UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission File Number: 000-21407

LASON, INC.

(Exact name of registrant as specified in its charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		38-3214743 (I.R.S. Employer identification number)

1305 Stephenson Highway
Troy, Michigan 48083
(Address of principal executive offices including zip code)

Telephone: (248) 837-7100
(Registrant’s telephone number, including area code)

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 o No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12,13,or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 9, 2004, 288,966 shares of Common Stock, $.01 par value were reserved for issuance according to the Company’s Plan of Reorganization and 29,756,034 shares were issued and outstanding.

TABLE OF CONTENTS


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)			2

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003			3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)			4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			5

NOTE 1: NATURE OF OPERATIONS			5
NOTE 2: BASIS OF PRESENTATION			5
NOTE 3: NEW ACCOUNTING STANDARDS			5
NOTE 4: LONG TERM OBLIGATIONS			6
NOTE 5: INCOME TAXES			6
NOTE 6: INCOME (LOSS) PER SHARE			7
NOTE 7: COMMITMENTS AND CONTINGENCIES			7
NOTE 8: PENDING MERGER TRANSACTION			7
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			8
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			13
ITEM 4: CONTROLS AND PROCEDURES			13
FORWARD-LOOKING STATEMENTS			13

PART II. OTHER INFORMATION			14

ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES			14

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K			14

SIGNATURES			15

CERTIFICATION OF CHIEF EXECUTIVE OFFICER			16

CERTIFICATION OF CHIEF FINANCIAL OFFICER			17

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002			18
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification pursuant to Section 1350

LASON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, Unaudited)


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2004		2003			2004			2003
Revenues	$	35,123	$	43,206		$	70,300		$	87,222
Cost of revenues		26,166		31,943			53,540			64,285

Gross profit		8,957		11,263			16,760			22,937
Selling, general and administrative expenses		8,171		10,380			16,328			21,648

Income from operations		786		883			432			1,289
Net interest expense		451		759			947			1,515

Income (loss) from operations before income taxes		335		124			(515	)		(226	)
Provision for income taxes		37		89			74			197

Net income (loss)		298		35			(589	)		(423	)

Basic and diluted income (loss) per common share	$	0.01	$	(0.00	)	$	(0.02	)	$	(0.01	)

The accompanying Notes are an integral part of the condensed consolidated financial statements.

LASON, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of June 30, 2004 and December 31, 2003
(In thousands, except for shares)


	June 30,		December 31,
	2004		2003
	(Unaudited)
ASSETS
Cash and cash equivalents	$	13,314	$	12,153
Accounts receivable (net of allowance of $1,676 and 2,009, respectively)		26,123		25,972
Supplies		1,954		2,182
Prepaid expenses and other		5,554		7,412

Total current assets		46,945		47,719
Property and equipment (net of accumulated depreciation of $5,187 and $3,770, respectively)		6,673		5,927

Total assets	$	53,618	$	53,646

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	6,672	$	6,076
Accrued expenses		7,711		7,325
Customer deposits		3,457		2,973
Deferred revenue		2,046		1,969
Current portion of long-term obligations		4,437		4,414

Total current liabilities		24,323		22,757
Long-term obligations		26,276		27,281

Total liabilities		50,599		50,038
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued and outstanding		—		—
Common stock, $.01 par value; 100,000,000 shares authorized, 288,966 shares reserved for issuance and 29,756,034 shares issued and outstanding		300		300
Additional paid-in capital		1,565		1,565
Retained earnings		1,154		1,743

Total stockholders’ equity		3,019		3,608

Total liabilities and stockholders’ equity	$	53,618	$	53,646

The accompanying Notes are an integral part of the condensed consolidated financial statements.

