<PAGE> 1
FILED PURSUANT TO
RULE 424(B)(3) AND
424(C)
REGISTRATION NO.
333-1084
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 13, 1996
2,000,000 SHARES
[FYI LOGO]
COMMON STOCK
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
This supplements the Prospectus dated September 13, 1996 which covers
2,000,000 shares of common stock, $.01 par value (the "Common Stock"), which may
be offered and issued by F.Y.I. Incorporated (the "Company") from time to time
in connection with the merger with or acquisition by the Company of other
businesses or assets, and which may be reserved for issuance pursuant to, or
offered and issued upon exercise or conversion of, warrants, options,
convertible notes or other similar instruments issued by the Company from time
to time in connection with any such merger or acquisition. This Prospectus
Supplement consists of the Company's Prospectus dated December 12, 1996 and the
Company's Quarterly Report on Form 10-Q for the fiscal period ended September
30, 1996 filed with the Securities and Exchange Commission on November 13, 1996.
The Common Stock of the Company is included for quotation on the Nasdaq
National Market. On December 12, 1996, the closing price of the Common Stock on
the Nasdaq National Market was $20.75 per share as published in The Wall Street
Journal on December 13, 1996.
The date of this Prospectus Supplement is December 13, 1996.
<PAGE> 2
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-16057
2,420,000 SHARES
[F.Y.I. INCORPORATED LOGO]
COMMON STOCK
Of the 2,420,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby, 2,000,000 shares are being sold by F.Y.I.
Incorporated ("F.Y.I." or the "Company") and 420,000 shares are being sold by
the Selling Stockholders. See "Principal and Selling Stockholders." The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders.
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "FYII." On December 11, 1996, the last sale price of the Common
Stock as reported on the Nasdaq National Market was $20.125 per share. See
"Price Range of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Stockholders
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Per Share........................ $20.00 $1.05 $18.95 $18.95
Total (3)........................ $48,400,000 $2,541,000 $37,900,000 $7,959,000
===================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $650,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 363,000 shares of Common Stock at the Price to Public shown
above solely to cover over-allotments, if any. If the Underwriters exercise
this option in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $55,660,000, $2,922,150 and $44,778,850,
respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject any order in whole or in part. It is expected that
delivery of certificates representing the shares will be made against payment
therefor at the office of Montgomery Securities on or about December 17, 1996.
------------------------
MONTGOMERY SECURITIES
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY
December 12, 1996
<PAGE> 3
[FYI Logo]
"REDEFINING DOCUMENT MANAGEMENT SERVICES"
[MAP]
[LEGEND]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. See "Risk
Factors" for a discussion of certain risks associated with an investment in the
Common Stock. Unless the context otherwise requires, the terms "Company" and
"F.Y.I." each refer to F.Y.I. Incorporated, a Delaware corporation, and its
subsidiaries and predecessors. Unless otherwise indicated, all share and
financial information set forth herein assumes no exercise of the Underwriters'
over-allotment option. Statements throughout this Prospectus that state the
Company's or management's intentions, hopes, beliefs, expectations, strategies,
predictions or any other variations thereof or comparable phraseology of the
Company's future activities or other future events or conditions are
forward-looking statements. It is important to note that the Company's actual
results or activities and actual events or conditions could differ materially
from those projected in such forward-looking statements. Additional information
concerning factors that could cause actual results to differ materially from
those in the forward-looking statements is contained under "Risk Factors."
THE COMPANY
F.Y.I. Incorporated was founded in September 1994 to create a national,
single source provider of document management services to three primary client
segments: healthcare institutions, professional services firms and financial
institutions. The Company's primary strategy is to consolidate the highly
fragmented document management services industry through acquisitions. In
January 1996, F.Y.I. acquired, simultaneously with the closing of its initial
public offering (the "IPO"), seven document management services businesses (the
"Founding Companies"). Since the IPO, the Company has acquired 15 additional
companies (the "Subsequent Acquisitions"). As a result of the Subsequent
Acquisitions combined with internal growth, the Company's revenue has increased
from $35.5 million for the nine months ended September 30, 1995 to $49.9 million
for the nine months ended September 30, 1996 ($65.0 million on a pro forma
basis, assuming all significant acquisitions were completed on January 1, 1996).
The Company intends to continue to aggressively pursue strategic acquisitions in
existing and new markets, cross-sell its full range of services to its current
customer base and expand the marketing of its services to new customers.
An estimated four trillion documents are generated annually in the United
States. The Company's three targeted client segments generate large volumes of
documents and require specialized processing, distribution, storage and
retrieval of these documents and the information they contain. The Company
believes that these client segments will continue to increase their outsourcing
of document management services in order to maintain their focus on core
operating competencies and revenue generating activities, reduce fixed costs,
including labor and equipment costs, and gain access to new technologies without
incurring the expense and risk of near-term obsolescence of such technologies.
While the document management requirements of each target client segment
require relatively unique and specialized services, the Company offers document
management services that are transferable across client segments, such as: (i)
document and data conversion services, including microfilm and microfiche
services and electronic imaging services; (ii) records management services,
namely active storage and maintenance of documents and files and archival
storage of inactive documents; and (iii) database management and related
services, including data entry, direct mail and fulfillment services. In
addition, in order to accommodate the document management needs of targeted
client segments, the Company also offers industry specific services, such as:
(i) medical records release services, namely processing requests for patients'
medical records from physicians, insurers, attorneys, healthcare institutions
and individuals; and (ii) litigation support services. The Company also derives
revenue from the sale of certain micrographic and business imaging products.
The Company believes that there are significant opportunities to
consolidate the capabilities and resources of a number of existing document
management services businesses with the intent of providing customers with a
single source document management solution. Accordingly, the Company is pursuing
a "fill-in-the-grid" strategy aimed at providing comprehensive document
management services based on the
3
<PAGE> 5
demands of the given geographical market. The Company has implemented an
aggressive, three-tiered acquisition program consisting of "beachhead
acquisitions" to enter additional targeted markets, "service expansion
acquisitions" to acquire additional service capabilities within such markets and
"tuck-in" acquisitions to gain market share. The Company believes that it will
continue to be an attractive acquiror of other document management services
companies due to its strategy of retaining selected owners and management of
acquired companies, its access to growth capital and its ability to offer
sellers cash for their business as well as an ongoing equity stake in the
Company.
The Company believes that the consolidation of document management services
businesses will provide it with a significant competitive advantage over
existing smaller competitors. As the Company gains critical mass in certain
geographic markets, it expects to be able to capitalize on its existing client
relationships, technical expertise, additional operating efficiencies, enhanced
marketing initiatives and national account programs to vertically integrate by
expanding the services offered to each of its client segments and horizontally
integrate by offering certain transferable services to a larger overall customer
base.
THE OFFERING
<TABLE>
<S> <C>
Common Stock being offered by:
The Company........................................ 2,000,000 shares
The Selling Stockholders........................... 420,000 shares
Common Stock to be outstanding after this Offering... 8,171,910 shares(1)
Use of proceeds...................................... To repay indebtedness, for acquisitions,
capital expenditures and other general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol........................ FYII
</TABLE>
- ---------------
(1) Excludes 780,080 shares issuable upon the exercise of currently outstanding
stock options and warrants and an additional 365,549 shares reserved for
issuance under the Company's employee stock option plan. See "Management --
Stock Option Plan," "Shares Eligible for Future Sale" and Note 11 of Notes
to the Consolidated Financial Statements of F.Y.I. Incorporated and
Subsidiaries.
4
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
F.Y.I. was founded in September 1994 and effectively began its operations
on February 1, 1996 following the completion of the IPO and the acquisitions of
the Founding Companies (the "Acquisitions"). The Summary Financial Data set
forth below for the periods prior to February 1, 1996 are derived from the
Combined Financial Statements of the Founding Companies contained elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
COMBINED FOUNDING COMPANIES
---------------------------------------------------------------------
ONE MONTH NINE MONTHS ENDED
NINE MONTHS ENDED SEPTEMBER 30, 1996(4)
FISCAL YEARS ENDED DECEMBER 31, ENDED JANUARY --------------------------
------------------------------------------- SEPTEMBER 30, 31, F.Y.I.
1991 1992 1993 1994 1995 1995 1996(4) INCORPORATED SUPPLEMENTAL
------- ------- ------- ------- ------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.............. $29,525 $35,696 $38,396 $43,032 $47,626 $35,486 $ 3,916 $ 45,971 $ 49,887
Operating income(1)........ 1,444 2,708 3,401 3,454 4,966 3,929 503 4,522 5,025
Interest and other expense
(income), net............ 132 272 248 29 139 159 (45) 232 187
Income before income
taxes(1)................. 1,312 2,436 3,153 3,425 4,827 3,770 548 4,290 4,838
Provision for income
taxes(2)................. 474 895 1,261 1,256 1,794 1,399 221 1,729 1,950
Net income(1)(2)........... $ 838 $ 1,541 $ 1,892 $ 2,169 $ 3,033 $ 2,371 $ 327 $ 2,561 $ 2,888
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per
share(1)(2)(3)........... $0.06 $0.47 $0.53
======= ======= =======
Weighted average shares
outstanding(3)........... 5,450 5,450 5,450
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------
ACTUAL AS ADJUSTED(5)
------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................ $ 5,038 $ 28,187
Total assets................................................................... 59,901 79,550
Long-term obligations, net of current maturities............................... 16,956 2,855
Stockholders' equity........................................................... 28,924 66,174
</TABLE>
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA FOR SIGNIFICANT
ACQUISITIONS(6)
-----------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER SEPTEMBER 30,
31, 1995 1996
----------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue...................................................................... $78,160 $64,964
Operating income................................................................... 9,724 7,813
Interest and other expense (income), net........................................... 1,454 827
Income before income taxes......................................................... 8,270 6,986
Provision for income taxes......................................................... 3,172 2,808
Net income......................................................................... $ 5,098 $ 4,178
======= =======
Net income per share............................................................... $0.87 $0.71
======= =======
Weighted average shares outstanding(3)............................................. 5,872 5,872
</TABLE>
Footnotes to Summary Financial Data appear on following page.
5
<PAGE> 7
Footnotes to Summary Financial Data.
(1) For the periods prior to February 1, 1996, gives effect to certain
reductions in salaries and benefits of the former owners and key employees
of the Founding Companies which were agreed to in connection with the
organization of the Company and the IPO (the "Compensation Differential").
See Note 3 of Notes to Combined Financial Statements of the Founding
Companies.
(2) For the periods prior to February 1, 1996, gives effect to certain tax
adjustments related to the taxation of certain Founding Companies as S
corporations or sole proprietorships prior to the consummation of the
Acquisitions and the tax impact of the Compensation Differential in each
period. See Note 3 of Notes to Combined Financial Statements of the Founding
Companies.
(3) Weighted average shares include: (i) 1,205,682 shares issued by F.Y.I. prior
to the consummation of the Acquisitions and the IPO; (ii) 1,878,933 shares
issued to the stockholders of the Founding Companies in connection with the
Acquisitions; (iii) 2,185,000 shares sold in the IPO; (iv) 15,923 shares of
Common Stock determined pursuant to the treasury stock method relating to
warrants to purchase 115,000 shares of Common Stock at $10.00 per share; (v)
585,589 shares of Common Stock issued in acquisitions consummated through
September 1996; and (vi) 36,200 shares of Common Stock issued upon the
exercise of stock options. Does not include (i) options to purchase 615,080
shares of Common Stock currently outstanding under the Company's 1995 Stock
Option Plan; and (ii) warrants outstanding to purchase 50,000 shares of
Common Stock.
(4) The Supplemental Statement of Operations Data for the nine months ended
September 30, 1996 represent the combined results of (i) the combined
Founding Companies for the one month of operations prior to the consummation
of the IPO and the Acquisitions; and (ii) F.Y.I. Incorporated and
Subsidiaries for the eight months of operations subsequent to the
consummation of the IPO and the Acquisitions. The Supplemental Data are
provided for informational purposes only and do not purport to present the
results of operations of the Company had the transactions assumed therein
occurred on or as of the dates indicated, nor are they necessarily
indicative of the results of operations which may be achieved in the future.
(5) Gives effect to the sale of 2,000,000 shares of Common Stock offered by the
Company hereby and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
(6) Gives effect to: (i) the acquisition of Robert A. Cook and Staff, Inc. and
RAC Services, Inc., B&B Information and Management, Inc., Premier Document
Management, Inc. and PDM Services, Inc., C.M.R.S. Incorporated, Minnesota
Medical Record Service, Inc., Texas Medical Record Service, Inc. and ZIA
Information Analysis Group (collectively, the "Significant Acquisitions") as
if the transactions were consummated for Statement of Operations Data as of
January 1, 1995; and (ii) the Acquisitions for Statement of Operations Data
for periods prior to February 1, 1996. See the separate unaudited pro forma
financial statements and notes thereto located elsewhere within this
Prospectus.
6
<PAGE> 8
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the specific factors set forth below as well as the other information
set forth in this Prospectus in evaluating an investment in the Company.
LIMITED OPERATING HISTORY; RISKS OF INTEGRATION; ABILITY TO MANAGE GROWTH
F.Y.I. was founded in September 1994 and conducted no operations prior to
the consummation of the IPO. F.Y.I. acquired the Founding Companies
simultaneously with the closing of the IPO and has acquired 15 additional
companies since that time (together with the Founding Companies, the "Operating
Companies"). Prior to their acquisition, these companies operated as separate
independent entities. Currently, the Company has a decentralized financial
reporting system and relies on the existing reporting systems of the Operating
Companies. The success of the Company will depend, in part, on the Company's
ability to integrate the operations of the Operating Companies, including
centralizing certain functions to achieve cost savings and developing programs
and processes that will promote cooperation and the sharing of opportunities and
resources. F.Y.I.'s management group has been assembled recently and had no
previous experience in the document management services industry. There can be
no assurance that the management group will effectively be able to oversee the
combined entity and implement the Company's operating or growth strategies.
Further, to the extent that the Company is able to implement fully its
acquisition strategy, the resulting growth of the Company will place significant
demands on management and on the Company's internal systems and controls. There
can be no assurance that the recently assembled management group will
effectively be able to direct the Company through a period of significant
growth. In addition, no assurance can be given that the Company's current
systems will be adequate for its future needs or that the Company will be
successful in implementing new systems. See "The Company,"
"Business -- Acquisition Strategy" and "Management."
A number of the Operating Companies offer different services, utilize
different capabilities and technologies and target different geographic markets
and client segments. While the Company believes that there are substantial
opportunities in integrating these businesses, these differences increase the
risk inherent in successfully completing such integration. Further, there can be
no assurance that the Company's strategy to establish a single source provider
for document management services will be successful, or that the Company's
target client segments will accept the Company as a provider of such services.
In addition, there can be no assurance that the operating results of the Company
will match or exceed the combined individual operating results achieved by the
Operating Companies prior to their acquisition.
ACQUISITION STRATEGY
The Company's primary growth strategy is the acquisition of additional
document management services businesses that will complement its existing
businesses. There can be no assurance that the Company will be able to identify
or reach mutually agreeable terms with acquisition candidates and their owners,
or that the Company will be able to profitably manage additional businesses or
successfully integrate such additional businesses into the Company without
substantial costs, delays or other problems. Acquisitions may involve a number
of special risks including: (i) adverse short-term effects on the Company's
reported operating results; (ii) diversion of management's attention; (iii)
dependence on retention, hiring and training of key personnel; (iv) risks
associated with unanticipated problems or legal liabilities; and (v)
amortization of acquired intangible assets. Some or all of these risks could
have a material adverse effect on the Company's operations and financial
performance. In addition, to the extent that consolidation becomes more
prevalent in the industry, the prices for attractive acquisition candidates may
be bid up to higher levels. In any event, there can be no assurance that
businesses acquired in the future will achieve sales and profitability that
justify the investment therein. See "Business -- Acquisition Strategy."
The Company is regularly in discussions with additional acquisition
candidates and may from time to time enter into letters of intent with respect
to the acquisition of such businesses. No assurance can be given,
7
<PAGE> 9
however, that the Company will acquire any additional businesses. See "The
Company -- Subsequent Acquisitions" and "Business -- Acquisition Strategy."
NEED FOR ADDITIONAL FINANCING TO CONTINUE ACQUISITION STRATEGY
The Company currently intends to finance future acquisitions by using cash
and its Common Stock for all or a portion of the consideration to be paid. The
Company filed a shelf registration statement (the "Acquisition Shelf") with the
Securities and Exchange Commission (the "Commission") relating to the separate
offering of up to 2,000,000 shares of Common Stock to be used as consideration
for acquisitions effected by the Company, of which 1,143,265 shares of Common
Stock were available as of December 11, 1996. In the event that the Company's
Common Stock does not maintain sufficient value, or potential acquisition
candidates are unwilling to accept the Company's Common Stock as consideration
for the sale of their businesses, the Company may be required to utilize more of
its cash resources, if available, in order to continue its acquisition program.
If the Company does not have sufficient cash resources, its growth could be
limited unless it is able to obtain capital through additional debt or equity
financings. In April 1996, the Company and its subsidiaries entered into a
credit agreement, as amended (the "Line of Credit"), with Banque Paribas, as
agent, and the lenders named therein. Under the Line of Credit, the Company and
its subsidiaries may borrow, on a revolving credit basis, loans in an aggregate
outstanding principal amount of $5.0 million for working capital and general
corporate purposes and term loans in an aggregate principal amount of $30.0
million for acquisitions, subject to certain restrictions in the Line of Credit.
As of December 11, 1996, the availability under the Line of Credit was $2.0
million for working capital and $8.8 million for acquisitions. There can be no
assurance, however, that funds available under the Line of Credit will be
sufficient for the Company's needs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Acquisition Strategy."
EFFECT OF POTENTIAL FLUCTUATIONS IN OPERATING RESULTS ON PRICE OF COMMON STOCK;
VOLATILITY OF STOCK PRICE
Results for any quarter are not necessarily indicative of the results that
the Company may achieve for any subsequent quarter or a full fiscal year.
Quarterly results may vary materially as a result of the timing and structure of
acquisitions, the timing and magnitude of costs related to such acquisitions,
the gain or loss of material client relationships and variations in the prices
charged by the Company for the services it provides. In addition, since a
significant portion of the Company's revenue is generated on a
project-by-project basis, the timing or completion of material projects could
result in fluctuations in the Company's results of operations for particular
quarterly periods. Such fluctuations in operating results may adversely affect
the market price of the Company's Common Stock. The market price for the
Company's shares may also fluctuate in response to material announcements by the
Company or significant clients or competitors of the Company, changes in the
economic or other conditions impacting the Company's targeted client segments or
changes in general economic conditions. Further, the securities markets have
experienced significant price and volume fluctuations from time to time that
have often been unrelated or disproportionate to the operating performance of
particular companies. These broad fluctuations may adversely affect the market
price of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Fluctuations in Quarterly
Results of Operations."
DEPENDENCE ON CERTAIN CLIENT SEGMENTS AND TECHNOLOGY
The Company derives its revenue primarily from its three targeted client
segments: healthcare institutions, professional services firms and financial
institutions. Fundamental changes in the business practices of any of these
client segments, whether due to regulatory, technological or other developments,
could cause a material reduction in demand by such clients for the services
offered by the Company. Any such reduction in demand would have a material
adverse effect on the results of operations of the Company. The document
management services industry is characterized by technological change, evolving
customer needs and emerging technical standards. Although the Company believes
that it will be able to continue to offer services based on the newest
technologies, there can be no assurance that the Company will be able to obtain
the rights
8
<PAGE> 10
to use any such technologies, that it will be able to effectively implement such
technologies on a cost-effective or timely basis or that such technologies will
not render obsolete the Company's role as a third party provider of document
management services. See "Business -- Services Offered."
COMPETITION
The document management services businesses in which the Company competes
and expects to compete are highly competitive. A significant source of
competition is the in-house document handling capability of the Company's
targeted client base. There can be no assurance that these businesses will
outsource more of their document management needs or that such businesses will
not bring in-house services that they currently outsource. In addition, certain
of the Company's competitors are larger businesses and have greater financial
resources than the Company. Certain of these competitors operate in broader
geographic areas than the Company, and others may choose to enter the Company's
areas of operation in the future. In addition, the Company intends to enter new
geographic areas through internal growth and acquisitions and expects to
encounter significant competition from established competitors in each of such
new areas. As a result of this highly competitive environment, the Company may
lose customers or have difficulty in acquiring new customers and new companies,
and its results of operations may be adversely affected. See "Business --
Competition."
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of its
executive officers and on senior management of the Operating Companies.
Furthermore, the Company will also be dependent on the senior management of
businesses acquired in the future. If any of these people is unable or unwilling
to continue in his or her present role, or if the Company is unable to attract
and retain other skilled employees, the Company's business could be adversely
affected. The Company does not intend to obtain key person life insurance
covering any of its executive officers or other members of senior management.
See "Management."
POTENTIAL LIABILITY FOR BREACH OF CONFIDENTIALITY
A substantial portion of the Company's business involves the handling of
documents containing confidential and other sensitive information. Although the
Company has established procedures intended to prevent 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
material liability to the Company.
INCREASE IN MINIMUM WAGE
As of October 1, 1996, the federal minimum wage increased to $4.75 an hour.
The second phase of the increase will be implemented on September 1, 1997,
bringing the federal minimum wage to $5.15 an hour. In addition, California and
other states have increased or may increase their minimum wage above the federal
minimum. A significant number of the Company's employees earn slightly above the
minimum wage and, therefore, the Company may have to increase salaries to remain
competitive. Accordingly, the Company's results of operations may be adversely
affected.
CONTROL BY MANAGEMENT
Following the completion of this Offering, the directors and executive
officers of the Company will beneficially own approximately 20.3% of the then
outstanding shares of Common Stock (19.5% if the Underwriters' over-allotment
option is exercised in full) and exercise substantial control over the Company's
affairs. These stockholders acting together would likely be able to elect a
sufficient number of directors to control the Board of Directors and to approve
or disapprove any matter submitted to a vote of stockholders. See "Principal and
Selling Stockholders."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of Common Stock of the Company in
the public market. After the completion of this Offering, there will be
8,171,910 shares of Common Stock outstanding. The 2,420,000 shares offered
hereby will be, and the 2,185,000 shares sold in the IPO are, freely tradable
without restriction unless acquired by
9
<PAGE> 11
affiliates of the Company. Of such 8,171,910 shares, 2,664,615 shares, together
with 165,000 shares of Common Stock currently issuable upon exercise of
outstanding warrants, have not been registered under the Securities Act of 1933,
as amended (the "Securities Act"), which means that they may be resold publicly
only upon registration under the Securities Act or in compliance with an
exemption from the registration requirements of the Securities Act, including
the exemption provided by Rule 144 under the Securities Act. Holders of all of
such unregistered shares, however, have certain registration rights with respect
to such shares.
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of 90 days from the date of this Offering without the
prior written consent of Montgomery Securities, except that the Company may
issue Common Stock in connection with acquisitions or upon the exercise of
options. In addition, the former owners of the Founding Companies and the
initial stockholders of the Company (which together include the Selling
Stockholders) have agreed with the Company that they will not sell any of their
shares for a period of two years after January 26, 1996 (other than certain
sales registered under the Securities Act and a limited ability to pledge such
shares as collateral). The Company has agreed not to waive such restriction for
a period of 90 days from the date of this Offering without the prior written
consent of Montgomery Securities. Directors of the Company who are not subject
to these contractual restrictions have agreed not to contract to sell or
otherwise sell or dispose of any of their Common Stock for a period of 90 days
after the date of this Prospectus without the prior written consent of
Montgomery Securities.
The Company issued 856,735 shares of Common Stock as partial consideration
for acquisitions completed since the IPO. Such 856,735 shares were registered
under the Acquisition Shelf and are freely tradable (except for 36,670 shares
held by a wholly-owned subsidiary of the Company) unless acquired by parties to
the acquisition or affiliates of such parties, other than the issuer, in which
case they may be sold pursuant to Rule 145 under the Securities Act. In
addition, these shares are subject to contractual restrictions on resale which
generally expire two years from the date of issuance.
The Company has reserved for issuance under the Company's 1995 Stock Option
Plan (the "Plan") an aggregate of 650,000 shares of Common Stock, or 12% of the
aggregate number of shares of the Common Stock outstanding, whichever is
greater. The Company has registered the shares issuable upon exercise of options
granted under the Plan, and such shares will be eligible for resale in the
public market. As of December 11, 1996, the Company had options to purchase
615,080 shares of Common Stock outstanding under the Plan. See "Principal and
Selling Stockholders" and "Shares Eligible for Future Sale."
EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is empowered to issue preferred stock
without stockholder action. The existence of this "blank-check" preferred could
render more difficult or discourage an attempt to obtain control of the Company
by means of a tender offer, merger, proxy contest or otherwise. See "Description
of Capital Stock."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be
covered by the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the sufficiency of the Company's working capital and the ability of
the Company to realize benefits from consolidating certain general and
administrative functions, to continue its aggressive acquisition program, to
retain management, to implement its focused business strategy to expand its
document management services geographically, to attract customers from other
businesses, to increase revenue by cross-selling services and to successfully
defend itself in ongoing and future litigation. Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and, therefore,
there can be no assurance that the forward-looking statements included in this
Prospectus will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
10
<PAGE> 12
THE COMPANY
F.Y.I. Incorporated was founded in September 1994 under the laws of the
State of Delaware to create a national, single source provider of document
management services. Prior to the IPO, F.Y.I. did not conduct any operations.
F.Y.I. acquired, simultaneously with the consummation of the IPO, the following
seven established businesses: Imagent Corporation (together with Mobile
Information Services Corporation, "Imagent"); Melanson & Associates, Inc. d/b/a
Researchers (together with Bay Area Micrographics, "Researchers"); Recordex
Services, Inc. ("Recordex"); C.&T. Management Services, Inc. d/b/a DPAS
(together with Qualidata, Inc., "DPAS"); Leonard Archives, Inc. ("Leonard");
Deliverex, Incorporated (together with ASK Record Management, "Deliverex"); and
Permanent Records, Inc. ("Permanent Records"), which are collectively referred
to as the "Founding Companies." See "Certain Transactions."
FOUNDING COMPANIES
Imagent. Imagent provides document management services to clients in the
northeastern and mid-atlantic United States. Founded in 1969, Imagent's three
primary lines of business include: (i) the distribution of microfilm and
business imaging supplies; (ii) microfilm processing; and (iii) business
services, including microfilming, database creation and management, electronic
imaging, data entry and microfilm storage and research services. A large number
of Imagent's microfilm processing clients are banks. Imagent's business services
segment, which is its fastest growing business segment, provides services to
financial, administrative and legal departments of a wide variety of companies.
Imagent is headquartered in Baltimore and had 1995 revenue of approximately
$13.5 million.
Researchers. Researchers provides litigation support services to law firms,
corporate legal departments and insurance companies in the San Francisco, Los
Angeles, San Jose and Sacramento metropolitan areas. These services include
customized solutions for a variety of its clients' document needs, including
on-site microfilming and electronic imaging, overnight document reproduction and
document indexing. In addition, Researchers has particular expertise in
retrieving and processing medical records for use in medical malpractice and
personal injury litigation. Founded in 1975, Researchers is a significant
provider of outsourced litigation support in California and has provided
services to many of the largest law firms in the State. Although Researchers'
business is primarily project driven, a majority of its 1995 revenue has been
generated by clients who were clients in 1994. Researchers is headquartered in
San Francisco and had 1995 revenue of approximately $9.9 million.
Recordex. Recordex provides medical records release services to over 150
hospitals and other healthcare institutions in 16 eastern states, including
Johns Hopkins Hospital, University of Massachusetts Medical Center and Duke
University Medical Center, as well as to physician groups, clinics and HMOs.
Recordex's services, which are performed on-site, include: (i) tracking of the
request for information from its receipt until its fulfillment; (ii) ensuring
that a request for information is complete and authorized; (iii) coordinating
the retrieval of the record; (iv) reproducing relevant pages for release; (v)
reassembling and refiling the record; and (vi) billing. Based in Malvern,
Pennsylvania, Recordex was founded in 1986 and had 1995 net service revenue of
approximately $8.5 million.
DPAS. DPAS provides database and processing services primarily to financial
institutions, including Wells Fargo, as well as to a number of other corporate
clients nationwide. Database services include: (i) document conversion; (ii)
customized data capture (manually or through scanning or other electronic
means); (iii) database creation, management and analysis; and (iv) certain
direct mail services. DPAS also provides remittance processing services as an
outsourcing option for the receivables function of its corporate clients. Such
services include receiving and processing credit card payments, encoding checks
and depositing payments, and certain other mailing-related activities.
Headquartered in San Francisco, DPAS was founded in 1961. DPAS had 1995 revenue
of approximately $5.4 million.
Leonard. Leonard provides records storage, retrieval and processing
services to over 30 hospitals and 100 medical facilities, as well as to a wide
variety of corporate clients in southern Michigan and northern Ohio. Founded in
1888 as a moving and storage company, Leonard entered the records storage
business in 1968. Leonard's services include: (i) active medical, financial and
legal records storage; (ii) archival storage of
11
<PAGE> 13
semi-active and inactive documents; (iii) environmental vault storage of
magnetic and micrographic media; (iv) disaster recovery services; and (v)
document destruction. Leonard provides document management services to a wide
variety of corporate clients, including Ford Motor Company, Chrysler Corporation
and Ameritech. Headquartered in Detroit, Leonard had 1995 revenue of
approximately $5.9 million.
Deliverex. Deliverex provides active medical records storage, retrieval and
processing services to 27 hospitals and medical facilities in the San Jose and
greater San Francisco Bay areas, including the Department of Veterans
Affairs -- Palo Alto (the "VA"), Stanford Health Services, Columbia/Good
Samaritan Hospital, Summit Medical Center and Santa Clara Valley Medical Center.
Founded in 1973, Deliverex offers off-site management of medical records,
including: (i) filling of records requests; (ii) extracting key pages within
minutes for transmission to hospitals via facsimile for emergency cases; (iii)
computerized tracking of medical records to their destinations; (iv) file system
conversion; (v) storage; and (vi) purging of files on a regular basis. In
addition, Deliverex is currently utilizing a system in which it electronically
images the most frequently used pages of a medical file so that it can provide
its clients with immediate access to such records at multiple locations through
linked computer terminals. This system is currently implemented at the VA.
Deliverex is a franchisor or licensor to five other medical records businesses
operating in San Francisco, Seattle, Denver, Baltimore and Ft. Lauderdale.
Deliverex had 1995 revenue of approximately $2.9 million.
Permanent Records. Permanent Records provides a wide range of document
management outsourcing service for its hospital, clinic and physician clients,
including: (i) on-site handling of medical records; (ii) off-site active and
inactive storage and retrieval services; (iii) microfilming; and (iv) medical
records release services. These services are provided to over 50 hospitals in
the Dallas/Fort Worth area, including Columbia/HCA Healthcare Systems and the
Harris and Irving healthcare systems. Founded in 1977, Permanent Records had
1995 revenue of approximately $1.6 million.
The aggregate consideration paid by F.Y.I. to acquire the Founding
Companies was approximately $35.1 million, consisting of: (i) $7,059,000 in
cash; (ii) 1,878,933 shares of Common Stock; (iii) the assumption and repayment
of approximately $191,000 of indebtedness owed by a Founding Company
stockholder; and (iv) the distribution of cash and certain receivables to
stockholders of Imagent and Leonard, which were S corporations, in the amount of
$2,750,000 and $700,000, respectively, representing the Accumulated Adjustment
Accounts ("AAA accounts"). AAA accounts generally represent undistributed
retained earnings of an S corporation, upon which taxes have been paid by the
stockholders. In addition, prior to the closing of the IPO, certain Founding
Companies made distributions to their stockholders of certain assets and related
liabilities, including the increase in net equity subsequent to June 30, 1995 of
each of the Founding Companies, other than Recordex. Based on the relevant
account balances as of December 31, 1995, the amount of these distributions was
$2,340,000. As such, total transfers of selected assets to and assumption of
selected liabilities of certain stockholders of the Founding Companies were in
the net amount of approximately $5,981,000 (of which $1,120,000 was distributed
prior to December 31, 1995).
The aggregate consideration paid for each Founding Company was: (i)
Imagent -- $1,500,000 and 331,497 shares of Common Stock; (ii)
Researchers -- $2,750,000 and 681,400 shares of Common Stock; (iii)
Recordex -- $309,000 and 198,589 shares of Common Stock; (iv) DPAS -- $400,000
and 117,068 shares of Common Stock; (v) Leonard -- $1,250,000 and 253,274 shares
of Common Stock; (vi) Deliverex -- $700,000 and 186,147 shares of Common Stock;
and (vii) Permanent Records -- $150,000 and 110,958 shares of Common Stock. In
addition, upon consummation of the IPO, the Company repaid approximately
$3,349,000 of third party indebtedness assumed by the Company in the
acquisitions of the Founding Companies, virtually all of which was guaranteed by
stockholders of the Founding Companies, and $584,000 of indebtedness to such
stockholders. Combined with the $191,000 of assumed indebtedness referred to in
the immediately preceding paragraph, the total indebtedness repaid from the
proceeds of the IPO was approximately $4,124,000.
12
<PAGE> 14
SUBSEQUENT ACQUISITIONS
Since the closing of the IPO in January 1996, the Company has acquired the
following 15 additional document management services businesses (collectively
referred to as the "Subsequent Acquisitions").
Cook. Robert A. Cook and Staff, Inc. and RAC Services, Inc. (collectively,
"Cook") were acquired by the Company in June 1996. Founded in 1966, Cook
provides litigation support services to hundreds of law firms and insurance
companies throughout the State of California. Cook is headquartered in San Jose
and had 1995 revenue of approximately $12.0 million. The aggregate consideration
paid by the Company for Cook consisted of $11.3 million in cash.
B&B. B&B Information and Image Management, Inc. ("B&B"), acquired by the
Company in May 1996, provides document management services to clients in the
Washington, D.C. area. Founded in 1980, B&B's primary lines of business include
micrographic, electronic imaging and database services. B&B's primary client
relationships include financial institutions, governmental agencies, insurance
companies, hospitals and medical facilities. B&B is headquartered in Upper
Marlboro, Maryland and had 1995 revenue of approximately $8.1 million. The
aggregate consideration paid by the Company for B&B consisted of $3.1 million in
cash and 183,333 shares of Common Stock.
Premier. Premier Document Management, Inc. and PDM Services, Inc.
(collectively, "Premier") were acquired by the Company in May 1996. Founded in
1984, Premier provides medical records release services to approximately 200
clients throughout the State of Washington and northern California. Based in
Seattle, Premier had 1995 revenue of approximately $3.0 million. The aggregate
consideration paid by the Company for Premier consisted of $1.2 million in cash
and 69,919 shares of Common Stock. The Company will make an additional cash and
stock earnout payment on March 1, 1997 to the stockholders of Premier, which
payment is not expected to exceed $3.0 million and may not exceed $6.0 million.
Medical Record. C.M.R.S. Incorporated ("CMRS"), Texas Medical Record
Service, Inc. ("Texas Medical Record") and Minnesota Medical Record Service,
Inc. ("Minnesota Medical Record") (CMRS, Texas Medical Record and Minnesota
Medical Record are referred to herein, collectively, as "Medical Record") were
affiliated corporations acquired by the Company in August 1996. CMRS, Texas
Medical Record and Minnesota Medical Record provide medical records release
services and are based in Los Angeles, Houston and Minneapolis, respectively,
and were founded in 1985, 1986 and 1987, respectively. Medical Record had 1995
combined revenue of approximately $5.5 million. The aggregate consideration paid
by the Company for Medical Record consisted of $2.3 million in cash and 178,051
shares of Common Stock (excluding 36,670 shares of Common Stock issued to a
wholly-owned subsidiary of the Company). The Company may make an additional cash
and stock earnout payment in September 1997 to the sole stockholder of CMRS up
to a maximum amount of $2.5 million.
ZIA. ZIA Information Analysis Group ("ZIA") was acquired by the Company in
September 1996. Founded in 1994, ZIA is based in San Francisco and provides
litigation consulting services, including discovery assistance, document coding,
forensic analysis and trial support services, to law firms, corporations and
regulated entities in California. ZIA had 1995 revenue of approximately $2.3
million. The aggregate consideration paid by the Company for ZIA consisted of
$2.3 million in cash and 154,286 shares of Common Stock. A total amount of
$183,998 in cash and 12,343 shares of Common Stock is being retained by the
Company for a period of 120 days from the date of closing as security against
any indemnification claim.
The acquisitions of Cook, B&B, Premier, Medical Record and ZIA are
collectively referred to herein as the "Significant Acquisitions."
In addition, the Subsequent Acquisitions include the following: (i)
Sacramento Valley Records Management, Inc. ("Sacramento"), a medical records
storage and delivery franchise company; (ii) certain assets of Microfilm
Associates, Ltd. ("Microfilm"), and Octo, Incorporated ("Octo"), both imaging
companies; (iii) Domor Data Processing ("Domor"), a data processing business;
(iv) Rushmore Legal Support ("Rushmore"), a litigation support business; (v)
Index Records Management ("Index"), a medical records storage business; (vi)
Carton-Hodgson, Inc. ("Carton") and CH Direct, Inc. ("Direct"), both direct
mail, fulfillment and data processing businesses which expand the Company's
direct mail and fulfillment
13
<PAGE> 15
business; and (vii) Data Input Services Corporation, Inc. ("DISC"), a data
processing business. These companies had aggregate 1995 revenue in excess of $12
million. The aggregate consideration for Sacramento, Microfilm, Octo, Domor,
Rushmore, Index, Carton, Direct and DISC consisted of approximately $7.4 million
in cash and 234,476 shares of Common Stock.
F.Y.I. paid $27.5 million in cash, issued 820,065 shares of Common Stock
(excluding 36,670 shares issued to a wholly-owned subsidiary of the Company) and
assumed certain debt in connection with the Subsequent Acquisitions.
The Company's executive offices are located at 3232 McKinney Avenue, Suite
900, Dallas, Texas 75204, and its telephone number is (214) 953-7555.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby, after deducting underwriting
discount and estimated offering expenses, are expected to be approximately $37.3
million (approximately $44.1 million if the Underwriters' over-allotment option
is exercised in full). The Company will not receive any proceeds from the sale
of shares of Common Stock by the Selling Stockholders. The Company expects to
use a portion of the remaining net proceeds to repay the outstanding balance on
its Line of Credit. As of December 11, 1996, the amount outstanding under the
Line of Credit was $21.8 million. Interest on loans outstanding under the Line
of Credit is, at the Company's option, payable at the prime rate in effect from
time to time plus 1.5% or at a Eurodollar rate plus 3.0%. The portion of the
Line of Credit allocated for acquisitions permits drawdowns until October 15,
1997, and any amount outstanding on that date matures at various times from
January 1998 through April 2001. The remaining net proceeds will be used for
general corporate purposes, which are expected to include additional
acquisitions. See "Risk Factors" and "The Company -- Subsequent Acquisitions."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "FYII." The Company completed its IPO in January 1996 at a price of
$13.00 per share. The following table sets forth, for the Company's fiscal
periods indicated, the range of high and low last reported sale prices for the
Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
First Quarter (from January 23, 1996).............. $20.00 $13.00(1)
Second Quarter..................................... $22.00 $16.00
Third Quarter...................................... $23.00 $17.00
Fourth Quarter (through December 11, 1996)......... $23.00 $20.00
</TABLE>
- ---------------
(1) Represents the initial public offering price.
On December 11, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $20.125 per share. At December 11, 1996, there
were 50 holders of record of the Company's Common Stock, although the Company
believes the number of beneficial holders is substantially greater.
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future and intends to retain its earnings, if any, to
finance the expansion of its business and for general corporate purposes. Any
payment of future dividends will be at the discretion of the Board of Directors
and will depend upon, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
and other factors that the Company's Board of Directors deems relevant. In
addition, the Line of Credit prohibits the payment of dividends by the Company
without the lender's consent.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company at September 30, 1996 and as adjusted to reflect the sale of
2,000,000 shares of Common Stock offered hereby and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
the audited consolidated financial statements of F.Y.I. Incorporated and
Subsidiaries and the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------
(IN THOUSANDS)
AS
ACTUAL ADJUSTED
------- --------
<S> <C> <C>
Short-term debt (including current portion of long-term debt).... $ 3,839 $ 339
======= =======
Long-term debt, excluding current portion........................ $16,956 $ 2,855
Stockholders' equity
Preferred Stock, $0.01 par value, 1,000,000 shares authorized,
none issued and outstanding................................. -- --
Common Stock, $0.01 par value, 26,000,000 shares authorized,
5,928,074 issued and outstanding, 7,928,074 issued and
outstanding as adjusted(1).................................. 59 79
Additional paid-in capital..................................... 26,805 64,035
Treasury stock(2).............................................. (501) (501)
Retained earnings.............................................. 2,561 2,561
------- -------
Total stockholders' equity............................. 28,924 66,174
------- -------
Total capitalization............................................. $45,880 $ 69,029
======= =======
</TABLE>
- ---------------
(1) Does not include an additional 611,700 shares of Common Stock reserved for
issuance pursuant to options outstanding at September 30, 1996 under the
Company's 1995 Stock Option Plan and warrants outstanding for the purchase
of 165,000 shares of Common Stock.
(2) A total of 36,670 shares of Common Stock, resulting from the acquisition of
Medical Record, are held by a wholly-owned subsidiary of the Company.
15
<PAGE> 17
SELECTED FINANCIAL DATA
F.Y.I. acquired, simultaneously with and as a condition to the closing of
the IPO, the Founding Companies. The Acquisitions have been accounted for in
accordance with generally accepted accounting principles ("GAAP") as a
combination of the Founding Companies at historical cost. Accordingly,
historical financial statements of these Founding Companies have been combined
throughout all relevant periods herein as if the Founding Companies had always
been members of the same operating group. However, since the Founding Companies
were not under common control or management, historical combined results may not
be comparable to, or indicative of, future performance.
The Selected Financial Data for the nine months ended September 30, 1996
have been derived from the Consolidated Financial Statements of F.Y.I.
Incorporated and Subsidiaries that have been audited by Arthur Andersen LLP and
that appear elsewhere in this Prospectus. The Selected Financial Data for the
nine months ended September 30, 1995 have been derived from the unaudited
Supplemental Data presented in the Consolidated Financial Statements of F.Y.I.
Incorporated and Subsidiaries included elsewhere in this Prospectus. The
Selected Financial Data for the years ended December 31, 1993, 1994 and 1995 and
for the one month ended January 31, 1996 have been derived from the Combined
Financial Statements of the Founding Companies that have been audited by Arthur
Andersen LLP and that appear elsewhere in this Prospectus. In their report,
Arthur Andersen LLP states that with respect to Recordex, as of and for the two
years in the period ended December 31, 1994, its opinion is based on the report
of other independent public accountants, namely Elko, Fischer, McCabe & Rudman,
Ltd. The Selected Financial Data for the years ended December 31, 1991
(unaudited) and 1992 (audited) have been derived from financial statements not
included elsewhere in this Prospectus. The unaudited financial statements have
been prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments and reclassifications necessary
for a fair presentation of the financial position and results of operations for
the periods presented. In addition, the Selected Financial Data are based on
available information and certain assumptions described in the footnotes set
forth below, all of which the Company believes are reasonable. The data relating
to the combined Founding Companies, Supplemental Data and pro forma information
are provided for informational purposes only and do not purport to present the
results of operations of the Company had the transactions assumed therein
occurred on or as of the dates indicated, nor are they necessarily indicative of
the results of operations which may be achieved in the future.
The Selected Individual Founding Company Financial Data for the years ended
December 31, 1993, 1994 and 1995 have been derived from the audited financial
statements of the Founding Companies that appear elsewhere in this Prospectus.
