ||||||||
West | 2,630 | 2,331 | ||||||||
Data Management | 502 | 1,873 | ||||||||
International | 1,648 | 875 | ||||||||
Other | (11,258 | ) | (3,386 | ) | ||||||
Total | $ | (5,819 | ) | $ | 10,833 | |||||
Details of other segment profit (loss): | ||||||||||
Net corporate interest expense | $ | (5,338 | ) | $ | (1,165 | ) | ||||
Corporate expenses not allocated to operating segments | (4,738 | ) | (1,885 | ) | ||||||
Amortization of intangibles not allocated to operating segments | (480 | ) | (264 | ) | ||||||
Compensatory stock option expense | | (72 | ) | |||||||
Other | (702 | ) | | |||||||
Total | $ | (11,258 | ) | $ | (3,386 | ) | ||||
9
March 31, 2000 | March 31, 1999 | |||||||||
Total assets: | ||||||||||
Midwest | $ | 15,000 | $ | | ||||||
Central | 107,738 | 70,628 | ||||||||
Northeast | 130,335 | 108,924 | ||||||||
Southeast | 105,271 | 40,697 | ||||||||
Southwest | 66,107 | 52,995 | ||||||||
West | 118,934 | 79,162 | ||||||||
Data Management | 65,902 | 43,373 | ||||||||
International | 177,550 | 26,911 | ||||||||
Other | 81,420 | 72,038 | ||||||||
Total | $ | 868,257 | $ | 494,728 | ||||||
Detail of other total assets: | ||||||||||
Net goodwill not allocated to operating segments | $ | 26,690 | $ | 29,031 | ||||||
Net other intangible assets not allocated to operating segments | 12,466 | 8,094 | ||||||||
Net investment in discontinued operations | 18,682 | 18,682 | ||||||||
Other corporate assets not allocated to operating segments | 23,582 | 16,231 | ||||||||
Total | $ | 81,420 | $ | 72,038 | ||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Lason is a leading provider of information management services. The Companys strategy is to process information in the following ways: (1) to provide integrated solutions that capture information across a variety of formats; (2) to manage information through database development; (3) to manage information through electronic storage and retrieval services; and (4) to disseminate information through hardcopy output, print on demand and electronic formats.
Lasons capability to capture, manage and output information includes both traditional and digital services that support customer migration to new technologies including internal-based applications.
Restructuring
In the fourth quarter of 1999, management completed a thorough review of its operations and approved a restructuring plan to make the company more efficient and to lower overall costs. The restructuring plan calls for the consolidation of facilities and operations, the closure of facilities, and streamlining of the administrative support functions. The Company has retained the Global Corporate Finance Group from Arthur Andersen LLP, to assist with the restructuring efforts and to provide guidance and support on a broad array of financial matters.
Acquisitions
From 1995 through December 31, 1999, the Company has acquired a significant number of businesses. The information management industry is highly fragmented, consisting of a large number of small companies providing limited service offerings. An important element of the Companys growth strategy has been to selectively make acquisitions of companies with complementary technologies or customer bases to consolidate its position as a provider of comprehensive information management services across a broad geographic area. However, as part of the Companys restructuring, management has now shifted its focus away from acquisitions and has accelerated the integration of its businesses to enhance the Companys future profitability. Accordingly, business acquisitions are not expected to be a significant part of the Companys growth and operating strategy going forward. The Company did not complete any acquisitions for the three months ended March 31, 2000.
10
Results of Operations Three Months Ended March 31, 2000 Compared with Three Months Ended March 31, 1999.
Consolidated net revenues increased 43% to $140.4 million for the three months ended March 31, 2000 from $98.5 million in the first quarter of 1999, excluding the results of discontinued operations. Approximately $2.6 million of the increase was due to growth in the Companys existing business, the remaining increase is due to revenue contributed by Companies acquired after March 31, 1999. Revenue from M-R, which was acquired June 30, 1999, accounted for 20% of the total increase in revenue for the three months ended March 31, 2000 as compared to the comparable 1999 period.