LASON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2004 and 2003
(In thousands, Unaudited)


	Six Months Ended
	June 30,
	2004			2003
Cash Flows Provided by Operating Activities	$	4,405		$	2,140	¹

Cash Flows From Investing Activities:
Net cash used in investing activities, property and equipment		(2,151	)		(1,296	)

Cash Flows From Financing Activities:
Repayment of long-term obligations, net		(1,084	)		(2,306	)
Repayment on capital lease liabilities and other		(9	)		(66	)

Net cash used in financing activities		(1,093	)		(2,372	)

Net increase (decrease) in cash and cash equivalents		1,161			(1,528	)
Cash and cash equivalents at beginning of period		12,153			25,931

Cash and cash equivalents at end of period	$	13,314		$	24,403

The accompanying Notes are an integral part of the condensed consolidated financial statements.

¹ During the first six months of 2003, approximately $0.6 million of cash used in operating activities related primarily to payments made with respect to the Predecessor’s bankruptcy proceedings for professional and administrative fees, cure costs and other administrative type claims which were accrued as of June 30, 2002.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1: NATURE OF OPERATIONS

Lason, Inc., a Delaware corporation, is a holding company which through its operating subsidiaries, Lason Systems, Inc. and Lason International, Inc., both Delaware companies (“Lason” or the “Company”), is a leading provider of integrated information outsourcing solutions through in excess of 55 locations and facilities management sites in 22 states, India, China (service relationship), Mexico and Canada. The Company serves over 3,500 active customers primarily in the healthcare, financial services, government and manufacturing and industrial vertical markets. The Company’s core competency resides in its ability to enhance the performance of its customers’ business by outsourcing their non-core business processes and back office operations. The Company’s primary services are data, document and image capture, web-based document repository services via its Document DNA™ (digital network access) product, analog services, on-site facilities management, print and mail type services, database management and other professional services. The Company’s service capabilities across a broad range of data and media types allows its customers to fulfill their business process and information outsourcing needs with a single vendor regardless of geography.

NOTE 2: BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of Lason have been prepared in accordance with accounting principles, generally accepted in United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

In the opinion of the Company, the accompanying financial statements include all adjustments, of a normal, recurring nature, necessary to present fairly its financial position as of June 30, 2004 and the results of operations for the three and six months ended June 30, 2004 and 2003. Results of operations for interim periods may not be indicative of future results.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 29, 2004.

The accompanying unaudited condensed consolidated financial statements of Lason have been prepared in conformity with generally accepted accounting principles for interim financial information

NOTE 3: NEW ACCOUNTING STANDARDS

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 clarifies the applications of Accounting Research Bulletin 51, Consolidated Financial Statements, for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest (“variable interest entities”). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both. In December 2003, the Financial Accounting Standards Board issued FASB Interpretation 46(R), Consolidation of Variable Interest Entities. FIN 46(R) replaces FIN 46 and clarifies the accounting for interests in variable interest entities. FIN 46(R) should be applied to entities considered to be Special Purpose Entities (“SPE’s”) no later than the end of the first reporting period after December 15, 2003 and by the end of the first reporting period that ends after March 15, 2004 to entities other than SPE’s. The adoption of this standard did not have an impact on the Company’s financial position or results of operations.

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which provides standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The statement is effective for financial instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period beginning after June 15, 2003. In 2003, the FASB elected to indefinitely defer the effective date for certain provisions of SFAS No. 150 relating to investments in limited-life entities. The adoption of the provisions of SFAS No. 150 not deferred by the FASB did not have a material effect on the Company’s financial condition, results of operations, or cash flows. The Company has not completed its evaluation of the effect of those provisions for which the effective dates have been deferred.