The Selected Individual Founding Company Financial Data for the year ended
December 31, 1992 have been derived from audited financial statements not
included elsewhere in this Prospectus.
The Selected Financial Data provided below should be read in conjunction
with the historical financial statements of F.Y.I., the Combined Financial
Statements of the Founding Companies and the financial statements of each of the
Founding Companies, including the related notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
appear elsewhere in this Prospectus.
16
<PAGE> 18
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
F.Y.I. was founded in September 1994 and effectively began its operations
on February 1, 1996 following the completion of the IPO. The Selected Financial
Data set forth below for the periods prior to February 1, 1996 are derived from
the Combined Financial Statements of the Founding Companies contained elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
COMBINED FOUNDING COMPANIES
----------------------------------------------------------------------------- NINE MONTHS ENDED
NINE MONTHS ONE MONTH SEPTEMBER 30, 1996(4)
FISCAL YEAR ENDED DECEMBER 31, ENDED ENDED ---------------------------
----------------------------------------------- SEPTEMBER 30, JANUARY 31, F.Y.I.
1991 1992 1993 1994 1995 1995 1996(4) INCORPORATED SUPPLEMENTAL
------- ------- ------- ------- ------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Service revenue... $22,958 $29,442 $32,067 $36,081 $40,615 $29,997 $ 3,487 $ 41,262 $ 44,749
Product revenue... 5,899 5,378 5,123 5,923 6,138 4,815 395 4,211 4,606
Other revenue..... 668 876 1,206 1,028 873 674 34 498 532
------- ------- ------- ------- ------- ------- ------ ------- -------
Total
revenue... 29,525 35,696 38,396 43,032 47,626 35,486 3,916 45,971 49,887
Cost of
services........ 14,742 18,348 20,318 23,650 25,937 19,064 2,196 26,020 28,216
Cost of products
sold............ 5,050 4,628 4,464 4,892 4,972 3,890 307 3,225 3,532
Depreciation...... 771 873 883 1,055 1,238 898 90 1,023 1,113
------- ------- ------- ------- ------- ------- ------ ------- -------
Gross
profit.... 8,962 11,847 12,731 13,435 15,479 11,634 1,323 15,703 17,026
Selling, general
and
administrative
expenses(1)..... 7,457 8,940 9,218 9,921 10,449 7,657 814 10,891 11,705
Amortization...... 61 199 112 60 64 48 6 290 296
------- ------- ------- ------- ------- ------- ------ ------- -------
Operating
income(1)... 1,444 2,708 3,401 3,454 4,966 3,929 503 4,522 5,025
Interest and other
expense
(income), net... 132 272 248 29 139 159 (45) 232 187
------- ------- ------- ------- ------- ------- ------ ------- -------
Income before
income
taxes(1)........ 1,312 2,436 3,153 3,425 4,827 3,770 548 4,290 4,838
Provision for
income
taxes(2)........ 474 895 1,261 1,256 1,794 1,399 221 1,729 1,950
------- ------- ------- ------- ------- ------- ------ ------- -------
Net
income(1)(2).... $ 838 $ 1,541 $ 1,892 $ 2,169 $ 3,033 $ 2,371 $ 327 $ 2,561 $ 2,888
======= ======= ======= ======= ======= ======= ====== ======= =======
Net income per
share(1)(2)(3).. $0.06 $0.47 $0.53
====== ======= =======
Weighted average
shares
outstanding(3)... 5,450 5,450 5,450
</TABLE>
<TABLE>
<CAPTION>
COMBINED FOUNDING COMPANIES F.Y.I. INCORPORATED
-------------------------------------------------------- ----------------------------
DECEMBER 31, SEPTEMBER 30, 1996
-------------------------------------------------------- ----------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(5)
----------- ------- ------- ------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................... $ 1,341 $ 1,223 $ 2,081 $ 1,404 $ 1,663 $ 5,038 $ 28,187
Total assets.......................... 13,989 14,124 15,143 19,130 19,681 59,901 79,550
Long-term obligations, net of current
maturities.......................... 2,809 2,713 3,077 3,185 2,777 16,956 2,855
Stockholders' equity.................. 4,315 4,797 5,223 6,410 7,111 28,924 66,174
</TABLE>
17
<PAGE> 19
SELECTED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA FOR
SIGNIFICANT ACQUISITIONS(6)
-----------------------------------
YEAR ENDED
DECEMBER NINE MONTHS ENDED
31, 1995 SEPTEMBER 30, 1996
----------- -------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue.......................................................................... $69,564 $59,453
Product revenue.......................................................................... 7,688 4,968
Other revenue............................................................................ 908 543
------- -------
Total revenue...................................................................... 78,160 64,964
Cost of services......................................................................... 42,186 36,232
Cost of products sold.................................................................... 6,222 3,845
Depreciation............................................................................. 1,632 1,304
------- -------
Gross profit....................................................................... 28,120 23,583
Selling, general and administrative expenses............................................. 17,500 15,103
Amortization............................................................................. 896 667
------- -------
Operating income................................................................... 9,724 7,813
Interest and other expense (income), net................................................. 1,454 827
------- -------
Income before income taxes............................................................... 8,270 6,986
Provision for income taxes............................................................... 3,172 2,808
------- -------
Net income............................................................................... $ 5,098 $ 4,178
======= =======
Net income per share..................................................................... $0.87 $0.71
------ ----------
------ ----------
Weighted average shares outstanding(3)................................................... 5,872 5,872
</TABLE>
- ---------------
(1) For the periods prior to February 1, 1996, gives effect to the Compensation
Differential. See Note 3 of Notes to Combined Financial Statements of the
Founding Companies.
(2) For the periods prior to February 1, 1996, gives effect to certain tax
adjustments related to the taxation of certain Founding Companies as S
corporations or sole proprietorships prior to the consummation of the
Acquisitions and the tax impact of the Compensation Differential in each
period. See Note 3 of Notes to Combined Financial Statements of the Founding
Companies.
(3) Weighted average shares include: (i) 1,205,682 shares issued by F.Y.I. prior
to the consummation of the Acquisitions and the IPO; (ii) 1,878,933 shares
issued to the stockholders of the Founding Companies in connection with the
acquisitions; (iii) 2,185,000 shares sold in the IPO; (iv) 15,923 shares of
Common Stock determined pursuant to the treasury stock method relating to
warrants to purchase 115,000 shares of Common Stock at $10.00 per share; (v)
585,589 shares of Common Stock issued in acquisitions consummated through
September 1996; and (vi) 36,200 shares of Common Stock issued upon the
exercise of stock options. Does not include (i) options to purchase 615,080
shares of Common Stock currently outstanding under the Company's 1995 Stock
Option Plan; and (ii) warrants outstanding to purchase 50,000 shares of
Common Stock.
(4) The Supplemental Statement of Operations Data for the nine months ended
September 30, 1996 represent the combined results of (i) the combined
Founding Companies for the one month of operations prior to the consummation
of the IPO and Acquisitions; and (ii) F.Y.I. Incorporated and Subsidiaries
for the eight months of operations subsequent to the consummation of the
Acquisitions and the IPO. The Supplemental Data are provided for
informational purposes only and do not purport to present the results of
operations of the Company had the transactions assumed therein occurred on
or as of the dates indicated, nor are they necessarily indicative of the
results of operations which may be achieved in the future.
(5) Gives effect to the sale of 2,000,000 shares of Common Stock offered by the
Company hereby and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
(6) Gives effect to: (i) the Significant Acquisitions as if the transactions
were consummated for Statement of Operations Data as of January 1, 1995; and
(ii) the Acquisitions for Statement of Operations Data for periods prior to
February 1, 1996. See the separate unaudited pro forma financial statements
and the notes thereto located elsewhere in this Prospectus.
18
<PAGE> 20
SELECTED INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31,(1)
-------------------------------------------
1992 1993 1994 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Imagent................................................................. $10,258 $10,252 $12,135 $13,544
Researchers............................................................. 7,231 8,738 9,973 9,874
Recordex................................................................ 4,655 5,465 6,826 8,550
Leonard................................................................. 4,041 4,372 5,007 5,858
Other................................................................... 9,511 9,569 9,091 9,800
------- ------- ------- -------
Total............................................................. $35,696 $38,396 $43,032 $47,626
======= ======= ======= =======
Gross profit:
Imagent................................................................. $ 2,562 $ 2,713 $ 3,293 $ 3,829
Researchers............................................................. 2,708 2,841 3,384 2,611
Recordex................................................................ 1,942 2,258 2,494 3,092
Leonard................................................................. 1,787 1,843 1,640 2,415
Other................................................................... 2,848 3,076 2,624 3,532
------- ------- ------- -------
Total............................................................. $11,847 $12,731 $13,435 $15,479
======= ======= ======= =======
Selling, general and administrative expenses:(2)
Imagent................................................................. $ 1,775 $ 2,036 $ 2,264 $ 2,471
Researchers............................................................. 1,425 1,458 1,590 1,458
Recordex................................................................ 1,729 1,978 2,216 2,715
Leonard................................................................. 1,359 1,385 1,517 1,482
Other................................................................... 2,652 2,361 2,334 2,323
------- ------- ------- -------
Total............................................................. $ 8,940 $ 9,218 $ 9,921 $10,449
======= ======= ======= =======
Operating income:(2)
Imagent................................................................. $ 787 $ 677 $ 1,012 $ 1,294
Researchers............................................................. 1,283 1,383 1,794 1,153
Recordex................................................................ 35 168 235 376
Leonard................................................................. 429 459 123 933
Other................................................................... 174 714 290 1,210
------- ------- ------- -------
Total............................................................. $ 2,708 $ 3,401 $ 3,454 $ 4,966
======= ======= ======= =======
Net income:(2)(3)
Imagent................................................................. $ 499 $ 429 $ 632 $ 860
Researchers............................................................. 712 731 1,118 684
Recordex................................................................ 8 66 118 183
Leonard................................................................. 231 264 35 527
Other................................................................... 91 402 266 779
------- ------- ------- -------
Total............................................................. $ 1,541 $ 1,892 $ 2,169 $ 3,033
======= ======= ======= =======
</TABLE>
- ---------------
(1) Researchers' amounts for 1992 and 1993 are reported for fiscal years ended
July 31. See Note 2 of Notes to Combined Financial Statements of the
Founding Companies.
(2) Gives effect to the Compensation Differential. See Note 3 of Notes to
Combined Financial Statements of the Founding Companies.
(3) Gives effect to certain tax adjustments related to the taxation of certain
Founding Companies as S corporations or sole proprietorships prior to the
consummation of the Acquisitions and the tax impact of the Compensation
Differential in each period. See Note 3 of Notes to Combined Financial
Statements of the Founding Companies.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto and "Selected Financial
Data" appearing elsewhere in this Prospectus. Additional information concerning
factors that could cause results to differ materially from those in the
forward-looking statements is contained under the section "Risk Factors."
INTRODUCTION
F.Y.I. was founded in September 1994 to create a national, single source
provider of document management services. In January 1996, F.Y.I. acquired,
simultaneously with the closing of the IPO, the Founding Companies. The
Acquisitions have been accounted for in accordance with GAAP as a combination of
the Founding Companies at historical cost, and January 31, 1996 has been used as
the effective date of the Acquisitions. Between September 1994 and the
consummation of the IPO, F.Y.I. did not conduct any operations. Accordingly, the
actual operating results of the Company included in the Statement of Operations
for the nine months ended September 30, 1996 represent only the eight months of
operations subsequent to the consummation of the Acquisitions and the IPO.
During the period prior to the IPO, F.Y.I. incurred various legal, accounting,
marketing, travel and other costs in connection with the Acquisitions and the
IPO which were funded by the issuance of equity securities. Additional costs
associated with the Acquisitions and the IPO were paid with proceeds of the IPO.
Subsequent to the IPO and through September 30, 1996, the Company acquired
13 additional document management businesses. All of these Subsequent
Acquisitions have been accounted for using the purchase method of accounting.
The results of operations for these Subsequent Acquisitions are reflected in the
Company's financial statements based upon their individual acquisition dates.
Supplemental Statement of Operations Data represent the combined results
of: (i) the Founding Companies for the one month of operations prior to the
consummation of the Acquisitions and the IPO and (ii) F.Y.I. Incorporated and
Subsidiaries for the eight months of operations subsequent to the consummation
of the Acquisitions and the IPO. Such data are presented and discussed herein in
order to present the results of the Company since the consummation of the IPO
compared to the results of the combined Founding Companies for periods prior to
the IPO. The Supplemental Data are provided for information purposes only and do
not purport to present the results of operations of the Company had the
transactions assumed therein occurred on or as of the dates indicated. The
Founding Companies were not under common control or management. Accordingly,
such historical combined results may not be comparable to, or indicative of,
future performance.
The Company's revenue is classified as service revenue, product revenue and
other revenue. Service revenue relates to: (i) document and data conversion
services; (ii) records management services; (iii) database management and
related services; (iv) medical records release of information services; and (v)
litigation support services. Product revenue represents sales of micrographic
and business imaging supplies and equipment, primarily in conjunction with film
processing and other micrographic services. Other revenue consists of
commissions on the sales of imaging systems and equipment and franchising fees.
Cost of services consists primarily of compensation and benefits to
non-administrative employees, occupancy costs, equipment costs and supplies, and
also includes the costs associated with other revenue discussed above. Cost of
products sold relates to micrographics and business imaging supplies and
equipment.
Selling, general and administrative expenses ("SG&A") consist primarily of
compensation and related benefits to the sales and marketing, executive
management, accounting, human resources and other administrative employees of
the Company, other sales and marketing costs, communications costs, insurance
costs and legal and accounting professional fees. SG&A subsequent to the IPO
include the costs of being a public company and the Company's executive
management team.
20
<PAGE> 22
THE COMPANY
The Company had conducted no significant operations from its inception
through the IPO and the Acquisitions. For accounting purposes and the
presentation of the actual financial results herein, January 31, 1996 has been
used as the effective date of the Acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
For the nine months ended September 30, 1996, revenue was $46.0 million,
gross profit was $15.7 million, operating income was $4.5 million and net income
was $2.6 million. As previously mentioned, F.Y.I. had no operations until
February 1996. For further discussion of supplemental operations for the nine
months ended September 30, 1996 and 1995, see "-- Supplemental."
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had $5.0 million of working capital
and $3.3 million of cash. Cash flows provided by operating activities for the
nine months ended September 30, 1996 were $1.4 million. Cash used for investing
activities was $29.7 million, as the Company paid $27.4 million for
acquisitions, net of cash acquired. Cash provided by financing activities was
$31.6 million. The Company raised $22.9 million in the IPO, net of underwriting
discount and other costs associated with the IPO. The Company assumed $8.5
million of debt in the acquisitions of the Founding Companies and subsequently
retired all of this debt with the proceeds of the IPO, with the exception of
approximately $0.4 million of debt with favorable interest rates and capital
lease obligations of approximately $0.4 million. In April 1996, the Company
negotiated a $35.0 million Line of Credit (see Note 8 of the Notes to
Consolidated Financial Statements of F.Y.I. Incorporated and Subsidiaries). The
Company paid $1.6 million in costs to secure this financing. As of September 30,
1996, the Company had borrowed $17.6 million under the Line of Credit to help
fund the acquisition program. The Company assumed $2.9 million of debt in the
Subsequent Acquisitions and retired $0.4 million of such debt. The assumed debt
remaining has interest rates more favorable than the Company's credit facility.
In the nine months ended September 30, 1995, the Company raised $0.1
million through the sale of preferred stock. During this period, the Company
spent $0.3 million in activities related to the IPO and the Acquisitions and
ended the period with $0.5 million in cash. The Company had no operations during
this period.
The Company anticipates that cash from operations, additional bank
financing available under the Line of Credit, the net proceeds of this Offering
and shares of Common Stock available under the Acquisition Shelf will provide
sufficient liquidity to execute the Company's acquisition and internal growth
plans for approximately the next 12 months. The availability under the Line of
Credit as of September 30, 1996 was $1.5 million for working capital and general
corporate purposes, and approximately $13.5 million for acquisitions. Should the
Company accelerate its acquisition program, the Company may need to seek
additional financing through the public or private sale of equity or debt
securities. There can be no assurance that the Company could secure such
financing if and when it is needed or on terms the Company deems acceptable. The
Company has registered pursuant to the Acquisition Shelf 2,000,000 shares of
Common Stock for issuance in its acquisition program, of which 1,377,741 shares
were available at September 30, 1996. The Company expects to renegotiate the
Line of Credit upon consummation of this Offering in order to increase its
flexibility in executing its acquisition strategy.
SUPPLEMENTAL
The Statement of Operations Data for the nine months ended September 30,
1995 represent the unaudited combined statement of operations of the Founding
Companies for the period adjusted to give effect to: (i) the Compensation
Differential; and (ii) provision for income taxes as if all entities had been
subject to federal and state income taxes for the period. The Supplemental
Statement of Operations Data for the nine months ended September 30, 1996
represent a combination of: (i) the audited results of the combined Founding
Companies for the one month of operations prior to the consummation of the IPO
and the
21
<PAGE> 23
Acquisitions adjusted for the compensation and tax adjustments discussed above;
and (ii) the audited results of F.Y.I. Incorporated and Subsidiaries for the
eight months subsequent to the consummation of the IPO and the Acquisitions
(which include the Subsequent Acquisitions from the date of their respective
acquisition). The Supplemental Data are provided for information purposes only
and do not purport to present the results of operations of the Company had the
transactions assumed therein occurred on or as of the dates indicated, nor are
they necessarily indicative of the results of operations which may be achieved
in the future.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Revenue
Total revenue. Total revenue increased 40.6% from $35.5 million for the
nine months ended September 30, 1995 to $49.9 million for the nine months ended
September 30, 1996. This increase was comprised of a 49.2% increase in service
revenue and was offset by a 6.0% decrease in product and other revenue.
Service revenue. Service revenue increased $14.8 million from $30.0 million
for the nine months ended September 30, 1995 to $44.8 million for the nine
months ended September 30, 1996. This increase was largely due to: (i) the
Subsequent Acquisitions; and (ii) internal growth in service revenue at the
Founding Companies of 9.0%. This internal growth was primarily attributable to:
(i) an increase in medical records release revenue at Recordex and Permanent of
$1.5 million primarily attributable to the expansion into 32 additional
healthcare institutions in the Eastern U.S. and Texas during 1995 and 1996; (ii)
an increase in litigation support revenue at Researchers of $700,000 primarily
due to increased overnight document production and increased medical records
subpoena and service of process requests; and (iii) an increase in micrographics
and electronic imaging revenue at Imagent of $323,000 attributable to an overall
increase in microfilming, scanning and coding projects, offset by the reduction
in microfilm processing revenue due to the loss of a customer in early 1996.
Product and other revenue. Product and other revenue decreased
approximately $351,000 from $5.5 million for the nine months ended September 30,
1995 to $5.1 million for the nine months ended September 30, 1996. The decrease
in product revenue primarily resulted from a decline in sales to governmental
and related entities during the federal government shutdown in late 1995. This
decline in product revenue was offset by increased product revenue associated
with the purchase of B&B in May 1996. The decrease in other revenue was
attributable to decreased sales of micrographics equipment in 1996.
Gross profit
Gross profit increased 46.3% from $11.6 million for the nine months ended
September 30, 1995 to $17.0 million for the nine months ended September 30,
1996, largely due to the increases in revenue discussed above. Gross profit as a
percentage of revenue increased from 32.8% for the nine months ended September
30, 1995 to 34.1% for the nine months ended September 30, 1996, primarily due to
the higher margin mix of revenue associated with the Subsequent Acquisitions.
Selling, general and administrative expenses
SG&A increased 52.9%, from $7.7 million for the nine months ended September
30, 1995 to $11.7 million for the nine months ended September 30, 1996,
primarily due to: (i) the establishment of corporate overhead required to
execute the acquisition program and to manage the consolidated group of
companies; and (ii) the SG&A associated with the Subsequent Acquisitions. SG&A
as a percentage of revenue (excluding corporate overhead) decreased from 21.7%
for the nine months ended September 30, 1995 to 20.7% for the nine months ended
September 30, 1996. This decrease was a result of: (i) a decrease in SG&A as a
percentage of revenue at the Founding Companies from 21.7% for the nine months
ended September 30, 1995 to 21.4% for the nine months ended September 30, 1996,
primarily due to spreading the Company's fixed costs over a larger revenue base;
and (ii) lower average SG&A as a percentage of revenue associated with the
Subsequent Acquisitions relative to the Founding Companies.
22
<PAGE> 24
Income before income taxes and net income
Income before income taxes increased 28.3% from $3.8 million for the nine
months ended September 30, 1995 to $4.8 million for the nine months ended
September 30, 1996, and net income increased 21.8%, from $2.4 million for the
nine months ended September 30, 1995 to $2.9 million for the nine months ended
September 30, 1996, largely attributable to the factors discussed above. Net
income for the nine months ended September 30, 1996 was impacted by a higher
effective tax rate attributable to the elimination of graduated tax rates as the
Founding Companies are now taxed on a consolidated basis and due to the impact
of nondeductible goodwill associated with certain of the Subsequent
Acquisitions.
FOUNDING COMPANIES COMBINED
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue
Total revenue. Total revenue increased 10.7%, from $43.0 million for the
year ended December 31, 1994 to $47.6 million for the year ended December 31,
1995. This increase was comprised of a 12.6% increase in service revenue, a 3.6%
increase in product revenue and a 15.1% decrease in other revenue.
Service revenue. Service revenue increased $4.5 million, from $36.1 million
for the year ended December 31, 1994 to $40.6 million for the year ended
December 31, 1995. This increase was largely due to: (i) an increase in
Imagent's revenue of $1.4 million, primarily attributable to opening a microfilm
processing laboratory in Philadelphia in December 1994, the revenue of which
represented approximately 56% of the increase in Imagent's revenue, and to an
overall increase in scanning and microfilming projects; (ii) an increase in
Leonard's revenue of $851,000 attributable to the addition of two new storage
contracts in 1994, to the opening of new records storage and retrieval
facilities in Toledo, Ohio in April 1994 and in Ann Arbor, Michigan in January
1995, which new facilities had revenue constituting 25.3% of the increase, and
to increased paper prices received in the first half of 1995 for sales of scrap
paper in the data disintegration area; and (iii) an increase in Recordex's
revenue of $1.7 million and in Permanent's revenue of $414,000 primarily
attributable to the expansion of medical records release services into 38
additional healthcare institutions in the Eastern U.S. and Texas during 1995.
Product revenue. Product revenue increased approximately $215,000, from
$5.9 million for the year ended December 31, 1994 to $6.1 million for the year
ended December 31, 1995. This resulted from obtaining a large contract to supply
micrographics products in March 1994 and an increase in film sales associated
with an overall increase in film processing due to the opening of two new
processing labs.
Other revenue. Other revenue decreased approximately $155,000, from $1.0
million for the year ended December 31, 1994 to $873,000 for the year ended
December 31, 1995. This decrease was primarily attributable to Imagent selling
lower volumes of imaging systems and equipment.
Costs and Expenses
Cost of services. Cost of services increased 9.7%, from $23.7 million for
the year ended December 31, 1994 to $25.9 million for the year ended December
31, 1995. Cost of services as a percentage of service and other revenue was
63.7% for the year ended December 31, 1994 and 62.5% for the year ended December
31, 1995. Combined cost of services as a percentage of revenue decreased 1.2% as
a result of fluctuations in several service areas: (i) Researchers' cost of
services increased $631,000, and as a percentage of revenue increased from 63.3%
to 70.3%, as it benefited from several large litigation projects in the first
half of 1994 and was negatively impacted in the year ended December 1995 by
expenses incurred in connection with the expansion of its imaging business and
the addition of personnel and increased rental expense associated with the
expansion of its San Francisco facility; (ii) Leonard's cost of services
increased $1,000, but as a percentage of revenue decreased from 62.6% to 53.5%,
primarily as a result of increased revenue and operating leverage in 1995
associated with the addition of two storage contacts in 1994 and expenses
incurred in 1994 in connection with the opening of new document storage and
retrieval facilities in Toledo, Ohio and Farmington Hills,
23
<PAGE> 25
Michigan; (iii) Deliverex's cost of services decreased $41,000, and as a
percentage of revenue decreased from 64.6% to 57.3%, as a result of price
increases and certain cost reduction programs; and (iv) DPAS's cost of services
decreased $414,000, and as a percentage of revenue decreased from 74.5% to
66.3%, primarily as a result of a cost reduction program implemented in April
1995.
Cost of products sold. Cost of products sold increased 1.6%, from $4.9
million for the year ended December 31, 1994 to $5.0 million for the year ended
December 31, 1995. Cost of products sold as a percentage of product revenue
decreased from 82.6% to 81.0% for the years ended December 31, 1994 and 1995,
respectively. This decrease was a result of additional value added rebates on
selected products from Eastman Kodak.
Depreciation
Depreciation increased 17.3%, from $1.1 million for the year ended December
31, 1994 to $1.2 million for the year ended December 31, 1995. This increase was
primarily associated with machinery and equipment purchased for the expansions
at Leonard and Recordex discussed above.
Gross profit
As a result of the foregoing, gross profit increased 15.2%, from $13.4
million, or 31.2% of total revenue, for the year ended December 31, 1994 to
$15.5 million, or 32.5% of total revenue, for the year ended December 31, 1995.
Selling, general and administrative expenses
SG&A increased 5.5%, from $11.8 million, or 27.5% of revenue, for the year
ended December 31, 1994 to $12.5 million, or 26.2% of revenue, for the year
ended December 31, 1995. After giving effect to the Compensation Differential in
each year, SG&A increased from $10.0 million, or 23.2% of revenue, for the year
ended December 31, 1994 to $10.5 million, or 22.1% of revenue, for the year
ended December 31, 1995. Although combined SG&A adjusted for the Compensation
Differential as a percentage of total revenue decreased 1.1% there were
fluctuations in several service areas: (i) Leonard's adjusted SG&A as a
percentage of revenue decreased from 30.3% to 25.3% primarily as a result of the
two storage contracts described above which provided revenue without
proportional increases in overhead; (ii) DPAS' adjusted SG&A as a percentage of
revenue decreased from 24.9% to 23.2% primarily as a result of a cost reduction
program implemented in April 1995; and (iii) Recordex's SG&A as a percentage of
revenue decreased from 33.1% to 31.8%, primarily as a result of increased
revenue related to its expansion of medical records release services into
additional healthcare institutions without a commensurate increase in overhead.
Pro forma operating income
Pro forma operating income giving effect to the Compensation Differential
increased 43.8%, from $3.5 million, or 8.0% of total revenue, for the year ended
December 31, 1994 to $5.0 million, or 10.4% of total revenue, for the year ended
December 31, 1995.
Interest expense, net
Interest expense, net of interest income increased 16.1% from $304,000 for
the year ended December 31, 1994 to $353,000 for the same period in 1995. This
was primarily due to increased borrowings in April through December for the
purchase of equipment associated with Leonard's opening of new document storage
facilities.
Provision for income taxes
The combined provision for income taxes and pro forma provision for income
taxes increased 42.8%, from $1.3 million, or an effective tax rate of 36.7%, for
the year ended December 31, 1994 to $1.8 million, or an
24
<PAGE> 26
effective tax rate of 37.2%, for the year ended December 31, 1995. The Founding
Companies were operated as separate entities for tax purposes for all periods
presented.
Pro forma net income
Pro forma net income giving effect to the Compensation Differential and pro
forma provision for income taxes increased 39.8%, from $2.2 million, or 5.0% of
total revenue, for the year ended December 31, 1994 to $3.0 million, or 6.4% of
total revenue, for the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
Revenue
Total revenue. Total revenue increased 12.1%, from $38.4 million in 1993
to $43.0 million in 1994. This increase was comprised of a 12.5% increase in
service revenue, a 15.6% increase in product revenue and a 14.8% decrease in
other revenue.
Service revenue. Service revenue increased $4.0 million, from $32.1
million in 1993 to $36.1 million in 1994. This increase was largely due to: (i)
an increase in Imagent's revenue of $1.3 million, primarily attributable to an
overall increase in scanning and microfilming projects, the opening of microfilm
processing laboratories in Roanoke, Virginia in April 1993 and in Philadelphia
in December 1994, the revenue of which constituted approximately 16% of the
increase in Imagent's revenue, and the purchase of a microfilm processing
business in October 1994, the revenue of which represented approximately 7% of
the increase in Imagent's revenue; (ii) an increase in Researchers' revenue of
$1.2 million, primarily attributable to performing services related to several
large litigation projects that commenced in 1993; (iii) an increase in
Recordex's revenue of $1.4 million, primarily attributable to the expansion of
medical records release services into an additional 30 healthcare institutions
in the eastern U.S. during 1994; and (iv) an increase in Leonard's revenue of
$635,000, primarily attributable to opening of new document storage facilities
in Farmington Hills, Michigan and Toledo, Ohio, the revenue of which represented
approximately 35% of the increase in Leonard's revenue, and securing two new
document storage and retrieval contracts during 1994. This increase was
partially offset by a decrease in DPAS' revenue of $468,000 primarily due to the
loss of three inventory compilation projects in 1993 and 1994.
Product revenue. Product revenue increased approximately $800,000, from
$5.1 million in 1993 to $5.9 million in 1994. This increase resulted primarily
from Imagent's obtaining a large contract to supply micrographics products in
March 1994 and an increase in film sales made in conjunction with increased film
processing services at Imagent's new laboratory.
Other revenue. Other revenue decreased approximately $178,000, from $1.2
million in 1993 to $1.0 million in 1994. This decrease was primarily related to
a decrease in commissions on the sale of micrographics equipment by Imagent.
Costs and expenses
Cost of services. Cost of services increased 16.4%, from $20.3 million in
1993 to $23.6 million in 1994. Cost of services as a percentage of service and
other revenue was 61.1% in 1993 and 63.7% in 1994. This increase in cost of
services as a percentage of service and other revenue was primarily attributable
to: (i) an increase in Imagent's cost of services of $816,000, and as a
percentage of revenue from 56.1% to 59.4%, due to costs related to the start-up
of the microfilm processing laboratory in Philadelphia and increased price
competition in one geographic area which began in late 1993; (ii) an increase in
Leonard's cost of services of $740,000, and as a percentage of revenue from
54.8% to 62.6%, related to its expansion into additional storage facilities in
late 1993 and 1994; (iii) an increase in DPAS' cost of services of $27,000, and
as a percentage of revenue from 68.9% to 74.5%, due to the loss of three
inventory compilation projects in late 1993 and 1994; and (iv) an increase in
Recordex's cost of services of $1.1 million, and as a percentage of revenue from
56.3% to 61.0%, related to its expansion into an additional 30 healthcare
institutions in the eastern U.S. during 1994. These increases as a percentage of
revenue were partially offset by a reduction in Researchers' cost of services,
25
<PAGE> 27
which increased $661,000, but decreased as a percentage of revenue from 64.7% to
63.3%, primarily as a result of increased revenue and enhanced operating
leverage associated with several large litigation projects in 1994.
Cost of products sold. Cost of products sold increased 9.6%, from $4.5
million in 1993 to $4.9 million in 1994. Cost of products sold as a percentage
of product revenue decreased from 87.1% in 1993 to 82.6% in 1994. This decrease
resulted from Imagent's receiving additional value added rebates and better
pricing on selected products from Eastman Kodak.
Depreciation
Depreciation increased 19.5%, from $883,000 in 1993 to $1.1 million in
1994. This increase was primarily associated with machinery and equipment
purchased for the expansions discussed above.
Gross profit
As a result of the foregoing, gross profit increased 5.5%, from $12.7
million, or 33.2% of total revenue, for 1993 to $13.4 million, or 31.2% of total
revenue, for 1994.
Selling, general and administrative
SG&A increased 7.2%, from $11.0 million in 1993 to $11.8 million in 1994.
After giving effect to the Compensation Differential in each year, SG&A
increased from $9.3 million, or 24.3% of revenue, in 1993 to $10.0 million, or
23.2% of revenue, in 1994. This decrease in SG&A as a percentage of revenue was
primarily related to an increase in Recordex's revenue related to its expansion
of medical records release services into additional healthcare institutions
without a commensurate increase in overhead. In addition, Researchers, Imagent
and Leonard all experienced slightly enhanced operating efficiencies in 1994.
Pro forma operating income
Pro forma operating income giving effect to the Compensation Differential
increased 1.6%, from $3.4 million, or 8.9% of total revenue, for 1993 to $3.5
million, or 8.0% of total revenue, for 1994.
Interest expense, net
Interest expense, net of interest income, increased slightly, from $299,000
for 1993 to $304,000 for 1994.
Provision for income taxes
The combined provision for income taxes and pro forma provision for income
taxes remained constant at $1.3 million, with an effective tax rate of 40.0% for
1993 and an effective tax rate of 36.7% for 1994. The Founding Companies were
operated as separate entities for tax purposes for all periods presented. See
Note 11 of Notes to Combined Financial Statements of the Founding Companies for
a more detailed analysis of the provision for income taxes.
Pro forma net income
Pro forma net income giving effect to the Compensation Differential and pro
forma provision for taxes increased 14.7%, from $1.9 million, or 4.9% of total
revenue, for 1993 to $2.2 million, or 5.0% of total revenue, for 1994.
Certain balance sheet changes
Accounts and notes receivable, less allowance for doubtful accounts and
notes increased from December 31, 1993 to December 31, 1994, primarily as a
result of an overall increase in revenue. Accounts receivable, officer and
employee, increased primarily as a result of advances to Researchers'
controlling stockholder. These advances were settled at Researchers' fiscal year
end of July 31. Intangible assets, net of accumulated amortization increased
primarily due to the purchase by Imagent of a microfilm processing business. The
intangible assets associated with this purchase represented a customer list and
a covenant not to compete. Property and equipment, net, accounts payable and
accrued liabilities and debt all increased primarily as a result of facility
expansions.
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<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4.1 million, $2.0 million
and $2.3 million, respectively, for the years ended December 31, 1995, 1994 and
1993. Net cash provided by operating activities for the year ended December 31,
1995 was primarily impacted by: (i) an increase in net income; (ii) an increase
in revenue without a corresponding increase in accounts receivable; (iii) the
settlement of a significant portion of Researchers' stockholder receivable; and
(iv) a decrease in accounts payable and accrued liabilities. Net cash provided
by operating activities for the year ended December 31, 1994 was impacted by
increased revenue and increases in accounts receivable and accounts payable and
accrued liabilities associated with facility expansions and was also impacted by
an increase in Researchers' stockholder receivable. Cash used in investing
activities was $1.3 million, $2.0 million and $1.1 million, respectively, for
the years ended December 31, 1995, 1994 and 1993. Cash used in investing
activities for the year ended December 31, 1995 and for the year ended December
31, 1994 was primarily used for purchases of property, plant and equipment
associated with facility expansions, and was also impacted in 1994 by the
purchase by Imagent of a microfilm processing business and the associated
intangible assets. Cash used in investing activities for 1993 was primarily used
for purchases of property, plant and equipment associated with facility
expansions. Cash used for financing activities was $2.1 million, $124,000 and
$1.2 million, respectively, for the years ended December 31, 1995, 1994 and
1993. Cash used for financing activities for the year ended December 31, 1995
consisted primarily of net payments on debt and payments of dividends. Cash used
for financing activities for the year ended December 31, 1994 consisted
primarily of payments of dividends offset by net proceeds from debt associated
with facility expansions. Cash used for financing activities for 1993 included
net payments on debt, advances to Recordex's parent company and payments of
dividends. As a result of the foregoing, cash and cash equivalents increased by
$686,000 for the year ended December 31, 1995, decreased by $86,000 in 1994 and
decreased by $79,000 in 1993.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Revenue from the Company's services shows no significant seasonal
variations. However, service revenue can vary from period to period due to the
impact of specific projects, primarily in the litigation support area. Quarterly
results may also vary as a result of the timing of acquisitions and the timing
and magnitude of costs related to such acquisitions. In addition, because the
anticipated financial benefits of the combination of the Operating Companies may
not be generated immediately, the Company's initial results as a combined
company may reflect corporate overhead that exceeds the realized benefits.
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<PAGE> 29
BUSINESS
F.Y.I. Incorporated was founded in September 1994 to create a national,
single source provider of document management services to three primary client
segments: healthcare institutions, professional services firms and financial
institutions. The Company's primary strategy is to consolidate the highly
fragmented document management services industry through acquisitions. In
January 1996, F.Y.I. acquired, simultaneously with the closing of its IPO, the
Founding Companies. Since the IPO, the Company has acquired 15 additional
companies. As a result of the Subsequent Acquisitions combined with internal
growth, the Company's revenue has increased from $35.5 million for the nine
months ended September 30, 1995 to $49.9 million for the nine months ended
September 30, 1996 ($65.0 million on a pro forma basis, assuming the Significant
Acquisitions were completed on January 1, 1996). The Company intends to continue
to aggressively pursue strategic acquisitions in existing and new markets,
cross-sell its full range of services to its current customer base and expand
the marketing of its services to new customers.
OVERVIEW
An estimated four trillion documents are generated annually in the United
States. A significant portion of the storage, processing and management of these
documents is outsourced to small document management services businesses.
Further, the Company believes that the document management services market is
growing due to several factors, including: (i) government regulations that
require lengthy document retention periods and rapid accessibility for many
types of records; (ii) increased customer expectations of low cost access to
records on short notice and, in many instances, at disparate locations; (iii)
the increasing litigiousness of society, necessitating access to relevant
documents and records for extended periods; and (iv) continuing advancements in
computer, networking, facsimile, printing and other technologies which have
greatly facilitated the production and wide distribution of documents.
The Company's three targeted client segments generate large volumes of
documents and require specialized processing, distribution, storage and
retrieval of these documents and the information they contain. The Company
believes that these client segments will continue to increase their outsourcing
of document management services in order to maintain their focus on core
operating competencies and revenue generating activities; reduce fixed costs,
including labor and equipment costs; and gain access to new technologies without
incurring the expense and risk of near-term obsolescence of such technologies.
The document management services business is highly fragmented. The Company
believes that many small document management services businesses: (i) have
insufficient capital for expansion; (ii) cannot keep abreast of rapidly changing
technologies; (iii) lack effective marketing programs; and (iv) are unable to
meet the needs of large, geographically dispersed clients. In addition, there
are a limited number of options for owners of such businesses to obtain
liquidity by selling their businesses. As a result, the Company believes that
many owners of such businesses will continue to be receptive to its acquisition
program.
BUSINESS STRATEGY
The Company's goal is to become a national, single source provider of
document management services for its three primary target client segments:
healthcare institutions, professional services firms and financial institutions.
In order to achieve this goal, the Company is implementing its focused business
strategy based on the following key principles:
Establish Full Service Operations in Multiple Metropolitan Areas. The
Company intends to establish a full range of document management operations to
meet the diverse needs of targeted metropolitan areas by implementing its
"fill-in-the-grid" strategy through selected acquisitions and expansion of
existing businesses. Ultimately, the Company will seek to achieve a national
scope of coverage so that it can implement a national sales and service policy.
Capitalize on Cross-Selling Opportunities. The Company intends to continue
to cross-sell in two primary ways. First, the Company intends to leverage its
existing client relationships by selling such clients additional document
management services provided by the Company's other businesses. Second, the
Company intends
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<PAGE> 30
to leverage its existing knowledge with respect to industry transferable
services by marketing such services across client segment lines.
Achieve Cost Savings Through Economies of Scale. The Company believes that
it will be able to achieve significant economies of scale by combining a number
of general and administrative functions at the corporate level and by reducing
or eliminating redundant functions and facilities. For example, the Company has
implemented a Company-wide insurance plan and is in the process of implementing
Company-wide employee benefits programs and purchasing certain items, such as
paper, microfilm and storage racks, on a combined basis. To the extent that the
Company is able to expand through the acquisition of additional document
management businesses, the Company believes that such cost savings will continue
to accrue.
Operate With a Decentralized Management Strategy. The Company believes that
the experienced local management teams of its acquired businesses have a
valuable understanding of their respective markets and businesses and have
existing client relationships upon which they may capitalize. Accordingly, the
Company is operating and expects to continue to operate with a decentralized
management strategy. Local management will remain empowered to make most of the
day-to-day operating decisions at each location and will be primarily
responsible for the profitability and growth of that location. Although the
Company intends to have local management operate with a high degree of autonomy,
the Company believes that regular communication between the individual
businesses and the Company's executive management team will be integral to
realizing the benefits afforded by the consolidation of these businesses into a
single company.
ACQUISITION STRATEGY
Since the IPO, the Company has acquired 15 additional companies. The
Company believes that there are significant opportunities to consolidate the
capabilities and resources of a number of existing document management services
businesses with the intent of providing customers with a single source document
management solution. Accordingly, the Company is pursuing a "fill-in-the-grid"
strategy aimed at providing comprehensive document management services based on
the demands of the given geographical market. The Company has implemented an
aggressive, three-tiered acquisition program consisting of "beachhead
acquisitions" to enter additional targeted markets, "service expansion
acquisitions" to acquire additional service capabilities within such markets and
"tuck-in" acquisitions to gain market share.
In order to enter a targeted geographic market, the Company makes
"beachhead" acquisitions of leading document management services companies with
strong market positions. In analyzing beachhead acquisition candidates, the
Company focuses on acquiring businesses that have one or more of the following
characteristics: (i) experienced and high quality management; (ii) multiple
locations, preferably with operations in two to three contiguous markets; (iii)
a strong customer franchise; and (iv) a history of profitability.
The second tier of the Company's acquisition program involves the
acquisition of related document management services companies that will either
increase the Company's offered services in a particular region or increase its
share of the market for those services it already offers in that region. In
making such "service expansion" acquisitions, the Company assesses the services
required by the specific market's customer base and then seeks to acquire
leading providers of such services within that geographic area.
Finally, in order to increase its market share and realize economies of
scale, the third tier of the Company's acquisition program is the acquisition of
smaller "tuck-in" businesses that can be easily assimilated into the operations
of the Company's existing businesses. Such tuck-in businesses are intended to
enable the Company to benefit from the operating leverage of its existing
businesses by acquiring additional market share and revenue while eliminating or
reducing certain general, administrative and operating costs previously
associated with such revenue. Accordingly, the Company targets tuck-in
businesses with strong customer relationships.
The Company believes that it will continue to be an attractive acquiror of
other document management services companies due to its strategy of retaining
selected owners and management of acquired companies, its access to growth
capital and its ability to offer sellers cash for their business as well as an
ongoing equity stake in the Company. Nevertheless, there are numerous risks
associated with the Company's intended acquisition
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<PAGE> 31
program. See "Risk Factors -- Acquisition Strategy," "-- Reliance on Key
Personnel" and "-- Need for Additional Financing to Continue Acquisition
Strategy."
SERVICES OFFERED
The Company provides a wide variety of document management services and
draws upon its available services to develop document management solutions for
its clients based on their specific needs. The current document management
services that are provided in certain geographic locations include:
TRANSFERABLE SERVICES
Document and Data Conversion Services. Document and data conversion
services include micrographics services and electronic imaging services.
Micrographics services involve: (i) the conversion of paper documents into
microfilm images; (ii) film processing; and (iii) computer-based indexing and
formatting. Typically, micrographic services are selected: (i) as a
cost-competitive technology to reduce the physical size of stored records; (ii)
for their long-term (over 100 years) archival capabilities; and (iii) as an
intermediate step in certain imaging or reprographic applications.