Gross profit increased to $39.4 million for the first quarter of 2000 from $34.8 million for the comparable 1999 quarter, however, gross profit as a percentage of net revenues declined to 28% for the three months ended March 31, 2000 from 35% for the comparable period of 1999. The lower gross profit as a percentage of revenue is largely the result of changes in the Companys product mix and start up costs associated with new contracts.
Selling, general and administrative expenses were approximately 24% of net revenues for the quarter ended March 31, 2000, versus 20% in the comparable period of 1999. Selling, general and administrative expenses increased $14.3 million to $34.3 million for the three months ended March 31, 2000 from $20.0 million for the comparable 1999 period. Approximately $7.4 million of the increase is due to selling, general and administrative expenses of companies acquired after March 31, 1999. The remaining increase is primarily due to enhancing the corporate infrastructure and other corporate administration expenses associated with managing a larger consolidated organization.
Amortization of intangibles increased to $5.4 million for the three months ended March 31, 2000 from $2.4 million for the first quarter of 1999 primarily due to an increase in goodwill related to business acquisitions that were completed subsequent to March 31, 1999.
In December 1999, Lason announced its intention to discontinue, by sale or exit from the market, its activities providing traditional litigation support, software development and other services. Those services are no longer consistent with Lasons long-term growth strategy. The businesses to be discontinued consist of nine litigation copy businesses, an offset print business, a digital graphics business and the software development business that was acquired as part of the M-R acquisition in 1999. The results of operations of these businesses have been classified as discontinued operations in the Companys condensed consolidated financial statements. Combined, these businesses had net revenues of approximately $6.9 million for the three months ended March 31, 2000 compared to approximately $7.7 million in 1999. The discontinued operations reported a net loss of approximately $1.1 million for the three months ended March 31, 2000 and net income of $304,000 for the comparable period of 1999. The significant decrease in net income for these businesses in 2000 primarily relates to operating losses sustained by the offset print business and the software company, Memex. The net assets of the discontinued businesses primarily consist of accounts receivable and goodwill, and have been segregated as net assets of discontinued operations, net of allowance for estimated loss on disposal, in the Companys condensed consolidated balance sheets. The Company has engaged brokers and is actively marketing these businesses.
Net interest expense was $5.5 million for the 2000 first quarter compared to $1.5 million in 1999. The increase is primarily due to higher average line of credit balances resulting from borrowings used to fund business acquisitions during 1999 and the effects of higher average interest rates in 2000 compared to 1999.
The majority of the Companys goodwill amortization expense is not deductible for federal income tax purposes. As a result, the Company has recorded an income tax benefit of $1.1 million on a pre tax loss of $5.8 million from continuing operations for the three months ended March 31, 2000.
Liquidity and Capital Resources
The Company has funded its operations and acquisitions through a combination of cash from operations, bank borrowings and the issuance of shares of common stock.
11
Cash provided by operating activities was $4.2 million for the three months ended March 31, 2000 compared to $3.4 million for the comparable 1999 period. The increase in 2000 versus 1999 is primarily due to faster accounts receivable turnover and higher accounts payable balances offset by lower net income before non-cash charges.
Cash used in investing activities totaled $41.3 million for the three months ended March 31, 2000 compared to $61.4 million in 1999. For the three months ended March 31, 2000, approximately $31.2 million was used to fund the additional purchase price resulting from acquired businesses achieving their targeted operating income during the relevant measurement period. In 1999, cash used in investing activities was largely used to fund the acquisition of businesses. Cash used for acquisitions totaled $54.3 million for the three months ended March 31, 1999. Cash used for investments in capital assets totaled $9.4 million in the first quarter of 2000 compared to $7.1 million in the comparable period of 1999.
Cash provided by financing activities was $34.5 million for the three months ended March 31, 2000 compared to $58.9 million for the 1999 comparable period and largely consisted of borrowings on the Companys revolving line of credit.
Credit Agreement Borrowings
The Company has a credit agreement with a bank group. Borrowings under the credit agreement are expected to be used to finance the additional purchase price for certain acquisitions, working capital, capital expenditures and other corporate purposes. Such borrowings are collateralized by a lien on all property of the Company, guarantees of certain of the Companys subsidiaries, as well as pledges of the capital stock of certain subsidiaries. Interest on amounts outstanding is calculated based on interest rates determined at the time of borrowing. Borrowings bear interest at rates ranging from a Eurodollar rate plus a maximum of 2.75% (9.09% as of May 12, 2000) or a base percentage rate plus a maximum of 1.25% (10.25% at May 12, 2000) at the Companys election at the time of borrowing. The credit agreement contains restrictions on acquisitions, disposition of assets, and the incurrence of other liabilities and contains certain financial ratio covenants.