NOTE 4: LONG TERM OBLIGATIONS

In September of 2003, the Company amended its Credit Agreement with the holders of its Senior Notes via the First Amendment to the Credit Agreement (the “Amendment”). Under the terms of the Amendment, the holders of the Company’s Senior Notes agreed to bifurcate such notes into a new $10 million revolving credit facility and a $32 million term loan obligation. The Amendment leaves unchanged the maturity date of the Credit Agreement, as applicable to the term loan. The revolving credit facility matures on December 31, 2005. These obligations are collateralized by a lien on all property of the Company, guarantees of certain of the Company’s subsidiaries, as well as pledges of the capital stock of certain subsidiaries. Borrowings under the revolving credit facility and the term loan obligation bear interest at a rate of prime (floating) plus 2.5 percent (6.75% at June 30, 2004). The Credit Agreement and Amendment contain restrictions on acquisitions, disposition of assets, and the incurrence of other liabilities and contain certain financial covenants related to minimum EBITDA, liquidity, ratio of earnings to fixed charges and certain restrictions on capital expenditures. At June 30, 2004, the Company had $6 million outstanding on its $10 million revolving credit facility. In addition to the quarterly principal payments, the Credit Agreement calls for principal reductions from net cash proceeds received from the sale or disposition of assets.

Aggregate maturities of the Senior Notes and revolving credit facility for the four years subsequent to June 30, 2004 are $4,000, $10,000, $4,000, and $10,864.

The Company’s long-term obligations also include a unsecured, non-interest bearing Junior Note issued to certain key managers (who were also ex-owners of businesses acquired by Lason).

The Junior Note calls for semi-annual principal payments with final maturity at December 31, 2006. Aggregate maturities for the Junior subsequent to June 30, 2004 are as follows (in thousands):


2004		624
2005		624
2006		933

Total	$	2,181
Unamortized Discount at June 30, 2004		(332	)

Junior Note Balance	$	1,849

The Junior Note Indenture provides that the principal payments outlined above will be made, subject to the express condition that certain performance tests are satisfied. Based upon the Company’s current information, it believes that the performance tests will be satisfied and the payments will be made.

NOTE 5: INCOME TAXES

In connection with the Company’s past plan of reorganization under Chapter 11 of the United States Bankruptcy Code, a gain on cancellation of indebtedness was realized by the Company’s predecessor in the amount of approximately $236.0 million. The ultimate gain realized by the Company will depend upon the final resolution of claims in the Bankruptcy Court and could vary from that currently realized. This gain was not taxable since the gain resulted from reorganization under the Bankruptcy Code. However, at the beginning of its 2003 taxable year, the Company reduced certain attributes including net operating loss carry forwards (“NOLs”), certain tax credits and tax basis in assets in an amount equal to such gain on

extinguishment. At June 30, 2004, the Company estimates that its NOLs aggregated approximately $23.6 million, which will expire in 2022.

The Company’s management, in assessing the realizability of deferred tax assets, must consider whether it is more likely than not that part or all of the deferred tax assets may not be realized. This assessment includes consideration for the scheduled reversal of temporary taxable difference, projected future taxable income, and tax planning strategies. At June 30, 2004 and December 31, 2003 due to the high degree of uncertainty surrounding their realizability, a full valuation allowance has been established on all of the deferred taxes.

NOTE 6: INCOME (LOSS) PER SHARE

Basic income (loss) per share has been computed in accordance with SFAS No. 128, “Earnings per Share.” The weighted average common shares used for the three and six month periods ending June 30, 2004 and 2003 were 30,045,000. This includes shares reserved for distribution under the Company’s Plan, in addition to shares issued and outstanding as of June 30, 2004 and June 30, 2003, respectively.

NOTE 7: COMMITMENTS AND CONTINGENCIES

The Company is a defendant in an adversary proceeding in the Bankruptcy Court for the District of Delaware in Wilmington (the “Court”). The plaintiff is Ark 2000-1 CLO, Limited (“Ark”), one of the Company’s senior secured lenders. The nature of the dispute is over certain provisions in the Company’s Pre-petition Credit Agreements and Plan, which call for the sharing of net proceeds from certain designated asset sales between the Company and the senior secured lenders. The net proceeds in dispute are approximately $1.7 million. On October 15, 2003, the Court ruled in favor of the Company, denying the plaintiff’s motion and any claim by the plaintiffs to the proceeds. On October 24, 2003, Ark filed a motion before the Court asking it to reconsider its ruling. The Company believes the plaintiffs’ arguments are without merit and it is vigorously defending itself in this matter. An unfavorable outcome or settlement, if any, in this matter may result in a charge to current earnings.