Electronic imaging services involve the conversion of paper or microfilm
documents into digitized information through optical scanners. Digitized
information can be either stored as an image or converted to code through
optical character recognition (OCR) or digital imaging storage and retrieval
technologies. Conversion to code provides additional processing capabilities
such as manipulation of data. In both cases, the digitized information can be
stored on either a magnetic medium, such as a computer diskette, or on optical
laser disks, such as compact disks. Electronic imaging is generally used because
of the storage media's high speed of retrieval, its multiple indexing and text
search formatting capabilities, and its ability to be used to distribute output
to multiple locations. Electronic imaging services are typically billed on a
job-by-job basis, based on the number of images and complexity of the retrieval
applications.
Records Management Services. Records management services consist of active
or open shelf storage and archival storage of inactive documents. Active or open
shelf storage services involve the storage, processing (i.e., indexing and
formatting), retrieval, delivery and return to storage of documents on a rapid
time frame. Representative uses for open shelf storage include active medical
and legal case files. In many instances, open shelf storage is offered as an
outsourced file room service, where documents are requested and retrieved
frequently and, in many cases, transmitted via facsimile due to the urgency of
the request. Service fees generally include a monthly fee based on activity
levels and volumes stored, with extra billing for specialized requests.
The archiving of inactive documents involves storage for extended periods
of time with a lesser emphasis on service or accessibility to stored documents.
Typical uses for archival storage of inactive documents include storage of
closed files for professional services firms and documents that may be required
by law to be maintained by hospitals, other healthcare institutions and
financial institutions for extended periods. Service fees generally include
billing for storage space, plus activity charges for each retrieval, delivery
and return to storage, and ultimately for document destruction.
Database Management and Related Services. Database management and related
services include database management, data entry, direct mail and fulfillment
services. Database management services involve data capture (manually or through
scanning or other electronic media), data consolidation and elimination,
storage, maintenance, formatting and report creation. Data entry includes the
conversion of text and handwritten paper media into digital files. An advantage
of digital files is the ability to manipulate large amounts of data quickly and
efficiently. In some cases, database services include statistical analysis of
data. Direct mail and fulfillment services provide customers with rapid,
reliable and cost-effective methods for making large-scale distributions of
statements, reports and letters to consumers and other target audiences.
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INDUSTRY SPECIFIC SERVICES
The Company has developed industry specific services in order to address
the document management needs of their particular clients. These industry
specific services include:
Medical Records Release Services. Medical records release services involve
processing a request for a patient's medical records from a physician, insurance
company, attorney, healthcare institution or individual. The medical records
release service provider initially verifies that the release is properly
authorized, coordinates the retrieval of the record, determines the relevant
parts of the record to be copied and delivers the copied records (or portions
thereof) to the requesting party. Medical records release services are provided
on-site and off-site pursuant to contracts with hospitals and other large
healthcare institutions. The medical records release service provider bills the
recipient directly and sometimes pays a fee to the hospital.
Litigation Support. Litigation often involves the production (i.e.,
delivery to opposing counsel) and management of thousands of pages of documents,
extracted in their current working form from the offices and files of litigating
parties and their experts, advisors and legal counsel. Litigation support
services include managing the logistics of high volume document production,
microfilming and/or electronic imaging, document coding, computer indexing,
automated document retrieval and high speed, multiple-set reproduction of
documents. Additional litigation support services include subpoena of business
documents and service of process, discovery assistance, document coding,
forensic analysis and other trial support services to law firms, corporations
and regulated entities. These clients typically look to litigation support
companies to augment their internal operations and capabilities on an as-needed,
job-by-job basis. Clients are generally billed on a per unit basis.
BUSINESS IMAGING PRODUCTS SALES
The Company has a five-year agreement with the Eastman Kodak Company that
expires on December 31, 1999 and grants the Company the right to act as a
distributor of a wide range of Kodak microfilm and business imaging supplies in
Delaware, Maryland, Pennsylvania, Virginia, West Virginia and Washington, D.C.
SALES AND MARKETING
The Company has a broad customer base, and none of the Company's customers
accounted for more than 5.0% of revenue for the nine months ended September 30,
1996. Historically, the Company's sales efforts have been implemented on a
location-by-location basis and typically have been coordinated either through
separate sales personnel or as part of the local management's responsibilities.
The Company's existing local sales efforts are supplemented through local sales
representatives. The Company will strive to increase its client base by
attracting customers away from small, single business operators as a result of
its ability to offer a broader range of solutions for its clients' document
management needs. In addition, the Company intends to continue to focus on
increasing revenue from its existing clients by cross-selling its services and
broadening its product offerings. Once the Company gains critical mass in a
number of metropolitan areas, it will seek to augment local sales and marketing
efforts through the implementation of a national sales/account program.
COMPETITION
The document management services businesses in which the Company competes
and expects to compete are highly competitive. A significant source of
competition is the in-house document handling capability of the Company's target
client base. There can be no assurance that these businesses will outsource more
of their document management needs or that such businesses will not bring
in-house services that they currently outsource. In addition, certain of the
Company's competitors are larger businesses and have greater financial resources
than the Company. Certain of these competitors operate in broader geographic
areas than the Company, and others may choose to enter the Company's areas of
operation in the future. In addition, the Company intends to continue to enter
new geographic areas through internal growth and by acquiring existing companies
and expects to encounter significant competition from established competitors in
each of such new areas. As a result of this highly competitive environment, the
Company may lose customers or have difficulty in acquiring new customers and new
companies and its results of operations may be adversely affected.
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The Company believes that the principal competitive factors in document
management services include accuracy, reliability and security of service and
client segment specific knowledge and price. The Company competes primarily on
the basis of quality of service and client segment specific knowledge, and
believes that it competes favorably with respect to these factors.
EMPLOYEES
As of September 30, 1996, the Company had approximately 1,478 full-time and
207 part-time employees. As of such date, the Company had 122 employees
represented by labor unions. The Company considers its relations with its
employees to be good.
PROPERTY, PLANT AND EQUIPMENT
As of September 30, 1996, the Company operated approximately 50 document
management service facilities in 10 states. Except for the two facilities owned
by the Company, these facilities are leased and are principally used for
operations and general administrative functions. See Note 9 of Notes to
Consolidated Financial Statements of F.Y.I. Incorporated and Subsidiaries for
further information relating to these leases. In March 1996, the Company moved
into its current corporate headquarters in Dallas, Texas.
As of September 30, 1996, the Company also operated on-site at
approximately 300 client locations on a contractual basis and from time to time
at many other client locations for specific projects.
In order to secure its obligations under its Line of Credit, the Company
granted to Banque Paribas, as agent for the Company's lenders, a lien on
substantially all of the Company's properties and other assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company believes that its properties are generally well maintained, in
good condition and adequate for its present needs. Furthermore, the Company
believes that suitable additional or replacement space will be available when
required.
LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of these actions
will have a material adverse effect on the financial condition or results of
operations of the Company.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that: (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water as well as handling
and disposal practices for solid and hazardous wastes; and (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposal or other releases of solid wastes and hazardous substances.
The Company is currently unaware of any environmental conditions relating
to present or past waste generation at or from these facilities that would be
likely to have a material adverse effect on the financial condition or results
of operations of the Company. However, there can be no assurance that
environmental liabilities in the future will not have a material adverse effect
on the financial condition or results of operations of the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------
<S> <C> <C>
Thomas C. Walker(1).......................... 63 Chairman of the Board and Chief
Development Officer
Ed H. Bowman, Jr.(1)......................... 50 President and Chief Executive Officer;
Director
David Lowenstein(1).......................... 34 Executive Vice President -- Corporate
Development and Acquisitions and Chief
Financial Officer; Director
Timothy J. Barker............................ 34 Vice President and Chief Accounting
Officer
Margot T. Lebenberg.......................... 29 Vice President, General Counsel and
Secretary
G. Michael Bellenghi(1)...................... 48 Director
Jerry F. Leonard, Jr. ....................... 56 Director
Greg Melanson................................ 43 Director
Jonathan B. Shaw............................. 41 Director
Michael J. Bradley(2)(3)..................... 52 Director
Donald F. Moorehead, Jr.(2)(3)............... 46 Director
Hon. Edward M. Rowell(2)(3).................. 65 Director
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
At each annual meeting of stockholders, directors will be elected by the
holders of the Common Stock.
All officers serve at the discretion of the Board of Directors. See
"-- Employment Agreements; Covenants-Not-to-Compete."
Thomas C. Walker has been Chairman of the Board of F.Y.I. since its
inception in September 1994 and has been Chief Development Officer of F.Y.I.
since November 1995 and from September 1994 until November 1995, Mr. Walker held
the positions of President and Chief Executive Officer. From August 1991 to
December 1994, Mr. Walker was Vice President, Corporate Development, of Laidlaw
Waste Systems, Inc., a subsidiary of Laidlaw, Inc., a waste management company,
where he was responsible for its acquisition and divestiture program in the
United States and Mexico. From May 1989 until he joined Laidlaw Waste Systems,
Inc., Mr. Walker was President of Thomas C. Walker Associates, Inc., a company
providing merger, acquisition and financial consulting services focusing on the
waste management industry. During his career, Mr. Walker has been responsible
for the acquisition or divestiture of over 125 businesses over a 29-year period.
Mr. Walker holds a B.S. in Industrial Engineering from Lafayette College.
In May 1989, Mr. Walker resigned from a senior executive position with a
former employer and received a severance payment under the terms of his
employment agreement. In July 1989, such employer commenced a proceeding in
bankruptcy, and, after emerging from such proceeding and in connection with its
liquidation, sought to recover Mr. Walker's severance payment as a preference
claim. Mr. Walker litigated this claim but ultimately entered into a judgment
requiring him to make significant payments to his former employer. In April
1993, Mr. Walker filed a voluntary petition in bankruptcy in order to discharge
such judgment and two mortgage notes relating to two condominiums in Dallas, the
holders of which were unwilling to renegotiate the terms of the mortgages. Mr.
Walker did not seek any other relief from creditors, and the bankruptcy was
discharged in February 1994.
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<PAGE> 35
Ed H. Bowman, Jr. has been President and Chief Executive Officer and a
Director of F.Y.I. since November 1995. From May 1993 to June 1995, Mr. Bowman
was Executive Vice President and Chief Operating Officer of the Health Systems
Group of First Data Corporation, a financial services company. Mr. Bowman was
responsible for the day-to-day operations of research and development, marketing
and customer service. From 1983 to 1993, Mr. Bowman served in a number of
executive positions with HBO & Co. ("HBO"), including VP -- International,
VP -- Marketing, Senior VP -- Customer Services, Group Senior VP -- Research and
Development, and last serving as Executive Vice President and Chief Operating
Officer of the Star Business Unit with responsibility for domestic operations.
Prior to joining HBO, Mr. Bowman was with Andersen Consulting for 10 years,
where he was elected a Partner. Mr. Bowman became a C.P.A. in 1973 and holds an
M.S. from Georgia Institute of Technology and a B.B.A. from Georgia State
University. Mr. Bowman is an investor and former board member of several
early-stage, high-technology companies.
David Lowenstein reassumed the responsibility of Chief Financial Officer of
F.Y.I. in July 1996, the position he held prior to the IPO, and has been
Executive Vice President -- Corporate Development and Acquisitions and a
Director of F.Y.I. since February 1995. Prior to joining the Company, Mr.
Lowenstein served, since February 1994, as Vice President, Business Development
of Laidlaw Waste Systems, Inc., with overall responsibility for Laidlaw Waste
System's acquisition and divestiture program in North America. From April 1990
until February 1994, Mr. Lowenstein served in a variety of capacities, including
Director -- Corporate Development, for Laidlaw, Inc. From November 1988 to March
1990, he served as a business analyst for Tricil, Ltd., a solid and hazardous
waste company that was acquired by Laidlaw, Inc. in 1990. Mr. Lowenstein has
been responsible for the acquisition or divestiture of over 50 businesses in
North America and Europe. Mr. Lowenstein holds a B.A. in Economics from Sir
Wilfred Laurier University and an M.S. in Public and Business Administration
from Carnegie Mellon University. Mr. Lowenstein is a citizen of the Dominion of
Canada residing in the United States.
Timothy J. Barker has been Vice President and Chief Accounting Officer of
F.Y.I. since July 1996. From November 1995 to July 1996, Mr. Barker held the
position of Controller of F.Y.I. Prior to joining F.Y.I. as a full-time
consultant in June 1995, Mr. Barker was a manager with Arthur Andersen LLP,
where he served in various capacities over a nine-year period. Mr. Barker served
as Vice President of Financial Planning and Analysis for Sunbelt National
Mortgage Corporation from June 1993 to October 1994. Mr. Barker holds a B.A. in
Accounting from Texas Tech University and has been a C.P.A. since 1985.
Margot T. Lebenberg has been Vice President, General Counsel and Secretary
of F.Y.I. since May 1996. From 1992 until joining the Company, Ms. Lebenberg was
an associate at Morgan, Lewis & Bockius LLP in New York, where she practiced law
primarily in the areas of securities and mergers and acquisitions, specializing
in consolidation transactions. Ms. Lebenberg holds a B.A. in Economics and
History from the State University of New York at Binghamton and a J.D. from
Fordham University School of Law.
G. Michael Bellenghi has been a director since the closing of the IPO and
serves as Chairman of the Board and Chief Executive Officer of Recordex. Prior
to joining Recordex in October 1991, Mr. Bellenghi served as Partner-in-Charge
and Director of Deloitte & Touche's Philadelphia office Healthcare Practice for
10 years. Mr. Bellenghi has also served as a graduate professor in Financial
Management of Healthcare Institutions at LaSalle University. Mr. Bellenghi is a
director of Home Health Corporation of America, Inc., a publicly-held company.
Mr. Bellenghi is a certified public accountant and holds a B.A. in Accounting
from LaSalle University.
Jerry F. Leonard, Jr. has been a director since the closing of the IPO and
has been the President and Chief Executive Officer of Leonard since 1968. Mr.
Leonard has been active in the data storage business for over 28 years.
Greg Melanson has been a director since the closing of the IPO and has been
Chairman of the Board, President and Chief Executive Officer of Researchers
since 1978. Mr. Melanson has been in the litigation support services business
since 1975. Mr. Melanson holds a B.A. from the University of Southern
California.
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Jonathan B. Shaw has been a director since the closing of the IPO and has
been Chairman of the Board, President and Chief Executive Officer of Imagent
since 1990. Mr. Shaw has been active with Imagent for 16 years. Mr. Shaw
attended the University of Vermont and George Washington University.
Michael J. Bradley has been a director since the closing of the IPO. Since
January 1991, Mr. Bradley has served as a principal of Paragon and as a member
of the Board of Directors of Recordex. Mr. Bradley is also Vice-Chairman and a
director of Republic Bancorp Inc., a bank holding company, and has been
Executive Vice President of Mercy Health Corporation of Southeast Pennsylvania
since May 1994. Prior to joining Mercy Health Corporation, Mr. Bradley served as
President and Chief Executive Officer of several healthcare organizations,
including Thomas Jefferson University Hospital and North Philadelphia Health
System, both of which are located in Philadelphia, and the Columbia Presbyterian
Medical Center in New York City. Mr. Bradley is a certified public accountant
and holds a B.S. in Business Administration from Drexel University.
Donald F. Moorehead, Jr. has been a director of the Company since January
1995. Since May 1994, Mr. Moorehead has been Vice Chairman of the Board and
Chief Development Officer of U.S.A. Waste Services, Inc., a national waste
management company whose shares are listed on the New York Stock Exchange. From
October 1990 to May 1994, he served as its Chairman of the Board and Chief
Executive Officer. Mr. Moorehead was Chairman of the Board and Chief Executive
Officer of Mid-American Waste Systems, Inc., a waste management company, from
its inception in December 1985 until August 1990 and continued as a director
until February 1991. Mr. Moorehead is a director of Metal Management, Inc., a
scrap-metal company. From 1977 until 1984, Mr. Moorehead served in various
management positions with Waste Management, Inc. Mr. Moorehead holds a B.S. in
Engineering from the University of Tulsa.
Hon. Edward M. Rowell has been a director since the closing of the IPO.
From April 1990 to August 1994, Mr. Rowell served as the United States
Ambassador to Luxembourg. Mr. Rowell also served from January 1988 to April 1990
as the United States Ambassador to Portugal and from August 1985 to January 1988
as the Ambassador to Bolivia. Mr. Rowell is currently Vice President of the
American Foreign Service Association, an organization dedicated to the
protection and advancement of United States interests abroad. Mr. Rowell is also
an associate of Global Business Access, Ltd., a private trade development firm
in Washington, D.C. Mr. Rowell holds a B.A. in International Relations from Yale
University and was a Sloan Executive Fellow at the Stanford University Graduate
School of Business.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives a fee of $1,500 for attendance at each Board of Directors'
meeting and $1,000 for each committee meeting (unless held on the same day as a
Board of Directors' meeting) and an initial grant of non-qualified options to
purchase 10,000 shares of Common Stock. Non-employee directors will, beginning
with the first annual meeting of the Company's stockholders, receive annual
grants of non-qualified options to purchase 5,000 shares of Common Stock. See
"-- Stock Option Plan." All directors of the Company are reimbursed for
out-of-pocket expenses incurred in their capacity as directors of the Company.
EXECUTIVE COMPENSATION
F.Y.I. was incorporated in September 1994 and, prior to the IPO, did not
conduct any operations. The Company anticipates that during 1996 its most highly
compensated officers and their annualized base salaries will be: Mr.
Bowman -- $200,000, Mr. Walker -- $150,000, Mr. Lowenstein -- $120,000, Ms.
Lebenberg -- $100,000 and Mr. Barker -- $100,000 (collectively, the "named
executive officers"). Each named executive officer has entered into an
employment agreement with the Company. See "-- Employment Agreements;
Covenants-Not-To-Compete." Pursuant to such employment agreements, each such
officer is eligible to earn additional year-end bonus compensation.
35
<PAGE> 37
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding the compensation of
the Company's President and Chief Executive Officer and the only two executive
officers whose total annual salary and bonus exceeded $100,000 in 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------
NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS
- ------------------------------------------------------------ ---- ------------ -----
<S> <C> <C> <C>
Thomas C. Walker............................................ 1995 $150,000 $--
Chairman of the Board and
Chief Development Officer
Ed H. Bowman, Jr............................................ 1995 $ -- $--
President and
Chief Executive Officer
David Lowenstein............................................ 1995 $130,000 $--
Executive Vice President and
Chief Financial Officer
</TABLE>
- ---------------
(1) Mr. Bowman and Mr. Lowenstein commenced employment with F.Y.I. in November
1995 and February 1995, respectively.
OPTION/SAR GRANTS IN 1995 AND AGGREGATED OPTION/SAR EXERCISES IN 1995 AND FISCAL
YEAR-END OPTION/SAR VALUE TABLE
In 1995, the Company granted non-qualified options to purchase 80,000
shares of Common Stock to Mr. Bowman and non-qualified options to purchase
15,000 shares of Common Stock to Mr. Barker. However, these options were
contingent upon the consummation of the IPO, which was completed in January
1996. None of the other named executive officers was granted options in or prior
to 1995.
EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
Mr. Bowman, Ms. Lebenberg and Mr. Barker entered into employment agreements
with F.Y.I. dated as of November 1995, July 1996 and July 1996, respectively.
Messrs. Walker and Lowenstein entered into employment agreements with F.Y.I. in
December 1994 and February 1995, respectively. Pursuant to such agreements, each
of such persons receives an annual base salary and is eligible for additional
year-end bonus compensation. The employment agreement for each of Mr. Bowman and
Ms. Lebenberg is for a term of three years, and Mr. Barker's employment
agreement is for a term of two years and five months. Each employment agreement
automatically renews at the end of its initial term (and each succeeding term)
for an additional one year, unless terminated or not renewed by the Company or
the employee.
Each of the employment agreements provides that, in the event of a
termination of employment by the Company without cause, such employee shall be
entitled to receive from the Company such employee's then current salary for the
greater of two years (one year in the case of Mr. Barker) or whatever period is
remaining under the term of the agreement. In the event of a change in control
of the Company, if the employee has not received notice 15 days prior to the
event resulting in such change of control that such employee's employment will
be continued by the successor to the Company, it shall be deemed a termination
without cause, except that the amount of the lump-sum payment to be made to such
employee shall be triple (150% in the case of Mr. Barker) the amount ordinarily
due upon a termination without cause. In addition, in the event of a change in
control of the Company, each employee may elect to terminate his employment
agreement and receive 150% of the amount ordinarily due upon a termination
without cause.
Each employment agreement contains a covenant-not-to-compete with the
Company for a period of two years following termination of employment, provided
that: (i) in the event of a termination of employment by the Company without
cause, the term of the covenant-not-to-compete contained in the employment
36
<PAGE> 38
agreement will be shortened to one year; and (ii) in the event of a change in
control of the Company wherein the employee does not receive notice 15 days
prior to the event resulting in such change of control of the continuation of
such employee's employment, the covenant-not-to-compete shall not apply. If
applicable law reduces the time period during which the employee is prohibited
from competing with the Company, the covenant-not-to-compete shall be reduced to
the maximum period permitted by law.
SEVERANCE ARRANGEMENT
Effective July 22, 1996, the Company's then Executive Vice President and
Chief Financial Officer resigned. Under the terms of the separation agreement,
the Company has paid or will pay the former Executive Vice President and Chief
Financial Officer an aggregate of $195,000 as follows: $120,000 on August 19,
1996, $50,000 on January 30, 1997 and $25,000 on August 19, 1997. Furthermore,
in addition to options for 8,000 shares that vested, additional options for
22,000 shares held by the former executive were accelerated and vested. All of
such options have been exercised.
STOCK OPTION PLAN
In October 1995, the Board of Directors and F.Y.I.'s stockholders approved
the Company's 1995 Stock Option Plan (the "Plan"), which became effective on the
date of the IPO. The purpose of the Plan is to provide directors, officers and
key employees with additional incentives by increasing their ownership interests
in the Company. Directors, officers and other key employees of the Company and
its subsidiaries are eligible to participate in the Plan. Awards may also be
granted to consultants providing valuable services to the Company. In addition,
individuals who have agreed to become a key employee or consultant, and key
employees and consultants of entities that are expected to become subsidiaries,
are eligible for option grants, conditional in each case on actual employment,
consultant or subsidiary status. Awards of options to purchase Common Stock may
include incentive stock options ("ISOs") and/or non-qualified stock options.
The Plan also provides for automatic option grants to directors who are not
otherwise employed by the Company or its subsidiaries. Upon commencement of
service (or upon agreeing to serve in the case of the initial non-employee
directors), a non-employee director will receive a non-qualified option to
purchase 10,000 shares of Common Stock, and continuing non-employee directors
will receive annual options to purchase 5,000 shares of Common Stock. Options
granted to non-employee directors become exercisable one-third on the date of
grant and one-third on each of the next two anniversaries of the date of grant.
Non-employee directors' options have a term of five years from the date of
grant.
The maximum number of shares of Common Stock that may be subject to
outstanding options, determined immediately after the grant of any option, is
the greater of 650,000 shares or 12% of the aggregate number of shares of the
Company's Common Stock outstanding, provided, however, that options to purchase
no more than 650,000 shares of Common Stock may be granted as ISOs.
The Company currently has outstanding non-qualified options to purchase a
total of 380,580 shares of Common Stock granted in November 1995 at $13.00 per
share (including options granted to non-employee directors of the Company).
These options, other than those granted to non-employee directors, are generally
exercisable after July 21, 1996 as to 20% of the underlying shares, and as to an
additional 20% on each of the next four anniversaries of the date of option
grant. In November 1995, the Company granted to Mr. Bowman and Mr. Barker
warrants to purchase 100,000 and 15,000 shares of Common Stock, respectively,
each at $10.00 per share. The warrants are exercisable as to 50% on January 26,
1998 and as to the remaining 50% on January 26, 1999. In May 1996, the Company
granted Mr. Bowman an additional warrant (the "Additional Warrant") to purchase
50,000 shares of Common Stock at $20.00 per share. The Additional Warrant is
exercisable as to 50% on May 21, 1998 and as to the remaining 50% on May 21,
1999.
The Company has outstanding non-qualified options to purchase 234,500
shares of Common Stock granted since November 1995 at fair market value at the
date of the grant to (i) key employees and (ii) in connection with certain of
the Subsequent Acquisitions.
37
<PAGE> 39
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock by: (i) each person known to the Company
to be the beneficial owner of more than 5% thereof; (ii) each director; (iii)
each named executive officer; (iv) all executive officers and directors as a
group; and (v) each Selling Stockholder. The address of each person listed below
is c/o F.Y.I. Incorporated, 3232 McKinney Avenue, Suite 900, Dallas, Texas
75204. All persons listed have sole voting and investment power with respect to
their shares unless otherwise indicated.
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR OWNED
TO OFFERING AFTER OFFERING
--------------------- NUMBER OF SHARES ---------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------- --------- ------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C>
Greg Melanson...................... 613,260 9.9% 120,000 493,260 6.0%
Thomas C. Walker................... 337,590 5.5 67,590 270,000 3.3
Jerry F. Leonard, Jr............... 237,890 3.9 -- 237,890 2.9
Jonathan B. Shaw................... 265,198 4.3 50,000 215,198 2.6
David Lowenstein................... 265,250 4.3 53,250 212,000 2.6
Steven H. Rowen.................... 167,532 2.7 26,600 140,932 1.7
Donald F. Moorehead, Jr.(1)........ 66,950 1.1 -- 66,950 *
Kent Lee Patterson................. 63,015 1.0 2,479 60,536 *
Robert Tessler..................... 75,463 1.2 15,002 60,461 *
Michael J. Bradley(2).............. 72,863 1.2 12,500 60,363 *
Gerald Pierson..................... 66,196 1.1 7,950 58,246 *
Roger Mansfield.................... 68,140 1.1 13,628 54,462 *
Theodore R. Montuori............... 66,299 1.1 13,000 53,299 *
G. Michael Bellenghi............... 66,196 1.1 13,200 52,996 *
Neil Dean Patterson................ 63,015 1.0 11,000 52,015 *
Ed H. Bowman, Jr.(3)............... 42,000 * -- 42,000 *
Fairfield Management, LLC.......... 21,099 * 4,000 17,099 *
Timothy J. Barker(4)............... 10,000 * -- 10,000 *
Margot T. Lebenberg(5)............. 9,200 * -- 9,200 *
Jack B. Dane....................... 12,057 * 4,376 7,057 *
Hon. Edward M. Rowell(6)........... 6,666 * -- 6,666 *
William M. DeArman................. 27,128 * 5,425 -- *
All executive officers and
directors as a group (12
persons)(7)...................... 1,993,063 31.9% 316,540 1,676,523 20.3%
</TABLE>
- ---------------
* Represents less than 1%.
(1) Does not include 3,334 shares which may be acquired upon the exercise of
options not exercisable within 60 days.
(2) Does not include 3,334 shares which may be acquired upon the exercise of
options not exercisable within 60 days.
(3) Does not include 198,000 shares which may be acquired upon the exercise of
options and warrants not exercisable within 60 days.
(4) Does not include 36,000 shares which may be acquired upon the exercise of
options and warrants not exercisable within 60 days.
(5) Does not include 36,000 shares which may be acquired upon the exercise of
options not exercisable within 60 days.
(6) Does not include 3,334 shares which may be acquired upon the exercise of
options not exercisable within 60 days.
(7) Does not include 280,002 shares which may be acquired upon the exercise of
options and warrants not exercisable within 60 days.
38
<PAGE> 40
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 26,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of preferred stock,
par value $.01 per share (the "Preferred Stock"). As of December 11, 1996, the
Company had outstanding 6,171,910 shares of Common Stock and no shares of
Preferred Stock and had 50 record holders of Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board of Directors out of funds legally
available therefore. See "Dividend Policy." Holders of Common Stock are entitled
to share ratably in the net assets of the Company upon liquidation after payment
or provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of Common Stock have no preemptive
rights to purchase shares of stock of the Company. Shares of Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of the Company. All outstanding shares of Common Stock are, and the
shares of Common Stock to be issued hereby will be upon payment therefor, fully
paid and non-assessable.
The Common Stock is traded on the Nasdaq National Market under the symbol
"FYII."
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Certificate of Incorporation and limitations prescribed by law,
the Board of Directors is expressly authorized to adopt resolutions to issue the
shares, to fix the number of shares and to change the number of shares
constituting any series, and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any class or
series of the Preferred Stock, in each case without any further action or vote
by the stockholders. The Company has no current plans to issue any shares of
Preferred Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
39
<PAGE> 41
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder; (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans); or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is: (i) the owner of 15% or more of the outstanding
voting stock of the corporation; or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws, by action of
its stockholders, to exempt itself from coverage, provided that such bylaw or
certificate of incorporation amendment shall not become effective until 12
months after the date it is adopted. The Company has not adopted such an
amendment to its Certificate of Incorporation or By-laws.
OFFICER AND DIRECTOR LIABILITY
Pursuant to the Company's Certificate of Incorporation and under Delaware
law, directors of the Company are not liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty, except for liability in
connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has derived an improper personal benefit.
In accordance with Delaware law, the Company entered into indemnification
agreements with its directors, pursuant to which it agreed to pay certain
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement incurred by such directors in connection with certain actions, suits
or proceedings. These agreements require directors to repay the amount of any
expenses advanced if it shall be determined that they shall not have been
entitled to indemnification.
The Company maintains liability insurance for the benefit of its directors
and officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
Between September 1994 and September 1995, F.Y.I. issued 1,205,682 shares
of Common Stock at an aggregate purchase price of $1,225,000 to certain founding
stockholders, including Thomas C. Walker, David Lowenstein and the Jerral W.
Jones Family Limited Partnership.
In connection with the acquisitions of the Founding Companies, and as
consideration for their interests in these companies, certain officers,
directors and holders of more than 5% of the outstanding shares of the Company
received cash and shares of Common Stock of the Company as follows: Mr.
Melanson -- $2,475,000 and 613,260 shares of Common Stock; Mr.
Leonard -- $1,250,000 and 253,274 shares of Common Stock; Mr. Shaw -- $1,200,000
and 265,198 shares of Common Stock; Mr. Bellenghi -- $103,000 and 66,196 shares
of Common Stock; and Mr. Bradley -- $103,000 and 66,196 shares of Common Stock.
For a description of the transactions pursuant to which the Company was formed,
see "The Company."
40
<PAGE> 42
The Company has repaid approximately $4,106,000 of indebtedness of the
Founding Companies, of which approximately $2,212,000 directly or indirectly
benefited officers, directors or greater than 5% stockholders of the Company as
follows: Mr. Melanson -- approximately $417,000; Mr. Shaw -- approximately
$155,000; Mr. Leonard -- approximately $1.2 million; Mr. Bellenghi -- $205,000;
and Mr. Bradley -- $205,000. In each case, such person was previously either a
direct obligor or a guarantor of such indebtedness.
The Company has an option to acquire an additional start-up document
management business owned by Mr. Melanson, and Mr. Melanson has an option to
require the Company to purchase such business at such time as its annual pre-tax
profits exceed $550,000. In either event, the consideration payable to Mr.
Melanson will consist of shares of the Company's Common Stock with a value equal
to six times the amount of such pre-tax profits. For the nine months ended
September 30, 1996, the pre-tax earnings of such business were approximately
$350,000.
WARRANTS TO PURCHASE COMMON STOCK
In November 1995, the Company granted to Mr. Bowman and Mr. Barker warrants
to purchase 100,000 and 15,000 shares of Common Stock, respectively, each with
an exercise price of $10.00 per share. These warrants are exercisable as to 50%
on January 26, 1998 and as to the remaining 50% on January 26, 1999. In May
1996, the Company granted to Mr. Bowman the Additional Warrant to purchase
50,000 shares of Common Stock at an exercise price of $20.00 per share. The
Additional Warrant is exercisable as to 50% on May 21, 1998 and as to the
remaining 50% on May 21, 1999.
REAL ESTATE TRANSACTIONS
Leonard leases two properties from Leonard Investments, a partnership
consisting of Mr. Leonard and his father. The aggregate rental expenses for
these properties were approximately $127,000, $126,000 and $127,000 for the
three years ended December 31, 1993, 1994 and 1995, respectively. The Company
also leases one other facility from Mr. Leonard's father. The rental expenses
for this property were approximately $62,000 for each of the three years ended
December 31, 1993, 1994 and 1995, respectively. The Company believes that the
amounts paid for such properties do not exceed the fair market rental thereof.
Researchers leases office facilities and certain equipment from Mr.
Melanson. The total lease payments to Mr. Melanson were $187,000, $177,000 and
$242,000 for the three years ended December 31, 1993, 1994 and 1995,
respectively. Researchers is also required to pay the taxes and insurance on the
properties. The Company believes that the amounts paid for such properties do
not exceed the fair market rental thereof.
CERTAIN LOANS
At December 31, 1995, two companies in which Mr. Leonard and his relatives
owned 78% and 33% of the outstanding shares, respectively, were obligated to
Leonard in the amount of $259,000. See Note 10 of Notes to the Financial
Statements of Leonard.
COMPANY POLICY
In the future, transactions with affiliates of the Company are anticipated
to be minimal and will be approved by a majority of the Board of Directors,
including a majority of the disinterested members of the Board of Directors, and
will be made on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
SHARES ELIGIBLE FOR FUTURE SALE
After the completion of this Offering, there will be 8,171,910 shares of
Common Stock outstanding. The 2,420,000 shares offered hereby will be, and the
2,185,000 shares sold in the IPO are, freely tradable without restriction unless
acquired by affiliates of the Company. Of such 8,171,910 shares, 2,664,615
shares, together with 165,000 shares of Common Stock currently issuable upon
exercise of outstanding warrants, have not been registered under the Securities
Act, which means that they may be resold publicly only upon registration
41
<PAGE> 43
under the Securities Act or in compliance with an exemption from the
registration requirements of the Securities Act, including the exemption
provided by Rule 144 thereunder. Holders of all of such unregistered shares,
however, have certain registration rights with respect to such shares.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of the acquisition of restricted shares of
Common Stock from either the Company or any affiliate of the Company, the
acquiror or subsequent holder thereof may sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of the Common Stock, or the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding the
date on which notice of the proposed sale is sent to the Commission. Under Rule
144, the two year "holding period" for such unregistered shares has expired or
will expire at various times through January 1998. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. If three years
have elapsed since the later of the date of the acquisition of restricted shares
of Common Stock from the Company or any affiliate of the Company, a person who
is not deemed to have been an affiliate of the Company at any time for 90 days
preceding a sale would be entitled to sell such shares under Rule 144 without
regard to the volume limitations, manner of sale provisions or notice or public
information requirements.
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of 90 days from the date of this Offering without the
prior written consent of Montgomery Securities, except that the Company may
issue Common Stock in connection with acquisitions or upon the exercise of
options. In addition, the former owners of the Founding Companies and the
initial stockholders of the Company (which together include the Selling
Stockholders) have agreed with the Company that they will not sell any of their
shares for a period of two years after January 26, 1996 (other than certain
sales registered under the Securities Act and a limited ability to pledge such
shares as collateral). The Company has agreed not to waive such restriction for
a period of 90 days from the date of this Offering without the prior written
consent of Montgomery Securities. Directors of the Company who are not subject
to these contractual restrictions have agreed not to contract to sell or
otherwise sell or dispose of any of their Common Stock for a period of 90 days
after the date of this Prospectus without the prior written consent of
Montgomery Securities.
The Company issued 856,735 shares of Common Stock as partial consideration
for acquisitions completed since the IPO. Such 856,735 shares were registered
under the Acquisition Shelf and are freely tradable (except for 36,670 shares
held by a wholly-owned subsidiary of the Company) unless acquired by parties to
the acquisition or affiliates of such parties, other than the issuer, in which
case they may be sold pursuant to Rule 145 under the Securities Act. Rule 145
permits, in part, such persons to resell immediately securities acquired in
transactions covered under the Rule, provided such securities are resold in
accordance with the public information requirements, volume limitations and
manner of sale requirements of Rule 144. If a period of two years has elapsed
since the date such securities were acquired in such transaction and if the
issuer meets the public information requirements of Rule 144, Rule 145 permits a
person who is not an affiliate of the issuer to freely resell such securities.
In addition, these shares are subject to contractual restrictions on resale
which generally expire two years from the date of issuance.
The Company has reserved for issuance under the Plan an aggregate of
650,000 shares of Common Stock, or 12% of the aggregate number of shares of the
Common Stock outstanding, whichever is greater. The Company has registered the
shares issuable upon exercise of options granted under the Plan, and such shares
will be eligible for resale in the public market. As of December 11, 1996, the
Company had options to purchase 615,080 shares of Common Stock outstanding under
the Plan.
Sales, or the availability for sale of, substantial amounts of the Common
Stock in the public market could adversely affect prevailing market prices and
the ability of the Company to raise equity capital in the future.
42
<PAGE> 44
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions in the underwriting agreement (the
"Underwriting Agreement") by and among the Company, the Selling Stockholders and
the Underwriters, to purchase from the Company and the Selling Stockholders the
number of shares of Common Stock indicated below opposite their respective
names, at the public offering price less the underwriting discount set forth on
the cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of the shares of Common
Stock if they purchase any.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Montgomery Securities........................................ 806,668
Bear, Stearns & Co. Inc. .................................... 806,666
William Blair & Company, L.L.C............................... 806,666
---------
Total.............................................. 2,420,000
=========
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $0.60 per share; and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $0.10 per share to
certain other dealers. After the public offering, the offering price and other
selling terms may be changed by the Underwriters. The Common Stock is offered
subject to receipt and acceptance by the Underwriters, and to certain other
conditions, including the right to reject orders in whole or in part.
The Company has granted to the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to a
maximum of 363,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent the Underwriters exercise such over-allotment
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may exercise this
over-allotment option only to cover over-allotments made in connection with this
Offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company has agreed not to sell any shares of Common Stock for a period
of 90 days from the date of this Prospectus without the prior written consent of
Montgomery Securities, except for: (i) shares of Common Stock issued in
connection with acquisitions; or (ii) shares of Common Stock issued upon the
exercise of outstanding stock options. In addition, the former owners of the
Founding Companies and the initial stockholders of the Company (which together
include the Selling Stockholders) are contractually prohibited by the Company
from selling shares of Common Stock for a period of two years following the
consummation of the IPO (other than certain sales registered under the
Securities Act and a limited ability to pledge such shares as collateral). The
Company has agreed not to waive such restriction for a period of 90 days after
the date of this Prospectus without the prior written consent of Montgomery
Securities. Directors of the Company who are not subject to these contractual
restrictions have agreed not to contract to sell or otherwise sell or dispose of
any of their Common Stock for a period of 90 days after the date of this
Prospectus without the prior written consent of Montgomery Securities.
In connection with this Offering, certain Underwriters and selling group
members may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market immediately prior to the commencement of sales in
this Offering, in accordance with Rule 10b-6A under the Exchange Act. Passive
market making consists of displaying bids on the Nasdaq National Market that are
limited by the bid prices of independent market makers and completing purchases
in response to order flow at prices limited by such bids.
43
<PAGE> 45
Net purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified period and must be discontinued for any day on
which such limit is reached. Passive market making may stabilize the market
price of the Common Stock at a level above that which might otherwise prevail
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered by this
Prospectus has been passed upon for the Company by Morgan, Lewis & Bockius LLP,
New York, New York. Certain legal matters in connection with the sale of Common
Stock offered hereby will be passed upon for the Underwriters by Howard, Rice,
Nemerovski, Canady, Falk & Rabkin, A Professional Corporation, San Francisco,
California.
EXPERTS
The audited consolidated financial statements for the nine months ended
September 30, 1996 and for the year ended December 31, 1995 included in this
Prospectus and elsewhere in this Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report. The audited financial statements of Imagent Corporation and Related
Company; Melanson and Associates, Inc. and Related Company; C. & T. Management
Services, Inc. and Related Company; Leonard Archives, Inc.; Deliverex,
Incorporated and Subsidiary and Related Company and Permanent Records, Inc. for
the three years ended December 31, 1995, or the applicable fiscal year-ends
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports. The audited Combined Financial Statements of the
Founding Companies for the one month ended January 31, 1996 and the three years
ended December 31, 1995 included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report. In this report, Arthur
Andersen LLP states that with respect to Recordex Services, Inc., as of and for
the two years in the period ended December 31, 1994, its opinion is based on the
report of other independent public accountants, namely Elko, Fischer, McCabe &
Rudman, Ltd. The audited financial statements for Recordex Services, Inc. for
the year ended December 31, 1995 included in this Prospectus and elsewhere in
the Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report. The audited financial
statements for Recordex Services, Inc. for the two years ended December 31, 1994
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Elko, Fischer, McCabe & Rudman, Ltd., independent public
accountants, as indicated in their report with respect thereto. The financial
statements are included herein in reliance upon the authority of said firms as
experts in giving said reports.
The financial statements of B & B Information and Image Management, Inc. as
of December 31, 1994 and 1995 have been included herein in reliance on the
report of C.W. Amos & Company, LLC, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
The financial statements of Premier Document Management, Inc. as of
December 31, 1995 have been included herein in reliance on the report of Moss
Adams LLP, independent public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in auditing and accounting.
The financial statements of Robert A. Cook and Staff, Inc. and Related
Company for the three years ended December 31, 1995 included in this Prospectus
and elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The financial statements of ZIA Information Analysis Group for the year
ended December 31, 1995 included in this Prospectus and elsewhere in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
44
<PAGE> 46
The financial statements of C.M.R.S. Incorporated for the year ended
February 29, 1996 included in this Prospectus and elsewhere in this Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The financial statements of Minnesota Medical Record Service, Inc. for the
year ended September 30, 1995 included in this Prospectus and elsewhere in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
The financial statements of Texas Medical Record Service, Inc. for the year
ended February 29, 1996 included in this Prospectus and elsewhere in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included in reliance upon the authority of said firm as experts in giving said
report.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials can be obtained from the Commission at Judiciary Plaza, 450 Fifth
Street, N.W. Washington, D.C. 20549, at prescribed rates. The Commission
maintains an Internet Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission. The address of that site is http://www.sec.gov.
The Company has filed with the Commission, a Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and such Common Stock, reference is made to such
Registration Statement and exhibits. A copy of the Registration Statement on
file with the Commission may be obtained from the Commission's principal office
in Washington, D.C. upon payment of the fees prescribed by the Commission and
through the Commission's Internet Web site.
The Company's Common Stock is listed on the Nasdaq National Market. Proxy
statements and other information concerning the Company can also be inspected at
the offices of the Nasdaq National Market, 1735 K Street, Washington D.C. 20006.
45
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
F.Y.I. INCORPORATED AND SUBSIDIARIES
Report of Independent Public Accountants........................................... F-4
Consolidated Balance Sheets........................................................ F-5
Consolidated Statements of Operations.............................................. F-6
Consolidated Statements of Stockholders' Equity.................................... F-7
Consolidated Statements of Cash Flows.............................................. F-8
Notes to Consolidated Financial Statements......................................... F-9
FOUNDING COMPANIES
Report of Independent Public Accountants........................................... F-20
Report of Independent Public Accountants........................................... F-21
Combined Balance Sheets............................................................ F-22
Combined Statements of Operations.................................................. F-23
Combined Statements of Stockholders' Equity........................................ F-24
Combined Statements of Cash Flows.................................................. F-25
Notes to Combined Financial Statements............................................. F-26
IMAGENT CORPORATION AND RELATED COMPANY
Report of Independent Public Accountants........................................... F-39
Combined Balance Sheets............................................................ F-40
Combined Statements of Operations.................................................. F-41
Combined Statements of Stockholders' Equity........................................ F-42
Combined Statements of Cash Flows.................................................. F-43
Notes to Combined Financial Statements............................................. F-44
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
Report of Independent Public Accountants........................................... F-49
Combined Balance Sheets............................................................ F-50
Combined Statements of Operations.................................................. F-51
Combined Statements of Stockholders' Equity........................................ F-52
Combined Statements of Cash Flows.................................................. F-53
Notes to Combined Financial Statements............................................. F-54
RECORDEX SERVICES, INC.