The credit agreement includes a revolving credit facility of $150 million, which the Company may increase up to $250 million subject to certain limitations. A portion of the revolving credit facility of up to $50 million is available to the Company for borrowings in Euro, British pound sterling, Canadian dollar and other freely traded currencies to be agreed upon with the lenders. Lason is not required to make principal payments until final maturity in 2004. As of May 12, 2000, $324.3 million was borrowed under the credit agreement.
On March 30, 2000, the Company amended its credit agreement with its lenders. The amendment increased the revolving credit facility from $150 million to $175 million, which may be further increased to $185 million.
As of May 15, 2000, the Company is not in compliance with certain covenants in its credit agreement. Under the terms of the credit agreement the lenders can, in addition to any other remedies that may be available to them, declare all amounts outstanding under the credit agreement to be immediately due and payable and can commence enforcement and collection actions. Enforcement and collection actions by the lenders could have a material adverse effect on the Company.
The lenders have waived the covenant violations and related defaults through May 31, 2000. The Company is currently negotiating with the lenders to modify the credit agreement to reflect current operating conditions and the Companys current business plan but there can be no assurance that the Company will complete these negotiations successfully. Failure to amend the credit agreement could have a material adverse effect on the Company.
Future Capital Needs
The Companys 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 agreement, will be sufficient to meet debt
12
In addition to its operational needs, the Company has cash requirements related to additional purchase price payments (the Payments) to be made, contingent upon certain targets being achieved, in connection with prior acquisitions. The maximum amount of the Payments, if any, that could be paid over a period of twenty-four months from March 31, 2000 totals approximately $188.6 million. It is anticipated that the actual amount of the Payments will be less than the maximum amount. The ability of the Company to make the Payments is dependent on the availability of financing, and there can be no assurance that any future financing will be available or that the terms of any future financing will be favorable to the Company. See Note 5 of Notes to Condensed Consolidated Financial Statements.
Inflation
Certain of the Companys 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 3. Quantitative and Qualitative Disclosures about Market Risk
Lason has exposure to interest rate risk on its obligations outstanding under the existing credit agreement, which bears interest at a variable rate. Based on the Companys outstanding balance under the credit agreement on March 31, 2000 of approximately $320.0 million, a one-percent increase or decrease in interest rates would decrease or increase, respectively, the Companys pre-tax earnings and operating cash flows by appropriately $3.2 million on an annualized basis.
Due to Lasons operations outside of the United States, the Company experiences foreign currency exchange gains and losses. Fluctuations between the United States dollar and other currencies may adversely affect Lasons results of operations. While the Company may engage in foreign currency hedging transactions in the future which may moderate the overall effect of such currency rate fluctuations, the Company will be affected by such fluctuations, and there is no assurance that the Company will be successful in any hedging activities. Also, there is no assurance that such exchange rate fluctuations will not cause significant fluctuations in the Companys results of operations.
Forward-Looking Statements
Lason may from time to time provide information including certain statements included in or incorporated by reference in this Form 10-Q which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those forward-looking statements include the intent, belief or current expectations of the company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: (i) variations in quarterly results; (ii) the assimilation of acquisitions; (iii) the management of the Companys growth and expansion; (iv) dependence on major customers, dependence on key personnel; (v) development by competitors of new or superior products or services, or entry into the market of new competitors; (vi) fluctuations in paper prices; (vii) reliability of the Companys data; (viii) volatility of the Companys stock price; (ix) managements ability to successfully complete its restructuring initiatives; (x) any financial and legal impact of the class action litigation; (xi) changes in the business services outsourcing industry; (xii) significance of intangible assets; (xii) changes related to compensatory stock options; and (xiv) other risks identified from time to time in the Companys reports and registration statements filed with the Securities and Exchange Commission.