In addition to the foregoing, the Company is subject to lawsuits and pending or asserted claims with respect to matters arising out of the ordinary course of business. Although the Company cannot predict the outcomes of these legal proceedings, it is not currently aware of any claim or action, in the aggregate, that would have a material adverse effect on its financial position, results of operations or liquidity.

NOTE 8: PENDING MERGER TRANSACTION

On May 21, 2004 the Company entered into a merger agreement with a affiliate of Charterhouse Group, Inc. (“Charterhouse”), under which Charterhouse will acquire the Company in a transaction valued at approximately $30 million. Under the pending merger agreement, Charterhouse would acquire 100% of the common stock of the Company for $0.125 per share (approximately 30,045,000 shares) and replace the Company’s current senior indebtedness with substantially less indebtedness. The Company’s resulting capital structure would include significantly more equity. Existing management is expected to continue operating the Company after the transaction closes and will have an ownership interest in the Charterhouse affiliate. Completion of the transaction is subject to certain closing conditions, including the approval of holders of a majority of the Company’s outstanding common stock.

The Company mailed its definitive proxy statement regarding the pending transaction on July 16, 2004 and has scheduled a shareholder meeting for August 11, 2004, seeking approval of the transaction. If the transaction is approved by the Company’s shareholders and subsequently completed, the Company will have less than 300 shareholders and will seek to de-register its common stock and cease to be a public company. Should the pending transaction be approved, it is expected to close by mid August 2004.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Lason is a leading provider of integrated information outsourcing solutions through in excess of 55 locations and facilities management sites in 22 states, India, China (service relationship), Mexico and Canada. The Company serves over 3,500 active customers primarily in the healthcare, financial services, government and manufacturing and industrial vertical markets. The Company’s core competency resides in its ability to enhance the performance of its customers’ business by outsourcing their non-core business processes and back office operations. The Company’s primary services are data, document and image capture, web-based document repository services via its Document DNA™ (digital network access) product, analog services, on-site facilities management, print and mail type services, database management and other professional services. The Company’s service capabilities across a broad range of data and media types allows its customers to fulfill their business process and information outsourcing needs with a single vendor regardless of geography. Lason’s capability to capture, manage and output information includes both traditional and digital services that support customer migration to new technologies including internal-based applications.

The Company’s strategy is to be a value-added business partner to its customers by leveraging its integrated business process outsourcing (“BPO”) capabilities across a broad geographical spectrum to continually assist them in reducing their information management and back office costs and minimize their on-going technology and capital requirements. Key components to this strategy are the Company’s strategically located off-shore capabilities and solution offerings, such as Document DNA™ (its web-based document repository), which allow it to fulfill customers’ business process outsourcing needs cost effectively twenty-four hours a day, seven days a week.

Results of Operations—Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003

Consolidated net revenues were $35.1 million for the three months ended June 30, 2004 as compared to $43.2 million for the three months ended June 30, 2003. The decline in revenues was a result of several factors, including an effort to focus on more complex BPO and integrated solution sales, which require a longer sales cycle, a cyclical decline in volumes within certain applications, such as mortgage loan processing, due to external macro-economic factors, continued decline in the demand for the Company’s analog services, and due to customers that elected to pursue strategic re-sourcing alternatives following the Company’s emergence from its previous Chapter 11 proceedings. The demand for the Company’s BPO services remains high and it has developed a substantial pipeline of opportunities as compared to the second quarter of 2003. The Company’s revenues are generally based upon transaction volumes of information and data sent to it by third parties. For the most part, these volumes are not contractually required or guaranteed. In addition, the mix of the Company’s revenue is dependent upon the application or service being provided and can vary between project and recurring type work. In many cases, the work being performed by the Company for an individual customer contains elements of both project and recurring type work. Project work represents one-time services. Recurring work represents services being provided to a customer on a consistent basis that are generally under contract or have been regularly provided by the Company to the customer through a long standing relationship.