Report of Independent Public Accountants........................................... F-60
Report of Independent Public Accountants........................................... F-61
Balance Sheets..................................................................... F-62
Statements of Operations........................................................... F-63
Statements of Changes in Stockholder's Equity...................................... F-64
Statements of Cash Flows........................................................... F-65
Notes to Financial Statements...................................................... F-66
LEONARD ARCHIVES, INC.
Report of Independent Public Accountants........................................... F-72
Balance Sheets..................................................................... F-73
Statements of Operations........................................................... F-74
Statements of Stockholders' Equity................................................. F-75
Statements of Cash Flows........................................................... F-76
Notes to Financial Statements...................................................... F-77
</TABLE>
F-1
<PAGE> 48
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
C. & T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
Report of Independent Public Accountants........................................... F-83
Combined Balance Sheets............................................................ F-84
Combined Statements of Operations.................................................. F-85
Combined Statements of Stockholders' Equity........................................ F-86
Combined Statements of Cash Flows.................................................. F-87
Notes to Combined Financial Statements............................................. F-88
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
Report of Independent Public Accountants........................................... F-93
Combined Balance Sheets............................................................ F-94
Combined Statements of Operations.................................................. F-95
Combined Statements of Stockholders' Equity........................................ F-96
Combined Statements of Cash Flows.................................................. F-97
Notes to Combined Financial Statements............................................. F-98
PERMANENT RECORDS, INC.
Report of Independent Public Accountants........................................... F-104
Balance Sheets..................................................................... F-105
Statements of Operations........................................................... F-106
Statements of Stockholders' Equity................................................. F-107
Statements of Cash Flows........................................................... F-108
Notes to Financial Statements...................................................... F-109
SIGNIFICANT ACQUISITIONS
COOK AND STAFF, INC. AND RELATED COMPANY
Report of Independent Public Accountants........................................... F-112
Combined Balance Sheets............................................................ F-113
Combined Statements of Operations.................................................. F-114
Combined Statements of Stockholder's Equity........................................ F-115
Combined Statements of Cash Flows.................................................. F-116
Notes to Combined Financial Statements............................................. F-117
B&B INFORMATION AND IMAGE MANAGEMENT, INC.
Report of Independent Public Accountants........................................... F-120
Balance Sheets..................................................................... F-121
Statements of Operations........................................................... F-122
Statements of Stockholder's Equity................................................. F-123
Statements of Cash Flows........................................................... F-124
Notes to Financial Statements...................................................... F-125
PREMIER DOCUMENT MANAGEMENT, INC.
Report of Independent Public Accountants........................................... F-129
Combined Balance Sheets............................................................ F-130
Combined Statements of Operations.................................................. F-131
Combined Statements of Stockholders' Equity........................................ F-132
Combined Statements of Cash Flows.................................................. F-133
Notes to Combined Financial Statements............................................. F-134
C.M.R.S. INCORPORATED
Report of Independent Public Accountants........................................... F-139
Balance Sheets..................................................................... F-140
Statements of Operations........................................................... F-141
Statements of Stockholder's Equity................................................. F-142
Statements of Cash Flows........................................................... F-143
Notes to Financial Statements...................................................... F-144
</TABLE>
F-2
<PAGE> 49
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MINNESOTA MEDICAL RECORD SERVICE, INC.
Report of Independent Public Accountants........................................... F-148
Balance Sheets..................................................................... F-149
Statements of Operations........................................................... F-150
Statements of Stockholder's Equity................................................. F-151
Statements of Cash Flows........................................................... F-152
Notes to Financial Statements...................................................... F-153
TEXAS MEDICAL RECORD SERVICE, INC.
Report of Independent Public Accountants........................................... F-156
Balance Sheets..................................................................... F-157
Statements of Operations........................................................... F-158
Statements of Stockholders' Equity................................................. F-159
Statements of Cash Flows........................................................... F-160
Notes to Financial Statements...................................................... F-161
ZIA INFORMATION ANALYSIS GROUP
Report of Independent Public Accountants........................................... F-164
Balance Sheets..................................................................... F-165
Statements of Operations........................................................... F-166
Statements of Stockholders' Equity................................................. F-167
Statements of Cash Flows........................................................... F-168
Notes to Financial Statements...................................................... F-169
PRO FORMA FINANCIAL STATEMENTS
F.Y.I. INCORPORATED AND SUBSIDIARIES
Pro Forma Statement of Operations for the Year Ended December 31, 1995
(unaudited)..................................................................... F-175
Pro Forma Statement of Operations for the Nine Months Ended September 30, 1996
(unaudited)..................................................................... F-176
Notes to Pro Forma Financial Statements (unaudited)................................ F-177
</TABLE>
F-3
<PAGE> 50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To F.Y.I. Incorporated:
We have audited the accompanying consolidated balance sheets of F.Y.I.
Incorporated (a Delaware corporation) as of December 31, 1995 and September 30,
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for the nine months ended September 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly,
in all material respects, the consolidated financial position of F.Y.I.
Incorporated as of December 31, 1995, and September 30, 1996, and the
consolidated results of operations and cash flows for the nine months ended
September 30, 1996, in accordance with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
November 4, 1996
F-4
<PAGE> 51
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 52 $ 3,336
Accounts receivable and notes receivable, less allowance for doubtful
accounts of $0 and $1,075, respectively................................ -- 14,191
Inventory................................................................ -- 567
Prepaid expenses and other current assets................................ 52 687
------ -------
Total current assets.............................................. 104 18,781
PROPERTY, PLANT AND EQUIPMENT, net......................................... 15 10,105
GOODWILL AND OTHER INTANGIBLES, net of amortization of $0 and $379,
respectively............................................................. -- 28,099
DEFERRED OFFERING COSTS.................................................... 2,190 --
NOTE RECEIVABLE, SHAREHOLDERS -- LONG TERM................................. -- 643
OTHER NONCURRENT ASSETS.................................................... 6 2,273
------ -------
Total assets...................................................... $2,315 $59,901
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities................................. $1,101 $ 7,177
Short-term obligations................................................... -- 3,545
Current maturities of long-term obligations.............................. -- 294
Unearned revenue......................................................... -- 686
Income taxes payable..................................................... -- 1,752
Current portion of deferred income taxes................................. -- 289
------ -------
Total current liabilities......................................... 1,101 13,743
LONG-TERM OBLIGATIONS, net of current maturities........................... -- 16,956
DEFERRED INCOME TAXES, net of current portion.............................. -- 278
------ -------
Total liabilities................................................. 1,101 30,977
------ -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $.01 par value, 1,000,000 and 0 shares
authorized, 9,000 and 0 shares issued and outstanding at December 31,
1995 and September 30, 1996, respectively.............................. -- --
Preferred stock, $.01 par value, 1,000,000 shares authorized, 0 shares
issued and outstanding................................................. -- --
Common stock, $.01 par value, 26,000,000 shares authorized, 663,125 and
5,928,074 shares issued and outstanding at December 31, 1995 and
September 30, 1996, respectively....................................... 7 59
Additional paid-in-capital............................................... 1,207 26,805
Retained earnings........................................................ -- 2,561
------ -------
1,214 29,425
Less -- Treasury stock, $.01 par value, 0 and 36,670 shares at December
31, 1995 and September 30, 1996, respectively.......................... -- (501)
------ -------
Total stockholders' equity........................................ 1,214 28,924
------ -------
Total liabilities and stockholders' equity.................... $2,315 $59,901
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 52
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------
1995 1996
------- -----------
<S> <C> <C>
(UNAUDITED)
REVENUE:
Service revenue...................................................... $ -- $41,262
Product revenue...................................................... -- 4,211
Other revenue........................................................ -- 498
------- -------
Total revenue................................................ -- 45,971
COST OF SERVICES....................................................... -- 26,020
COST OF PRODUCTS SOLD.................................................. -- 3,225
DEPRECIATION........................................................... -- 1,023
------- -------
Gross profit................................................. -- 15,703
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................... -- 10,891
AMORTIZATION........................................................... -- 290
------- -------
Operating income............................................. -- 4,522
OTHER (INCOME) EXPENSE:
Interest expense..................................................... -- 479
Interest income...................................................... -- (207)
Other income, net.................................................... -- (40)
------- -------
Income before income taxes................................... -- 4,290
PROVISION FOR INCOME TAXES............................................. -- 1,729
------- -------
NET INCOME............................................................. $ -- $ 2,561
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................. -- 5,450
======= =======
NET INCOME PER COMMON SHARE............................................ $ -- $ 0.47
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 53
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK TREASURY STOCK
------------------ --------------- --------------- TOTAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT APIC R/E S/E
--------- ------ ------ ------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995............. 663,125 $ 7 9,000 $ -- -- $ -- $ 1,207 $ -- $ 1,214
Initial public offering................ 2,185,000 22 -- -- -- -- 21,830 -- 21,852
Conversion of preferred stock into
common stock......................... 542,557 5 (9,000) -- -- -- (5) -- --
Issuance of common stock for Founding
Companies............................ 1,878,933 19 -- -- -- -- (4,586) -- (4,567)
Deferred tax liability:
S corporation to C corporation
conversion for Founding
companies.......................... -- -- -- -- -- -- (691) -- (691)
Common stock issued in connection with
subsequent acquisitions.............. 622,259 6 -- -- -- -- 8,489 -- 8,495
Treasury stock re-acquired in
connection with a subsequent
acquisition.......................... -- -- -- -- 36,670 (501) -- -- (501)
Exercise of options, net............... 36,200 -- -- -- -- -- 561 -- 561
Net income............................. -- -- -- -- -- -- -- 2,561 2,561
--------- ---- ------ ---- ------ ----- ------- ------ -------
Balance, September 30, 1996............ 5,928,074 $ 59 -- $ -- 36,670 $(501) $26,805 $2,561 $28,924
========= ==== ====== ==== ====== ===== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 54
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ -- $ 2,561
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization................................ -- 1,313
Deferred tax benefit......................................... (274)
Change in operating assets and liabilities:
Accounts receivable and notes receivable..................... -- (159)
Inventory.................................................... -- (58)
Prepaid expenses and other assets............................ -- (325)
Accounts payable and accrued liabilities..................... -- (1,798)
Unearned revenue............................................. -- 95
----- --------
Net cash provided by operating activities............... -- 1,355
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment....................... (7) (2,328)
Cash paid for acquisitions, net of cash acquired................ -- (27,365)
----- --------
Net cash used for investing activities.................. (7) (29,693)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance, net of underwriting
discounts and other costs.................................... (251) 23,448
Proceeds from preferred stock issuance.......................... 135 --
Proceeds from short-term obligations............................ -- 3,500
Proceeds from long-term obligations............................. -- 14,101
Cash paid for debt issuance costs............................... -- (1,602)
Principal payments on short-term obligations.................... -- (5,252)
Principal payments on long-term obligations..................... -- (2,573)
----- --------
Net cash (used in) provided by financing activities..... (116) 31,622
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............. (123) 3,284
CASH AND CASH EQUIVALENTS, beginning of period.................... 669 52
----- --------
CASH AND CASH EQUIVALENTS, end of period.......................... $ 546 $ 3,336
===== ========
SUPPLEMENTAL DATA:
Cash paid for --
Income taxes................................................. $ -- $ 1,130
Interest..................................................... $ -- $ 120
NONCASH FINANCING TRANSACTIONS:
Debt assumed in acquisitions.................................... $ -- $ 11,379
Equipment acquired via capital lease............................ $ $ 42
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 55
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
F.Y.I. Incorporated (the "Company" or "F.Y.I.") was founded in September
1994 to create a national, single source provider of document management
services to three primary client segments: healthcare institutions, professional
services firms and financial institutions. In January 1996, F.Y.I. acquired (the
"Acquisitions") simultaneously with the closing of its initial public offering
(the "IPO") on January 23, 1996, seven document management services businesses
(the "Founding Companies"). The Founding Companies are headquartered in San
Francisco (2), San Jose, Fort Worth, Detroit, Malvern (Philadelphia) and
Baltimore, and operate in over 23 states. The consideration for the Founding
Companies consisted of a combination of cash and common stock (the "Common
Stock") of F.Y.I.
Between September 1994 and the consummation of the IPO and the
Acquisitions, F.Y.I. did not conduct any operations. For accounting purposes and
for the purposes of the presentation of the financial statements herein, January
31, 1996 has been used as the effective date of the Acquisitions. Accordingly,
the actual operating results of the Company included in the Statement of
Operations for the nine months ended September 30, 1996 represent the eight
months of operations subsequent to the consummation of the Acquisitions.
Supplemental Statement of Operations Data for the nine months ended September
30, 1996 is presented in Note 15 herein.
The consolidated financial statements of F.Y.I. include the accounts of
F.Y.I. Incorporated and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated. The results of operations for
the nine months ended September 30, 1996 will not be indicative of the results
for the full year because: (i) the Company only had operations for eight of the
nine months; and (ii) the impact of acquisitions recorded as purchases, whose
results are only included subsequent to the purchase date.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND THE ACQUISITIONS:
Initial Public Offering
On January 26, 1996, the Company completed the IPO of 2,185,000 shares of
Common Stock (including the exercise of the underwriters' over-allotment option)
at $13.00 per share. Proceeds from the IPO, net of underwriting commissions and
offering costs, were approximately $22.9 million. Of these net proceeds,
approximately $7.1 million was used to pay a portion of the consideration for
the Acquisitions, approximately $7.7 million was used to retire certain
indebtedness of the Founding Companies, approximately $8.0 million was used for
acquisitions subsequent to the IPO, and $0.1 million was used as working
capital.
Upon the closing of the IPO, the Company converted the 9,000 shares of
Series A Preferred Stock then outstanding into 542,557 shares of Common Stock.
Acquisitions of the Founding Companies
Simultaneously with the closing of the IPO, the Company acquired the
Founding Companies. The aggregate consideration paid by F.Y.I. to acquire the
Founding Companies was approximately $35 million, consisting of: (i) $7,059,000
in cash; (ii) 1,878,933 shares of Common Stock; (iii) the assumption and
repayment of approximately $191,000 of indebtedness owed by a Founding Company
stockholder; and (iv) the distribution of cash and certain receivables to
certain Founding Company stockholders of S corporations in the amount of
$3,450,000, representing the undistributed retained earnings of S corporations,
upon which taxes have been paid by the stockholders.
The Acquisitions have been accounted for in accordance with generally
accepted accounting principles ("GAAP") as a combination of F.Y.I. and the
Founding Companies at historical cost, because: (i) the Founding Companies'
stockholders transferred assets to F.Y.I. in exchange for Common Stock and cash
simultaneously, with the IPO; (ii) the nature of future operations of the
Company will be substantially
F-9
<PAGE> 56
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
identical to the combined operations of the Founding Companies; and (iii) no
former stockholder group of any of the Founding Companies obtained a majority of
the outstanding voting shares of the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.
Inventory
Inventory is stated at the lower of cost or market with cost determined on
a first-in, first-out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
computed using straight-line and accelerated methods over the estimated useful
lives of the assets. Leasehold improvements are depreciated over the lesser of
the useful life or the term of the lease.
Intangible Assets
Intangible assets consist primarily of excess purchase price over net
assets, which are amortized over 30 years. In conformance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company's
management continually evaluates whether events and circumstances indicate the
remaining estimated useful life of intangible assets may warrant revisions or
that the remaining balance of intangibles or other long-lived assets may not be
recoverable. To make this evaluation, management uses an estimate of
undiscounted net income over the remaining life of the intangibles or other
long-lived assets.
Revenue Recognition
Revenue is recognized when the services are rendered, or products are
shipped, to the Company's customers. Microfilm processing revenue is recognized
on a percentage-of-completion basis. Unearned revenue represents customer
storage and certain services which are billed in advance.
Income Taxes
Income taxes are provided based upon the provisions of SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred income
taxes under the asset and liability method.
Deferred income taxes are provided for temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes.
Temporary differences result primarily from accelerated depreciation and
amortization for tax purposes, deferred contract revenues being taxed when
billed, and various accruals and reserves being deductible for tax purposes in
different periods.
Net Income Per Share
Net income per common share has been computed by dividing income by the
weighted average number of common shares and equivalent shares outstanding for
the period. For purposes of computing income per common share for the nine month
period ended September 30, 1996, the common stock equivalent impact of stock
options outstanding during the period, are not included as their effect is not
material.
F-10
<PAGE> 57
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
The activity in the allowance for doubtful accounts and notes receivable is
as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING BALANCE COSTS AND END OF
OF PERIOD ACQUIRED EXPENSES WRITE-OFFS PERIOD
---------- -------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1996
Allowance for doubtful accounts......... $ -- $1,130 $573 $(628) $1,075
==== ====== ==== ===== ======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
YEARS 1995 1996
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land............................................ N/A $ -- $ 602
Buildings and improvements...................... 7-18 -- 2,534
Leasehold improvements.......................... 5-10 -- 638
Vehicles........................................ 5-7 -- 1,368
Machinery and equipment......................... 5-15 -- 14,885
Computer equipment.............................. 5-7 15 436
Furniture and fixtures.......................... 5-15 -- 981
---- -------
$ 15 $21,444
Less -- Accumulated depreciation and
amortization.................................. -- 11,339
---- -------
$ 15 $10,105
==== =======
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued liabilities................... $ 954 $4,561
Accrued compensation and benefits.......................... 147 1,793
Sales tax payable.......................................... -- 291
Other...................................................... -- 532
------ ------
$1,101 $7,177
====== ======
</TABLE>
F-11
<PAGE> 58
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. BUSINESS COMBINATIONS:
Since the IPO and through September 30, 1996, the Company has acquired 13
additional businesses (together with the Founding Companies, the "Operating
Companies") which provide document management services. All of the acquisitions
are accounted for under the purchase method of accounting.
In May 1996, the Company acquired the stock of B&B Information and Image
Management, Inc. ("B&B") and Premier Document Management, Inc. and PDM Services,
Inc. ("Premier"). In June 1996, the Company acquired all of the non-cash assets
of Robert A. Cook and Staff, Inc. and RAC Services, Inc. ("Cook"). In August
1996, the Company acquired C.M.R.S. Incorporated ("CMRS"), Minnesota Medical
Record Service, Inc. ("Minnesota Medical Record") and Texas Medical Record
Service, Inc. ("Texas Medical Record") (collectively "Medical Record"). Also, as
of August 1996, the Company acquired ZIA Information Analysis Group ("ZIA").
B&B, Premier, Cook, Medical Record and ZIA are considered significant
subsidiaries of the Company. The aggregate consideration paid for B&B, Premier,
Cook, Medical Record and ZIA consisted of $20,129,000 in cash and 585,589 shares
of Common Stock. The preliminary allocation of the purchase price is set forth
below:
<TABLE>
<S> <C>
Consideration Paid...................................... $28,123,000
Estimated Fair Value of Tangible Assets................. 10,758,000
Estimated Fair Value of Liabilities..................... 7,527,000
Goodwill................................................ 24,892,000
</TABLE>
The fair market value of the shares of Common Stock used in calculating the
consideration paid was $13.65, which is based on approximately a 35% discount
from the average trading price of the Common Stock based on the length and type
of restrictions in the purchase agreements.
The Company acquired substantially all of the assets of Sacramento Valley
Records Management, Inc. ("Sacramento") and Microfilm Associates, Ltd.
("Microfilm") in February 1996; Octo, Inc. ("Octo") in June 1996; and Domor Data
Processing ("Domor"), Rushmore Legal Support ("Rushmore") and Index Record
Management ("Index") in July 1996. The aggregate consideration paid for
Sacramento, Microfilm, Octo, Domor, Rushmore and Index consisted of $3,017,000
in cash. The preliminary allocation of the purchase price is set forth below:
<TABLE>
<S> <C>
Consideration Paid....................................... $3,017,000
Estimated Fair Value of Tangible Assets.................. 720,000
Estimated Fair Value of Liabilities...................... 433,000
Goodwill................................................. 2,730,000
</TABLE>
The estimated fair market values reflected above are based on preliminary
estimates and assumptions and are subject to revision. In management's opinion,
the preliminary allocation is not expected to be materially different than the
final allocation.
All intangibles are considered enterprise goodwill. Based on the historical
profitability of the purchased companies and trends in the legal, healthcare and
other industries to outsource document management functions in the foreseeable
future, the enterprise goodwill will be amortized over a period of 30 years.
Management continually evaluates whether events and circumstances indicate that
the remaining estimated useful life of intangible assets may warrant revisions
or that the remaining balance of intangibles or other long-lived assets may not
be recoverable. To make this evaluation, management uses an estimate of
undiscounted net income over the remaining life of the intangibles or other
long-lived assets. The goodwill associated with the B&B, Premier, Medical Record
and ZIA acquisitions is not deductible for income tax purposes.
F-12
<PAGE> 59
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Set forth below is unaudited pro forma financial information for the nine
months ended September 30, 1996 and for the year ended December 31, 1995. The
unaudited pro forma data give effect to: (i) the acquisitions of B&B, Premier,
Cook, Medical Record and ZIA; (ii) the acquisitions of the Founding Companies;
and (iii) compensation and tax adjustments for all transactions as if the
transactions had occurred on January 1, 1995. The acquisitions of Sacramento,
Microfilm, Octo, Domor, Rushmore and Index have not been included in the pro
forma financial statements for periods prior to their acquisition date as the
effect is immaterial.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1995 1996
----------------- -----------------
(UNAUDITED, IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue............................................ $78,160 $64,964
Income before income taxes......................... 8,270 6,986
Net income......................................... 5,098 4,178
Net income per common share........................ $ 0.87 $ 0.71
Average shares outstanding......................... 5,872 5,872
======= =======
</TABLE>
8. CREDIT FACILITIES:
Short Term Obligations
Short-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
(IN THOUSANDS)
Revolving line of credit, expiring at April 14, 2001,
interest at prime plus 1.5% or the Eurodollar rate plus
3% (8.75% to 9.75% at September 30, 1996)................ $ -- $3,500
Other...................................................... -- 45
------ ------
Total short-term obligations..................... $ -- $3,545
====== ======
</TABLE>
F-13
<PAGE> 60
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term Obligations
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Line of credit, expiring at April 14, 2001, interest at
prime plus 1.5% or the Eurodollar rate plus 3% (8.75% to
9.75% at September 30, 1996)............................. $ -- $14,101
Industrial Revenue Bonds: Variable Rate (3.5% at September
30, 1996) Demand/Fixed Rate Revenue Bonds, Prince
George's County, Maryland; due beginning in 1996 through
2014 secured by all real estate equipment and other
tangible property of a subsidiary of the Company......... -- 2,363
Notes payable -- Small Business Administration, monthly
payment of $3,000, including principal and interest at
4%, maturing November 17, 2014, secured by deed of trust
on real estate and non-real estate assets of the Company,
guaranteed by a stockholder and the stockholder's wife... -- 397
Capital lease obligations.................................. -- 364
All other obligations...................................... -- 25
------- -------
Total............................................ -- 17,250
Less -- Current maturities of long-term obligations........ -- 294
------- -------
Total long-term obligations...................... $ -- $16,956
======= =======
</TABLE>
In April 1996, the Company and its subsidiaries entered into a credit
agreement, as amended (the "Line of Credit"), with Banque Paribas, as agent, and
the lenders named therein. Under the Line of Credit, the Company and its
subsidiaries may borrow on a revolving credit basis loans in an aggregate
outstanding principal amount up to $35.0 million from time to time under the
secured revolving credit and acquisition facility, subject to certain customary
borrowing capacity requirements. The Line of Credit is secured by the stock,
receivables and equipment of F.Y.I. and its subsidiaries. The Company and its
subsidiaries may borrow up to an aggregate $30.0 million of term loans under the
Credit Agreement for acquisitions under prescribed conditions.
The Company and its subsidiaries may borrow revolving credit loans up to an
aggregate $5.0 million under the Credit Agreement for working capital and
general corporate purposes. The commitment to fund revolving credit loans
expires April 14, 2001. The commitment to fund term loans expires October 15,
1997. The annual interest rate applicable to borrowings under this facility is,
at the option of the Company, (i) 1.50% plus the prime rate or (ii) 3.00% plus
the Eurodollar rate.
The Company also has outstanding an Irrevocable Letter of Credit in the
amount of approximately $2.4 million, to serve as guarantee for periodic
principal and interest payments related to the Industrial Revenue Bonds.
The Credit Agreement requires mandatory prepayments in certain
circumstances. The outstanding principal balance of term loans as of October 15,
1997 shall thereafter be due and payable in 14 equal quarterly payments
beginning January 15, 1998, and ending April 15, 2001. The outstanding principal
balance of revolving credit loans shall be due and payable on April 15, 2001.
The weighted average interest rate on short and long-term obligations at
September 30, 1996 was 8.3%. The Credit Agreement contains certain reporting
requirements and financial covenants, including requirements that the Company
maintain minimum levels of net worth and other financial ratios. As of September
30, 1996, the Company has complied with all loan covenants.
F-14
<PAGE> 61
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of Long-Term Obligations
As of September 30, 1996, maturities of long-term obligations are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30
- -------------------------
<S> <C>
1997............................................................. $ 294
1998............................................................. 3,173
1999............................................................. 4,162
2000............................................................. 4,173
2001............................................................. 3,141
Thereafter....................................................... 2,307
-------
Total.................................................. $17,250
=======
</TABLE>
9. LEASE COMMITMENTS:
The Operating Companies lease various office buildings, machinery,
equipment, and vehicles. Future minimum lease payments under capital leases and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996
---------------------
CAPITAL OPERATING
YEARS ENDING SEPTEMBER 30 LEASES LEASES
- ------------------------- ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1997.................................................... $ 221 $ 3,048
1998.................................................... 93 2,800
1999.................................................... 50 2,496
2000.................................................... 26 1,451
2001.................................................... 5 1,015
Thereafter.............................................. -- 3,828
----- -------
Total minimum lease payments............................ $ 395 $14,638
Less -- Amounts representing interest................... 31 =======
-----
Net minimum lease payments.............................. 364
Less -- Current portion of obligations under capital
leases.................................................. 205
-----
Long-term portion of obligations under capital leases... $ 159
=====
</TABLE>
Rent expense for all operating leases for the nine months ended September
30, 1996 was approximately $2,373,000.
Certain operating companies sublease a portion of their office facilities
under noncancelable lease agreements which expire at various dates to three
unrelated businesses. Future minimum sublease rental income as of September 30,
1996 for the remainder of the term and in the aggregate are as follows (in
thousands):
<TABLE>
<S> <C>
1997.......................................................................... $ 72
1998.......................................................................... 26
1999.......................................................................... 26
2000.......................................................................... 26
2001.......................................................................... 10
----
$160
====
</TABLE>
F-15
<PAGE> 62
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
The provision for federal and state income taxes consists of the following
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996
-----------------
<S> <C>
Federal --
Current................................................... $1,660
Deferred.................................................. (243)
State --
Current................................................... 343
Deferred.................................................. (31)
------
$1,729
======
</TABLE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996
-----------------
<S> <C>
Tax at statutory rate....................................... $1,459
Add (deduct) --
State income taxes........................................ 206
Nondeductible expenses.................................... 64
------
$1,729
======
</TABLE>
The components of deferred income tax liabilities and assets are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Deferred income tax liabilities-
Tax over book depreciation and amortization...... $ -- $ 350
Accrual to cash differences, net................. -- 657
----- ------
Total deferred income tax liabilities.... -- 1,007
Deferred income tax assets-
Allowance for doubtful accounts.................. -- 265
Other reserves, net.............................. -- 156
Other, net....................................... -- 19
----- ------
Total deferred income tax assets......... -- 440
----- ------
Total net deferred income tax liabilities.......... $ -- $ 567
===== ======
Current portion of deferred income tax
liabilities...................................... -- 289
Long-term deferred tax liabilities................. -- 278
----- ------
$ -- $ 567
===== ======
</TABLE>
11. STOCK OPTION PLAN:
Accounting Policy for Employee Stock Options
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation." SFAS No. 123 encourages
companies to account for stock based compensation awards based on the fair value
of the awards at the date they are granted. The resulting compensation cost
would be shown as an expense in the statements of operations. Adoption of the
standard is required for fiscal years beginning after December 15, 1995.
Companies can choose not to apply the new accounting method and continue to
apply current accounting requirements; however, disclosure will be required as
to what net income and earnings per share would have been had the new accounting
method been followed. The Company
F-16
<PAGE> 63
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounts for its stock-based compensation under Accounting Principles Board
Statement No. 25 "Accounting of Stock Issued to Employees." Under this
accounting method, no compensation expense is recognized in the consolidated
statements of operations if no intrinsic value of the option exists at the date
of grant. While the Company does not intend to adopt SFAS No. 123 for accounting
purposes; it will implement the disclosure requirements which will include
annual pro forma disclosures of its effects commencing December 31, 1996.
In October 1995, the Board of Directors and F.Y.I.'s stockholders approved
the 1995 Stock Option Plan ("the Plan"), which became effective on the date of
the IPO.
The Plan provides awards of options to purchase Common Stock and may
include incentive stock options ("ISOs") and/or non-qualified stock options.
The Plan also provides for automatic option grants to directors who are not
otherwise employed by the Company or its subsidiaries. Upon commencement of
service (or upon agreeing to serve in the case of the initial non-employee
directors), a non-employee director will receive a non-qualified option to
purchase 10,000 shares of Common Stock, and continuing non-employee directors
will receive annual options to purchase 5,000 shares of Common Stock. Options
granted to non-employee directors become exercisable one-third on the date of
grant and one-third on each of the next two anniversaries of the date of grant.
Non-employee directors' options have a term of five years from the date of
grant.
The maximum number of shares of Common Stock that may be subject to
outstanding options, determined immediately after the grant of any option, is
the greater of 650,000 shares or 12% of the aggregate number of shares of the
Company's Common Stock outstanding, provided, however, that options to purchase
no more than 650,000 shares of Common Stock may be granted as ISOs. At September
30, 1996 and December 30, 1995, approximately 711,000 and 650,000 shares,
respectively, were subject to outstanding options.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------
EXERCISE
SHARES PRICE PER SHARE
-------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Balance at inception.................................... -- --
Granted................................................. 473 $13.00
--- -------------
Balance, December 31, 1995.............................. 473 $13.00
Granted................................................. 210 $16.00-$21.50
Exercised............................................... 36 $13.00
Forfeited............................................... 35 $13.00
--- -------------
Balance, September 30, 1996............................. 612 $13.00-21.50
=== =============
Exercisable, September 30, 1996......................... 113 $13.00-21.50
=== =============
</TABLE>
12. EMPLOYEE BENEFIT PLANS:
Certain of the Operating Companies have qualified defined contribution
employee benefit plans (the "Plans"), the majority of which allow for voluntary
pretax contributions by employees. The Operating Companies pay all general and
administrative expenses of the Plans and in some cases, the Operating Companies
make matching and discretionary contributions to the Plans. The Operating
Companies offer no postemployment or postretirement benefits. The expense
incurred related to the Plans by the Company was approximately $50,000 for the
nine months ending September 30, 1996.
F-17
<PAGE> 64
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RELATED-PARTY TRANSACTIONS:
Leasing Transactions
Certain of the Operating Companies lease their operating facilities, along
with certain equipment, from selling parties who remained employees or directors
of the Company. These leases are for various lengths and annual amounts. The
rental expense for these operating leases for the nine months ended September
30, 1996 was approximately $375,000.
Notes Receivable
In the Acquisitions, the Company acquired $613,000 of notes receivable from
two Founding Company shareholders. At the time of the Merger, the shareholders
entered into new notes receivable with a stated interest rate (5%) and principal
payment schedules. Interest is payable on a semi-annual basis, and principal is
due as follows: 1998 -- $321,000; and 1999 -- $322,000.
Other Transactions
An operating company purchases digital coding services from an entity in
which an F.Y.I. stockholder has a controlling interest. The expense incurred to
the entity for the nine months ended September 30, 1996 was $4,000 and billings
to the entity were $22,000. Additionally, the Company charges the entity a
management fee for accounting services. Management fees were $20,000 for the
nine months ended September 30, 1996.
14. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of these actions
will have a material adverse effect on the financial position or results of
operations of the Company.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company maintains cash and cash equivalents and certain other
financial instruments at various major financial institutions across many
geographic areas. Credit risk on trade receivables is minimized as a result of
the large number of entities comprising the Company's customer base and their
dispersion across many industries and geographic areas.
15. SUPPLEMENTAL DATA (UNAUDITED):
Statement of Operations -- Supplemental Data
The Statement of Operations Data for the nine months ended September 30,
1995 represent the unaudited combined statement of operations of the Founding
Companies for the period adjusted to give effect to: (i) compensation levels the
officers and owners have agreed to receive subsequent to the IPO; and (ii)
provision for income taxes as if all entities had been subject to federal and
state income taxes for the period. The Supplemental Statement of Operations Data
for the nine months ended September 30, 1996 represent a combination of: (i) the
audited results of the combined Founding Companies for the one month of
operations prior to the consummation of the Acquisitions adjusted for the
compensation and tax adjustments discussed above; and (ii) the audited results
of F.Y.I. Incorporated and Subsidiaries for the eight months subsequent to the
consummation of the Acquisitions (which includes acquisitions subsequent to the
IPO from the date of their respective acquisition). The Supplemental Data are
provided for information purposes only
F-18
<PAGE> 65
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and do not purport to present the results of operations of the Company had the
transactions assumed therein occurred on or as of the dates indicated, nor are
they necessarily indicative of the results of operations which may be achieved
in the future.
<TABLE>
<CAPTION>
SUPPLEMENTAL DATA
-------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue......................................... $29,997 $44,749
Product revenue......................................... 4,815 4,606
Other revenue........................................... 674 532
------- -------
Total revenue................................... 35,486 49,887
Cost of services........................................ 19,064 28,216
Cost of products sold................................... 3,890 3,532
Depreciation............................................ 898 1,113
------- -------
Gross profit.................................... 11,634 17,026
Selling, general and administrative expenses(a)......... 7,657 11,705
Amortization............................................ 48 296
------- -------
Operating income................................ 3,929 5,025
Interest and other expenses, net........................ 159 187
------- -------
Income before income taxes.............................. 3,770 4,838
Provision for income taxes(b)........................... 1,399 1,950
------- -------
Net income.............................................. $ 2,371 $ 2,888
======= =======
Net income per share.................................... $ 0.53
=======
Weighted average shares outstanding..................... 5,450
</TABLE>
- ---------------
(a) Adjusted for Founding Company pro forma Compensation Differential of $1,532
for 1995 and $683 for 1996.
(b) Adjusted for pro forma provision for taxes of $1,411 for 1995 and $351 for
1996.
F-19
<PAGE> 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To F.Y.I. Incorporated:
We have audited the accompanying combined balance sheets of the Founding
Companies (Note 1) as of December 31, 1994 and 1995 and January 31, 1996, and
the related combined statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995 and the
one month ended January 31, 1996. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined financial statements based on our audits. We did not
audit the financial statements of Recordex Services, Inc., as of and for the two
years in the period ended December 31, 1994 which statements reflect total
assets of 14% of the combined totals as of December 31, 1994, and total revenues
of 14% and 16% of the combined totals for each of the two years in the period
ended December 31, 1994. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for those entities, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of the Founding Companies as of December 31,
1994 and 1995 and January 31, 1996, and the results of their combined operations
and their combined cash flows for each of the three years in the period ended
December 31, 1995 and the one month ended January 31, 1996, in accordance with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
November 4, 1996
F-20
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Recordex Services, Inc.
Malvern, Pennsylvania
We have audited the accompanying balance sheet of Recordex Services, Inc.
(a wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31,
1994, and the related statements of operations, changes in stockholder's equity,
and cash flows for the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Recordex Services, Inc. (a
wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31,
1994, and the results of its operations and its cash flows for the two years
then ended in conformity with generally accepted accounting principles.
ELKO, FISCHER, McCABE & RUDMAN, LTD.
Certified Public Accountants
Media, Pennsylvania
September 15, 1995
F-21
<PAGE> 68
FOUNDING COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JANUARY 31,
1994 1995 1996
------- ------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 1,056 $ 1,742 $ 1,581
Accounts and notes receivable, less allowance for doubtful
accounts and notes of $677, $562 and $581, respectively... 7,802 7,939 7,881
Accounts receivable, officer and employee.................... 971 692 412
Accounts receivable, affiliates.............................. 280 279 256
Inventory.................................................... 257 331 298
Current portion of deferred income taxes..................... 78 24 24
Prepaid and other current assets............................. 216 320 326
------- ------- -------
Total current assets................................. 10,660 11,327 10,778
------- ------- -------
PROPERTY, PLANT AND EQUIPMENT, net............................. 6,142 6,467 4,824
INTANGIBLE ASSETS, net of accumulated amortization
of $17, $82 and $88, respectively............................ 836 770 764
ACCOUNTS RECEIVABLE, OFFICERS -- LONG-TERM..................... 795 890 73
OTHER NONCURRENT ASSETS........................................ 262 193 111
NOTES RECEIVABLE, LONG-TERM.................................... 435 34 34
------- ------- -------
Total assets......................................... $19,130 $19,681 $16,584
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities..................... $ 5,674 $ 5,587 5,467
Short-term obligations....................................... 1,970 1,430 4,213
Current maturities of long-term obligations.................. 715 1,250 1,109
Officers payable -- short-term............................... 520 1,064 1,064
Unearned revenue............................................. 377 333 374
------- ------- -------
Total current liabilities............................ 9,256 9,664 12,227
------- ------- -------
LONG-TERM OBLIGATIONS, net of current.......................... 3,107 2,738 1,528
LONG-TERM OBLIGATIONS -- AFFILIATES, net of current............ 43 19 195
LONG-TERM OBLIGATIONS -- OFFICERS, net of current.............. 35 20 20
DEFERRED INCOME TAXES.......................................... 229 129 122
OTHER NONCURRENT LIABILITIES................................... 50 -- --
------- ------- -------
Total liabilities.................................... 12,720 12,570 14,092
------- ------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock (Note 9)........................................ 173 173 173
Additional paid-in capital................................... 775 775 579
Retained earnings............................................ 5,463 6,163 1,740
------- ------- -------
6,411 7,111 2,492
Less -- Treasury stock, 10,000 shares in 1994, no par,
$1,000 assigned value..................................... 1 -- --
------- ------- -------
Total stockholders' equity........................... 6,410 7,111 2,492
------- ------- -------
Total liabilities and stockholders' equity........... $19,130 $19,681 $16,584
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-22
<PAGE> 69
FOUNDING COMPANIES
COMBINED STATEMENTS OF OPERATIONS (NOTE 1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ONE MONTH
FISCAL YEAR ENDED DECEMBER 31, ENDING
------------------------------ JANUARY 31,
1993 1994 1995 1996
------- ------- ------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Service revenue.................................... $32,067 $36,081 $40,615 $3,487
Product revenue.................................... 5,123 5,923 6,138 395
Other revenue...................................... 1,206 1,028 873 34
------- ------- ------- ------
Total revenue.............................. 38,396 43,032 47,626 3,916
COST OF SERVICES..................................... 20,318 23,650 25,937 2,196
COST OF PRODUCTS SOLD................................ 4,464 4,892 4,972 307
DEPRECIATION......................................... 883 1,055 1,238 90
------- ------- ------- ------
Gross profit............................... 12,731 13,435 15,479 1,323
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES........ 11,045 11,836 12,489 1,503
------- ------- ------- ------
Operating income (loss).................... 1,686 1,599 2,990 (180)
OTHER (INCOME) EXPENSE:
Interest expense................................... 339 388 492 24
Interest income.................................... (40) (84) (139) --
Other.............................................. (51) (275) (214) (69)
------- ------- ------- ------
Income (loss) before income taxes.......... 1,438 1,570 2,851 (135)
PROVISION (BENEFIT) FOR INCOME TAXES................. 218 211 163 (130)
------- ------- ------- ------
NET INCOME (LOSS).................................... $ 1,220 $ 1,359 $ 2,688 $ (5)
======= ======= ======= ======
PRO FORMA DATA (Unaudited -- See Note 3):
HISTORICAL NET INCOME................................ $ 1,220 $ 1,359 $ 2,688 $ (5)
PRO FORMA COMPENSATION DIFFERENTIAL.................. 1,715 1,855 1,976 683
PRO FORMA PROVISION FOR INCOME TAXES................. 1,043 1,045 1,631 351
------- ------- ------- ------
PRO FORMA NET INCOME................................. $ 1,892 $ 2,169 $ 3,033 $ 327
======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-23
<PAGE> 70
FOUNDING COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 1)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TREASURY
---------------- PAID-IN RETAINED ---------------- STOCK TOTAL
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT SUBSCRIBED EQUITY
------- ------ ------- -------- ------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992....... 208,109 $173 $ 775 $ 3,850 10,000 $ (1) $ -- $ 4,797
Dividends declared............. -- -- -- (823 ) -- -- -- (823)
Adjustment to conform fiscal
year-ends of certain combined
companies.................... -- -- -- 29 -- -- -- 29
Net income..................... -- -- -- 1,220 -- -- -- 1,220
------- ---- ----- ------- ------- ---- ---- -------
BALANCE, December 31, 1993....... 208,109 173 775 4,276 10,000 (1) -- 5,223
Dividends declared............. -- -- -- (401 ) -- -- -- (401)
Adjustment to conform fiscal
year-ends of certain
combined companies........... -- -- -- 229 -- -- -- 229
Net income..................... -- -- -- 1,359 -- -- -- 1,359
------- ---- ----- ------- ------- ---- ---- -------
BALANCE, December 31, 1994....... 208,109 173 775 5,463 10,000 (1) -- 6,410
Reissuance of treasury stock... -- -- -- -- (10,000) 1 (1) --
Dividends declared............. -- -- -- (2,032 ) -- -- -- (2,032)
Adjustment to conform fiscal
year-ends of certain combined
companies.................... -- -- -- 44 -- -- 1 45
Net income..................... -- -- -- 2,688 -- -- -- 2,688
------- ---- ----- ------- ------- ---- ---- -------
BALANCE, December 31, 1995....... 208,109 173 775 6,163 -- -- -- 7,111
Dividends declared............. -- -- -- (4,418 ) -- -- -- (4,418)
Debt assumed................... (196) (196)
Net income (loss).............. -- -- -- (5 ) -- -- -- (5)
------- ---- ----- ------- ------- ---- ---- -------
BALANCE, January 31, 1996........ 208,109 $173 $ 579 $ 1,740 -- $ -- $ -- $ 2,492
======= ==== ===== ======= ======= ==== ==== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-24
<PAGE> 71
FOUNDING COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED ONE MONTH
DECEMBER 31, ENDING
--------------------------- JANUARY 31,
1993 1994 1995 1996
------- ------- ------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................... $ 1,220 $ 1,359 $ 2,688 $ (5)
Adjustment to reconcile net income to net cash provided
by operating activities-
Amortization and depreciation............................... 995 1,115 1,302 108
Loss (gain) on sale-retirement of assets.................... -- (38) (3) --
Loss on investment.......................................... -- 17 -- --
Deferred tax expense (benefit).............................. 39 (555) (60) (7)
Changes in operating assets and liabilities-
Accounts receivable...................................... (446) (1,058) 220 (355)
Prepaid expenses and other assets........................ (54) (142) (53) 97
Stockholder receivable................................... -- (272) 331 252
Inventory................................................ (164) 171 (74) 34
Accounts payable......................................... 557 1,366 (162) 33
Unearned revenue......................................... 74 94 (44) 41
Other....................................................... 77 (46) (62) (128)
------- ------- ------- -------
Net cash provided by operating activities............ 2,298 2,011 4,083 70
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment....................... (1,119) (1,734) (1,423) (84)
Sale of property, plant and equipment........................... 40 203 76 17
Purchase of intangibles......................................... -- (438) -- --
Other, net...................................................... (70) (4) -- --
------- ------- ------- -------
Net cash used for investing activities............... (1,149) (1,973) (1,347) (67)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on short-term obligations.................... (425) (578) (2,063) (19)
Principal payments on long-term obligations..................... (1,802) (443) (704) (51)
Proceeds from short-term borrowing.............................. 427 1,068 1,825 2,790
Proceeds from long-term borrowings.............................. 1,605 316 642 --
Borrowings (payments) on line of credit......................... 155 38 219 185
Payment of dividends............................................ (823) (401) (2,032) (3,069)
Advances to parent.............................................. (352) (98) -- --
Other, net...................................................... -- 78 55 --
Net change in cash due to conforming fiscal year-end............ (13) (104) 8 --
------- ------- ------- -------
Net cash used for financing activities............... (1,228) (124) (2,050) (164)
------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. (79) (86) 686 (161)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR......................................................... 1,221 1,142 1,056 1,742
------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......................... $ 1,142 $ 1,056 $ 1,742 $ 1,581
======= ======= ======= =======
SUPPLEMENTAL DATA:
Interest paid................................................... $ 334 $ 379 $ 486 $ 24
Income taxes paid............................................... 55 67 296 3
NONCASH TRANSACTIONS:
Equipment acquired through capital lease obligations............ $ 117 $ 310 $ 225 --
Sale of investment.............................................. -- 13 -- --
Acquisition of intangible assets with debt...................... -- 414 -- --
Note receivable received in connection with sale of building.... 550 -- -- --
Dividend of note receivable..................................... -- -- -- 425
Dividend of property and equipment.............................. -- -- -- 1,607
Dividend of long-term obligation................................ -- -- -- 1,374
Dividend of advances to parent.................................. -- -- -- 835
Dividend of short-term obligation............................... -- -- -- 144
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE> 72
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Concurrently with the initial public offering of its common stock (the
"IPO"), F.Y.I. Incorporated ("F.Y.I.") merged with the following seven companies
(the "Founding Companies"): Imagent Corporation and Mobile Information Services
("Imagent"); Melanson and Associates, Inc. ("Melanson") dba Researchers and Bay
Area Micrographics ("Researchers"); Recordex Services, Inc. (a wholly owned
subsidiary of Paragon Management Group, Inc.) ("Recordex"); C.&T. Management
Services, Inc. dba DPAS, and Qualidata, Inc. dba The Mail House ("DPAS");
Leonard Archives, Inc. ("Leonard"); Deliverex, Incorporated ("DLX") and
Peninsula Records Management, a wholly owned subsidiary of DLX ("PRM"), and an
affiliate, ASK Record Management, Inc. ("ASK") (collectively "Deliverex"); and
Permanent Records, Inc. ("Permanent"). The merger will be effected by FYI
through issuance of its common stock and cash.