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Item 1. Legal Proceedings
On December 21, 1999 and various dates thereafter, several individuals filed complaints against the Company and certain executive officers in various United States District Courts. The complaints purport to be brought as class actions on behalf of purchasers of shares of the Companys common stock during periods ranging from August 14, 1998 through December 17, 1999. The complaints generally allege that the Company and its officers made public statements containing material omissions or misrepresentations which created the misleading impression that the Companys revenues and earnings were on target with market forecasts and consequently artificially inflated the market price of the shares of the Companys common stock. The complaints allege violations of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and one complaint alleges violations of the Securities Act of 1933. The complaints seek unspecified damages allegedly incurred as a result of the decline in the market price of shares of the Companys common stock after the Company announced on December 17, 1999 that it expected lower fourth quarter earnings per share compared with consensus analysts estimates.
These actions are in a preliminary stage. However, the Company believes, based on the advice of outside legal counsel, that it and the named officers have substantial defenses to the plaintiffs claims, and the Company intends to vigorously defend these claims. While the final resolution of this litigation cannot be presently determined, management does not believe it will have a material adverse effect on the Companys business, or the future consolidated financial statements, although such adverse effects could be possible.
Various other claims have been made against the Company in the normal course of business. Management believes that none of those legal proceedings will have a material adverse effect on the Companys business, financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
During the first quarter of 2000, the Company issued 329,704 shares of its common stock to shareholders of companies it had previously acquired as additional consideration for the achievement of certain target levels of financial performance after the acquisitions. The shares were issued at prices ranging from $8.44 to $45.29 for a total value of $3,838,000. The issuances of shares of the common stock were exempt from registration under the Securities Act of 1933 by virtue of Section 4(2) thereof as transactions not involving a public offering.
Item 3. Defaults upon Senior Securities
At March 31, 2000, there was $320 million outstanding under the Companys credit agreement with its lenders. At that time, the Company was not, and the Company currently is not, in compliance with certain financial covenants contained in the credit agreement. The lenders have the right under the credit agreement to, in addition to any other remedies that may be available to them, declare all amounts outstanding immediately due and payable, but they have not done so. The lenders have waived the covenant violations and related defaults through May 31, 2000. The Company is currently negotiating with the lenders to modify the credit agreement to reflect current operating conditions and the Companys current business plan. There can be no assurance, however, that the Company will complete these negotiations successfully. Failure to amend the credit agreement could have a material adverse effect on the Company. See Note 5 to Notes to Condensed Consolidated Financial Statements.
Item 5. Other Information
William J. Rauwerdink resigned his position as Executive Vice President, Chief Financial Officer, Secretary, and Treasurer of the Company effective May 15, 2000.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
2.9 | Agreement of Purchase and Sale of Stock dated July 17, 1997 between Lason and Image Conversion Systems, Inc.(1) | |
2.10 | Asset Purchase Agreement dated November 25, 1997 between Lason and VIP Imaging, Inc.(2) | |
2.11 | Stock Purchase Agreement dated February 12, 1998 with respect to the acquisition of Racom Corporation and its affiliates by Lason.(3) | |
2.12 | Asset Purchase Agreement dated March 5, 1998 between Lason and API Systems, Inc.(4) | |
2.13 | Agreement for the Purchase and Sale of Stock dated July 24, 1998 between Lason and Consolidated Reprographics.(5) | |
2.15 | Transaction Agreement between Lason and M-R Group plc dated March 25, 1999.(6) | |