Gross profit was to $9.0 million for the three months ended June 30, 2004 as compared to $11.3 million for the three months ended June 30, 2003. Gross profit as a percentage of net revenues was 25.6 percent for the three months ended June 30, 2004 versus 26.2 percent for the three months ended June 30, 2003. The decrease in gross profit and gross margin percentage is due principally to lower revenue levels and the mix of applications or services provided. The Company’s cost of revenues consist primarily of wages and benefits to its employees, the cost of materials and equipment and other items related to directly providing services and products to its customers.

Selling, general and administrative expenses decreased $2.2 million to $8.2 million or 23.4 percent of net revenues for the three months ended June 30, 2004 from $10.4 million or 24.1 percent of net revenues for the three months ended June 30, 2003. The reduction of $2.2 million is due to the Company’s ongoing integration and restructuring activities to realign organizationally, eliminate excess capacity and streamline its operations and further enhance its off-shore service capabilities, consistent with its strategic focus on more complex Business Process Outsourcing and integrated solution sales.

Included in the results of operations for the three months ended June 30, 2004 and 2003 was approximately $0.7 and $0.6 million, respectively, in depreciation expense related to property and equipment.

Net interest expense was $0.5 million and $0.8 million for the three months ended June 30, 2004 and three months ended June 30, 2003, respectively, consisting principally of interest on the Company’s long term obligations which decreased significantly.

The provision for income taxes was approximately $0.04 million and $0.1 million for the three months ended June 30, 2004 and 2003, respectively. The provision is primarily related to foreign and state income taxes.

Results of Operations—Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003

Consolidated net revenues were $70.3 million for the six months ended June 30, 2004 as compared to $87.2 million for the six months ended June 30, 2003. The decline in revenues was a result of several factors, including an effort to focus on more complex Business Process Outsourcing and integrated solution sales, which require a longer sales cycle, a cyclical decline in volumes within certain applications, such as mortgage loan processing, due to external macro-economic factors, continued decline in the demand for the Company’s analog services, and due to customers that elected to pursue strategic re-sourcing alternatives following the Company’s emergence from its previous Chapter 11 proceedings. The demand for the Company’s BPO services remains high and it has developed a substantial pipeline of opportunities as compared to the second quarter of 2003. The Company’s revenues are generally based upon transaction volumes of information and data sent to it by third parties. For the most part, these volumes are not contractually required or guaranteed. In addition, the mix of the Company’s revenue is dependent upon the application or service being provided and can vary between project and recurring type work. In many cases, the work being performed by the Company for an individual customer contains elements of both project and recurring type work. Project work represents one-time services. Recurring work represents services being provided to a customer on a consistent basis that are generally under contract or have been regularly provided by the Company to the customer through a long standing relationship.

Gross profit was to $16.8 million for the six months ended June 30, 2004 as compared to $22.9 million for the six months ended June 30, 2003. Gross profit as a percentage of net revenues was 23.9 percent for the six months ended June 30, 2004 versus 26.3 percent for the six months ended June 30, 2003. The decrease in gross profit and gross margin percentage is due principally to lower revenue levels and the mix of applications or services provided. The Company’s cost of revenues consist primarily of wages and benefits to its employees, the cost of materials and equipment and other items related to directly providing services and products to its customers.

Selling, general and administrative expenses decreased $5.3 million to $16.3 million or 23.2 percent of net revenues for the six months ended June 30, 2004 from $21.6 million or 24.8 percent of net revenues for the six months ended June 30, 2003. The reduction of $5.3 million is due to the Company’s ongoing integration and restructuring activities to realign organizationally, eliminate excess capacity and streamline its operations and further enhance its off-shore service capabilities, consistent with its strategic focus on more complex Business Process Outsourcing and integrated solution sales.

Included in the results of operations for the six months ended June 30, 2004 and 2003 was approximately $1.7 and $1.3 million, respectively, in depreciation expense related to property and equipment.

Net interest expense was $0.9 million and $1.5 million for the six months ended June 30, 2004 and six months ended June 30, 2003, respectively, consisting principally of interest on the Company’s long term obligations. The decrease in interest expense of approximately $0.6 million is the result of the Company establishing a new revolving credit facility in September of 2003, and use of a portion of the Company’s excess cash to pay down its outstanding obligations.