The Founding Companies are providers of document management services to
three primary client groups: healthcare institutions, professional services
firms, and financial institutions.
2. BASIS OF PRESENTATION:
Simultaneously with the closing of the Offering, F.Y.I. and separate wholly
owned subsidiaries of F.Y.I. will merge with the Founding Companies (the
"Acquisitions"). The accompanying combined financial statements and related
notes represent the combined financial position, results of operations, and cash
flows of the Founding Companies excluding FYI without giving effect to the
Mergers and the Offering. The assets and liabilities of the Founding Companies
are reflected at their historical amounts. The Founding Companies were not under
common control or management during any of the periods presented.
Melanson has previously reported on a fiscal year ending July 31. As such,
the accounts of Melanson for its 1993 fiscal year has been combined with the
accounts of the other Founding Companies for the year ended December 31, 1993.
The fiscal 1994 and 1995 accounts of Melanson have been recast to a December 31
year-end and have been combined with the accounts of the other Founding
Companies for the years ended December 31, 1994 and 1995. The exclusion of
Melanson's net income for the period from August 1 through December 31, 1993, of
$229,000 is reflected as an adjustment to retained earnings in the December 31,
1994, combined statement of stockholders' equity. The results of operations
related to the adjustment to retained earnings for Melanson included revenues of
$3,820,000 and costs and expenses of $3,591,000 from August 1, through December
31, 1993.
Deliverex's affiliate, ASK, has previously reported on a fiscal year ending
December 31. DLX and PRM have previously reported on a fiscal year ending
September 30. The 1995 accounts of DLX and PRM have been recast to a December 31
year-end and have been combined with the accounts of the other Founding
Companies for the year ended December 31, 1995. The exclusion of DLX and PRM's
net income for the period from October 1 through December 31, 1994, of $44,000
is reflected as an adjustment to retained earnings in the December 31, 1995
combined statement of stockholders' equity. The results of operations related to
the adjustment to retained earnings for DLX and PRM included revenue of $553,000
and costs and expenses of $509,000 from October 1 through December 31, 1994.
The affiliate of Imagent Corporation, Mobile Information Services, had
previously reported on a fiscal year ending June 30 through fiscal 1992. As
such, the accounts of the affiliate for its 1992 fiscal year have been combined
with the accounts of the other Founding Companies for the years ended December
31, 1992. The exclusion of the affiliate's net income for the period from July 1
through December 31, 1992, of $29,000 is reflected as an adjustment to retained
earnings in the December 31, 1992, combined statement of stockholders' equity.
The results of operations related to the adjustment to retained earnings for the
affiliate of Imagent Corporation included revenues of $656,000 and costs and
expenses of $627,000 from July 1 through December 31, 1992.
F-26
<PAGE> 73
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Founding Companies consider highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Inventory
Inventory is stated at the lower of cost or market with cost determined on
a first-in, first-out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
computed using straight-line and accelerated methods over the estimated useful
lives of the assets. Leasehold improvements are depreciated over the lesser of
the useful life or the term of the lease.
Intangible Assets
Intangible assets consist primarily of customer lists, acquired by a
founding company in October of 1994, which are amortized over 15 years. The
Founding Companies continually evaluate whether events and circumstances
indicate the remaining estimated useful life of intangible assets may warrant
revisions or that the remaining balance of intangibles or other long-lived
assets may not be recoverable. To make this evaluation, the Founding Companies
use an estimate of undiscounted net income over the remaining life of the
intangibles or other long-lived assets. The Financial Accounting Standards Board
has issued Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS 121), which established accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill. Adoption is
required in financial statements for fiscal years beginning after December 15,
1995. FYI and the Founding Companies do not expect the adoption of SFAS 121 to
have any material effect on the combined financial statements. FYI and
the Founding Companies will adopt SFAS 121 in 1996.
Revenue Recognition
Revenue is recognized when the services are rendered, or products are
shipped, to the Founding Companies' customers. Unearned revenue represents
customer storage and certain services which are billed in advance.
Income Taxes
Income taxes are provided based upon the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," for the
Founding Companies that are C corporations for income tax purposes, which
requires recognition of deferred income taxes under the asset and liability
method.
Certain of the Founding Companies are S corporations or a sole
proprietorship for income tax purposes and, accordingly, any income tax
liabilities are the responsibility of the respective owners. The historical
combined net income of the Founding Companies includes no provision for income
taxes of the S corporations or sole proprietorship.
Deferred income taxes are provided for temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes.
Temporary differences result primarily from accelerated depreciation and
amortization for tax purposes, deferred contract revenues being taxed when
billed, cash basis of
F-27
<PAGE> 74
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
accounting for tax purposes versus accrual basis accounting for financial
reporting purposes, and various accruals and reserves being deductible for tax
purposes in different periods.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to make their
presentation consistent with the current year.
Pro Forma Net Income (Unaudited)
The Founding Companies have been managed throughout the periods presented
as independent private companies and represent a variety of tax structures (S
corporation, C corporation, and sole proprietorship). Therefore, selling,
general, and administrative expenses for the periods presented reflect
compensation and related benefits that owners and certain key employees received
from their respective businesses during these periods. These owners and key
employees have agreed to certain reductions in salaries and benefits in
connection with the Mergers. Each stockholder (other than one Paragon Management
Group stockholder) has entered into a three year employment agreement with FYI
which contains a set base salary, participation in any future FYI incentive
plans, four weeks vacation, car allowance, health benefits, and a two-year
covenant-not-to-compete following termination of such person's employment. The
employment agreements provide for the following compensation levels by company:
<TABLE>
<CAPTION>
COMPANY COMPENSATION
------- ------------
<S> <C>
Imagent......................................... $ 250,000
Researchers..................................... 250,000
Recordex........................................ 300,000
DPAS............................................ 220,000
Leonard......................................... 100,000
Deliverex....................................... 247,000
Permanent....................................... 120,000
----------
$1,487,000
==========
</TABLE>
The unaudited pro forma data present compensation at the level the officers
and owners of the Founding Companies have agreed to receive subsequent to the
Offering. In addition, the pro forma data present the provision for income taxes
as if all entities had been subject to federal and state income taxes and
adjusted for the impact of the compensation differential discussed above.
F-28
<PAGE> 75
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
The activity in the allowance for doubtful accounts and notes receivable is
as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1993
Allowance for doubtful accounts........ $599 $715 $ (572) $742
==== ==== ====== ====
Year Ended December 31, 1994
Allowance for doubtful accounts........ $742 $835 $ (900) $677
==== ==== ====== ====
Year Ended December 31, 1995
Allowance for doubtful accounts........ $677 $710 $ (825) $562
==== ==== ====== ====
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------------
YEARS 1994 1995
------------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Land................................................ N/A $ 415 $ 415
Buildings and improvements.......................... 7-18 2,203 2,194
Leasehold improvements.............................. 5-10 452 477
Vehicles............................................ 5-7 1,114 1,163
Machinery and equipment............................. 5-15 8,223 9,589
Furniture and fixtures.............................. 5-15 382 500
------- -------
12,789 14,338
Less -- Accumulated depreciation and amortization... 6,647 7,871
------- -------
$ 6,142 $ 6,467
======= =======
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued liabilities................. $3,298 $3,255
Accrued compensation and benefits........................ 731 827
Sales tax payable........................................ 119 94
Income tax payable....................................... 907 818
Other accrued liabilities................................ 619 593
------ ------
$5,674 $5,587
====== ======
</TABLE>
F-29
<PAGE> 76
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. CREDIT FACILITIES:
Short-Term Obligations
Short-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Researchers
Bank line of credit -- expiring October 10, 1996, limited to
$425,000, interest payable monthly at prime plus 1.5% (10% and
10.5% at December 31, 1994 and 1995, respectively), guaranteed by
the shareholder.................................................. $ 395 $ 213
Recordex
Bank line of credit, limited to $300,000, interest payable
monthly at the bank's prime plus 0.75% (10.25% and 10.5% at
December 31, 1994 and 1995, respectively), secured by all
assets........................................................... 143 250
DPAS
Bank line of credit, limited to $300,000, interest payable
monthly at prime plus 1% (9.5% and 10.75% at December 31, 1994
and 1995, respectively).......................................... 300 253
Trust deed payable on demand; monthly payment of $6,000 including
principal and interest at the bank's index rate plus 1.5% (11%
and 11.25% at December 31, 1994 and 1995, respectively), maturing
January 15, 1998; secured by first trust deed on commercial
property......................................................... 197 144
Note payable -- bank payable on demand, monthly payment of $8,000
plus accrued interest at prime plus 2% (10.5% and 10.75% at
December 31, 1994 and 1995, respectively), maturing December
1996, secured by non-real estate assets of DPAS.................. 200 100
Note payable -- bank, payable on demand, monthly payment of
$5,000 plus accrued interest at prime plus 2% (10.5% and 11% at
December 31, 1994 and 1995, respectively), maturing January 1996,
secured by non-real estate assets of DPAS........................ 60 --
Leonard
Bank demand note, expiring June 1999, interest at prime plus
0.75% (9.25% at December 31, 1994), secured by accounts
receivable and machinery and equipment........................... 119 --
Bank master equipment line of credit, each borrowing payable on
demand and is termed-out over 36 equal monthly payments, accrued
interest at prime plus 0.75% (9.25% at December 31, 1994),
payable monthly, secured by accounts receivable and machinery and
equipment........................................................ 242 --
</TABLE>
F-30
<PAGE> 77
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Bank demand master equipment note, monthly payment of $5,000 plus
accrued interest at prime plus 0.75% (9.25% at December 31,
1994), matures 1999, secured by accounts receivable and machinery
and equipment.................................................... $ 265 $ --
Bank working capital line of credit, payable on demand, accrued
interest at prime plus 1.25% (9.75% at December 31, 1995),
secured by a first security interest in all accounts receivable,
machinery, and equipment, and a personal guarantee by the
stockholder...................................................... -- 316
Deliverex
Bank line of credit, limited to $50,000, at prime plus a premium,
as defined by the outstanding principal balance (14% and 12.25%
at December 31, 1994 and 1995), no defined expiration date....... 46 39
Permanent
Bank line of credit, expiring on January 6, 1996, limited to
$175,000, interest at the bank's base rate, as defined, plus 1%
(10.5% at December 31, 1995), secured by accounts receivable,
inventory, equipment and fixtures, and life insurance policy..... 3 115
------ ------
Total short-term obligations............................. $1,970 $1,430
====== ======
</TABLE>
The weighted average interest rate on borrowings under the lines of credit
were approximately 7.50%, 9.75%, and 10.21% for the years ended December 31,
1993, 1994, 1995, respectively. The prime rate was 6%, 8.5%, and 8.5% at
December 31, 1993, 1994, and 1995.
Officers payable -- Short-term
Officers payable -- short term consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
---- (IN ----
THOUSANDS)
<S> <C> <C>
Leonard
Note payable -- stockholder, payable on demand, accrued interest at
8.75%, unsecured................................................. $ -- $500
DPAS
Note payable -- stockholder, payable on demand, accrued interest at
9.0%, unsecured.................................................. $504 $546
</TABLE>
F-31
<PAGE> 78
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Obligations
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------ --------
(IN THOUSANDS)
<S> <C> <C>
Imagent
Noninterest-bearing note payable to Micrographics Services,
$200,000 due May 1, 1995, remainder due on February 1, 1996.... $ 414 $ 194
Researchers
Mortgage payable -- bank, monthly payment of $4,000 through
July 1994, $5,000 from August 1994 through maturity date of
July 2003; payment includes principal and interest at bank's
reference index plus 4% (9.45% and 9.25% at December 31, 1994
and 1995, respectively), secured by deed of trust on real
property....................................................... 565 561
Note payable -- bank, monthly payment of $2,000 plus accrued
interest at prime plus 1.75% (9.25% and 10.5% at December 31,
1994 and 1995, respectively), maturity date of September 15,
1998, unsecured................................................ 74 54
Note payable -- bank, monthly payment of $2,000 plus accrued
interest at prime plus 1.5% (9.25% and 10.25% at December 31,
1994 and 1995, respectively) maturing October 15, 1999,
guaranteed by the stockholder.................................. 97 77
Note payable -- bank, monthly payment of $5,000 through
maturity of November 2025; payment includes principal and
interest at 8%, secured by deed of trust on real property...... 738 739
Note payable -- bank, monthly payment of $2,000 plus accrued
interest at prime plus 1.75% (9.25% and 10.5% at December 31,
1994 and 1995, respectively); maturing September 15, 1997,
guaranteed by the stockholder.................................. 55 35
Note payable -- Xerox, monthly payment of $1,000, including
principal and interest at 15.5%, maturing November 1999,
secured by Xerox equipment..................................... 45 33
Recordex
Notes payable -- monthly payment of $4,000 plus accrued
interest at prime plus 1% (10.5% and 10.75% at December 31,
1994 and 1995, respectively), maturing December 1996, secured
by all assets.................................................. 96 42
Notes payable -- bank, monthly payment of $1,000 plus interest
at prime plus 1% (10.5% and 10.75% at December 31, 1994 and
1995, respectively), maturing April 1, 1997, secured by all
assets......................................................... 39 22
Note payable -- bank, monthly payment of $4,000 plus accrued
interest at prime plus 1% (10.5% and 10.75% at December 31,
1994 and 1995, respectively), maturing June 30, 1998; secured
by all assets.................................................. 140 128
</TABLE>
F-32
<PAGE> 79
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
------ --------
(IN THOUSANDS)
<S> <C> <C>
Leonard
Mortgage payable, monthly payment of $9,000, including
principal and interest at prime plus .75% (9% and 9.5% at
December 31, 1994 and 1995, respectively), maturing October 1,
1996; secured by a first mortgage on the land, building and
certain equipment, guaranteed by the stockholder and former
stockholder.................................................... 562 504
Mortgage payable -- bank, monthly payment of $8,000, including
principal and interest at prime plus 1.25% (9.75% at December
31, 1995), maturing December 1, 2000, secured by a second
mortgage on the land, building, and certain equipment, and
guaranteed by the stockholder.................................. -- 600
Deliverex
Notes payable -- Small Business Administration, monthly payment
of $3,000, including principal and interest at 4%, maturing
November 17, 2014, secured by deed of trust on real estate and
non-real estate assets of the Company, guaranteed by the
stockholder and the stockholder's wife......................... 430 410
Capital lease obligations........................................ 351 424
All other obligations............................................ 120 85
------ --------
Total.................................................. 3,726 3,908
Less -- Current maturities of long-term obligations.............. 619 1,170
------ --------
Total long-term obligations............................ $3,107 $ 2,738
====== ========
</TABLE>
Certain short-term and long-term obligations contain warranties and
covenants and require maintenance of certain financial ratios of certain
Founding Companies.
As of December 31, 1995, all Founding Companies have complied with their
loan covenants.
Long-Term Obligations -- Affiliates
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
---- (IN ----
THOUSANDS)
<S> <C> <C>
Leonard
Note payable, monthly payment of $1,185, including principal and
interest at prime plus 1% (9.5% at December 31, 1994 and 1995,
respectively), maturing in 1998, unsecured.......................... $ 38 $26
Note payable -- Affiliate, interest payable annually at prime plus
1% (9.5% at December 31, 1994 and 1995, respectively), maturing
December 31, 1995, unsecured........................................ 69 59
Other................................................................. 32 14
---- ---
139 99
Less -- Current maturities of long-term obligations................. 96 80
---- ---
Total long-term obligations to affiliates................... $ 43 $19
==== ===
</TABLE>
F-33
<PAGE> 80
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Obligations -- Officer
DPAS has a 12% interest-bearing stockholder note payable totaling $51,000
and $38,000 at December 31, 1994 and 1995, respectively. Current maturities of
this note totaling $16,000 and $18,000 at December 31, 1994 and 1995,
respectively, have been included as Officers Payable -- Short-Term.
Maturities of Long-Term Obligations
Maturities of long-term obligations are as follows (In Thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31
------------
<S> <C>
1996............................................................ $1,268
1997............................................................ 370
1998............................................................ 250
1999............................................................ 139
2000............................................................ 471
2001 and thereafter............................................. 1,547
------
Total................................................. $4,045
======
</TABLE>
8. LEASE COMMITMENTS:
The Founding Companies lease various office buildings, machinery,
equipment, and vehicles. Future minimum lease payments under capital leases and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
---------------------
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1996.............................................................. $ 221 $ 1,967
1997.............................................................. 148 2,061
1998.............................................................. 76 1,899
1999.............................................................. 29 1,663
2000.............................................................. 12 1,065
2001 and thereafter............................................... -- 4,673
----- -------
Total minimum lease payments...................................... 486 $13,328
=======
Less -- Amounts representing interest............................. 62
-----
Net minimum lease payments........................................ 424
Less -- Current portion of obligations under capital leases....... 183
-----
Long-term portion of obligations under capital leases............. $ 241
=====
</TABLE>
Rent expense for all operating leases for the years ended December 31,
1993, 1994, and 1995 was $1,972,000, $2,227,000, and $2,219,000, respectively.
F-34
<PAGE> 81
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY:
The common stock authorized, issued, and outstanding of the Founding
Companies consists of the following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Imagent
Common stock, class A and B, $10 par value, 7,500 shares authorized,
400 shares issued, and common stock, no par value, 100 shares
authorized and issued............................................... $21.. $ 21
Researchers
Common stock, no par, 75,000 shares authorized, 556 shares issued
and
outstanding......................................................... 2 2
Recordex
Common stock, $1 par value, 1,000 shares authorized, issued and
outstanding......................................................... 1 1
DPAS
Common stock, $1 par value and no par, 125,000 shares authorized,
3,100 shares issued and outstanding................................. 4 4
Leonard
Common stock, $10 par value, 8,500 shares authorized, 4,293 shares
outstanding......................................................... 43 43
Deliverex
Common stock, no par value, 510,000 shares authorized, 107,000
shares issued at stated value....................................... 10 10
Permanent
Common stock, $1 par value, 100,000 shares authorized, 91,660 shares
issued and outstanding.............................................. 92 92
---- ----
Total....................................................... $173 $173
==== ====
</TABLE>
In December 1994, ASK approved the reissuance of 10,000 shares of treasury
stock to its minority stockholder. Compensation expense of $1,000 was recorded
at the date of approval in 1994, equivalent to the estimated value of the shares
at the approval date. The shares were reissued on January 1, 1995.
10. EMPLOYEE BENEFIT PLANS:
Certain of the Founding Companies have qualified defined contribution
employee benefit plans (the "Plans"), the majority of which allow for voluntary
pretax contributions by employees. The Founding Companies pay all general and
administrative expenses of the Plans and, in some cases, the Founding Companies
make matching and discretionary contributions to the Plans. The Founding
Companies offer no postemployment or postretirement benefits. The expenses
incurred related to the Plans by the Founding Companies were $36,000, $63,000,
and $82,000 for the years ending December 31, 1993, 1994, and 1995,
respectively.
F-35
<PAGE> 82
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES:
The provision for federal and state income taxes consists of the following
(In Thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED DECEMBER 31,
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Federal --
Current..................................................... $120 $593 $172
Deferred.................................................... 39 (440) (40)
State --
Current..................................................... 43 173 51
Deferred.................................................... 16 (115) (20)
---- ---- ----
$218 $211 $163
==== ==== ====
</TABLE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following (In Thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED DECEMBER 31,
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate......................................... $489 $534 $969
Add (deduct) --
State income taxes.......................................... 35 37 23
Effect of graduated tax rates............................... (10) (26) (26)
Income of S corporations.................................... (318) (339) (809)
Other, net.................................................. 22 5 6
---- ---- ----
$218 $211 $163
==== ==== ====
</TABLE>
The components of deferred income tax liabilities and assets are as follows
(In Thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DECEMBER 31,
--------------
1994 1995
---- ----
<S> <C> <C>
Deferred income tax liabilities-
Tax over book depreciation and amortization........................ $116 $129
Accrual to cash differences, net................................... 690 381
Other, net......................................................... 7 --
---- ----
Total deferred income tax liabilities...................... 813 510
Deferred income tax assets-
Allowance for doubtful accounts.................................... 149 159
Other reserves, net................................................ 502 192
Other, net......................................................... 11 54
---- ----
Total deferred income tax assets........................... 662 405
---- ----
Total net deferred income tax liabilities............................ $151 $105
==== ====
Current deferred tax asset........................................... $(78) $(24)
Long-term deferred tax liabilities................................... 229 129
---- ----
$151 $105
==== ====
</TABLE>
F-36
<PAGE> 83
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED-PARTY TRANSACTIONS:
Leasing Transactions
Leonard leases its operating facilities from Leonard Investments and a
former stockholder. These leases are for various lengths and annual amounts. The
rental expense for these operating leases for the years ended December 31, 1993,
1994, and 1995 was approximately $189,000, $188,000, and $189,000, respectively.
Leonard also has obligations to Leonard Investments. Leonard Investments is a
partnership owned by the stockholder and former stockholder of Leonard.
Researchers leases office facilities in Sacramento and San Francisco,
California, along with certain equipment from Researcher's principal
shareholder. The leases provide for lease terms on a month-to-month basis as
well as over five to ten-year periods commencing on August 1, 1991, through July
31, 2001, with monthly lease payments of $2,000 to $9,000. The total lease
payments to Researcher's principal shareholder for these operating leases for
the years ended July 31, 1993, and December 31, 1994 and 1995 was approximately
$187,000, $177,000, and $242,000, respectively. The lease agreements provide
that the Researchers pay all related taxes and insurance.
Permanent entered into an agreement to lease a building, beginning on July
1, 1995, from Permanent's stockholders. Lease expense per year will be
approximately $90,000.
Other Transactions
Researchers purchases digital coding services from an affiliated entity,
Researchers LLC. Researchers' principal shareholder has a controlling interest
in Researchers LLC. During the years ended December 31, 1994 and 1995,
Researchers incurred expenses of $28,000 and $11,000, and had billings to
Researchers LLC of approximately $4,000 and $40,000.
Receivables and Advances
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Accounts receivable, officer and employee --
Deliverex -- noninterest bearing................................. $ 315 $ 315
Leonard -- noninterest bearing................................... 14 67
Researchers -- noninterest bearing............................... 642 310
------ ------
971 692
Accounts receivable, affiliates --
Leonard -- noninterest bearing................................... 280 259
Researchers -- noninterest bearing............................... -- 20
------ ------
280 279
------ ------
Accounts receivable, officers -- long-term --
Deliverex -- noninterest bearing................................. 74 74
Recordex -- noninterest bearing.................................. 721 816
------ ------
795 890
------ ------
Total related-party receivables.......................... $2,046 $1,861
====== ======
</TABLE>
Leonard has guaranteed a promissory note in the principal amount of
approximately $636,000 as of December 31, 1995, with interest at 10%, payable in
monthly installments in varying amounts through December 1, 2004. The promissory
note is from the stockholder to the former joint owner in Leonard.
F-37
<PAGE> 84
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Leonard's guarantee and security interest are subordinate to all other notes
payable to the bank and the Detroit Economic Growth Council.
13. COMMITMENTS AND CONTINGENCIES:
Litigation
The Founding Companies are, from time to time, parties to litigation
arising in the normal course of their business, most of which involve claims for
workers compensation, unemployment and property damage incurred in connection
with their operations. Management of the Founding Companies believes that none
of this litigation will have a material adverse effect on the combined financial
position or combined results of operations of the Founding Companies.
Recordex is one of several defendants in a federal and three state lawsuits
contesting the reasonableness of the fees charged for medical records release
services. The plaintiffs in these cases are seeking class certification. In
November 1994, the plaintiff's motion for class certification and all other
claims were denied in the federal lawsuit. The plaintiffs filed an appeal on
January 3, 1995. On April 4, 1996, the Court of Appeals affirmed the decision in
favor of the Company on the substantive claims, but remanded the case to the
District Court for a hearing on the individual plaintiff's request for
injunctive relief. In February 1996, one of the Pennsylvania lawsuits was
concluded favorably to the Company. While the outcome of the remaining
litigation is uncertain, management of Recordex believes that it has meritorious
defenses, and there will not be a material effect on its financial position or
results of operations.
Employment Agreements
Researchers has employment agreements with certain personnel to pay
specific amounts annually. The employment agreements provide for a total annual
compensation amount of $595,000 to be disbursed to certain personnel of
Researchers in accordance with the terms of each employee's employment
agreement.
Concentration of Credit Risk
Financial instruments that potentially subject the Founding Companies to
concentration of credit risk consist primarily of cash and cash equivalents and
trade receivables. The Founding Companies maintain cash and cash equivalents and
certain other financial instruments at various major financial institutions
across many geographic areas. Credit risk on trade receivables is minimized as a
result of the large number of entities comprising the Founding Companies'
customer base and their dispersion across many industries and geographic areas.
F-38
<PAGE> 85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Imagent Corporation:
We have audited the accompanying combined balance sheets of Imagent
Corporation (a Maryland corporation) and Related Company as of December 31, 1994
and 1995, and the related combined statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Imagent Corporation
and Related Company as of December 31, 1994 and 1995, and the results of their
combined operations and their combined cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 15, 1996
F-39
<PAGE> 86
IMAGENT CORPORATION AND RELATED COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 516,422 $1,073,616
Accounts receivable, less allowances for doubtful accounts of
$40,000 for each period........................................ 1,742,526 1,412,351
Inventories....................................................... 252,742 306,441
Prepaid and other current assets.................................. 15,778 17,196
---------- ----------
Total current assets...................................... 2,527,468 2,809,604
PROPERTY AND EQUIPMENT, net......................................... 1,035,816 968,163
INTANGIBLES, net of amortization of $17,935 and $82,481 at December
31, 1994 and 1995................................................. 834,498 769,952
OTHER NONCURRENT ASSETS............................................. 38,745 73,838
---------- ----------
Total assets.............................................. $4,436,527 $4,621,557
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations....................... $ 220,000 $ 194,347
Accounts payable and accrued liabilities.......................... 1,098,467 1,097,855
---------- ----------
Total current liabilities................................. 1,318,467 1,292,202
LONG-TERM OBLIGATIONS, net of current maturities.................... 194,347 --
---------- ----------
Total liabilities......................................... 1,512,814 1,292,202
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock...................................................... 20,773 20,773
Retained earnings................................................. 2,902,940 3,308,582
---------- ----------
Total stockholders' equity................................ 2,923,713 3,329,355
---------- ----------
Total liabilities and stockholders' equity................ $4,436,527 $4,621,557
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-40
<PAGE> 87
IMAGENT CORPORATION AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Service revenue................................... $ 4,173,176 $ 5,451,372 $ 6,844,552
Product revenue................................... 5,123,101 5,922,622 6,138,127
Other revenue..................................... 955,345 760,789 561,350
----------- ----------- -----------
10,251,622 12,134,783 13,544,029
COST OF SERVICES.................................... 2,875,063 3,691,206 4,474,396
COST OF PRODUCT SOLD................................ 4,464,187 4,892,293 4,972,103
DEPRECIATION........................................ 199,389 257,847 268,183
----------- ----------- -----------
Gross profit.............................. 2,712,983 3,293,437 3,829,347
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....... 2,196,798 2,571,162 2,838,360
----------- ----------- -----------
Operating income.......................... 516,185 722,275 990,987
OTHER (INCOME) EXPENSE:
Interest income................................... (11,954) (13,241) (27,728)
Other............................................. (3,395) 4,669 (52,612)
----------- ----------- -----------
NET INCOME.......................................... $ 531,534 $ 730,847 $ 1,071,327
=========== =========== ===========
PRO FORMA DATA (Unaudited -- See Note 11):
HISTORICAL NET INCOME............................... $ 531,534 $ 730,847 $ 1,071,327
PRO FORMA COMPENSATION DIFFERENTIAL................. 161,143 289,571 303,357
PRO FORMA PROVISION FOR INCOME TAXES................ 264,013 388,137 515,100
----------- ----------- -----------
PRO FORMA NET INCOME................................ $ 428,664 $ 632,281 $ 859,584
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-41
<PAGE> 88
IMAGENT CORPORATION AND RELATED COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 500 $20,773 $ -- $2,139,804 $ 2,160,577
Dividends declared................. -- -- -- (467,204) (467,204)
Net income......................... -- -- -- 531,534 531,534
--
--- ------- ---- ---------- ----------
BALANCE, December 31, 1993........... 500 20,773 -- 2,204,134 2,224,907
Dividends declared................. -- -- -- (32,041) (32,041)
Net income......................... -- -- -- 730,847 730,847
--
--- ------- ---- ---------- ----------
BALANCE, December 31, 1994........... 500 20,773 -- 2,902,940 2,923,713
Dividends declared................. -- -- -- (665,685) (665,685)
Net income......................... -- -- -- 1,071,327 1,071,327
--
--- ------- ---- ---------- ----------
BALANCE, December 31, 1995........... 500 $20,773 $ -- $3,308,582 $ 3,329,355
=== ======= ==== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-42
<PAGE> 89
IMAGENT CORPORATION AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 531,534 $ 730,847 $1,071,327
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization...................... 199,389 275,782 332,729
Loss (gain) on disposal of assets.................. -- 20,693 (3,042)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable, net...................... (186,962) (547,294) 330,175
Prepaid and other assets...................... 2,101 (5,218) (36,511)
Inventories................................... (164,008) 171,363 (53,699)
Increase (decrease) in --
Accounts payable and accrued liabilities...... 292,779 81,748 (612)
--------- --------- ----------
Net cash provided by operating
activities............................. 674,833 727,921 1,640,367
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment................... (419,577) (322,797) (230,033)
Purchase of intangible assets......................... -- (438,086) --
Proceeds from sale of property and equipment.......... -- -- 32,545
--------- --------- ----------
Net cash used in investing activities.... (419,577) (760,883) (197,488)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations........... -- -- (220,000)
Capital distributions................................. (467,204) (32,041) (665,685)
Net change in cash due to conforming fiscal
year-end........................................... (12,840) -- --
--------- --------- ----------
Net cash used in financing activities.... (480,044) (32,041) (885,685)
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (224,788) (65,003) 557,194
CASH AND CASH EQUIVALENTS, at beginning of period....... 806,213 581,425 516,422
========= ========= ==========
CASH AND CASH EQUIVALENTS, at end of period............. $ 581,425 $ 516,422 $1,073,616
========= ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for --
Interest........................................... $ -- $ -- $ --
Income taxes....................................... -- -- --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCIAL
ACTIVITIES:
Acquisition of intangible assets with debt............ -- 414,347 --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-43
<PAGE> 90
IMAGENT CORPORATION AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined financial statements include the accounts of
Imagent Corporation (formerly Mobile Microfilming Corporation) and Mobile
Information Services (collectively the "Company"). The Company is a microfilm
processing laboratory and Kodak distributor of microfilm/microfilming supplies
and a broker of imaging equipment and systems and provides data and document
acquisition services for public and private industry customers. The Company's
customers are primarily located in the Mid-Atlantic region.
The Company and its stockholders entered into a definitive agreement with
F.Y.I. Incorporated ("FYI") in October 1995, pursuant to which the Company will
merge with FYI (the "Merger"). All outstanding shares of the Company's common
stock will be exchanged for cash and shares of FYI's common stock concurrent
with the consummation of the initial public offering (the "Offering") of the
common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The Company is under common control of two stockholders. All significant
intercompany transactions have been eliminated in combination.
Mobile Information Services (MIS) reported on a June 30, 1992, year-end
prior to 1993; as such its accounts for the year ended June 30, 1992, have been
combined with the accounts of Mobile Microfilming Corporation as of December 31,
1992. The results of MIS's operations for the six months ended December 31,
1992, have been reflected as an adjustment to retained earnings. Unaudited
revenues and net income were approximately $656,000 and $29,000, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are depreciated over the lesser of the asset's useful
life or lease term.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Intangible and Other Long-Lived Assets
The customer list is being amortized over a 15-year period, and the
covenant not to compete is being amortized over the term of the agreement.
The Company continually evaluates whether events and circumstances indicate
the remaining estimated useful life of intangibles and long-lived assets may
warrant revisions or that the remaining balance of intangibles or other
long-lived assets may not be recoverable. To make this evaluation, the Company
uses an estimate of undiscounted net income over the remaining life of the
intangibles or other long-lived assets. The Financial Accounting Standards Board
has issued Statement of Financial Accounting Standard No. 121: Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
(SFAS 121) which establishes accounting standards for the impairment of
long-lived assets, certain
F-44
<PAGE> 91
IMAGENT CORPORATION AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
identifiable intangibles, and goodwill. Adoption is required in financial
statements for fiscal years beginning after December 15, 1995. The Company does
not expect the adoption of SFAS 121 to have any material effect on the combined
financial statements. The Company will adopt SFAS 121 in 1996.
Revenue Recognition
Revenue is recognized when services are rendered, or products are shipped,
to the Company's customers.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, consist primarily of trade accounts receivable. The Company's
customers are concentrated in the mid-Atlantic states and the primary customers
are governmental and financial institutions. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends, and other information.
An agency of the federal government accounted for 14% and 17% of its
revenues for the years ended December 31, 1994 and 1995, respectively. The
Company did not have sales to this customer prior to 1994.
Income Taxes
The Company is an S corporation for income tax purposes and, accordingly,
any income tax liabilities are the responsibility of the stockholders. The
Company's S corporation status will terminate with the effective date of the
Merger discussed in Note 1.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ---------------------------
(YEARS) 1994 1995
------------ ----------- -----------
<S> <C> <C> <C>
Vehicles..................................... 5 $ 249,165 $ 188,826
Leasehold improvements....................... 10 327,320 348,658
Machinery and equipment...................... 5-15 1,250,409 1,385,076
Furniture and fixtures....................... 5-15 21,589 49,288
Office equipment............................. 5-15 224,787 258,183
---- ----------- -----------
2,073,270 2,230,031
Less -- Accumulated depreciation and
amortization............................... 1,037,454 1,261,868
----------- -----------
$ 1,035,816 $ 968,163
=========== ===========
</TABLE>
4. INTANGIBLE ASSETS:
Other noncurrent assets consist of the following at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Customer list..................................... $802,433 $802,433
Covenant not to compete........................... 50,000 50,000
-------- --------
852,433 852,433
Less -- Accumulated amortization.................. 17,935 82,481
-------- --------
$834,498 $769,952
======== ========
</TABLE>
F-45
<PAGE> 92
IMAGENT CORPORATION AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into an agreement on October 5, 1994, with Micrographic
Sciences, Inc. The Company purchased Micrographic Sciences Inc.'s customer list
and received a three-year covenant not to compete.
The purchase price was 100% of the processing sales plus 50% of the
microfilm sales between April 1, 1994, and March 31, 1995. The ultimate purchase
price of the customer list and the covenant not to compete was established as
$852,433.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Accounts payable............................................ $ 831,072 $ 871,345
Accrued payroll and related benefits........................ 143,510 176,825
Accrued expenses............................................ 123,885 49,685
---------- ----------
$1,098,467 $1,097,855
========== ==========
</TABLE>
6. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Noninterest-bearing note payable to Micrographics Sciences,
due on February 1, 1996.................................... $414,347 $194,347
Less -- Current maturities................................... 220,000 194,347
-------- --------
Long-term obligations, net of current maturities............. $194,347 $ --
======== ========
</TABLE>
The Company has established a line of credit facility with a financial
institution. The line of credit is secured by the Company's accounts receivable
and inventory. This line of credit allows the Company to borrow up to $500,000
at an interest rate equal to prime. At December 31, 1995, $500,000 of borrowing
capacity was available.
7. OPERATING LEASES:
The Company leases its office buildings. Lease payments for the years ended
December 31, 1993, 1994 and 1995, totaled $235,435, $246,816 and $230,369,
respectively. Minimum future lease payments under operating leases as of
December 31, 1995, for each of the next five years and in the aggregate are as
follows:
<TABLE>
<S> <C>
1996.............................................................. $223,152
1997.............................................................. 219,738
1998.............................................................. 120,342
1999.............................................................. --
2000.............................................................. --
Thereafter........................................................ --
--------
Total................................................... $563,232
========
</TABLE>
F-46
<PAGE> 93
IMAGENT CORPORATION AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLAN:
Effective January 1, 1991, the Company adopted a profit sharing plan to
provide for contributions made under salary deferral agreements pursuant to the
Internal Revenue Code. All employees shall be eligible to enter the plan if they
are at least 21 years of age and have at least one year of service.
All deferred compensation and company contributions are placed in a trust
to be held and invested by the trustee. The profit sharing expense was $16,195,
$19,325, and $20,875 for the years ended December 31, 1993, 1994, and 1995,
respectively.
9. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for workers'
compensation and unemployment incurred in connection with its operations.
Management believes none of these actions will have a material adverse effect on
the combined financial positions or combined results of operations of the
Company.
10. COMMON STOCK:
Common stock at December 31, 1994 and 1995, consists of the following:
<TABLE>
<CAPTION>
SHARES
PAR ------------------- ASSIGNED
VALUE AUTHORIZED ISSUED VALUE
----- ---------- ------ --------
<S> <C> <C> <C> <C>
Imagent Corporation --
Preferred Stock................................ $ 500 50 -- $ --
Class A Common Stock........................... 10 5,000 200 2,000
Class B Common Stock........................... 10 2,500 200 2,000
Mobile Information Services...................... None 100 100 16,773
----- --- -------
7,650 500 $20,773
===== === =======
</TABLE>
11. PRO FORMA NET INCOME (UNAUDITED):
Selling, general and administrative expenses for the periods presented
reflect compensation and related benefits that owners and certain key employees
received during the periods. These owners and key employees have agreed to
certain reductions in salaries and benefits in connection with the Merger.
In connection with the merger, each stockholder has entered into a
three-year employment agreement with FYI which provides for set base salary,
participation in any FYI incentive bonus plans, four weeks paid vacation, a car
allowance, health benefits, and a two year covenant-not-to-compete following
termination of such person's employment. The stockholders' employment agreements
provide for an aggregate base salary of $250,000.
The unaudited pro forma data presents compensation at the level the
officers and owners of the Company have agreed to receive subsequent to the
Offering. In addition, the following pro forma data presents the provision for
income taxes as if the Company had been subject to federal and state income
taxes and adjusted for the impact of the compensation differential discussed
above.
F-47
<PAGE> 94
IMAGENT CORPORATION AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS:
On January 26, 1996, the Company was acquired by FYI. In conjunction with
the Merger, the Company will dividend cash and accounts receivable to its
stockholders in the amount of $2,750,000 which represents the AAA accounts of
the Company. In addition, the Company could make an additional distribution
corresponding to the increase in net stockholders' equity from June 30, 1995 to
November 30, 1995, not to exceed $400,000. The $400,000 available for the
additional distribution was distributed prior to December 31, 1995. Had the
$2,750,000 transaction been recorded at December 31, 1995, the effect on the
accompanying balance sheet would be a decrease in total assets and stockholders'
equity of $2,750,000.