2.16 | Amendment Agreement between Lason and M-R Group plc dated April 30, 1999.(6) | |
2.17 | Amendment Agreement between Lason and M-R Group plc dated May 13, 1999.(6) | |
3.1 | Form of Amended and Restated Certificate of Incorporation of the Company.(7) | |
3.2 | Form of Revised Amended and Restated Bylaws.(8) | |
4.1 | Form of Certificate representing Common Stock of the Company.(7) | |
4.3 | Third Amended and Restated Credit Agreement dated as of August 16, 1999 among the Company, the Lenders named therein, Bank One, Michigan as administrative agent, and Comerica Bank, as syndication agent.(9) | |
4.4 | Second Amendment to Third Amended and Restated Credit Agreement.(10) | |
10.5 | Registration Agreement dated January 17,1995 by and among the Company and the 1995 Stockholders.(7) | |
10.9 | Offer of employment dated April 30, 1996 from Lason Systems, Inc. to Mr. Rauwerdink.(7) | |
10.10 | Offer of employment dated June 12, 1996 from Lason Systems, Inc. to Mr. Jablonski.(7) | |
10.11 | 1995 Stock Option Plan of the Company.(7) | |
10.17 | 1996 Lason Management Bonus Plan.(7) | |
10.18 | Lason Systems, Inc. 401 (k) Profit Sharing Plan & Trust.(7) | |
10.19 | Amendments to Lason Systems, Inc. 401 (k) Profit Sharing Plan & Trust.(7) | |
10.20 | Lease Agreement dated as of September 3, 1985 by and between Lason Systems, Inc. and Mart Associates, as amended.(7) | |
10.24 | Employment Agreement of Gary L. Monroe dated June 1, 1999.(9) | |
10.25 | Amended and Restated Secured Promissory Note, dated as of June 5, 1999 Gary L. Monroe.(9) | |
10.26 | Amended and Restated Pledge and Security Agreement dated June 5, 1999 Gary L. Monroe.(9) | |
10.27 | Amended and Restated Secured Promissory Note, dated as of June 5, 1999 William J. Rauwerdink.(9) | |
10.28 | Amended and Restated Pledge and Security Agreement dated June 5, 1999 William J. Rauwerdink(9) | |
10.29 | Amended and Restated Secured Promissory Note, dated as of June 5, 1999 John R. Messinger.(9) | |
10.30 | Amended and Restated Pledge and Security Agreement dated June 5, 1999 John R. Messinger.(9) | |
10.42 | 1998 Equity Participation Plan of Lason, Inc.(11) |
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10.43 | Employment Agreement of John R. Messinger dated April 27, 1999.(6) | |
27 | Financial Data Schedule |
| Filed herewith. |
(1) | Incorporated herein by reference to registrants Form 8-K filed on August 4, 1997, Commission File No. 0-21407. |
(2) | Incorporated herein by reference to registrants Form 8-K filed on December 10, 1997, Commission File No. 0-21407. |
(3) | Incorporated herein by reference to registrants Form 8-K filed on March 17, 1998, Commission File No. 0-21407. |
(4) | Incorporated herein by reference to registrants Form 8-K filed on March 20, 1998, Commission File No. 0-21407. |
(5) | Incorporated herein by reference to registrants Form S-1 filed on July 30, 1998, Commission File No. 333-60143. |
(6) | Incorporated herein by reference to Registrants Form 10-Q filed on May 17, 1999 Commission File No. 0-21407. |
(7) | Incorporated herein by reference to registrants Form S-1 filed on October 7, 1996, Commission File No. 333-09799. |
(8) | Incorporated herein by reference to registrants Form 10-Q filed on May 15, 1998, Commission File No. 0-21407. |
(9) | Incorporated herein by reference to Registrants Form 10-Q filed on August 16, 1999, Commission File No. 0-21407. |
(10) | Incorporated herein by reference to Registrants Form 10-K filed on March 30, 2000, Commission File No. 0-21407. |
(11) | Incorporated herein by reference to registrants 1998 proxy statement, Appendix A, filed on April 28, 1998, Commission File No. 0-21407. |
B. Reports on Form 8-K
On January 5, 2000, the Company filed a From 8-K, disclosing in Item 5 the nature of certain complaints filed against the Company. Such complaints are discussed further in Item 1 of this Form 10-Q.
On January 19, 2000, the Company filed a Form 8-K, disclosing in Item 5 that the Company had taken certain actions which required a change to the purchase method of accounting for the acquisition of M-R Group plc.
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ LASON, Inc. |
|
(Registrant) | |
/s/ GARY L. MONROE |
|
Chief Executive Officer and | |
Chairman of the Board | |
/s/ ROBERT T. BASSMAN |
|
Vice President and | |
Corporate Controller |
May 15, 2000
(Date)
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Exhibit No. | Description | |||
27 | Financial Data Schedule |
|