The provision for income taxes was approximately $0.1 million and $0.2 million for the six months ended June 30, 2004 and 2003, respectively. The provision is primarily related to foreign and state income taxes.

Liquidity and Capital Resources

At June 30, 2004, the Company had net working capital of $22.6 million and cash and cash equivalents of $13.3 million. The Company’s net senior debt (defined as total term loan and revolving credit borrowings less cash and cash equivalents) was $15.6 million at June 30, 2004. In addition, at June 30, 2004, the Company had $4.0 million of availability on its revolving credit facility. The Company has funded its operations and integration and restructuring activities through cash from operations. Net cash provided by operating activities for the six months ended June 30, 2004 was $4.4 million.

Net cash used in investing activities totaled $2.2 million for the six months ended June 30, 2004. These funds were used for investments in capital assets.

In September of 2003, the Company amended its Credit Agreement with the holders of its Senior Notes via the First Amendment to the Credit Agreement (the “Amendment”). Under the terms of the Amendment, the holders of the Company’s Senior Notes agreed to bifurcate such notes into a new $10 million revolving credit facility and a $32 million term loan obligation. The Amendment leaves unchanged the maturity date of the Credit Agreement, as applicable to the term loan. The revolving credit facility matures on December 31, 2005. Such obligations are collateralized by a lien on all property of the Company, guaranties of certain of the Company’s subsidiaries, as well as pledges of the capital stock of certain subsidiaries. Borrowings under the revolving credit facility and term loan obligation bear interest at a rate of prime (floating) plus 2.5 percent (6.75% at June 30, 2004). The Credit Agreement and Amendment contain restrictions on acquisitions, disposition of assets, and the incurrence of other liabilities and contain certain financial covenants related to minimum EBITDA, liquidity, ratio of earnings to fixed charges, and cash-flow levels and certain restrictions on capital expenditures. At June 30, 2004, the Company had $4 million of availability on its $10 million revolving credit facility.

The Junior Note Indenture provides that the principal payments will be made, subject to the express condition that certain performance tests are satisfied. Based upon the Company’s current information, it believes that the performance tests will be satisfied and the payments will be made.

Management believes that it has sufficient liquidity through its cash from operations, cash on hand of $13.3 million and $4.0 million of revolving credit availability at June 30, 2004 to meet its on-going business needs, including satisfying its long term obligations as they become due. The Company consistently monitors and evaluates its capital structure and options for maximizing the efficiency and availability of such. Should the Company require future financing, no assurances can be given that the terms or availability of such would be favorable to the Company.

Contractual Obligations

Information regarding our contractual obligations is contained in Item 7 of our annual report on Form 10-K for the fiscal year ended December 31, 2003. No material changes to such information have occurred during the six months ended June 30, 2004.

Risk Factors

If any of the following risks actually occur, the Company’s business, financial condition or results of operations could be negatively impacted. You should also refer to the other information contained in this report and incorporated in this report by reference, including our consolidated financial statements and the related notes.

Volatility of Available Temporary Labor and Paper Prices

The Company is dependent primarily upon two basic supplies: temporary labor and paper. The Company uses and relies on temporary labor to manage fluctuations in its business. The supply and price of available and trained temporary labor is dependent upon general economic conditions that are beyond the Company’s control. There can be no assurance that the Company will continue to have access to the trained temporary labor necessary to manage its business as it would expect, nor assurance that it will be available at the prices the Company would like. Further, the price of paper can be highly volatile. There can be no assurance that the price of paper will not change in the future. Any significant price increase in either

temporary labor or paper that cannot be passed on to customers or a shortage in the supply of available temporary labor could have a material adverse effect on the Company’s business, financial condition or results of operations.