F-48
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Melanson and Associates, Inc.:
We have audited the accompanying combined balance sheets of Melanson and
Associates, Inc. (a California corporation) and Related Company as of December
31, 1994 and 1995, and the related combined statements of operations,
stockholders' equity, and cash flows for each of the years ended July 31, 1993,
and December 31, 1994 and 1995. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Melanson
and Associates, Inc. and Related Company as of December 31, 1994 and 1995, and
the combined results of their operations and their combined cash flows for each
of the years ended July 31, 1993, and December 31, 1994 and 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 15, 1996
F-49
<PAGE> 96
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 339,031 $ 330,134
Accounts receivable, less allowance of $87,912 and $78,247....... 2,629,127 2,117,843
Stockholder receivable........................................... 641,547 310,634
Deferred tax assets.............................................. 10,179 --
Prepaid and other current assets................................. 3,413 19,310
---------- ----------
Total current assets..................................... 3,623,297 2,777,921
---------- ----------
PROPERTY AND EQUIPMENT, net........................................ 2,475,708 2,401,983
OTHER NONCURRENT ASSETS............................................ 120,514 16,830
---------- ----------
Total assets............................................. $6,219,519 $5,196,734
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations........................................... $ 395,000 $ 213,000
Current maturities of long-term obligations...................... 77,936 93,388
Accounts payable and accrued liabilities......................... 1,829,137 1,480,069
---------- ----------
Total current liabilities................................ 2,302,073 1,786,457
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES................... 1,532,469 1,435,814
DEFERRED INCOME TAXES.............................................. 187,473 70,473
---------- ----------
Total liabilities........................................ 4,022,015 3,292,744
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par, authorized 75,000 shares, 556 shares issued
and outstanding............................................... 2,421 2,421
Retained earnings................................................ 2,195,083 1,901,569
---------- ----------
Total stockholders' equity............................... 2,197,504 1,903,990
---------- ----------
Total liabilities and stockholders' equity............... $6,219,519 $5,196,734
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-50
<PAGE> 97
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
DECEMBER 31,
JULY 31, -------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
SERVICE REVENUE........................................ $8,738,476 $9,972,861 $9,874,336
COST OF SERVICES....................................... 5,650,307 6,311,498 6,942,566
DEPRECIATION........................................... 246,777 277,081 320,685
---------- ---------- ----------
Gross profit................................. 2,841,392 3,384,282 2,611,085
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 2,453,307 2,619,401 2,394,867
---------- ---------- ----------
Operating income............................. 388,085 764,881 216,218
OTHER (INCOME) EXPENSE:
Interest expense..................................... 120,203 87,751 112,068
Interest income...................................... (786) (814) (36,467)
Other (income) expense, net.......................... (4,974) (81,576) (53,417)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES............................. 273,642 759,520 194,034
PROVISION (BENEFIT) FOR INCOME TAXES................... 88,289 183,146 (7,263)
---------- ---------- ----------
Net income................................... $ 185,353 $ 576,374 $ 201,297
========== ========== ==========
PRO FORMA DATA (Unaudited -- See Note 13):
HISTORICAL NET INCOME.................................. $ 185,353 $ 576,374 $ 201,297
PRO FORMA COMPENSATION DIFFERENTIAL.................... 994,667 1,029,133 936,717
PRO FORMA PROVISION FOR INCOME TAXES................... 449,444 487,013 453,994
---------- ---------- ----------
PRO FORMA NET INCOME................................... $ 730,576 $1,118,494 $ 684,020
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-51
<PAGE> 98
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, July 31, 1992........................... 556 $2,421 $1,653,924 $1,656,345
Dividends declared............................. -- -- (201,511) (201,511)
Net income..................................... -- -- 185,353 185,353
--- ------ ---------- ----------
BALANCE, July 31, 1993........................... 556 2,421 1,637,766 1,640,187
Net income for the period August 1, 1993, to
December 31, 1993........................... -- -- 229,428 229,428
--- ------ ---------- ----------
BALANCE, December 31, 1993....................... 556 2,421 1,867,194 1,869,615
Dividends declared............................. -- -- (248,485) (248,485)
Net income..................................... -- -- 576,374 576,374
--- ------ ---------- ----------
BALANCE, December 31, 1994....................... 556 2,421 2,195,083 2,197,504
Dividends declared............................. -- -- (494,811) (494,811)
Net income..................................... -- -- 201,297 201,297
--- ------ ---------- ----------
BALANCE, December 31, 1995....................... 556 $2,421 $1,901,569 $1,903,990
=== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-52
<PAGE> 99
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
DECEMBER 31,
JULY 31, ---------------------
1993 1994 1995
----------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 185,353 $ 576,374 $ 201,297
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation.......................................... 246,777 277,081 320,685
Deferred tax benefit.................................. (41,177) (526,790) (106,821)
Loss (gain) on disposal of assets..................... -- (18,635) 516
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable, net......................... 81,802 84,111 511,284
Stockholder receivable........................... -- (271,921) 330,913
Prepaid and other current assets................. 21,062 (147,004) 87,787
Increase (decrease) in --
Accounts payable and accrued liabilities......... 284,748 547,727 (349,068)
----------- --------- ---------
Net cash provided by operating activities...... 778,565 520,943 996,593
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net................. (326,466) (580,398) (291,691)
Proceeds from sales of property.......................... -- 203,068 44,215
----------- --------- ---------
Net cash used in investing activities.......... (326,466) (377,330) (247,476)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on short-term obligations............. (220,512) (288,124) (250,000)
Proceeds from short-term borrowings...................... 158,124 525,000 68,000
Principal payments on long-term obligations.............. (1,246,603) (80,507) (81,203)
Proceeds from long-term borrowings....................... 1,425,000 -- --
Payment of dividends..................................... (201,511) (248,485) (494,811)
----------- --------- ---------
Net cash used in financing activities.......... (85,502) (92,116) (758,014)
----------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 366,597 51,497 (8,897)
ADJUSTMENT TO CONFORM FISCAL YEAR-END TO A CALENDAR YEAR... -- (103,689) --
CASH AND CASH EQUIVALENTS, at beginning of period.......... 24,626 391,223 339,031
----------- --------- ---------
CASH AND CASH EQUIVALENTS, at end of period................ $ 391,223 $ 339,031 $ 330,134
=========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for --
Interest.............................................. $ 120,203 $ 87,751 $ 112,068
Income taxes.......................................... $ 33,914 $ 52,500 $ 257,876
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-53
<PAGE> 100
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined financial statements include the accounts of
Melanson and Associates, Inc. (dba Researchers) and Bay Area Micrographics
(BAM -- or the "Related Company") (a sole proprietorship), (collectively the
"Company"). The Company provides photocopying, microfilming, and electronic
imaging of document services to its customers from its offices in California.
In October 1995, the Company and its stockholders entered into a definitive
agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will
merge with FYI (the "Merger"). All outstanding shares of the Company's common
stock and the ownership of the sole proprietorship will be exchanged for cash
and shares of FYI's common stock concurrent with the consummation of the initial
public offering (the "Offering") of the common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The Company is under common control. All significant intercompany
transactions have been eliminated in combination.
Fiscal Year-Ends
BAM has a December 31 year-end. Researchers has a July 31 year-end. The
accounts and results of BAM, using a December 31 year-end, have been combined
with the July 31 year-end accounts and results of Researchers in the
accompanying combined financial statements for 1993. Researcher's accounts and
results for 1994 and 1995 have been recast to a December 31 year-end.
Researcher's net income for the five-month period August 1, 1993, to December
31, 1993, was $229,428.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the accelerated and straight-line methods over the estimated useful lives of the
assets. Leasehold improvements are depreciated over the lesser of the asset's
useful life or the lease term.
Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill. Adoption is required in financial
statements for fiscal years beginning after December 15, 1995. The Company does
not expect the adoption of SFAS 121 to have any material effect on the combined
financial statements. The Company will adopt SFAS 121 in 1996.
Income Taxes
Researchers is a C corporation. BAM is a sole proprietorship for income tax
purposes and, accordingly, any income tax liabilities are the responsibility of
the owner. For purposes of these combined financial
F-54
<PAGE> 101
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
statements, no federal and state income taxes have been provided for BAM. BAM's
sole proprietorship status will terminate with the effective date of the Merger
discussed in Note 1.
Deferred income taxes for Researchers are provided for timing differences
in the recognition of revenues and expenses for tax and financial reporting
purposes. Temporary differences result primarily from accelerated depreciation
and amortization for tax purposes, deferred contract revenues being taxed when
billed and various accruals and reserves being deductible for tax purposes in
different periods.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by Statement of Financial Accounting Standards (SFAS)
No. 105, consist primarily of trade accounts receivable. The Company's customers
are concentrated in the Western states and the primary customers are legal
institutions. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends, and other information.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, DECEMBER 31,
(YEARS) 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Land......................................... $ 412,500 $ 412,500
Building and improvements.................... 15-31 1,289,327 1,289,327
Machinery and equipment...................... 7 1,310,220 1,351,255
Leasehold improvements....................... 5-7 107,621 107,621
Computer equipment........................... 5-7 606,702 804,314
Autos and aircraft........................... 5-7 229,289 244,809
Furniture and fixtures....................... 7 40,055 42,208
----------- -----------
3,995,714 4,252,034
Less -- Accumulated depreciation............. 1,520,006 1,850,051
----------- -----------
$ 2,475,708 $ 2,401,983
=========== ===========
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Accounts payable........................................... $ 414,073 $ 527,643
Sales tax payable.......................................... 76,435 77,961
Income taxes payable....................................... 846,248 687,933
Accrued compensation and benefits.......................... 273,139 180,837
Other accrued liabilities.................................. 219,242 5,695
---------- ----------
Total accounts payable and accrued liabilities... $1,829,137 $1,480,069
========== ==========
</TABLE>
5. SHORT-TERM OBLIGATIONS:
The Company has a $425,000 line of credit with interest payable at prime
plus 1.5%, (7.5% and 10% at December 31, 1994 and 1995), on the outstanding
principal balance. The line of credit, which expires in
F-55
<PAGE> 102
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
October 1996, is guaranteed by the principal stockholder. The Company had draws
outstanding of $395,000 and $213,000 at December 31, 1994 and 1995.
6. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Mortgage payable -- bank, monthly payment of $3,981 through
July 1993, $4,771 from August 1993, to July 1994, and
$4,694 through maturity date of July 2003; payment
includes principal and interest of 9.45% and 9.25%,
respectively; secured by deed of trust on real
property. ............................................... $ 564,851 $ 560,716
Note payable -- bank, monthly principal of $1,650 plus
interest at prime plus 1.75% (9.25% and 10.5% at December
31, 1994 and 1995, respectively) and a maturity date of
September 15, 1998....................................... 74,250 54,450
Note payable -- bank, monthly principal of $1,667 plus
interest at prime plus 1.5% (9.0% and 10.25% at December
31, 1994 and 1995, respectively) and a maturity date of
October 15, 1999......................................... 96,667 76,667
Note payable -- bank, monthly payment of $5,456 through
maturity of November 2025; payment includes principal
plus interest at 8%, secured by deed of trust on real
property................................................. 738,094 739,498
Note payable -- bank, monthly principal of $1,667 plus
interest at prime plus 1.75% (9.25% and 10.5% at December
31, 1994 and 1995, respectively) and a maturity date of
September 15, 1997, guaranteed by the principal
stockholder.............................................. 55,000 35,000
Note payable -- Xerox, monthly payment of $748, payment
includes principal and interest at 15.5% and a maturity
date of November 1999.................................... 44,872 33,287
Note payable -- bank, monthly payment of $768; payment
includes principal plus interest at 8.5%; maturity dates
of November 1998......................................... 36,671 29,584
---------- ----------
Total obligation................................. 1,610,405 1,529,202
Less -- Current maturities................................. 77,936 93,388
---------- ----------
$1,532,469 $1,435,814
========== ==========
</TABLE>
As of December 31, 1994 and 1995, the Company has complied with all loan
covenants.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996................................................... $ 93,388
1997................................................... 88,095
1998................................................... 68,915
1999................................................... 39,660
2000................................................... 17,532
Thereafter............................................. 1,221,612
----------
Total........................................ $1,529,202
==========
</TABLE>
F-56
<PAGE> 103
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASE COMMITMENTS AND RELATED-PARTY TRANSACTIONS:
The Company leases office facilities in Sacramento and San Francisco,
California, along with certain equipment from the Company's principal
shareholder. The Company also leases office facilities in Los Angeles and San
Jose, California, from third parties. The leases provide for lease terms on a
month to month basis as well as over five to ten year periods commencing on
August 1, 1991, through July 31, 2001, with monthly lease payments of $1,950 to
$8,500. The lease agreements provide that the Company pay all related taxes and
insurance. The total lease expense for the years ended July 31, 1993 and
December 31, 1994 and 1995, totaled approximately $373,000, $429,000 and
$520,000, respectively, including total lease payments to the Company's
principal shareholder of approximately $187,000, $177,000 and $242,000,
respectively. Minimum future lease payments under operating leases as of
December 31, 1995, for each of the next five years and in the aggregate are as
follows:
<TABLE>
<S> <C>
1996............................................................. $ 368,886
1997............................................................. 284,400
1998............................................................. 284,400
1999............................................................. 284,400
2000............................................................. 273,300
Thereafter....................................................... 828,000
----------
Total.................................................. $2,323,386
==========
</TABLE>
8. EMPLOYEE BENEFIT PLAN:
On January 1, 1993, the Company adopted a qualified 401(k) plan covering
substantially all eligible employees who meet certain age and length of service
requirements. The plan allows for employee and employer contributions. The plan
also requires an employer matching contribution unless changed in writing by the
employer. Employer contributions charged to operations for the years ended July
31, 1993, and December 31, 1994 and 1995, were approximately $0, $15,000, and
$17,172, respectively.
The Company offers no postretirement or postemployment benefits.
9. INCOME TAXES:
The following income tax information for Researchers is presented in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109).
This statement provides for a liability approach to accounting for income taxes.
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
DECEMBER 31,
JULY 31, ----------------------
1993 1994 1995
-------- --------- --------
<S> <C> <C> <C>
Federal --
Current......................................... $ 98,578 $ 551,458 $ 76,491
Deferred........................................ (34,605) (419,015) (82,071)
State --
Current......................................... 30,888 158,478 23,067
Deferred........................................ (6,572) (107,775) (24,750)
-------- --------- --------
$ 88,289 $ 183,146 $ (7,263)
======== ========= ========
</TABLE>
F-57
<PAGE> 104
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
DECEMBER 31,
JULY 31, ----------------------
1993 1994 1995
-------- --------- --------
<S> <C> <C> <C>
Tax at statutory rate............................. $ 93,038 $ 258,237 $ 65,971
Add (deduct) --
State income taxes.............................. 16,418 26,498 (1,110)
Nondeductible expenses.......................... 5,747 -- --
Effect of sole partnership nontaxable income.... (26,914) (101,589) (72,124)
-------- --------- --------
$ 88,289 $ 183,146 $ (7,263)
======== ========= ========
</TABLE>
The components of deferred income tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred income tax liabilities --
Property and equipment....................................... $ 63,171 $ 73,175
Accrual to cash differences, net............................. 361,747 176,370
-------- --------
Total deferred income tax liabilities................ 424,918 249,545
Deferred income tax assets --
Allowance for doubtful accounts.............................. 35,286 31,408
Accrued expenses............................................. 212,338 147,664
-------- --------
Total deferred income tax assets..................... 247,624 179,072
-------- --------
Total net deferred income tax liabilities............ $177,294 $ 70,473
======== ========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for workers'
compensation incurred in connection with its operations. Management believes
that none of these actions will have a material adverse effect on the financial
position or results of operations of the Company.
Employment Agreements
The Company has employment agreements with certain personnel to pay
specific amounts annually. The employment agreements provide for a total annual
compensation amount of $595,500 to be disbursed to certain personnel of the
Company in accordance with the terms of each employee's employment agreement
11. RELATED-PARTY TRANSACTION:
The Company purchases digital coding services from Researchers LLC, an
affiliated entity. The Company's principal shareholder has a controlling
interest in Researchers LLC. During the years ended December 31, 1994 and 1995,
the Company incurred expenses related to purchases and services of approximately
$28,000 and $10,642 and had billings of approximately $3,500 and $40,377 to
Researchers, LLC.
F-58
<PAGE> 105
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Stockholder receivable results from advances to the stockholder in excess
of his earned salary and estimated bonus. Amounts are settled at year-end.
12. SIGNIFICANT CUSTOMER:
For the year ended July 31, 1993, the Company had one customer which
accounted for approximately 11% of combined revenue. For the year ended December
31, 1994, the Company had two customers which accounted for approximately 13%
and 11% of combined revenue. For the year ended December 31, 1995, the Company
had two customers which each accounted for approximately 12% of combined
revenue.
13. PRO FORMA NET INCOME (UNAUDITED):
Selling, general, and administrative expenses for the periods presented
reflect compensation and related benefits that owners and certain key employees
received during the periods. These owners and key employees have agreed to
certain reductions in salaries and benefits in connection with the Merger.
In connection with this merger, each stockholder has entered into a three
year employment agreement with FYI which provides for set base salary,
participation in any future FYI incentive bonus plans, four weeks paid vacation,
a car allowance, health benefits and a two year covenant-not-to-compete
following termination of such person's employment. The stockholders' employment
agreements provide for an aggregate base salary of $250,000.
The unaudited pro forma data presents compensation at the level the
officers and owners of the Company have agreed to receive subsequent to the
Offering. In addition, the following pro forma data presents the provision for
income taxes as if the sole proprietorship had been subject to federal and state
income taxes and adjusted for the impact of the compensation differential
discussed above.
14. SUBSEQUENT EVENTS:
On January 26, 1996 the Company was acquired by FYI. In connection with the
Merger, the Company will dividend land, building, and related improvements of
$1,488,327 and the related mortgage payable of $1,300,224 to the principal
stockholder. In addition the Company will make a cash distribution of $250,000
prior to the closing of the Merger. Had these transactions been recorded at
December 31, 1995, the effect on the accompanying balance sheet would be a
decrease in assets of $1,738,327, liabilities of $1,300,224, and stockholders'
equity of $438,103.
F-59
<PAGE> 106
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Recordex Services, Inc.:
We have audited the accompanying balance sheet of Recordex Services, Inc.
(a wholly owned subsidiary of Paragon Management Group, Inc.) as of December 31,
1995, and the related statements of operations, changes in stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Recordex Services, Inc. for the years ended December 31, 1994 and
1993, were audited by other auditors whose report dated September 15, 1995,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Recordex Services, Inc. (a
wholly owned subsidiary of Paragon Management Group, Inc.) as of December 31,
1995, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 15, 1996
F-60
<PAGE> 107
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Recordex Services, Inc.
Malvern, Pennsylvania
We have audited the accompanying balance sheet of Recordex Services, Inc.
(a wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31,
1994, and the related statements of operations, changes in stockholder's equity,
and cash flows for the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Recordex Services, Inc. (a
wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31,
1994, and the results of its operations and its cash flows for the two years
then ended in conformity with generally accepted accounting principles.
ELKO, FISCHER, McCABE & RUDMAN, LTD.
Certified Public Accountants
Media, Pennsylvania
September 15, 1995
F-61
<PAGE> 108
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash.............................................................. $ 2,538 $ --
Accounts receivable, net of contractual allowances and provision
for uncollectible accounts of $470,000 and $363,032............ 1,364,193 1,585,322
Prepaid expenses and other assets................................. 34,280 74,007
Deferred tax asset................................................ 27,000 133,389
---------- ----------
Total current assets...................................... 1,428,011 1,792,718
---------- ----------
PROPERTY AND EQUIPMENT:
Equipment......................................................... 946,450 1,281,427
Less accumulated depreciation..................................... 442,077 683,875
---------- ----------
Net property and equipment................................ 504,373 597,552
---------- ----------
OTHER ASSETS:
Security deposits................................................. 15,039 19,471
Advances to parent................................................ 721,328 816,335
---------- ----------
Total other assets........................................ 736,367 835,806
---------- ----------
Total assets.............................................. $2,668,751 $3,226,076
========== ==========
CURRENT LIABILITIES:
Line of credit.................................................... $ 142,527 $ 250,000
Accounts payable.................................................. 325,718 960,568
Accrued expenses.................................................. 197,189 118,363
Accrued payroll and payroll taxes................................. 195,052 282,442
Retrieval fees payable............................................ 425,699 127,989
Income taxes payable.............................................. 44,750 125,480
Current maturities --
Capitalized lease obligations.................................. 59,510 101,287
Notes payable.................................................. 86,249 105,125
---------- ----------
Total current liabilities................................. 1,476,694 2,071,254
---------- ----------
LONG-TERM LIABILITIES:
Less current maturities --
Capitalized lease obligations.................................. 89,844 89,468
Notes payable.................................................. 188,380 86,867
Deferred income taxes.......................................... 41,600 48,200
---------- ----------
Total long-term liabilities............................... 319,824 224,535
---------- ----------
Total liabilities......................................... 1,796,518 2,295,789
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 1)
STOCKHOLDERS' EQUITY:
Common stock -- par value $1; 1,000 shares authorized, issued, and
outstanding.................................................... 1,000 1,000
Additional paid-in capital.......................................... 774,000 774,000
Retained earnings................................................... 97,233 155,287
---------- ----------
Total stockholder's equity................................ 872,233 930,287
---------- ----------
Total liabilities and stockholders' equity................ $2,668,751 $3,226,076
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 109
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
NET SERVICE REVENUE.................................... $5,464,798 $6,825,633 $8,549,947
COSTS OF SERVICES...................................... 3,076,365 4,165,625 5,233,447
DEPRECIATION........................................... 130,073 166,486 224,602
---------- ---------- ----------
Gross profit................................. 2,258,360 2,493,522 3,091,898
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 2,185,239 2,368,242 2,923,065
---------- ---------- ----------
Operating income............................. 73,121 125,280 168,833
INTEREST EXPENSE....................................... 26,357 58,038 85,088
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE.......................... 46,764 67,242 83,745
PROVISION FOR INCOME TAXES............................. 19,000 22,600 25,691
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE... 27,764 44,642 58,054
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME
TAXES................................................ (17,500) -- --
---------- ---------- ----------
NET INCOME............................................. $ 10,264 $ 44,642 $ 58,054
========== ========== ==========
PRO FORMA DATA (Unaudited -- See Note 10):
HISTORICAL NET INCOME.................................. $ 10,264 $ 44,642 $ 58,054
PRO FORMA COMPENSATION DIFFERENTIAL.................... 94,696 109,710 207,666
PRO FORMA PROVISION FOR INCOME TAXES................... 38,475 36,873 82,941
---------- ---------- ----------
PRO FORMA NET INCOME................................... $ 66,485 $ 117,479 $ 182,779
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 110
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992....................... $1,000 $ 774,000 $ 42,327 $817,327
Net income..................................... -- -- 10,264 10,264
------ --------- -------- --------
BALANCE, December 31, 1993....................... 1,000 774,000 52,591 827,591
Net income..................................... -- -- 44,642 44,642
------ --------- -------- --------
BALANCE, December 31, 1994....................... 1,000 774,000 97,233 872,233
Net income..................................... -- -- 58,054 58,054
------ --------- -------- --------
BALANCE, December 31, 1995....................... $1,000 $ 774,000 $155,287 $930,287
====== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-64
<PAGE> 111
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 10,264 $ 44,642 $ 58,054
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization...................... 241,832 208,024 224,602
Loss on investment................................. -- 16,667 --
Deferred income taxes.............................. 36,500 (21,900) (99,789)
(Increase) decrease in assets --
Accounts receivable, net......................... (62,820) (398,111) (221,129)
Prepaid expenses and other assets.................. (8,097) 1,700 (39,727)
Security deposits.................................. 4,913 (5,614) (4,432)
Advances to parent................................. (217,609) (51,815) (95,007)
Increase (decrease) in liabilities --
Accounts payable................................. (32,192) 35,398 634,850
Accrued expenses................................. (17,332) 46,862 (78,826)
Accrued payroll and payroll taxes................ 68,824 63,893 87,390
Retrieval fees................................... 20,509 214,220 (297,710)
Income taxes payable............................. -- 44,750 80,730
--------- --------- ---------
Total adjustments............................. 34,528 154,074 190,952
--------- --------- ---------
Net cash provided by operating activities..... 44,792 198,716 249,006
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (94,923) (86,703) (186,779)
Purchase of investment................................ (30,000) -- --
--------- --------- ---------
Net cash used in investing activities......... (124,923) (86,703) (186,779)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable............................. -- (15,371) (82,637)
Borrowings on notes payable........................... 150,000 -- --
Borrowings (payments) on line of credit............... 134,500 (1,973) 107,473
Repayment of capital lease obligations................ (65,014) (50,261) (89,601)
Advances to parent.................................... (134,500) (46,725) --
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................. 84,986 (114,330) (64,765)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH......................... 4,855 (2,317) (2,538)
CASH, BEGINNING OF YEAR................................. -- 4,855 2,538
--------- --------- ---------
CASH, END OF YEAR....................................... $ 4,855 $ 2,538 $ --
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid......................................... $ 26,357 $ 58,038 $ 85,088
NONCASH TRANSACTIONS:
Equipment acquired through capital lease
obligations........................................ $ 26,397 $ 160,828 $ 131,002
Sale of investment.................................... -- 13,333 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 112
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
On October 16, 1991, Paragon Management Group, Inc. (the "Parent"),
acquired all of the issued and outstanding shares of common stock of Recordex
Services, Inc. (the "Company"). Established in 1987, the Company is a supplier
of computerized correspondence management systems to hospital medical records
departments. The Company provides services to over 100 hospitals in 11 states.
In October 1995, the Company, its Parent, and the shareholders of its
Parent entered into a definitive agreement with F.Y.I. Incorporated (FYI),
pursuant to which the Company will be acquired by FYI (the "Merger"). All
outstanding shares of the Company will be exchanged for cash and shares of FYI
Common Stock concurrent with the consummation of the initial public offering
(the "Offering") of the common stock of FYI. (See Note 11.)
Accounts Receivable
The Company follows the reserve method of providing for doubtful accounts
receivable.
Transactions with Parent
The Company pays management fees to its Parent for management, consulting,
and other services. These costs are presented in selling, general, and
administrative costs on the statement of operations.
The Company pays certain expenses on behalf of its Parent including
salaries, occupancy costs, and benefits. These payments are recorded as advances
to Parent on the Company's books until the Company is reimbursed by the Parent.
These advances are noninterest bearing obligations. (See Note 11.)
Equipment
Capital additions including assets acquired under capital leases are stated
at cost. Maintenance, repairs, and minor renewals are charged to operations as
incurred. Depreciation is provided over the estimated useful lives of the assets
using the straight-line method for financial reporting purposes and accelerated
methods for tax purposes. The estimated useful lives used for depreciation vary
for financial reporting and tax purposes. The range of lives for equipment is
three to five years for financial reporting purposes.
Intangible and Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" (SFAS 121) which establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill. Adoption is required in financial
statements for fiscal years beginning after December 15, 1995. The Company does
not expect the adoption of SFAS 121 to have any effect on the financial
statements. The Company will adopt SFAS 121 in 1996.
Supplemental Cash Flow Information
The Company purchased an investment for $30,000 in 1993. As of December 31,
1994, the Company had accepted an offer to have the investee buy back the
investment for $13,333 and a $16,667 loss was recorded in the 1994 statement of
operations. The Company did not receive the proceeds of the sale until January
1995, and a $13,333 receivable was presented as part of other current assets on
the 1994 balance sheet.
F-66
<PAGE> 113
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company and its Parent file a consolidated return for federal income
tax purposes. The Company prospectively adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," on January 1, 1993
and 1993 statement of operations includes a cumulative effect adjustment of
$17,500 to record a deferred tax liability.
The Company provides for income taxes based on its share of the
consolidated income tax expense in accordance with SFAS No. 109. The allocation
is performed by treating the Company as if it were a separate taxpayer.
Income taxes, after adopting SFAS No. 109, are provided for the tax effects
of transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between the
basis of fixed assets, contractual allowances, and provision for uncollectible
accounts and retrieval fees and accrued expenses for financial and income tax
reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Retrieval Fees Payable
The Company pays retrieval fees to various healthcare organizations with
which it has contracts. Those fees represent charges to the Company by the
healthcare organization for each medical record retrieved from the
organization's records department. Those fees are payable upon receipt of cash
for the billing of the Company's services or upon the billing of its services,
according to specific contract terms.
Revenue Recognition
Revenue is recognized when the service is rendered. Net service revenues is
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Gross service revenue.......................... $6,034,321 $7,553,828 $9,240,603
Less -- Contractual allowances and provision
for uncollectible accounts................... 569,523 728,195 690,656
---------- ---------- ----------
Net service revenue.................. $5,464,798 $6,825,633 $8,549,947
========== ========== ==========
</TABLE>
2. LINE OF CREDIT:
The Company has a line of credit agreement with a bank for $300,000. The
interest rate on the line is the lending bank's prime rate plus 0.75% (10.5% and
10.25% at December 31, 1995 and 1994, respectively), payable monthly on
outstanding borrowings. The line is secured by all assets of the Company and
guarantees of the Parent and certain stockholders of the Parent. Payment of
principal is due on demand and the line is reviewed annually by the bank.
The outstanding borrowings on the line were $250,000 and $142,527 at
December 31, 1995 and 1994, respectively. Interest expense on the line was
$30,121, $26,829, and $15,387 for the years ended December 31, 1995, 1994, and
1993, respectively.
3. TERM LOANS:
In October 1993, the Company entered into an agreement with a bank whereby
the outstanding balance on its line of credit of $150,000 was converted to a
term loan. The term loan is payable in monthly installments
F-67
<PAGE> 114
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of $4,167 plus interest at prime plus 1% (10.75% and 10.5% at December 31, 1995
and 1994, respectively) with the full balance due December 22, 1996. The
balances at December 31, 1995 and 1994, were $41,658 and $95,829, respectively.
In April 1994, the Company entered into a $50,000 term loan agreement with
a bank. The loan is payable in monthly installments of $1,400 plus interest at
the bank's prime rate plus 1% (10.75% and 10.5% at December 31, 1995 and 1994,
respectively), maturing April 1, 1997. The balance at December 31, 1995 and 1994
were $22,000 and $38,800, respectively.
On July 26, 1995, the Company converted $140,000 of the balance on its line
of credit to a term loan. The term loan is payable in monthly installments of
$3,889, plus interest of prime plus 1% (10.75% at December 31, 1995) with the
full balance due June 30, 1998. Accordingly, the line of credit and notes
payable balances have been adjusted at December 31, 1995, to reflect this
transaction. The balance at December 31, 1995, was $128,334.
The term loans are secured by all assets of the Company, its Parent, and
guarantees of certain stockholders of the Parent.
Aggregate annual maturities of the term loans at December 31, 1995, as
adjusted for the conversion described above are as follows:
<TABLE>
<S> <C>
1996.............................................................. $105,125
1997.............................................................. 51,867
1998.............................................................. 35,000
1999.............................................................. --
2000.............................................................. --
--------
Total................................................... $191,992
========
</TABLE>
Interest expense on the term loans was $14,660, $14,395 and $37,500 for the
years ended December 31, 1995, 1994 and 1993, respectively.
4. CAPITALIZED LEASE OBLIGATIONS:
The Company leases certain of its equipment under noncancelable leases
which meet the capital lease criteria as defined by the Financial Accounting
Standards Board in Statement No. 13. Accordingly, the present value of future
minimum lease payments has been recorded as leased property under capital lease,
net of depreciation, and obligations under capital lease. At December 31, 1995,
the future minimum lease payments are as follows:
<TABLE>
<S> <C>
1996.............................................................. $120,727
1997.............................................................. 83,163
1998.............................................................. 9,904
1999.............................................................. 1,744
2000.............................................................. 1,163
--------
Total................................................... 216,701
Less -- Amounts representing interest............................. 25,946
--------
Net present value of minimum lease payments....................... 190,755
Less -- Current portion........................................... 101,287
--------
Long-term obligation.............................................. $ 89,468
========
</TABLE>
F-68
<PAGE> 115
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Equipment purchased under capital leases included in the balance sheets is
as follows at December 31:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Equipment...................................................... $202,711 $333,508
Less -- Accumulated depreciation............................... 30,722 77,516
-------- --------
Total................................................ $171,989 $255,992
======== ========
</TABLE>
Total interest expense on capital lease obligations for the years ended
December 31, 1995, 1994, and 1993, was $40,307, $16,353, and $10,970,
respectively.
5. INTANGIBLES:
A covenant not to compete was incorporated in the stock purchase agreement
for the Company dated October 16, 1991. The covenant provided for noncompetition
by the seller and its affiliates directly or indirectly in the business
conducted by the Company for a three-year period. Amortization was provided over
the three-year period commencing October 16, 1991.
The Company contracts with various healthcare organizations to provide
services over a given time period. The value of these contracts was determined
as of October 16, 1991, by an appraisal performed in conjunction with the stock
purchase agreement. The contracts were amortized over their remaining lives
commencing October 16, 1991.
Both the covenant not to compete and the contracts are fully amortized at
December 31, 1995.
6. INCOME TAXES:
The provision for taxes on income consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Currently payable:
Federal........................................... $ -- $ 32,200 $ 96,699
State............................................. -- 12,300 28,781
------- -------- --------
-- 44,500 125,480
------- -------- --------
Deferred:
Federal........................................... 14,700 (16,900) (79,455)
State............................................. 4,300 (5,000) (20,334)
------- -------- --------
Total..................................... $19,000 $ 22,600 $ 25,691
======= ======== ========
</TABLE>
Deferred taxes result from the effect of transactions which are recognized
in different periods for financial and tax reporting purposes and relate
primarily to depreciation and contractual allowances and provision for
uncollectible accounts. Deferred income taxes are recognized for tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years, to differences between the financial reporting and
the tax basis of existing assets and liabilities.
F-69
<PAGE> 116
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred income tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
TAX EFFECTS
DECEMBER 31,
----------------------
1994 1995
--------- --------
<S> <C> <C>
Deferred tax assets:
Contractual allowances and provision for uncollectible
accounts................................................. $ 96,000 $127,649
Accrual of legal settlement................................. 11,000 5,740
--------- --------
107,000 133,389
--------- --------
Deferred tax liabilities:
Retrieval fees and accrued expenses......................... (80,000) --
Fixed assets and depreciation............................... (41,600) (48,200)
--------- --------
(121,600) (48,200)
--------- --------
Total net deferred assets (liabilities)....................... $ (14,600) $ 85,189
========= ========
</TABLE>
The Company prospectively adopted Financial Accounting Standards No. 109,
"Accounting for Income Taxes," on January 1, 1993, and the 1993 statement of
income includes a cumulative effect adjustment of $17,500 to record a deferred
tax liability.
The provision for income taxes differs from the tax at the statutory rate
due to the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Income before income taxes and cumulative effect of
accounting changes.................................. $46,764 $67,242 $83,745
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Taxes using federal statutory rates at 34%............ $15,900 $22,900 $ 28,473
State income taxes, net of the federal tax benefit.... 2,800 4,000 5,568
Nondeductible travel and entertainment................ 100 4,600 3,400
Effects of utilizing graduated tax rates for current
provision........................................... -- (8,700) (11,750)
Other................................................. 200 (200) --
------- ------- --------
Provision for income taxes.................. $19,000 $22,600 $ 25,691
======= ======= ========
</TABLE>
For purposes of the consolidated federal tax return, the Parent has a net
operating loss carryforward available to offset taxable income of the Company in
1994. The net operating loss carryforward will be fully utilized for the tax
year 1994.
7. 401(k) PLAN:
The Company has adopted a contributory 401(k) plan (the "Plan") as of
September 1, 1993. The Plan allows employees to make elective contributions
through salary reduction. The Plan allows for discretionary employer matching.
Participation in the Plan is limited based on certain age and service
requirements. The Company made no contribution to the Plan for the years ended
December 31, 1995 and 1994.
F-70
<PAGE> 117
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. OPERATING LEASES
The Company leases office space under an operating lease which expires in
1998. The future minimum annual rental payments required under this operating
lease as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996..................................................................... $69,804
1997..................................................................... 69,804
1998..................................................................... 29,805
</TABLE>
Rent expense charged against operations for the years ended December 31, 1995,
1994 and 1993 was $77,172, $55,173, and $47,175, respectively.
9. COMMITMENTS AND CONTINGENCIES:
The Company is named as a defendant, with other medical records copying
copy services and numerous hospitals, in a federal and three state lawsuits
contesting the reasonableness of the fees charged for medical records
reproduction. The plaintiff's in each of these cases are seeking class
certification. In November 1994, the plaintiff's motion for class certification
and all other claims were denied in the federal lawsuit. The plaintiffs filed an
appeal on January 3, 1995. On April 4, 1996, the Court of Appeals affirmed the
decision in favor of the Company on the substantive claims, but remanded the
case to the District Court for a hearing on the individual plaintiff's request
for injunctive relief.
The three state lawsuits, two in Pennsylvania, and one in Ohio, are similar
to the federal suit described above. In February 1996, one of the Pennsylvania
lawsuits was concluded favorably to the Company. Management of the Company and
its counsel believe that the outcome of the remaining cases will be influenced
by the outcome of the other cases.
Although the ultimate outcome of the remaining litigation is not presently
determinable, management of the Company and its counsel believe that they can
successfully defend these cases and any liability resulting from them will not
have a material effect on the Company's financial statements.
10. PRO FORMA NET INCOME (UNAUDITED):
Selling, general, and administrative expenses for the periods presented
reflect compensation and related benefits that owners and certain key employees
received during the periods. These owners and key employees have agreed to
certain reductions in salaries and benefits in connection with the Merger.
In connection with the Merger, two of the Parent's stockholders have
entered into a three year employment agreement with FYI which provides for set
base salary, participation in any future FYI incentive bonus plans, four weeks,
paid vacation, a car allowance, health benefits, and a two year covenant-not-to-
compete following termination of such person's employment. The stockholders'
employment agreements provide for an aggregate base salary of $300,000.
The unaudited pro forma data presents compensation at the level the
officers and owners of the Company have agreed to receive subsequent to the
Offering. In addition, the pro forma data presents the incremental provision for
income taxes for the impact of the compensation differential discussed above.
11. SUBSEQUENT EVENTS:
On January 26, 1996, the Company was acquired by FYI. In connection with
the Merger, the Company assumed a note payable to the Parent's stockholders in
the amount of $190,590 and distributed advances receivable from the Parent of
$816,335. Had these transactions been recorded at December 31, 1995, the effect
on the accompanying balance sheet would be an increase in liabilities of
$190,590, a decrease in assets of $816,335 and a decrease in stockholders'
equity of $1,006,925. (See Note 1.)
F-71
<PAGE> 118
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Leonard Archives, Inc.:
We have audited the accompanying balance sheets of Leonard Archives, Inc.
(a Michigan corporation) as of December 31, 1994 and 1995, and the related
statements of operations, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Leonard Archives, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 15, 1996
F-72
<PAGE> 119
LEONARD ARCHIVES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 36,190 $ 13,414
Accounts receivable, less allowance for doubtful accounts of
$35,000 for each period........................................ 901,459 888,352
Accounts receivable -- affiliates................................. 280,033 259,236
Accounts receivable -- officer and employees...................... 14,189 67,043
Prepaids and other current assets................................. 104,702 124,106
---------- ----------
Total current assets...................................... 1,336,573 1,352,151
PROPERTY AND EQUIPMENT, net......................................... 1,670,307 1,962,635
OTHER NONCURRENT ASSETS............................................. 14,275 16,775
---------- ----------
Total assets.............................................. $3,021,155 $3,331,561
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term obligations............................................ $ 625,431 $ 315,797
Short-term obligations to stockholder............................. -- 500,000
Current maturities of long-term obligations....................... 219,823 707,241
Accounts payable and accrued liabilities.......................... 846,065 662,379
Unearned income................................................... 377,372 333,590
---------- ----------
Total current liabilities................................. 2,068,691 2,519,007
LONG-TERM OBLIGATIONS, net of current maturities.................... 664,926 723,603
LONG-TERM OBLIGATIONS TO AFFILIATES, net of current
maturities........................................................ 42,484 19,326
---------- ----------
Total liabilities......................................... 2,776,101 3,261,936
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $10, 8,500 shares authorized, 4,293 shares
outstanding for all periods.................................... 42,930 42,930
Retained earnings................................................. 202,124 26,695
---------- ----------
Total stockholders' equity................................ 245,054 69,625
---------- ----------
Total liabilities and stockholders' equity................ $3,021,155 $3,331,561
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE> 120
LEONARD ARCHIVES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
SERVICE REVENUE........................................ $4,372,109 $5,006,725 $5,858,023
COST OF SERVICES....................................... 2,395,102 3,135,573 3,136,965
DEPRECIATION........................................... 133,668 231,261 305,614
---------- ---------- ----------
Gross profit................................. 1,843,339 1,639,891 2,415,444
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 1,543,994 1,576,865 1,627,377
---------- ---------- ----------
Operating income............................. 299,345 63,026 788,067
OTHER (INCOME) EXPENSE:
Interest expense..................................... 74,354 114,894 144,155
Interest income...................................... (14,657) (18,653) (18,320)
Other (income) expense, net.......................... 5,062 (44,161) 2,661
---------- ---------- ----------
NET INCOME............................................. $ 234,586 $ 10,946 $ 659,571
========== ========== ==========
PRO FORMA DATA (Unaudited -- See Note 11):
HISTORICAL NET INCOME.................................. $ 234,586 $ 10,946 $ 659,571
PRO FORMA COMPENSATION DIFFERENTIAL.................... 159,470 60,000 144,821
PRO FORMA PROVISION FOR INCOME TAXES................... 130,175 35,485 276,893
---------- ---------- ----------
PRO FORMA NET INCOME................................... $ 263,881 $ 35,461 $ 527,499
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE> 121
LEONARD ARCHIVES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992....................... 4,293 $42,930 $ 145,492 $ 188,422
Dividends declared............................. -- -- (107,900) (107,900)
Net income..................................... -- -- 234,586 234,586
----- ------- --------- ---------
BALANCE, December 31, 1993....................... 4,293 42,930 272,178 315,108
Dividends declared............................. -- -- (81,000) (81,000)
Net income..................................... -- -- 10,946 10,946
----- ------- --------- ---------
BALANCE, December 31, 1994....................... 4,293 42,930 202,124 245,054
Dividends declared............................. -- -- (835,000) (835,000)
Net income..................................... -- -- 659,571 659,571
----- ------- --------- ---------
BALANCE, December 31, 1995....................... 4,293 $42,930 $ 26,695 $ 69,625
===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE> 122
LEONARD ARCHIVES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income........................................... $ 234,586 $ 10,946 $ 659,571
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization..................... 133,668 231,261 305,614
Changes in operating assets and liabilities--
(Increase) decrease in--
Accounts receivable, net..................... (209,273) (183,387) (18,950)
Prepaid and other assets..................... (13,578) (5,796) (21,904)
Increase (decrease) in--
Accounts payable and accrued liabilities..... 131,010 229,416 (183,686)
Unearned income.............................. 74,525 94,280 (43,782)
--------- --------- -----------
Net cash provided by operating
activities............................ 350,938 376,720 696,863
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.................. (139,750) (607,035) (504,023)
--------- --------- -----------
Net cash used in investing activities... (139,750) (607,035) (504,023)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on short-term obligations......... -- (79,434) (1,546,196)
Principal payments on long-term obligations.......... (118,084) (127,115) (170,982)
Proceeds from short-term obligations................. 16,401 531,515 1,736,562
Proceeds from long-term obligations.................. -- -- 600,000
Payment of dividends................................. (107,900) (81,000) (835,000)
--------- --------- -----------
Net cash provided by (used in) financing
activities............................ (209,583) 243,966 (215,616)
--------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 1,605 13,651 (22,776)
CASH AND CASH EQUIVALENTS, at beginning of period...... 20,934 22,539 36,190
--------- --------- -----------
CASH AND CASH EQUIVALENTS, at end of period............ $ 22,539 $ 36,190 $ 13,414
========= ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest.......................................... $ 69,378 $ 102,951 $ 136,029
NONCASH TRANSACTIONS:
Equipment acquired through capital lease
obligations....................................... $ 90,111 $ 149,500 $ 93,919
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE> 123
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Leonard Archives, Inc. (the "Company") stores records, computer media and
microfilm for all industries. The Company also provides document destruction as
a complement to complete records management. The Company operates out of two
Detroit facilities and three other facilities, in Ann Arbor and Farmington
Hills, Michigan, and in Toledo, Ohio.
In October 1995, the Company and its stockholder entered into a definitive
agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will
merge with FYI (the "Merger"). All outstanding shares of the Company's common
stock will be exchanged for cash and shares of FYI's common stock concurrent
with the consummation of the initial public offering (the "Offering") of the
common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. Building
improvements are depreciated over the lesser of the asset's useful life or the
lease-term.
Unearned Income
Unearned income represents customer storage services which are billed in
advance.
Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" (SFAS 121), which is establishing
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill. Adoption is required in financial
statements for fiscal years beginning after December 15, 1995. The Company does
not expect the adoption of SFAS 121 to have any effect on the financial
statements. The Company will adopt SFAS 121 in 1996.
Revenue Recognition
Revenue is recognized when the services are rendered.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk, as defined by Statement of Financial Accounting
Standards (SFAS) No. 105, consist primarily of trade receivables.
Trade receivables are primarily short-term receivables from clients located
in Michigan and Ohio. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends, and other information.
F-77
<PAGE> 124
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company is an S corporation for income tax purposes and, accordingly,
any income tax liabilities are the responsibility of the stockholder. The
Company's S corporation status will terminate with the effective date of the
Merger discussed in Note 1.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ---------------------------
(YEARS) 1994 1995
------------ ----------- -----------
<S> <C> <C> <C>
Land......................................... NA $ 2,581 $ 2,581
Building and building improvements........... 7-18 900,015 904,524
Warehouse and vault equipment................ 5-15 1,306,586 1,696,107
Transportation equipment..................... 3-7 65,752 72,572
Equipment under capital leases............... 5 274,833 359,088
Office equipment............................. 5-7 236,280 327,851
Data disintegration equipment................ 10 249,644 261,245
----------- -----------
3,035,691 3,623,968
Less -- Accumulated depreciation and
amortization............................... 1,365,384 1,661,333
----------- -----------
$ 1,670,307 $ 1,962,635
=========== ===========
</TABLE>
Accumulated depreciation of equipment under capital leases amounted to
$72,587 and $125,137 at December 31, 1994 and 1995, respectively.
4. SHORT-TERM OBLIGATIONS:
Short-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Bank demand note, expiring June 1999, interest at prime plus
0.75% (9.25% at December 31, 1994), secured by accounts
receivable and machinery and equipment....................... $118,621 $ --
Bank master equipment line of credit, each borrowing payable on
demand and is termed-out over 36 equal monthly payments,
accrued interest at prime plus 0.75% (9.25% at December 31,
1994), payable monthly, secured by accounts receivable and
machinery and equipment...................................... 241,810 --
Bank working capital line of credit, payable on demand, accrued
interest at prime plus 1.25% (9.75% at December 31, 1995),
secured by a first security interest in all accounts
receivable, machinery, and equipment, and a personal
guarantee by the stockholder ................................ -- 315,797
Bank demand master equipment note, monthly payment of $5,000
plus accrued interest at prime plus 0.75% (9.25% at December
31, 1994), matures 1999, secured by accounts receivable and
machinery and equipment...................................... 265,000 --
-------- --------
$625,431 $315,797
======== ========
</TABLE>
F-78
<PAGE> 125
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Short-term obligations to affiliates consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
-------- ----------
<S> <C> <C>
Note payable -- stockholder, payable on demand, accrued
interest at 8.75%, unsecured............................... $ -- $ 500,000
</TABLE>
5. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
-------- ----------
<S> <C> <C>
Mortgage payable -- bank, monthly payment of $8,500,
including principal and interest at prime plus 0.75% (9%
and 9.5% at December 31, 1994 and 1995, respectively),
maturing October 1, 1996, secured by a first mortgage on
the land, building, and certain equipment and guaranteed by
the stockholder and a former stockholder................... $561,644 $ 503,529
Note payable -- Detroit Economic Growth Council, monthly
payment of $1,353, including principal and interest at
6.1%, maturing June 1, 1995, secured by certain assets of
the Company and guaranteed by the stockholder and his
wife....................................................... 7,979 --
Mortgage payable -- bank, monthly payment of $7,978,
including principal and interest at prime plus 1.25% (9.75%
at December 31, 1995), maturing December 1, 2000, secured
by a second mortgage on the land, building, and certain
equipment and guaranteed by the stockholder. .............. -- 600,000
Note payable -- bank, monthly payment of $517, including
principal and interest at 12%, maturing May 1998, secured
by automobile.............................................. 17,310 12,895
Capital lease obligations -- interest rates ranging from 3%
to 15.9%, maturing at dates from January 1996 to September
2000....................................................... 202,249 233,951
-------- ----------
Total.............................................. 789,182 1,350,375
Less -- Current maturities................................... 124,256 626,772
-------- ----------
$664,926 $ 723,603
======== ==========
</TABLE>
Long-term obligations to affiliates consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- -------
<S> <C> <C>
Note payable -- Leonard Investments, monthly payment of $1,185,
including principal and interest at prime plus 1% (9.5% at
December 31, 1994 and 1995), maturing in 1998, unsecured...... $ 37,193 $26,157
Note payable -- Leonard Investments, monthly payment of $861,
including principal and interest at prime plus 1% (9.5% at
December 31, 1994 and 1995), maturing January 1996,
unsecured..................................................... 31,691 14,471
</TABLE>
F-79
<PAGE> 126
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- -------
<S> <C> <C>
Note payable -- Leonard Investments, interest payable annually
at prime plus 1% (9.5% and 8.75% at December 31, 1994 and
1995, respectively), maturing January 1996, unsecured......... $ 69,167 $59,167
-------- -------
Total................................................. 138,051 99,795
Less -- Current maturities...................................... 95,567 80,469
-------- -------
$ 42,484 $19,326
======== =======
</TABLE>
The stockholder of the Company also has a personal note obligation which
has as collateral substantially all of the assets of the Company. The security
interests in these assets is subordinate to the security interest of the bank.
Maturities for December 31, 1996, 1997, 1998, 1999, 2000, and thereafter are
$707,241, $110,255, $115,257, $79,699, $437,718, and $0, respectively.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Accounts payable............................................... $582,185 $409,972
Accrued compensation, benefits, and taxes...................... 117,582 179,009
Other.......................................................... 146,298 73,398
-------- --------
$846,065 $662,379
======== ========
</TABLE>
7. LEASE OBLIGATIONS:
The Company leases its buildings, transportation equipment, and office
equipment under noncancelable lease agreements which expire at various dates.
Minimum future lease payments under capital and operating leases as of December
31, 1995, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1996......................................................... $100,136 $ 459,882
1997......................................................... 65,156 672,467
1998......................................................... 66,179 657,903
1999......................................................... 27,234 590,892
2000......................................................... 10,840 475,280
Thereafter................................................... -- 2,355,520
-------- ----------
Total minimum lease payments................................. 269,545 $5,211,944
==========
Less -- Amounts representing interest........................ 35,594
--------
Present value of net minimum lease payments.................. 233,951
Less -- Current portion of obligations under capital
leases..................................................... 82,083
--------
Long-term portion of obligations under capital leases........ $151,868
========
</TABLE>
Rental expense for all operating leases was approximately $354,894,
$569,762, and $531,735 for the years ended December 31, 1993, 1994 and 1995,
respectively.
F-80
<PAGE> 127
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLAN:
In 1994, the Company adopted a discretionary retirement plan covering
substantially all of its employees. Retirement expenses are funded through
annual contributions to the plan. Expenses related to the plan were $15,982 and
$24,227 for the years ended December 31, 1994 and 1995, respectively.
9. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for workers'
compensation, unemployment, and property damage incurred in connection with its
operations. Management believes none of these actions will have a material
adverse effect on the financial position or results of operations of the
Company.
10. RELATED-PARTY TRANSACTIONS:
The Company leases its operating facilities in Toledo and Trumbull
(Detroit) from Leonard Investments. These leases are for various lengths and
annual amounts. The rental expense for these operating leases for the years
ended December 31, 1993, 1994 and 1995, were $127,000, $126,000, and $127,000,
respectively. The Company is also borrowing funds from Leonard Investments as
described in Note 5. Leonard Investments is a partnership owned by the
stockholder and a former stockholder of the Company. The Ann Arbor facility is
leased from a former stockholder. Rental expense for the Ann Arbor facility was
$62,064 for the years ended December 31, 1993, 1994, and 1995.
Accounts receivable -- affiliate represents amounts due from Accumed
Billing, Inc. and Pathfinders, Inc. The sole stockholder of the Company and his
relatives own a 78% interest in Accumed Billing, Inc. and a 33% interest in
Pathfinders, Inc. The receivables relate primarily to employee services provided
to Accumed Billing, Inc. and Pathfinders, Inc.
Leonard has guaranteed a promissory note in the principal amount of
approximately $636,000 as of December 31, 1995, with interest at 10%, payable in
monthly installments in varying amounts through December 1, 2004. The promissory
note is from the stockholder to the former joint owner in Leonard. Leonard's
guarantee and security interest are subordinate to all other notes payable to
the bank and the Detroit Economic Growth Council.
11. PRO FORMA NET INCOME (UNAUDITED):
Selling, general, and administrative expenses for the periods presented
reflect compensation and related benefits that owners and certain key employees
received during these periods. These owners and key employees have agreed to
certain reductions in salaries and benefits in connection with the Merger.
In connection with this merger, the stockholder has entered into a three
year employment agreement with FYI which provides for set base salary,
participation in any future FYI incentive bonus plans, four week paid vacation,
a car allowance, health benefits, and a two year covenant-not-to-compete
following termination of such person's employment. The stockholder's employment
agreement provides for a $100,000 base salary.
The unaudited pro forma data presents compensation at the level the
officers and owners of the Company have agreed to receive subsequent to the
Offering. In addition, the pro forma data presents the provision for income
taxes as if the Company had been subject to federal and state income taxes and
adjusted for the impact of the compensation differential discussed above.
F-81
<PAGE> 128
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS:
In October 1995, the Company and its stockholder entered into a definitive
agreement to be acquired by FYI. This transaction was subsequently closed on
January 26, 1996. In conjunction with this merger, prior to year-end, the
Company distributed cash to its stockholder in the amount of $700,000 which
represented the AAA account of the Company. In addition, the Company can make an
additional distribution corresponding to the increase in net stockholders'
equity from June 30, 1995 to November 30, 1995, not to exceed $75,000. The
amount available for the additional distribution at December 31, 1995, is
$75,000. Had these transactions been recorded at December 31, 1995, the effect
on the accompanying balance sheet would be a decrease in total assets and a
decrease in stockholder's equity of $75,000.
F-82
<PAGE> 129
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To C.&T. Management Services, Inc.:
We have audited the accompanying combined balance sheets of C.&T.
Management Services, Inc. (a California corporation) and Related Company as of
December 31, 1994 and 1995, and the related combined statements of operations,
stockholders' deficit, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of C.&T. Management
Services, Inc. and Related Company as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 15, 1996
F-83
<PAGE> 130
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 24,115 $ 58,823
Accounts receivable, less allowance of $44,265 and $19,286....... 820,896 956,089
Note receivable -- current....................................... 52,386 424,649
Prepaid and other current assets................................. 34,259 36,748
---------- ----------
Total current assets..................................... 931,656 1,476,309
PROPERTY AND EQUIPMENT, net........................................ 221,773 257,716
NOTE RECEIVABLE, NET OF CURRENT PORTION............................ 429,219 --
OTHER NONCURRENT ASSETS, net....................................... 25,108 17,255
---------- ----------
Total assets............................................. $1,607,756 $1,751,280
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term obligations........................................... $ 757,189 $ 496,809
Current maturities of long-term obligations...................... 24,034 26,234
Accounts payable and accrued liabilities......................... 429,799 468,845
Stockholder note payable -- current.............................. 519,808 563,514
Current portion of deferred income taxes......................... 15,857 15,857
---------- ----------
Total current liabilities................................ 1,746,687 1,571,259
LONG-TERM OBLIGATIONS:
Notes payable.................................................... 6,221 --
Stockholder note payables, net of current........................ 35,126 19,969
---------- ----------
Total liabilities............................................. 1,788,034 1,591,228
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $1 par value and no par (Note 12), authorized
125,000 shares, 3,100 shares issued and outstanding........... 4,000 4,000
Additional paid-in capital....................................... 1,285 1,285
Retained (deficit) earnings...................................... (185,563) 154,767
---------- ----------
Total stockholders' equity (deficit)..................... (180,278) 160,052
---------- ----------
Total liabilities and stockholders' equity (deficit)..... $1,607,756 $1,751,280
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-84
<PAGE> 131
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES............................................... $5,804,738 $5,337,100 $5,369,412
COST OF SERVICES....................................... 4,001,734 3,975,161 3,560,791
DEPRECIATION EXPENSE................................... 66,999 52,797 53,007
---------- ---------- ----------
Gross profit................................. 1,736,005 1,309,142 1,755,614
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 1,633,876 1,508,037 1,414,629
---------- ---------- ----------
Operating income (loss)........................... 102,129 (198,895) 340,985
OTHER (INCOME) EXPENSE:
Interest expense..................................... 93,815 102,969 126,406
Interest income...................................... (10,969) (50,116) (51,460)
Other income, net.................................... (46,255) (135,809) (95,891)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES...................... 65,538 (115,939) 361,930
PROVISION FOR INCOME TAXES............................. 1,600 1,600 1,600
---------- ---------- ----------
Net income (loss)............................ $ 63,938 $ (117,539) $ 360,330
========== ========== ==========
PRO FORMA DATA (Unaudited -- See Note 14):
HISTORICAL NET INCOME (LOSS)........................... $ 63,938 $ (117,539) $ 360,330
PRO FORMA COMPENSATION DIFFERENTIAL.................... 224,187 177,531 171,383
PRO FORMA PROVISION FOR INCOME
TAXES................................................ 119,101 22,231 199,326
---------- ---------- ----------
PRO FORMA NET INCOME................................... $ 169,024 $ 37,761 $ 332,387
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-85
<PAGE> 132
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
---------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992................. 3,100 4,000 1,285 (131,962) (126,677)
Net income............................... -- -- -- 63,938 63,938
----- ------ ------ --------- ---------
BALANCE, December 31, 1993................. 3,100 4,000 1,285 (68,024) (62,739)
Net loss................................. -- -- -- (117,539) (117,539)
----- ------ ------ --------- ---------
BALANCE, December 31, 1994................. 3,100 4,000 1,285 (185,563) (180,278)
Dividend................................. -- -- -- (20,000) (20,000)
Net income............................... -- -- -- 360,330 360,330
----- ------ ------ --------- ---------
BALANCE, December 31, 1995................. 3,100 $4,000 $1,285 $ 154,767 $ 160,052
===== ====== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-86
<PAGE> 133
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 63,938 $(117,539) $ 360,330
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation/amortization.............................. 66,999 52,797 53,007
Gain on sale........................................... -- (40,000) --
Deferred tax benefit................................... (3,307) -- --
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable, net.......................... 74,750 (49,785) (135,193)
Prepaid and other assets.......................... (77,165) 39,161 5,364
Increase (decrease) in --
Accounts payable and accrued liabilities.......... (49,645) 107,135 39,046
--------- --------- ---------
Net cash provided by (used in) operating
activities................................. 75,570 (8,231) 322,554
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Additions) dispositions of property and equipment........ (15,696) (34,967) (88,950)
--------- --------- ---------
Net cash (used in) investing activities...... (15,696) (34,967) (88,950)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit.......................... 25,000 -- --
Principal payments on stockholder notes payable........... (179,195) (116,970) (13,451)
Proceeds from stockholder notes payable................... -- 310,000 42,000
Principal payments on short-term obligations.............. (204,117) (210,990) (260,380)
Principal payments on long-term obligations............... (146,687) (17,606) (24,036)
Proceeds from short-term borrowings....................... 253,352 11,162 20,015
Principal collected on note receivable.................... 14,157 78,092 56,956
Issuance of note receivable............................... (14,410) -- --
Dividends paid............................................ -- -- (20,000)
--------- --------- ---------
Net cash provided by (used in) financing
activities................................. (251,900) 53,688 (198,896)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (192,026) 10,490 34,708
CASH AND CASH EQUIVALENTS, at beginning of year............. 205,651 13,625 24,115
--------- --------- ---------
CASH AND CASH EQUIVALENTS, at end of year................... $ 13,625 $ 24,115 $ 58,823
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for --
Interest............................................. $ 92,397 $ 105,757 $ 128,192
Taxes................................................ 4,300 1,600 1,600
NONCASH TRANSACTIONS:
Note receivable received in connection with sale of
building............................................... $ 550,000 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-87
<PAGE> 134
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined financial statements include the accounts of
C.&T. Management Services, Inc. (dba DPAS) and Qualidata, Inc. (dba The Mail
House -- the "Related Company") (collectively the "Company"). The Company's
principal business is providing data processing, information management, and
bulk mailing services for its customers who are located primarily on the West
Coast.
The Company and its stockholders entered into a definitive agreement with
F.Y.I. Incorporated ("FYI") pursuant to which the Company will merge with FYI
(the "Merger"). All outstanding shares of the Company's common stock will be
exchanged for cash and shares of FYI's common stock concurrent with the
consummation of the initial public offering (the "Offering") of the common stock
of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The companies discussed in Note 1 are all under common control of two
stockholders. All significant intercompany transactions have been eliminated in
combination.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Intangible and Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 121: Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of (SFAS 121) which establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill. Adoption is required in financial
statements for fiscal years beginning after December 15, 1995. The Company does
not expect the adoption of SFAS 121 to have any effect on the combined financial
statements. The Company will adopt SFAS 121 in 1996.
Revenue Recognition
Revenue is recognized when services are rendered.
Income Taxes
The companies are S corporations for income tax purposes and, accordingly,
any federal income tax liabilities are the responsibility of the stockholders.
The Company's S corporation status will terminate with the effective date of the
Merger discussed in Note 1.
Reclassifications
Certain prior year amounts have been reclassified to make their
presentation consistent with the current year.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by Statement of Financial Accounting Standards (SFAS)
No. 105, consist primarily of trade accounts receivable. The Company's customers
are concentrated in the Western United States and the primary
F-88
<PAGE> 135
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
customers are state and public institutions. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends, and other information.
3. NOTES RECEIVABLE:
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Sunrise Mushroom -- interest rate at 12% with monthly principal
and interest payments of $9,125, balloon payment due at
maturity on January 16, 1996. The note is secured by a
commercial building sold to Sunrise Mushroom by the Company
in 1993...................................................... $480,000 $424,649
Other notes receivable, noninterest bearing.................... 1,605 --
-------- --------
Total notes receivable............................... 481,605 424,649
Less -- Current portion........................................ 52,386 424,649
-------- --------
$429,219 $ --
======== ========
</TABLE>
The Company sold a commercial building to Sunrise Mushroom on February 1,
1993, for $625,000, including $75,000 of cash and a note receivable of $550,000.
The gain of $40,000 was deferred in 1993 and subsequently recognized in 1994
upon fulfillment of the requirements for gain recognition under SFAS No. 66,
"Accounting for Sales of Real Estate."
The Sunrise Mushroom note receivable was refinanced in January 1995 and is
due in full on January 16, 1996 (see Note 15).
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------------
(YEARS) 1994 1995
------------- ---------- -----------
<S> <C> <C> <C>
Autos and trucks.............................. 5 $ 198,794 $ 198,794
Furniture and equipment....................... 5-10 1,754,905 1,842,360
---------- -----------
1,953,699 2,041,154
Less -- Accumulated depreciation.............. 1,731,926 1,783,438
---------- -----------
$ 221,773 $ 257,716
========== ===========
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Accounts payable............................................... $282,972 $384,967
Sales tax payable.............................................. 17,027 15,991
Other accrued liabilities...................................... 114,766 59,498
Accrued compensation, benefits, and taxes...................... 15,034 8,389
-------- --------
$429,799 $468,845
======== ========
</TABLE>
F-89
<PAGE> 136
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHORT-TERM OBLIGATION:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Note payable -- bank; interest at the bank's index rate prime
plus 1.0%; monthly payments of $10,000, 9.5% and 10.75% at
December 31, 1994 and 1995, maturing January 1, 1998......... $300,000 $252,724
Trust deed payable; interest at the Bank's index rate prime
plus 1.5% (floor of 9.0%); monthly payments of $6,085;
maturity January 15, 1998; at December 31, 1994 and 1995, the
interest rate was 11% and 11.25% secured by first trust deed
on commercial property....................................... 197,189 144,085
Note payable -- bank; monthly principal of $8,333 plus interest
at prime plus 2% and a maturity date of December 1996;
interest rate at December 31, 1994 and 1995, was 10.5% and
10.75%; secured by non-real estate assets of the Company..... 200,000 100,000
Note payable -- bank; monthly principal of $5,000 plus interest
at prime plus 2% and a maturity date of January 1996; secured
by non-real estate assets of the Company..................... 60,000 --
-------- --------
Total................................................ $757,189 $496,809
======== ========
</TABLE>
7. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Note payable -- EMC Corp.; interest rate at 14.658% with monthly
payments of $1,004 and a maturity date of June, 1996........... $16,129 $ 5,772
Note payable -- bank; interest rate at 11.25% with monthly
payments of $227 and a maturity date of February 1996; secured
by 1990 Ford truck............................................. 2,964 447
Vendor notes payable............................................. 11,162 20,015
------- -------
Total.................................................. 30,255 26,234
Less -- Current maturities....................................... 24,034 26,234
------- -------
$ 6,221 $ --
======= =======
</TABLE>
As of December 31, 1994 and 1995, the Company has complied with all loan
covenants.
8. OPERATING LEASES:
The Company leases its office buildings, office equipment, and computer
software under noncancelable lease agreements which expire at various dates.
Lease payments for the years ended December 31, 1993, 1994,
F-90
<PAGE> 137
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and 1995, totaled approximately, $460,000, $455,000, and $293,000. Future
minimum lease payments under operating leases as of December 31, 1995, for each
of the next five years and in the aggregate are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 262,465
1997............................................................. 266,917
1998............................................................. 261,969
1999............................................................. 245,081
2000............................................................. 226,147
Thereafter....................................................... 709,259
----------
Total.................................................. $1,971,838
==========
</TABLE>
9. EMPLOYEE BENEFIT PLAN:
The Company sponsors a profit sharing plan. Employees become eligible after
one year of service to the Company. The employees are not allowed to make
contributions to the plan; Company contributions are determined by the Board of
Directors. The profit sharing plan expense was $19,392, $12,422, and $19,866 for
1993, 1994 and 1995, respectively.
The Company offers no postretirement or postemployment benefits.
10. INCOME TAXES:
The Company has elected S corporation status under the Internal Revenue
Code. In lieu of federal income taxes, the shareholder is taxed on the Company's
taxable income. Therefore, no provision or liability for federal income tax has
been included in the financial statements for the years ended December 31, 1993,
1994, and 1995. Due to the losses recorded in 1992 and 1994, only the California
minimum corporate tax of $800 has been due. A deferred state tax liability
exists primarily due to the cash basis method of reporting for income tax
purposes. The deferred tax liability of $15,857 at December 31, 1994 and 1995,
represents the 2.5% State of California corporate tax on the net temporary
differences.
State income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------ ------
<S> <C> <C> <C>
Current......................................... $ 4,907 $1,600 $1,600
Deferred........................................ (3,307) -- --
------- ------ ------
$ 1,600 $1,600 $1,600
======= ====== ======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involve workers' compensation and
unemployment claims incurred in connection with its operations. Management
believes that none of these actions will have a material adverse effect on the
financial position or results of operations of the Company.
F-91
<PAGE> 138
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMON STOCK:
Common stock at December 31, 1994 and 1995, consists of the following:
<TABLE>
<CAPTION>
SHARES
--------------------------
PAR ISSUED AND TOTAL
VALUE AUTHORIZED OUTSTANDING VALUE
------ ---------- ----------- ------
<S> <C> <C> <C> <C>
C&T Management Services, Inc.............. $1.00 25,000 3,000 $3,000
Qualidata, Inc. .......................... No par 100,000 100 1,000
------- ----- ------
125,000 3,100 $4,000
======= ===== ======
</TABLE>
13. RELATED-PARTY TRANSACTIONS:
A stockholder has advanced funds to the Company of $503,502 and $545,502 as
of December 31, 1994 and 1995, respectively. The amounts advanced bear interest
at a rate of 9% and are payable on demand.
The Company has a 12% interest-bearing stockholder note payable totaling
$51,432 and $37,981 at December 31, 1994 and 1995, that has monthly principal
and interest payments of $1,800 and a maturity date of October 1997.
The maturity for this obligation is as follows:
<TABLE>
<S> <C>
1996............................................................... $18,012
1997............................................................... 19,969
-------
$37,981
=======
</TABLE>
14. PRO FORMA NET INCOME (UNAUDITED):
Selling, general, and administrative expenses for the periods presented
reflect compensation and related benefits that the owner and certain key
employees received during the periods. The owner and key employees have agreed
to certain reductions in salaries and benefits in connection with the Merger.
In connection with the Merger, each stockholder has entered into a
three-year employment agreement with FYI which provides for set base salary,
participation in any future FYI incentive bonus plans, four week paid vacation,
a car allowance, health benefits and a two year covenant-not-to-compete
following termination of such person's employment. The stockholders' employment
agreements provide for an aggregate base salary of $220,000.
The unaudited pro forma data presents compensation at the level the
officers and owner of the Company have agreed to receive subsequent to the
Offering. In addition, the following pro forma data presents the provision for
income taxes as if the Company had been subject to federal and state income
taxes and adjusted for the impact of the compensation differential discussed
above.
15. SUBSEQUENT EVENTS:
In October 1995, the Company and its stockholders entered into a definitive
agreement to be acquired by FYI. This transaction was subsequently closed on
January 26, 1996.
In conjunction with the Merger, the Company will dividend to the
stockholders, a note receivable totaling $424,649 and related mortgage note
payable of $144,085. In addition, the Company will make a cash distribution of
$250,000 prior to the closing of the merger of which $20,000 was distributed
prior to year-end. Had these transactions been recorded at December 31, 1995,
the effect on the accompanying balance sheet would be a decrease in total assets
of $654,649, total liabilities of $144,085, and stockholders' equity of
$510,564.
In addition certain cash proceeds of the Offering will be used to repay the
stockholder notes payable of $583,483.
F-92
<PAGE> 139
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Deliverex, Incorporated:
We have audited the accompanying combined balance sheets of Deliverex,
Incorporated (a California corporation) and Subsidiary and Related Company as of
September 30, 1994, and December 31, 1995, and the related combined statements
of operations, stockholders' equity, and cash flows for each of the years ended
September 30, 1993 and 1994, and December 31, 1995. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Deliverex,
Incorporated and Subsidiary and Related Company as of September 30, 1994 and
December 31, 1995, and the combined results of their operations and their
combined cash flows for each of the years ended September 30, 1993 and 1994, and
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 15, 1996
F-93
<PAGE> 140
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $120,948 $ 210,444
Accounts receivable.............................................. 129,397 288,197
Accounts receivable -- stockholder............................... 314,731 314,731
Deferred tax assets current...................................... 112,030 --
Prepaid and other current assets................................. 3,180 9,410
-------- ----------
Total current assets..................................... 680,286 822,782
PROPERTY AND EQUIPMENT, net........................................ 172,675 172,926
ADVANCES TO OFFICER................................................ 73,403 73,403
OTHER NONCURRENT ASSETS, net....................................... 48,948 48,948
-------- ----------
Total assets............................................. $975,312 $1,118,059
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations........................................... $ 47,270 $ 39,258
Deferred tax liabilities......................................... -- 10,964
Current maturities of long-term obligations...................... 27,564 22,098
Accounts payable and accrued liabilities......................... 250,614 196,725
-------- ----------
Total current liabilities................................ 325,448 269,045
LONG-TERM OBLIGATIONS, net of current maturities................... 430,318 403,263
OTHER LONG-TERM LIABILITIES........................................ 49,728 --
-------- ----------
Total liabilities........................................ 805,494 672,308
-------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par, authorized 510,000 shares, 107,000 shares
issued........................................................ 9,900 9,900
Retained earnings................................................ 160,918 435,851
-------- ----------
170,818 445,751
Less -- Treasury stock, 10,000 shares in 1994, no par; $1,000
assigned value................................................ 1,000 --
-------- ----------
Total stockholders' equity............................... 169,818 445,751
-------- ----------
Total liabilities and stockholders' equity............... $975,312 $1,118,059
======== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-94
<PAGE> 141
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
SEPTEMBER 30,
------------------------- DECEMBER 31,
1993 1994 1995
---------- ---------- ------------
<S> <C> <C> <C>
REVENUES:
Service revenue..................................... $2,321,024 $2,338,379 $2,555,394
Other revenue....................................... 251,026 267,601 311,653
---------- ---------- ----------
2,572,050 2,605,980 2,867,047
COST OF SERVICES...................................... 1,647,265 1,684,738 1,643,271
DEPRECIATION.......................................... 75,656 58,320 52,393
---------- ---------- ----------
Gross profit................................ 849,129 862,922 1,171,383
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES......... 672,894 798,407 822,942
---------- ---------- ----------
Operating income............................ 176,235 64,515 348,441
OTHER (INCOME) EXPENSE:
Interest expense.................................... 24,934 21,937 23,435
Interest income..................................... (140) (135) (3,614)
Other (income) expense, net......................... (592) (9,112) (1,665)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES............................ 152,033 51,825 330,285
PROVISION (BENEFIT) FOR INCOME TAXES.................. 51,846 (10,519) 99,529
---------- ---------- ----------
Net income.................................. $ 100,187 $ 62,344 $ 230,756
========== ========== ==========
PRO FORMA DATA (Unaudited -- see Note 13):
HISTORICAL NET INCOME................................. $ 100,187 $ 62,344 $ 230,756
PRO FORMA COMPENSATION DIFFERENTIAL................... 80,679 189,200 211,864
PRO FORMA PROVISION FOR INCOME TAXES.................. 41,268 75,868 103,150
---------- ---------- ----------
PRO FORMA NET INCOME.................................. $ 139,598 $ 175,676 $ 339,470
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-95
<PAGE> 142
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHARES RETAINED TREASURY STOCK TREASURY TOTAL
---------------- EARNINGS ----------------- STOCK STOCKHOLDERS'
SHARES AMOUNT (DEFICIT) SHARES AMOUNT SUBSCRIBED EQUITY
------- ------ -------- ------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1992......... 107,000 $9,900 $ (1,613) 10,000 $(1,000) $ -- $ 7,287
Net income........................ -- -- 100,187 -- -- -- 100,187
------- ------ -------- ------- ------- -------- --------
BALANCE, September 30, 1993......... 107,000 9,900 98,574 10,000 (1,000) -- 107,474
Net income........................ -- -- 62,344 -- -- -- 62,344
------- ------ -------- ------- ------- -------- --------
BALANCE, September 30, 1994......... 107,000 9,900 160,918 10,000 (1,000) -- 169,818
Treasury stock subscribed......... -- -- -- -- -- 1,000 1,000
Net income -- October 1, 1994, to
December 31, 1994............... -- -- 44,177 -- -- -- 44,177
------- ------ -------- ------- ------- -------- --------
BALANCE, January 1, 1995............ 107,000 9,900 205,095 10,000 (1,000) 1,000 214,995
Reissuance of treasury stock...... -- -- -- (10,000) 1,000 (1,000) --
Net income........................ -- -- 230,756 -- -- -- 230,756
------- ------ -------- ------- ------- -------- --------
BALANCE, December 31, 1995.......... 107,000 $9,900 $435,851 -- $ -- $ -- $445,751
======= ====== ======== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-96
<PAGE> 143
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------
1993 1994 1995
--------- -------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 100,187 $ 62,344 $ 230,756
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation....................................... 75,656 58,320 52,393
Deferred tax expense (benefit)..................... 26,965 (8,396) 107,970
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable, net...................... (33,803) 8,711 (143,461)
Prepaid expenses and other assets............. 16,001 1,138 (6,230)
Increase (decrease) in --
Accounts payable and accrued liabilities...... (157,655) (8,998) (48,277)
Other liabilities............................. 77,641 (46,568) (19,402)
--------- -------- ----------
Net cash provided by operating
activities............................. 104,992 66,551 173,749
--------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment................... (65,477) (60,150) (63,350)
Decrease in notes receivable.......................... (40,193) (4,575) --
--------- -------- ----------
Net cash used in investing activities.... (105,670) (64,725) (63,350)
--------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on short-term obligations.............. -- 47,270 (6,674)
Proceeds from long-term obligations................... 30,178 6,267 --
Principal payments on long-term obligations........... (47,121) (35,274) (21,964)
--------- -------- ----------
Net cash provided by (used in) financing
activities............................. (16,943) 18,263 (28,638)
--------- -------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (17,621) 20,089 81,761
ADJUSTMENT TO CONFORM FISCAL YEAR-END TO A CALENDAR
YEAR-END.............................................. -- -- 7,735
CASH AND CASH EQUIVALENTS,
at beginning of period................................ 118,480 100,859 120,948
--------- -------- ----------
CASH AND CASH EQUIVALENTS,
at end of period...................................... $ 100,859 $120,948 $ 210,444
========= ======== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for --
Interest.............................................. $ 24,934 $ 21,824 $ 23,548
Income taxes.......................................... 12,813 9,496 24,934
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-97
<PAGE> 144
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined financial statements include the accounts of
Deliverex, Incorporated (DLX), its wholly owned subsidiary Peninsula Records
Management, Inc. (PRM) and ASK Record Management, Inc. (ASK -- the "Related
Company") (collectively the "Company"). The Company specializes in storing and
managing active and inactive files for hospitals throughout the United States
but has customers primarily located on the West Coast. The Company also has
franchises that are located in San Francisco, Sacramento, Seattle, and Denver.
In October 1995, the Company's stockholders entered into a definitive
agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will be
acquired by FYI (the "Merger"). All outstanding shares of the Company's common
stock will be exchanged for cash and shares of FYI's common stock concurrent
with the consummation of the initial public offering (the "Offering") of the
common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The companies referred to in Note 1 are all under common control. All
significant intercompany transactions have been eliminated in combination.
Fiscal Year-Ends
ASK has a December 31 year-end. The accompanying combined financial
statements reflect the accounts and results of ASK combined with the September
30 year-end accounts and results of DLX and PRM. DLX and PRM's net income for
the period from October 1 through December 31, 1994, of $44,177 is reflected as
an adjustment to retained earnings on the combined statement of stockholders'
equity.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Receivable from Shareholder
Receivable from shareholder represents advances made to the shareholder
which are payable on demand and will be repaid as a result of the transaction
discussed in Note 14.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are depreciated over the lesser of the asset's useful
life or the lease term.
Franchise and License Agreements
DLX has four franchise agreements and three licensee agreements. Initial
franchise fees are recognized as DLX's initial services and material obligations
are performed. Franchise and license agreements are for periods of up to twenty
years and contain options to renew.
Revenue Recognition
Revenue is recognized by PRM and ASK when the services are rendered to the
Company's customers. DLX's revenue is derived from monthly royalties under its
franchise and licensee agreements and is
F-98
<PAGE> 145
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
recognized in the month earned. Royalties earned are shown in other revenue on
the combined statements of operations.
Income Taxes
ASK is an S corporation for income tax purposes and, accordingly, any
income tax liabilities are the responsibility of the stockholders. For purposes
of these combined financial statements, no federal and state income taxes have
been provided for ASK. ASK's corporation status will terminate with the
effective date of the Merger discussed in Note 1.
Deferred income taxes are provided for temporary differences in the
recognition of revenues and expenses for income tax and financial reporting
purposes for DLX and PRM. Temporary differences result primarily from various
accruals and reserves being deductible for tax purposes in different periods.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by Statement of Financial Accounting Standards (SFAS)
No. 105, consist primarily of trade accounts receivable. The Company's customers
are concentrated in the Western-Pacific states and the primary customers are
healthcare institutions. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends, and other information.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES SEPTEMBER 30, DECEMBER 31,
(YEARS) 1994 1995
------------ ------------- ------------
<S> <C> <C> <C>
Vehicles...................................... 5 $ 78,317 $ 81,189
Leasehold improvements........................ 5-7 17,462 20,806
Machinery and equipment....................... 7 310,169 335,032
Furniture and fixtures........................ 7 96,015 125,363
Computer equipment............................ 5 13,691 13,691
Computer system development................... 5 13,784 19,941
--------- ---------
529,438 596,022
Less -- Accumulated depreciation and
amortization................................ (356,763) (423,096)
--------- ---------
$ 172,675 $ 172,926
========= =========
</TABLE>
Leasehold improvements are depreciated over the lesser of the asset's
useful life or the lease term.
F-99
<PAGE> 146
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1995
------------- ------------
<S> <C> <C>
Accounts payable........................................... $ 53,932 $100,599
Sales tax payable.......................................... 1,866 153
Income taxes payable....................................... 15,542 --
Other accrued liabilities.................................. 179,274 95,973
--------- --------
$ 250,614 $196,725
========= ========
</TABLE>
5. SHORT-TERM OBLIGATIONS:
The Company has a $50,000 bank line of credit at prime plus a premium, as
defined, on the outstanding principal balance. The line of credit has no defined
expiration date. The Company had draws outstanding of $47,270 and $39,258 at
September 30, 1994, and December 31, 1995, respectively. At September 30, 1994,
and December 31, 1995, the total interest rate was 14% and 12.25%.
6. LONG-TERM OBLIGATIONS:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1995
------------- ------------
<S> <C> <C>
Notes payable -- Small Business Administration, due
November 17, 2014, interest at 4%; monthly payments of
$2,702 secured by deed of trust on real estate and
non-real estate assets of the Company.................... $ 429,699 $409,766
Notes payable -- bank, due April 15, 1998, interest at
prime plus 4% (12.5% and 13.0% at September 30, 1994 and
December 31, 1995, respectively); monthly principal
payments of $155 plus accrued interest; secured by 1993
Toyota truck............................................. 6,676 4,816
Notes payable -- bank, due September 15, 1998, interest at
10.15%; monthly payments of $191; secured by 1991 Ford
van...................................................... 7,333 5,244
Notes payable -- bank, due April 15, 1998, interest at
prime plus 3% (11.50% and 12% at September 30, 1994 and
December 31, 1995, respectively); monthly principal
payments of $197, plus accrued interest; secured by 1993
Toyota trucks............................................ 7,908 5,535
Other...................................................... 6,266 --
--------- --------
457,882 425,361
Less -- Current maturities................................. 27,564 22,098
--------- --------
$ 430,318 $403,263
========= ========
</TABLE>
The Small Business Administration note payable is secured by machinery and
equipment, furniture and fixtures, and leasehold improvements of PRM as well as
by personal guarantees of DLX's stockholder. DLX's stockholder has also
guaranteed certain of the bank notes payable.
As of September 30, 1994, and through December 31, 1995, the Company has
complied with all loan covenants.
F-100
<PAGE> 147
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996............................................. $ 22,098
1997............................................. 22,943
1998............................................. 21,263
1999............................................. 18,127
2000............................................. 14,991
Thereafter....................................... 325,939
--------
$425,361
========
</TABLE>
7. OPERATING LEASES:
The Company leases its office buildings and certain of its automobiles.
Lease payments for the years ended September 30, 1993 and 1994, and December 31,
1995, totaled approximately $547,300, $545,000, and $446,000. Minimum future
lease payments under operating leases as of December 31, 1995, for each of the
next five years and in the aggregate are as follows:
<TABLE>
<S> <C>
1996............................................. $ 473,607
1997............................................. 442,924
1998............................................. 454,330
1999............................................. 452,785
2000............................................. --
----------
Total.................................. $1,823,646
==========
</TABLE>
8. EMPLOYEE BENEFIT COSTS:
The Company pays health and dental insurance premiums for the majority of
its employees. Premiums paid in the years ended September 30, 1993, 1994, and
December 31, 1995, were approximately $72,500, $79,600, and $84,000,
respectively.
The Company offers no postretirement or postemployment benefits.
9. INCOME TAXES:
The following income tax information for DLX and PRM is presented in
accordance with Statement of Financial Accounting Standards No. 109. This
statement provides for a liability approach to accounting for income taxes.
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------
1993 1994 1995
------- -------- ------------
<S> <C> <C> <C>
Federal --
Current......................................... $17,756 $ (2,878) $ (8,085)
Deferred........................................ 21,014 (6,488) 82,774
State --
Current......................................... 7,124 755 (356)
Deferred........................................ 5,952 (1,908) 25,196
------- --------- --------
$51,846 $(10,519) $ 99,529
======= ========= ========
</TABLE>
F-101
<PAGE> 148
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------
1993 1994 1995
------- -------- ------------
<S> <C> <C> <C>
Tax at statutory rate............................. $51,691 $ 17,620 $113,316
Add (deduct) --
State income taxes.............................. 14,370 4,948 16,666
Nondeductible expenses.......................... 255 551 --
Effect of graduated tax rates................... (5,484) (9,068) (5,027)
Effect of S corporation nontaxable income....... (8,986) (24,570) (25,426)
------- -------- --------
$51,846 $(10,519) $ 99,529
======= ======== ========
</TABLE>
The components of deferred income tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1995
------------- ------------
<S> <C> <C>
Deferred income tax liabilities --
Accrual to cash differences.............................. $ 49,389 $ 81,637
-------- --------
Total deferred income tax liabilities............ 49,389 81,637
Deferred income tax assets
Accrual to cash differences.............................. 102,841 54,352
Accrued expenses......................................... 58,578 16,321
-------- --------
Total deferred income tax assets................. 161,419 70,673
-------- --------
Total net deferred income tax assets
(liabilities).................................. $112,030 $(10,964)
======== ========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for workers'
compensation and unemployment incurred in connection with its operations.
Management believes that none of these actions will have a material adverse
effect on the financial position or results of operations of the Company.
11. CAPITAL STOCK:
Common stock at December 31, 1995, consists of the following:
<TABLE>
<CAPTION>
SHARES
PAR ---------------------- ASSIGNED
VALUE AUTHORIZED ISSUED VALUE
----- ---------- ------- --------
<S> <C> <C> <C> <C>
Deliverex, Incorporated...................... None 10,000 7,000 $ 900
ASK Record Management, Inc................... None 500,000 100,000 9,000
------- ------- ------
510,000 107,000 $9,900
======= ======= ======
</TABLE>
ASK's common stock is 65% owned by the 100% stockholder of DLX. PRM has
10,000 shares of no par value common stock authorized, issued, and outstanding.
PRM's common stock is owned by DLX.
In December 1994, ASK approved the reissuance of 10,000 shares of treasury
stock to its minority stockholder. Compensation expense was recorded in 1994,
equivalent to the repurchase cost in 1992. The shares were reissued on January
1, 1995.
F-102
<PAGE> 149
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. SIGNIFICANT CUSTOMER:
In 1994 and 1995, the Company had one customer that accounted for 15% and
16%, respectively, of combined revenues.
13. PRO FORMA NET INCOME (UNAUDITED):
Selling, general and administrative expenses for the periods presented
reflect compensation and related benefits that owners and certain key employees
received during the periods. These owners and key employees have agreed to
certain reductions in salaries and benefits in connection with the Merger.
In connection with this merger, each stockholder has entered into a
three-year employment agreement with FYI which provides for set base salary,
participation in any future FYI incentive bonus plans, four-week paid vacations,
a car allowance, health benefits, and a two-year covenant-not-to-compete
following termination of such person's employment. The stockholders' employment
agreements provide for an aggregate base salary of $247,000.
The unaudited pro forma data presents compensation at the level the
officers and owners of the Company have agreed to receive subsequent to the
Offering. In addition, the following pro forma data presents the provision for
income taxes as if the S corporation had been subject to federal and state
income taxes and adjusted for the impact of the compensation differential
discussed above.
14. SUBSEQUENT EVENTS
On January 26, 1996 the Company was acquired by FYI. In conjunction with
the Merger, the Company can make an additional distribution corresponding to the
increase in net stockholders' equity from June 30, 1995 to November 30, 1995,
not to exceed $200,000. The amount available for the additional distribution at
December 31, 1995, is $80,000. Had this transaction been recorded at December
31, 1995, the effect on the accompanying balance sheet would be a decrease in
total assets and stockholders' equity of $80,000, respectively.
F-103
<PAGE> 150
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Permanent Records, Inc.:
We have audited the accompanying balance sheets of Permanent Records, Inc.