Potential Liability for Unauthorized Disclosure of Confidential Information and Intellectual Property Infringement

A substantial portion of the Company’s business involves the handling of documents containing confidential information. Although the Company has established procedures intended to eliminate any unauthorized disclosure of confidential information and, in some cases, has contractually limited its potential liability for unauthorized disclosure of such information, there can be no assurance that unauthorized disclosures will not result in liability to the Company. It is possible that such liabilities could have a material adverse effect on the Company’s business, financial condition or results of operations.

The Company from time to time may be required to indemnify customers for claims of intellectual property infringement made by third parties from using our products and services. To the extent that the Company enters into these arrangements, and a claim occurs, the Company could be subject to damages, loss of existing business or future business, or other remedies under such agreements, which could have a material adverse effect on the Company’s business, financial condition or results of operations.

Importance of Continued Development of New Services

The introduction of competing services incorporating new technologies and the emergence of new technical standards could render some or all of the Company’s services unmarketable. The Company believes that its future success depends upon its ability to enhance its current services and develop new services that address the increasingly sophisticated needs of its customers. The failure of the Company to continue to service its customers, develop and enhance its existing services and introduce new services in a timely and cost effective manner in response to changing technologies, competition and customer requirements could have a material adverse effect on the Company’s business, financial condition or results of operations.

Risk of Business Interruptions and Dependence on Single Facilities for Certain Services

The Company believes that its ability and its future ability to retain customers has been due to and will continued to be dependent upon the continued delivery of prompt, efficient, high value services to its customers. Certain of the Company’s operations are performed at a single location and are dependent on continuous computer, electrical, telephone and data communication service. As a result, any disruption of the Company’s day-to-day operations could have a material adverse effect upon the Company. There can be no assurance that a fire, flood, earthquake, power loss, phone or data service loss or other disaster affecting one or more of the Company’s facilities would not disable these functions. Any significant damage to any such facility or other failure that causes significant interruptions in the Company’s operations may not be covered by insurance and could have a material adverse effect on the Company’s business, financial condition or results of operations.

Lack of Continued Growth in the Business Process Outsourcing Industry

The Company believes, based upon independent market research, that the business process outsourcing market will continue to experience growth for the next several years. The industry growth assumptions are based upon, among other things, the continued advancement of technology, increased government regulations regarding document retention, increased customer expectations regarding low-cost and efficient electronic access to records and a continued focus on business and profit enhancement though outsourcing of non-core activities. There can be no assurance that these factors will ultimately facilitate industry growth or that other foreseen or unforeseen changes in the market dynamics will not negatively impact projected market growth. Any negative impact upon general market trends for the business process outsourcing industry will have a material adverse effect on the Company’s business, financial condition and results of operations.

HIPPA Regulations

As a result of statutory authority granted pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the United States Department of Health and Human Services has issued regulations regarding the use and disclosure of personal health information by health care providers, health plans, and certain other “covered entities” operating in the health care industry. The HIPAA regulations require covered entities to take steps to maintain the privacy and security of personal health information. While the Company is not a “covered entity” directly governed by these regulations, many of its customers are covered entities under the HIPAA regulations and these customers are required to adjust their business arrangements to comply with HIPAA. These customers will be required to enter into “business associate arrangements” with the Company that conform to the requirements of HIPAA. The requirements of HIPAA, and the costs of complying with HIPAA, may adversely affect the business operations of these customers, which could have a negative impact on the Company’s business operations. Furthermore, the requirements of the “business associate arrangements,” and the changes the Company will have to make in its operations to comply with such agreements, will increase the Company’s costs of operations. To the extent the Company is unable to comply with the provisions of such agreements, it could lose the business generated by those clients or could be subject to damages for violation of its business associate agreements with those clients.

Future Financial Covenants

Under the Company’s First Amendment to the Credit Agreement, it is subject to certain reporting requirements and financial covenants, including requirements that it maintain minimum levels of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and cash-flow and certain other restrictions. Certain of these covenants become more restrictive over time. The Company is currently in compliance with such covenants as of June 30, 2004. While it is currently in compliance with such covenants, an erosion of its business could place the Company out of compliance in the future. Potential remedies for the lenders include declaring all outstanding amounts immediately payable, terminating commitments and enforcing any liens. In the event of any future noncompliance the Company would seek a waiver from such lenders related to these types of technical covenant violations, however, there is no assurance such waiver would be obtained.

International Operations

The Company operates in four countries outside the United States: India, China (service relationship), Mexico and Canada. Political and economic instability in these countries could have a material adverse impact on the Company’s results of operations. The Company’s future revenues, costs of operations and profits could be affected by a number of factors related to its international operations, including changes in foreign currency, exchange rates, changes in economic conditions from country to country, changes in a country’s political condition, trade protection measures, licensing and other legal requirements and local tax issues.

Future Risks

The Company identifies and evaluates the material risks potentially impacting its business on an on-going basis. Certain risks which are material to the Company’s business today may become immaterial in the future. Additionally, certain risks which are immaterial to the Company’s business today may become material in the future. Further, new risks to the Company’s business, which it is currently unaware of today, could develop in the future and dramatically impact its business, operations or financial condition.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has exposure to interest rate risk on its term loan and revolving credit facility, which bear interest at a variable rate. Based on the Company’s outstanding balance on June 30, 2004 of $28.9 million, a one-percent increase or decrease in interest rates would decrease or increase, respectively, the Company’s pre-tax earnings and operating cash flows by appropriately $0.3 million on an annualized basis.

Due to the Company’s 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 the results of operations. As the Company does not currently engage in foreign currency hedging transactions, there is no assurance that such exchange rate fluctuations will not cause significant fluctuations in the Company’s future results of operations.

ITEM 4: CONTROLS AND PROCEDURES

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). These Rules refer to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and Our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”), and have concluded that our disclosure controls and procedures are effective in providing them with material information relating to the Company known to others within the Company which is required to be included in our periodic reports filed under the Exchange Act.

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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. Without limitation, the words “believes,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Form 10-Q. 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: (1) important information is of a preliminary basis and subject to further adjustment, (2) the assimilation of business units, (3) the economic, political and regulatory environment, (4) competitive risks and uncertainties, (5) dependence on key customers and management, (6) fluctuations in paper prices, (7) price and availability of qualified temporary labor, (8) reliability of Company data, (9) changes in the business outsourcing industry, (10) management’s ability to implement its business plan, (11) the financial and legal effect of any outstanding litigation, (12) ultimate resolution and settlement of administrative and priority claims, including priority tax claims, whether known or unknown as a result of the Company’s previous Chapter 11 filing, (13) status of the Company’s financing, (14) other important factors beyond the control of Lason and (15) other risks identified from time to time in the Company’s reports and registration statements filed with the Securities and Exchange Commission. Actual future results may vary significantly from those set forth herein. These forward-looking statements represent Lason’s judgment as of the date of this report. Lason disclaims, however, any intent or obligation to update its forward-looking statements.

PART II. OTHER INFORMATION

ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.

In June 2004, 2,978,690 shares of common stock were issued to Senior Note holders and general unsecured creditors of the Company pursuant to the Company’s past plan of reorganization. Such issuance was exempt from registration under the Securities Act of 1933 pursuant to Section 1145 of Title 11 of the United States Code. The Company has 288,966 shares of common stock reserved for distribution pending the final resolution of claims under such plan.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits

	31.1		Certification of Chief Executive Officer

	31.2		Certification of Chief Financial Officer

	32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Reports on Form 8-K

A Report on Form 8-K was filed on May 17, 2004, disclosing in Items 7 and 12 thereof, the results of operations for the quarter ended March 31, 2004.

SIGNATURES

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.


	LASON, INC.
Date: August 10, 2004	By:	/s/ RONALD D. RISHER
		Ronald D. Risher
		Chief Executive Officer; President and Director


		/s/ DOUGLAS S. KEARNEY
		Douglas. S. Kearney
		Executive Vice President; Chief Financial Officer and Secretary

Exhibit Index


No.		Description

31.1		Certification of Chief Executive Officer
31.2		Certification of Chief Financial Officer
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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LASON INC 10-Q