(a Texas corporation) as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Permanent Records, Inc. as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 15, 1996
F-104
<PAGE> 151
PERMANENT RECORDS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 16,879 $ 56,010
Accounts receivable, net of allowance for uncollectible accounts of
$0 and $26,308.................................................... 163,663 266,431
Inventories.......................................................... 4,313 25,000
Prepaids and other current assets.................................... 20,841 58,395
-------- --------
Total current assets......................................... 205,696 405,836
PROPERTY AND EQUIPMENT, net............................................ 61,411 105,738
NOTE RECEIVABLE........................................................ 6,000 34,500
-------- --------
Total assets................................................. $273,107 $546,074
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term obligations............................................... $ 3,155 $115,000
Accounts payable and accrued liabilities............................. 32,303 66,383
Current portion of deferred income taxes............................. 54,761 93,041
-------- --------
Total current liabilities.................................... 90,219 274,424
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $1, 100,000 shares authorized, 91,660 shares
outstanding for all periods....................................... 91,660 91,660
Retained earnings.................................................... 91,228 179,990
-------- --------
Total stockholders' equity................................... 182,888 271,650
-------- --------
Total liabilities and stockholders' equity................... $273,107 $546,074
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE> 152
PERMANENT RECORDS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
SERVICE REVENUE........................................ $1,192,633 $1,148,926 $1,562,883
COST OF SERVICE........................................ 671,845 685,235 944,747
DEPRECIATION........................................... 30,902 12,000 12,739
---------- ---------- ----------
Gross profit................................. 489,886 451,691 605,397
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 359,430 393,533 466,939
---------- ---------- ----------
Operating income............................. 130,456 58,158 138,458
OTHER (INCOME) EXPENSE:
Interest expense..................................... -- 2,338 1,350
Interest income...................................... (2,052) (1,174) (290)
Other income, net.................................... (1,599) (8,929) (11,730)
---------- ---------- ----------
Income before income taxes................... 134,107 65,923 149,128
PROVISION FOR INCOME TAXES............................. 40,797 13,859 43,358
---------- ---------- ----------
NET INCOME............................................. $ 93,310 $ 52,064 $ 105,770
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE> 153
PERMANENT RECORDS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992....................... 91,660 $91,660 $ 31,401 $123,061
Dividends declared............................. -- -- (46,201) (46,201)
Net income..................................... -- -- 93,310 93,310
------ ------- -------- --------
BALANCE, December 31, 1993....................... 91,660 91,660 78,510 170,170
Dividends declared............................. -- -- (39,346) (39,346)
Net income..................................... -- -- 52,064 52,064
------ ------- -------- --------
BALANCE, December 31, 1994....................... 91,660 91,660 91,228 182,888
Dividends declared............................. -- -- (17,008) (17,008)
Net income..................................... -- -- 105,770 105,770
------ ------- -------- --------
BALANCE, December 31, 1995....................... 91,660 $91,660 $179,990 $271,650
====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-107
<PAGE> 154
PERMANENT RECORDS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 93,310 $ 52,064 $ 105,770
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation...................................... 30,902 12,000 12,739
Deferred tax expense.............................. 37,306 2,431 38,280
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable, net..................... (104,709) 28,727 (102,768)
Prepaid and other assets..................... -- (20,841) (37,554)
Inventory.................................... -- -- (20,687)
Note receivable.............................. (5,000) (1,000) (28,500)
Increase (decrease) in --
Accounts payable and accrued liabilities..... (1,016) 3,378 34,080
--------- -------- ---------
Net cash provided by operating
activities.............................. 50,793 76,759 1,360
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.................... (16,795) (41,555) (57,066)
--------- -------- ---------
Net cash used in investing activities..... (16,795) (41,555) (57,066)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on line of credit, net........... (5,248) (6,767) 111,845
Payment of dividends................................... (46,201) (39,346) (17,008)
--------- -------- ---------
Net cash (used in) provided by financing
activities.............................. (51,449) (46,113) 94,837
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (17,451) (10,909) 39,131
CASH AND CASH EQUIVALENTS, at beginning of period........ 45,239 27,788 16,879
--------- -------- ---------
CASH AND CASH EQUIVALENTS, at end of period.............. $ 27,788 $ 16,879 $ 56,010
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for --
Interest............................................ $ -- $ 2,338 $ 1,350
Taxes............................................... $ 4,125 $ 3,491 $ 12,017
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE> 155
PERMANENT RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying financial statements include the accounts of Permanent
Records, Inc. (the "Company"). The Company provides offsite active and inactive
storage and retrieval services, microfilming, and medical records release
services to its customers from its office in Fort Worth, Texas.
The Company and its stockholders entered into a definitive agreement with
F.Y.I. Incorporated ("FYI") in October 1995, pursuant to which the Company will
merge with FYI (the "Merger"). All outstanding shares of the Company's common
stock will be exchanged for cash and shares of FYI's common stock concurrent
with the consummation of the initial public offering of the common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Revenue Recognition
Revenue is recognized when services are rendered.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk, as defined by Statement of Financial Accounting
Standards (SFAS) No. 105, consist primarily of trade receivables.
Trade receivables are primarily short-term receivables from healthcare
institutions in Northern Central Texas. The Company's management reviews
receivables for collectibility.
Income Taxes
The Company is a C corporation. Deferred income taxes are provided for
timing differences in the recognition of revenues and expenses for tax and
financial reporting purposes. Temporary differences result primarily from
accelerated depreciation for tax purposes, deferred contract revenues being
taxed when billed and various accruals and reserves being deductible for tax
purposes in different periods.
F-109
<PAGE> 156
PERMANENT RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -----------------------
(YEARS) 1994 1995
------------ --------- ---------
<S> <C> <C> <C>
Machinery and equipment......................... 5-7 $ 224,580 $ 282,717
Auto and trucks................................. 5-7 17,979 17,979
Construction-in-progress........................ 13,346 --
Computer software............................... 3-5 -- 12,275
--------- ---------
255,905 312,971
Less -- Accumulated depreciation................ 194,494 207,233
--------- ---------
$ 61,411 $ 105,738
========= =========
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Income taxes payable............................................. $ 7,303 $ 5,078
Other accrued liabilities........................................ 25,000 61,305
------- -------
Total accounts payable and accrued liabilities......... $32,303 $66,383
======= =======
</TABLE>
5. SHORT-TERM OBLIGATIONS:
The Company has a $175,000 line of credit with interest payable at 1% over
the bank's base rate (10.5% at December 31, 1995) on the outstanding principal
balance. The line of credit, which expires in January 1996, is secured by
non-real estate assets of the Company and a life insurance policy on a
stockholder. The Company had amounts outstanding of $3,155 and $115,000 at
December 31, 1994 and 1995.
6. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS:
Operating Leases
The Company leases office and warehouse facilities in Fort Worth, Texas.
The Company entered into an agreement to lease a building, beginning on July 1,
1995, from the Company's stockholders. Lease expense per year will be
approximately $90,000. The lease term is 15 years. The Company also leases
vehicles and equipment from unrelated parties. The total lease expense for the
years ended December 31, 1993, 1994 and 1995, totaled approximately $35,100,
$56,700, and $122,323, respectively. Minimum future lease payments under
operating leases as of December 31, 1995, for each of the next five years and
thereafter are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 109,278
1997............................................................. 105,120
1998............................................................. 90,637
1999............................................................. 90,000
2000............................................................. 90,000
Thereafter....................................................... 780,000
----------
Total.................................................. $1,265,035
==========
</TABLE>
F-110
<PAGE> 157
PERMANENT RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
The following income tax information is presented in accordance with SFAS
No. 109, which provides for a liability approach to accounting for income taxes.
Federal income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Federal --
Current............................................. $ 3,491 $11,428 $ 5,078
Deferred............................................ 37,306 2,431 38,280
------- ------- -------
$40,797 $13,859 $43,358
======= ======= =======
</TABLE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
------- -------- -------
<S> <C> <C> <C>
Tax at statutory rate................................ $45,596 $ 22,414 $50,703
Add (deduct) --
Effect of graduated tax rates...................... (4,422) (10,914) (9,044)
Other.............................................. (377) 2,359 1,699
------- -------- -------
$40,797 $ 13,859 $43,358
======= ======== =======
</TABLE>
The components of deferred income tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
------- --------
<S> <C> <C>
Deferred income tax liabilities --
Tax over book depreciation.......................... $ 862 $ 7,539
Accrual to cash differences, net.................... 62,732 107,388
------- --------
Total deferred income tax liabilities....... 63,594 114,927
Deferred income tax assets --
Accrued expenses.................................... 8,833 21,886
------- --------
Total deferred income tax assets............ 8,833 21,886
------- --------
Total deferred income tax liabilities....... $54,761 $ 93,041
======= ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for workers'
compensation and unemployment incurred in connection with its operations.
Management believes that none of these actions will have a material adverse
effect on the financial position or results of operations of the Company.
9. SUBSEQUENT EVENTS
On January 26, 1996, the Company was acquired by FYI.
F-111
<PAGE> 158
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cook and Staff, Inc.:
We have audited the accompanying combined balance sheets of Cook and Staff,
Inc. (a California corporation) and Related Company as of December 31, 1994 and
1995, and the related combined statements of operations, stockholder's equity,
and cash flows for the three years in the period ended December 31, 1995. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Cook and
Staff, Inc. and Related Company as of December 31, 1994 and 1995, and the
combined results of their operations and their combined cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
June 22, 1996
F-112
<PAGE> 159
COOK AND STAFF, INC. AND RELATED COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................. $1,153,664 $1,261,271 $1,943,773
Accounts receivable, less allowance for doubtful
accounts of $100,000, $150,000, and $150,000
respectively........................................ 1,587,782 1,856,161 1,850,460
---------- ---------- ----------
Total current assets........................... 2,741,446 3,117,432 3,794,233
PROPERTY AND EQUIPMENT, net.............................. 449,230 346,493 309,587
OTHER NONCURRENT ASSETS.................................. 40,786 41,586 41,586
---------- ---------- ----------
Total assets................................... $3,231,462 $3,505,511 $4,145,406
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............... $ 220,140 $ 185,044 $ 199,896
Sales tax payable...................................... 48,445 42,427 57,406
Accrued compensation and benefits...................... 168,970 199,176 116,804
---------- ---------- ----------
Total current liabilities...................... 437,555 426,647 374,106
---------- ---------- ----------
DEFERRED INCOME TAXES.................................... 27,902 32,134 34,837
---------- ---------- ----------
Total liabilities.............................. 465,457 458,781 408,943
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock........................................... 13,851 13,851 13,851
Additional paid in capital............................. 405 405 405
Retained earnings...................................... 2,751,749 3,032,474 3,722,207
---------- ---------- ----------
Total stockholder's equity..................... 2,766,005 3,046,730 3,736,463
---------- ---------- ----------
Total liabilities and stockholder's equity..... $3,231,462 $3,505,511 $4,145,406
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-113
<PAGE> 160
COOK AND STAFF, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
--------------------------------------- MARCH 31,
1993 1994 1995 -----------------------
----------- ----------- ----------- 1995 1996
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SERVICE REVENUE................. $11,448,402 $12,014,034 $11,951,513 $2,845,343 $3,173,373
COST OF SERVICES................ 7,210,020 7,549,289 7,427,090 1,969,407 2,004,298
DEPRECIATION AND AMORTIZATION... 278,731 254,750 226,912 56,703 56,703
----------- ----------- ----------- ---------- ----------
Gross profit.......... 3,959,651 4,209,995 4,297,511 819,233 1,112,372
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES....... 3,184,328 1,555,595 1,709,945 381,875 418,919
----------- ----------- ----------- ---------- ----------
Operating income...... 775,323 2,654,400 2,587,566 437,358 693,453
OTHER (INCOME) EXPENSE:
Interest income............... (29,499) (44,240) (49,445) (1,788) (3,372)
Other (income) expense, net... (340,188) (13,055) 690 (309) (1,736)
----------- ----------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES...... 1,145,010 2,711,695 2,636,321 439,455 698,561
PROVISION FOR INCOME TAXES...... 28,626 54,234 39,596 6,592 8,828
----------- ----------- ----------- ---------- ----------
Net income............ $ 1,116,384 $ 2,657,461 $ 2,596,725 $ 432,863 $ 689,733
=========== =========== =========== ========== ==========
PRO FORMA DATA
(Unaudited -- see Note 8)
HISTORICAL NET INCOME........... $ 1,116,384 $ 2,657,461 $ 2,596,725 $ 432,863 $ 689,733
PRO FORMA COMPENSATION
DIFFERENTIAL.................. 1,572,002 -- -- -- --
PRO FORMA PROVISION FOR INCOME
TAXES......................... 1,058,179 1,030,444 1,014,932 169,190 267,065
----------- ----------- ----------- ---------- ----------
PRO FORMA NET INCOME............ $ 1,630,207 $ 1,627,017 $ 1,581,793 $ 263,673 $ 422,668
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-114
<PAGE> 161
COOK AND STAFF, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992............. 100 $10,000 $405 $ 2,159,329 $ 2,169,734
Dividends declared................... -- -- -- (681,425) (681,425)
Net income........................... -- -- -- 1,116,384 1,116,384
--- ------- ---- ----------- -----------
BALANCE, December 31, 1993............. 100 10,000 405 2,594,288 2,604,693
Contribution......................... 100 3,851 -- -- 3,851
Dividends declared................... -- -- -- (2,500,000) (2,500,000)
Net income........................... -- -- -- 2,657,461 2,657,461
--- ------- ---- ----------- -----------
BALANCE, December 31, 1994............. 200 13,851 405 2,751,749 2,766,005
Dividends declared................... -- -- -- (2,316,000) (2,316,000)
Net income........................... -- -- -- 2,596,725 2,596,725
--- ------- ---- ----------- -----------
BALANCE, December 31, 1995............. 200 13,851 405 3,032,474 3,046,730
Net income (unaudited)............... -- -- -- 689,733 689,733
--- ------- ---- ----------- -----------
BALANCE, March 31, 1996 (unaudited).... 200 $13,851 $405 $ 3,722,207 $ 3,736,463
=== ======= ==== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-115
<PAGE> 162
COOK AND STAFF, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH
---------------------------------------- 31,
1993 1994 1995 --------------------------
---------- ----------- ----------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $1,116,384 $ 2,657,461 $ 2,596,725 $ 432,863 $ 689,733
Adjustments to reconcile net income to net
cash provided by operating activities --
Depreciation and amortization expense... 278,731 254,750 226,912 56,703 56,703
Deferred income taxes................... 9,399 (6,923) 4,232 6,177 2,703
Loss on disposal of assets.............. 36,337 -- 8,847 -- 822
Changes in operating assets and
liabilities --
Increase) decrease in --
Accounts receivable, net........... (366,286) 298,333 (268,379) (131,857) 5,701
Increase (decrease) in --
Accounts payable and accrued
liabilities...................... (74,072) (37,696) (35,096) (57,906) 14,852
Sales tax payable.................. 49,575 (1,084) (6,018) (38,582) 14,979
Accrued compensation and
benefits......................... 1,231 (3,183) 30,206 65,811 (82,372)
---------- ----------- ----------- ---------- ----------
Net cash provided by operating
activities..................... 1,051,299 3,161,658 2,557,429 333,209 703,121
---------- ----------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment,
net..................................... (305,045) (166,222) (137,422) (75,781) (20,619)
Proceeds from sales of property........... 24,781 -- 4,400 -- --
Other..................................... (3,878) (610) (800) -- --
---------- ----------- ----------- ---------- ----------
Net cash used in investing
activities....................... (284,142) (166,832) (133,822) (75,781) (20,619)
---------- ----------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends............................ (681,425) (2,500,000) (2,316,000) -- --
---------- ----------- ----------- ---------- ----------
Net cash used in financing
activities....................... (681,425) (2,500,000) (2,316,000) -- --
---------- ----------- ----------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS... 85,732 494,826 107,607 257,428 682,502
CASH AND CASH EQUIVALENTS, at beginning of
period.................................... 573,106 658,838 1,153,664 1,153,664 1,261,271
---------- ----------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS, at end of
period.................................... $ 658,838 $ 1,153,664 $ 1,261,271 $ 1,411,092 $ 1,943,773
========== =========== =========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for --
Income taxes............................ $ 800 $ 52,500 $ 39,750 $ 18,000 $ 9,756
NONCASH FINANCING TRANSACTIONS:
Contribution, equipment................... $ -- $ 3,851 $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-116
<PAGE> 163
COOK AND STAFF, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined financial statements include the accounts of Cook
and Staff, Inc. and RAC Services, Inc. (the "Related Company", collectively the
"Company"). The Company provides litigation support services to its customers
from its offices in California.
In June 1996, the Company and its stockholder intend to enter into a
definitive agreement with F.Y.I. Incorporated ("F.Y.I.") pursuant to which the
Company will sell selected assets to F.Y.I. (the "Acquisition").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Cook and Staff, Inc. and Related Company are under common control. All
significant intercompany transactions have been eliminated in combination.
Fiscal Year-Ends
RAC Services, Inc. has a December 31 year-end. Cook and Staff, Inc. has a
June 30 year-end. Cook and Staff, Inc. accounts and results for the three years
have been recast to a December 31 year-end. The accounts and results of RAC
Services, Inc., using a December 31 year-end, have been combined with the recast
December 31 year-end accounts and results of Cook and Staff, Inc. in the
accompanying combined financial statements for 1993, 1994, and 1995.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
accelerated methods over the estimated useful lives of the assets.
Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill. Adoption is required in financial
statements for fiscal years beginning after December 15, 1995. The Company does
not expect the adoption of SFAS 121 would have any material effect on the
combined financial statements.
Revenue Recognition
Revenue is recognized when services are rendered to the Company's
customers.
Income Taxes
The Company is an S corporation for income tax purposes and, accordingly,
any income tax liabilities are the responsibility of the stockholder.
F-117
<PAGE> 164
COOK AND STAFF, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts
receivable. The Company's customers are concentrated in the Western United
States and the primary customers are insurance companies and legal institutions.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and other
information.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1994 1995
------------ ----------- -----------
<S> <C> <C> <C>
Machinery and equipment...................... 5-7 $ 1,038,070 $ 1,109,464
Computer equipment........................... 5 706,630 756,677
Autos........................................ 5 50,203 50,203
----------- -----------
1,794,903 1,916,344
Less -- Accumulated depreciation............. (1,345,673) (1,569,851)
----------- -----------
$ 449,230 $ 346,493
=========== ===========
</TABLE>
4. INCOME TAXES:
The Company has elected S corporation status under the Internal Revenue
Code. In lieu of federal income taxes, the shareholder is taxed on the Company's
taxable income. Therefore, no provision or liability for federal income tax has
been included in the financial statements for the years ended December 31, 1993,
1994, and 1995. A deferred state tax liability exists primarily due to the cash
basis method of reporting for income tax purposes. The deferred tax liability
represents the State of California S corporation tax on the net temporary
differences.
State income taxes are as follows at December 31:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current............................................... $19,227 $61,157 $35,364
Deferred.............................................. 9,399 (6,923) 4,232
------- ------- -------
$28,626 $54,234 $39,596
======= ======= =======
</TABLE>
F-118
<PAGE> 165
COOK AND STAFF, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office facilities in California. The leases provide for
lease terms over five years commencing on November 1, 1989, through June 30,
1999, with monthly lease payments of $2,534 to $20,866. The lease agreements
provide that the Company pay all related taxes and insurance. The total lease
expense for the years ended 1993, 1994, and 1995, totaled approximately
$399,000, $411,000 and $416,000, respectively. Minimum future lease payments
under operating leases as of December 31, 1995, for each of the next five years
and in the aggregate are as follows:
<TABLE>
<S> <C>
1996.............................................. $385,863
1997.............................................. 136,455
1998.............................................. 86,135
1999.............................................. 15,966
Thereafter........................................ --
--------
Total................................... $624,419
========
</TABLE>
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for workers'
compensation incurred in connection with its operations. Management believes
that none of these actions will have a material adverse effect on the financial
position or results of operations of the Company.
6. COMMON STOCK:
Common stock at December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
PAR ASSIGNED
VALUE AUTHORIZED ISSUED VALUE
----- ---------- ------ --------
<S> <C> <C> <C> <C>
Cook and Staff, Inc....................................... $ 100 1,000 100 $ 10,000
RAC Services, Inc......................................... None 1,000,000 100 3,851
--------- --- -------
1,001,000 200 $ 13,851
========= === =======
</TABLE>
7. SIGNIFICANT CUSTOMER:
The Company has two litigation support customer relationships which
combined billings to the respective customer branches and their independent
vendor attorneys were approximately 25% and 12% for the year ended December 31,
1995, 23% and 12% for the year ended December 31, 1994, and 11% and 12% for the
year ended December 31, 1993.
8. PRO FORMA NET INCOME (UNAUDITED):
Selling, general, and administrative expenses for the periods presented
reflect compensation and related benefits that owners and certain key employees
received during the periods. These owners and key employees have agreed to
certain reductions in salaries and benefits in connection with the Acquisition.
The unaudited pro forma data present compensation at the level the officers
and owners of the Company have agreed to receive subsequent to the Acquisition.
In addition, the pro forma data present the incremental provision for income
taxes as if the Company had been subject to federal and state income taxes and
adjusted for the impact of the compensation differential discussed above.
F-119
<PAGE> 166
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
B & B Information and Image Management, Inc.
Upper Marlboro, Maryland
We have audited the accompanying balance sheets of B & B Information and
Image Management, Inc. (an S Corporation) as of December 31, 1995 and 1994, and
the related statements of income, stockholder's equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of B & B Information and Image
Management, Inc. as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
C.W. AMOS & COMPANY, LLC
Baltimore, Maryland
March 20, 1996 (except for Note 8
for which the date is May 31, 1996)
F-120
<PAGE> 167
B & B INFORMATION AND IMAGE MANAGEMENT, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
CURRENT ASSETS
Cash................................................. $ 246,350 $ 173,189 $ 242,353
Trade and other receivables, less allowance for
doubtful accounts in 1994 of $11,200 and 1995 of
$20,200........................................... 1,280,436 1,851,326 1,756,097
Inventories.......................................... 172,700 154,715 242,023
Prepaid expenses..................................... 56,812 80,627 46,779
---------- ---------- ----------
Total current assets......................... $1,756,298 $2,259,857 $2,287,252
---------- ---------- ----------
PROPERTY AND EQUIPMENT, net............................ $3,083,803 $3,125,103 $3,156,065
---------- ---------- ----------
OTHER ASSETS
Prepaid expenses and deposits........................ $ 30,260 $ 1,418 $ 2,243
Debt issuance costs, net of accumulated amortization
in 1994 of $90,303 and 1995 of $131,389........... 87,893 103,235 101,848
---------- ---------- ----------
$ 118,153 $ 104,653 $ 104,091
---------- ---------- ----------
$4,958,254 $5,489,613 $5,547,408
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Note payable, bank................................... $ -- $ 50,000 $ 150,000
Current maturities of long-term debt................. 231,827 157,612 159,366
Accounts payable and accrued expenses................ 637,941 984,884 771,692
Dividends payable.................................... -- -- 252,928
Deferred revenue..................................... 241,522 290,599 255,130
---------- ---------- ----------
Total current liabilities.................... $1,111,290 $1,483,095 $1,589,116
---------- ---------- ----------
LONG-TERM DEBT......................................... $2,729,236 2,491,070 $2,450,022
---------- ---------- ----------
CONTINGENCY
STOCKHOLDER'S EQUITY
Capital stock, par value $10 per share; 100 shares
authorized, issued and outstanding................ $ 1,000 $ 1,000 $ 1,000
Additional paid-in capital........................... 81,590 81,590 81,590
Retained earnings.................................... 1,035,138 1,432,858 1,425,680
---------- ---------- ----------
$1,117,728 $1,515,448 $1,508,270
---------- ---------- ----------
$4,958,254 $5,489,613 $5,547,408
========== ========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
F-121
<PAGE> 168
B&B INFORMATION AND IMAGE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ------------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Service revenue............................ $5,343,032 $6,495,449 $1,570,720 $1,944,715
Product revenue............................ 777,896 1,549,756 211,982 271,064
Other revenue.............................. 59,910 34,749 14,401 10,945
---------- ---------- ---------- ----------
$6,180,838 $8,079,954 $1,797,103 $2,226,724
COST OF SERVICES............................. 3,108,429 3,658,599 827,515 1,115,918
COST OF PRODUCT SOLD......................... 610,836 1,250,228 162,714 235,779
DEPRECIATION................................. 301,455 332,937 75,519 84,510
---------- ---------- ---------- ----------
Gross profit....................... $2,160,118 $2,838,190 $ 731,355 $ 790,517
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES................................... 1,621,830 1,920,570 439,081 500,153
---------- ---------- ---------- ----------
Operating income................... $ 538,288 $ 917,620 $ 292,274 $ 290,364
OTHER (INCOME) EXPENSE:
Interest income............................ (83) (706) (184) (825)
Interest expense........................... 138,836 183,708 52,383 41,552
Amortization............................... 65,355 41,086 -- 1,387
Other, net................................. (3,918) 6,043 -- (15,000)
---------- ---------- ---------- ----------
Net income......................... $ 338,098 $ 687,489 $ 240,075 $ 263,250
========== ========== ========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
F-122
<PAGE> 169
B&B INFORMATION AND IMAGE MANAGEMENT, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993................ 100 $1,000 $81,590 $ 927,406 $1,009,996
Net income.............................. -- -- -- 338,098 338,098
Shareholder dividends................... -- -- -- (230,366) (230,366)
--- ------ ------- ---------- ----------
BALANCE, December 31, 1994................ 100 $1,000 $81,590 $1,035,138 $1,117,728
Net income.............................. -- -- -- 687,489 687,489
Shareholder dividends................... -- -- -- (289,769) (289,769)
--- ------ ------- ---------- ----------
BALANCE, December 31, 1995................ 100 $1,000 $81,590 $1,432,858 $1,515,448
Net income (unaudited).................. -- -- -- 263,250 263,250
Shareholder dividends (unaudited)....... -- -- -- (270,428) (270,428)
--- ------ ------- ---------- ----------
BALANCE, March 31, 1996 (unaudited)....... 100 $1,000 $81,590 $1,425,680 $1,508,270
=== ====== ======= ========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
F-123
<PAGE> 170
B & B INFORMATION AND IMAGE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- -----------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 338,098 $ 687,489 $ 240,075 $ 263,250
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................ 301,455 332,937 75,519 84,510
Amortization............................ 65,355 41,086 -- 1,387
Increase (decrease) in provision for
doubtful accounts..................... (58,500) 9,000 -- 3,000
(Gain) loss on sale of property and
equipment............................. -- 6,833 -- (15,000)
Changes in assets and liabilities:
(Increase) decrease in:
Trade and other receivables........ (351,096) (579,890) (80,170) 92,229
Inventories........................ 14,649 17,985 (57,052) (87,308)
Prepaid expenses and deposits...... (18,283) 5,027 (3,330) 33,023
Increase (decrease) in:
Accounts payable and accrued
expenses......................... 20,078 256,605 (24,246) (213,192)
Deferred revenue................... 71,781 49,077 (29,350) (35,469)
--------- --------- --------- ---------
Net cash provided by operating
activities.................... $ 383,537 $ 826,149 $ 121,446 $ 126,430
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ $(245,082) $(359,432) $ (40,667) $(118,166)
Proceeds from sale of property and
equipment............................... -- 68,700 -- 17,694
--------- --------- --------- ---------
Net cash used by investing
activities.................... $(245,082) $(290,732) $ (40,667) $(100,472)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of short-term
borrowings.............................. $(439,000) $ 50,000 $ -- $ 100,000
Proceeds from long-term borrowings......... 565,352 223,787 13,489 --
Payments on long-term debt................. (139,120) (536,168) (45,257) (39,294)
Debt issuance costs........................ -- (56,428) -- --
Shareholder dividends...................... (230,366) (289,769) (120,037) (17,500)
--------- --------- --------- ---------
Net cash used by financing
activities.................... $(243,134) $(608,578) $(151,805) $ 43,206
--------- --------- --------- ---------
Net increase (decrease) in cash.............. $(104,679) $ (73,161) $ (71,026) $ 69,164
Cash, beginning of year...................... 351,029 246,350 246,350 173,189
--------- --------- --------- ---------
Cash, end of year............................ $ 246,350 $ 173,189 $ 175,324 $ 242,353
========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.............................. $ 134,633 $ 180,544 $ 52,383 $ 41,552
========= ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Purchases of property and equipment
included in accounts payable............ $ -- $ 90,338 $ -- $ --
========= ========= ========= =========
Dividends declared and payable............. $ -- $ -- $ -- $ 252,928
========= ========= ========= =========
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
F-124
<PAGE> 171
B & B INFORMATION AND IMAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
B & B Information and Image Management, Inc. ("Company") is in the
principal business of converting paper documents into electronic and microfilm
images for customers in the Mid-Atlantic region.
Significant accounting policies not disclosed elsewhere in the financial
statements are as follows:
Depreciation:
Depreciation is provided on the straight-line method over the
estimated useful lives of the related assets.
Amortization:
Debt issuance costs are being amortized on the straight-line method
over the terms of the related debt.
Income taxes:
The Company has elected to be treated as a Small Business Corporation
(an S Corporation) under the provisions of the Internal Revenue Code. The
financial statements do not include a provision for income taxes since
taxable income is allocated to and reported directly by the shareholder.
Revenue recognition:
Microfilm processing revenue is recognized on a
percentage-of-completion basis. Service contract revenue is recognized on a
straight-line basis over the terms of the individual service contracts.
Revenue from the sale of supplies and equipment is recognized upon
shipment.
Credit risk:
The Company has deposits in a financial institution in excess of
amounts insured by the Federal Deposit Insurance Corporation.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period.
NOTE 2. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market, and include the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Parts and supplies............................................. $167,083 $154,530
Equipment for resale........................................... 5,617 185
-------- --------
$172,700 $154,715
======== ========
</TABLE>
F-125
<PAGE> 172
B & B INFORMATION AND IMAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment is carried at cost and consists of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------
(YEARS) 1994 1995
------------ ---------- ----------
<S> <C> <C> <C>
Land and land improvements....................... -- $ 599,773 $ 599,773
Building......................................... 40 1,961,701 1,972,704
Production equipment............................. 5 to 7 1,590,491 1,892,259
Furniture and fixtures........................... 5 to 7 192,413 203,186
Transportation equipment......................... 3 279,264 282,342
---------- ----------
$4,623,642 $4,950,264
Less accumulated depreciation.................... 1,539,839 1,825,161
---------- ----------
$3,083,803 $3,125,103
========== ==========
</TABLE>
NOTE 4. NOTE PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
INTEREST
DESCRIPTION RATE 1994 1995
---------------------------------------------- ------------- ---------- ----------
<S> <C> <C> <C>
Industrial Revenue Bonds; Variable Rate Variable
Demand/Fixed Rate Revenue Bonds, Prince (3.95% at
George's County, Maryland; due beginning in December 31,
1996 through 2014........................... 1995) $2,400,000 $2,400,000
Consolidated term loan, bank; due December,
1997; paid in full in 1995.................. Prime + 1.0% 460,443 --
Term loan, bank; due April, 1998.............. Prime + 1.0% -- 161,111
Notes payable, vehicles; due at various dates Varies 8.99%
through November, 1998...................... to 13.2% 54,890 58,068
Note payable, equipment; due July, 1997....... 6.00% 16,502 10,237
Note payable, equipment; due August, 1997..... 4.77% 29,228 19,266
---------- ----------
$2,961,063 $2,648,682
Current maturities............................ 231,827 157,612
---------- ----------
Long-term debt................................ $2,729,236 $2,491,070
========== ==========
</TABLE>
During 1995, the Company obtained a $250,000 demand revolving line of
credit for short-term working capital financing which is limited to 80% of
eligible accounts receivable at the bank's prime rate plus 1%, expiring in
April, 1996. The note is collateralized by all assets of the Company excluding
real estate and is guaranteed by the Company's shareholder. Borrowings on the
line of credit at December 31, 1995 were $50,000.
The Industrial Revenue Bonds were issued to provide funds for the
construction of the Company's office and operating facility, for the purchase of
certain equipment to be used in that facility, and for certain related expenses.
All real estate, equipment, and other tangible property at the location are
pledged as collateral to the bond holders.
F-126
<PAGE> 173
B & B INFORMATION AND IMAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Industrial Revenue Bonds are secured by a letter of credit issued by a
bank on behalf of the Company for approximately $2,450,000, expiring on December
31, 1996. The letter of credit is guaranteed by the Company's shareholder. The
letter of credit was placed with a new bank during 1995 resulting in issuance
costs of $56,428. The Company has the option to extend the letter of credit
based on the bank's annual review.
The Company had a consolidated term loan with its former bank, payable in
monthly installments of $12,500 plus interest at the bank's prime rate plus 1%,
maturing on December 31, 1997. During 1995, the Company borrowed $200,000 from a
bank, and used the proceeds and operating cash to repay the consolidated term
loan. The new term loan is payable in 36 equal monthly installments of
principal, plus interest through April, 1998, and is collateralized by all
assets of the Company, excluding real estate, and is guaranteed by the Company's
shareholder.
The bond indenture, term loan and letter of credit agreements have
covenants which, among other things, require the maintenance of certain
financial ratios. In addition, cross-default provisions exist among the bond
indenture and related agreements.
Notes payable, vehicles and equipment have senior collateral rights to
certain property and equipment, excluding the facility and related land pledged
to the bondholders, and are subordinated to the term loan as to accounts
receivable and inventories.
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996............................................. $ 157,612
1997............................................. 153,098
1998............................................. 87,972
1999............................................. 100,000
2000............................................. 100,000
Thereafter....................................... 2,050,000
----------
$2,648,682
==========
</TABLE>
The fair value of the note payable and long-term debt at December 31, 1995
approximates $2,301,000 based upon loans with similar terms and average
maturities currently being offered to the Company.
NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Accounts payable............................................... $355,908 $530,471
Accrued payroll and related benefits........................... 256,178 409,623
Other accrued expenses......................................... 25,855 44,790
-------- --------
$637,941 $984,884
======== ========
</TABLE>
NOTE 6. RELATED PARTY TRANSACTIONS
The Company traded with a related party in the amount of $120,000 for the
years ended December 31, 1995 and 1994. At December 31, 1994, $20,000 was
included in accounts payable and accrued expenses.
F-127
<PAGE> 174
B & B INFORMATION AND IMAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. CONTINGENCY
A former employee has filed a grievance against the Company with the Equal
Employment Opportunity Commission for discrimination and wrongful termination.
Management and the Company's counsel believe that the allegations and grievance
are without merit, and intend to vigorously contest this claim.
NOTE 8. SUBSEQUENT EVENT (UNAUDITED)
On May 31, 1996, the Company and its shareholder entered into an agreement
to be merged into F.Y.I. Incorporated effective May 1, 1996. The Company will
continue to operate as a wholly-owned subsidiary of F.Y.I.
F-128
<PAGE> 175
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Premier Document Management, Inc.
We have audited the accompanying combined balance sheet of Premier Document
Management, Inc. and Affiliate as of December 31, 1995 and the related combined
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Premier Document
Management, Inc. and Affiliate as of December 31, 1995 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
MOSS ADAMS LLP
Seattle, Washington
June 21, 1996
F-129
<PAGE> 176
PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................................... $ 87,550 $ 267,258
Accounts receivable -- trade, net of allowance for doubtful
accounts of $13,494 in 1995 and $13,778 in 1996................ 196,655 229,729
Refundable income taxes........................................... 23,000 10,100
Prepaid expenses.................................................. 86,846 65,962
-------- ---------
Total current assets...................................... 394,051 573,049
PROPERTY AND EQUIPMENT, net......................................... 311,090 341,335
DEPOSITS............................................................ 10,888 10,888
-------- ---------
$716,029 $ 925,272
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................. $ 12 $ 49,697
Notes payable..................................................... 34,944 34,944
Accrued liabilities
Wages.......................................................... 11,170 105,037
Vacation....................................................... 20,000 32,600
Payroll taxes.................................................. 346 21,803
Business taxes................................................. 14,669 4,435
Deferred income taxes............................................. 82,900 81,900
-------- ---------
Total current liabilities................................. 164,041 330,416
-------- ---------
COMMITMENTS AND CONTINGENCY (Notes 7 and 10)
STOCKHOLDERS' EQUITY
Common stock...................................................... 21,000 21,000
Additional paid-in capital........................................ 72,229 72,229
Retained earnings................................................. 458,759 501,627
-------- ---------
551,988 594,856
-------- ---------
$716,029 $ 925,272
======== =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-130
<PAGE> 177
PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ---------------------------
1995 1996 1995
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
SERVICE REVENUE........................................ $3,022,691 $866,752 $696,022
COST OF SERVICES....................................... 1,632,568 498,389 371,472
DEPRECIATION........................................... 84,367 27,733 16,235
---------- -------- --------
Gross profit................................. 1,305,756 340,630 308,315
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 1,185,033 286,571 256,466
---------- -------- --------
Operating income............................. 120,723 54,059 51,849
OTHER INCOME (EXPENSE)
Interest income...................................... 8,379 709 3,242
Interest expense..................................... (209) -- --
---------- -------- --------
Income before income taxes................... 128,893 54,768 55,091
PROVISION FOR INCOME TAXES............................. 32,243 11,900 12,100
---------- -------- --------
NET INCOME............................................. $ 96,650 $ 42,868 $ 42,991
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-131
<PAGE> 178
PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994, as previously
reported (Unaudited)..................... 120,000 $21,000 $72,229 $374,109 $467,338
Prior period adjustment (Note 11)........ (12,000) (12,000)
------- ------- ------- -------- --------
BALANCE, December 31, 1994, as restated.... 120,000 21,000 72,229 362,109 455,338
Net income....................... 96,650 96,650
------- ------- ------- -------- --------
BALANCE, December 31, 1995................. 120,000 21,000 72,229 458,759 551,988
Net income....................... 42,868 42,868
------- ------- ------- -------- --------
BALANCE, March 31, 1996 (Unaudited)........ 120,000 $21,000 $72,229 $501,627 $594,856
======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-132
<PAGE> 179
PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -------------------------
1995 1996 1995
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 96,650 $ 42,868 $ 42,991
Adjustments to reconcile income from operations to net
cash from operating activities
Depreciation and amortization......................... 118,555 37,154 24,324
Deferred income taxes................................. 15,000 (1,000) (5,600)
Changes in assets and liabilities
Accounts receivable -- trade, net................... (37,851) (33,074) (28,704)
Refundable income taxes............................. (40,000) 12,900 (4,400)
Prepaid expenses.................................... (16,825) 20,884 35,303
Deposits............................................ 1,406 -- --
Accounts payable.................................... (3,275) 49,685 42,028
Accrued liabilities................................. 16,338 117,690 46,183
--------- -------- --------
149,998 247,107 152,125
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment...................... (240,063) (67,399) (59,166)
Receipts (advances) on note receivable................... 45,500 -- (3,156)
--------- -------- --------
(194,563) (67,399) (62,322)
--------- -------- --------
CHANGE IN CASH............................................. (44,565) 179,708 89,803
CASH AND CASH EQUIVALENTS
Beginning of period...................................... 132,115 87,550 132,116
--------- -------- --------
End of period............................................ $ 87,550 $267,258 $221,919
--------- -------- --------
SUPPLEMENTAL INFORMATION
Cash paid during the period for
Interest.............................................. $ 209 $ -- $ --
--------- -------- --------
Income tax............................................ $ 57,243 $ -- $ 22,100
--------- -------- --------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-133
<PAGE> 180
PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS -- Premier Document Management, Inc. and Affiliate (the
"Company") provides medical records reproduction and management services on
behalf of hospitals and medical clinics in the Pacific Northwest. The amount the
Company can charge requesting parties for reproduction services is regulated by
law. It operates out of facilities located throughout Washington and in San
Jose, California.
On May 31, 1996, the Company merged with Premier Acquisition Corp., a
wholly-owned subsidiary of F.Y.I. Incorporated (see Note 12).
PRINCIPLES OF COMBINATION -- The combined financial statements include the
accounts of Premier Document Management, Inc. and PDM Services, Inc., an
affiliate controlled through common ownership. All material intercompany
transactions have been eliminated.
USE OF ESTIMATES -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS -- For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
DEPRECIATION AND AMORTIZATION -- Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized using the straight-line method over the
estimated useful lives of the related assets or the length of the lease,
whichever is less.
INCOME TAXES -- Income taxes are provided for the effect of transactions
reported in the financial statements tax provision consists of taxes currently
due plus deferred taxes related to differences in the financial statement and
tax bases of certain assets and liabilities.
PDM Services, Inc., with consent of its stockholder, has elected to be
taxed as an S corporation. In lieu of corporate income taxes, the stockholders
of an S corporation are taxed on their proportionate share of taxable income. On
May 31, 1996, the Company merged with Premier Acquisition Corp. and ceased to be
an S corporation (see Note 12).
INTERIM FINANCIAL STATEMENTS -- The accompanying combined statements of
income and cash flows for the three months ended March 31, 1996 and 1995 are
unaudited. The unaudited results of operations and cash flows have been prepared
on the same basis as the audited combined financial statements and, in the
opinion of management, include all adjustments necessary for a fair presentation
for the periods presented.
F-134
<PAGE> 181
PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Copying equipment........................................... $189,907 $209,845
Vehicles.................................................... 144,054 158,467
Computer hardware........................................... 222,120 249,792
Computer software........................................... 20,352 20,352
Office furniture............................................ 56,857 62,233
Production equipment........................................ 29,574 29,574
Leasehold improvements...................................... 7,233 7,233
-------- --------
670,097 737,496
Less accumulated depreciation and amortization.............. 359,007 396,161
-------- --------
$311,090 $341,335
======== ========
</TABLE>
NOTE 3 -- RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE -- At December 31, 1994, the Company held a $45,500
promissory note receivable from its President and majority stockholder. During
1995, payment was received in full, along with $3,326 of interest.
NOTES PAYABLE -- The Company has four unsecured promissory notes totaling
$34,944 payable to its President and majority stockholder. The notes are payable
on demand and bear interest at 4%. Subsequent to March 31, 1996, the stockholder
contributed the notes to the Company. Accordingly, the balance was reclassified
to additional paid-in capital.
NOTE 4 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------------
1995 1996 1995
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current expense.................................. $17,243 $12,900 $12,600
Deferred expense (benefit)....................... 15,000 (1,000) (500)
------- ------- -------
$32,243 $11,900 $12,100
======= ======= =======
</TABLE>
F-135
<PAGE> 182
PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amount determined by
applying U.S. statutory federal income tax rates to income before income taxes
as a result of the following differences:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------------
1995 1996 1995
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax at statutory rates........................... $30,332 $ 8,692 $ 9,186
Non-deductible loss of PDM Services, Inc., an S
corporation................................. 940 379 (17)
Non-deductible items........................... 1,262 143 61
Effect of estimated higher rates used to
calculate deferred tax assets and
liabilities................................. (291) 2,686 2,870
------- ------- -------
Provision for income taxes....................... $32,243 $11,900 $12,100
======= ======= =======
</TABLE>
Deferred income taxes are computed based on temporary differences between
the financial statement and tax bases of certain assets and liabilities. The
Company has elected to prepare its income tax return using the cash method of
accounting. Accordingly, temporary differences relate to accrual basis assets
and liabilities as well as differences in accumulated depreciation. Gross
deferred income tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities
Accrual basis income...................................... $ 92,100 $ 92,100
Depreciation.............................................. 8,600 7,600
-------- --------
100,700 99,700
Deferred tax assets
Accrual basis expenses.................................... (17,800) (17,800)
-------- --------
Net deferred tax liability.................................. $ 82,900 $ 81,900
======== ========
</TABLE>
Income taxes for the three months ended March 31, 1995 and 1996 were
computed using the effective tax rate estimated to be applicable for the full
fiscal year.
NOTE 5 -- COMMON STOCK
Common stock consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
(UNAUDITED)
<S> <C> <C>
Premier Document Management, Inc.
$1 par value; 50,000 shares authorized; 20,000 shares
issued and outstanding.................................... $ 20,000 $20,000
PDM Services, Inc.
No par value, 1,000,000 shares authorized; 100,000 shares
issued and outstanding.................................... 1,000 1,000
-------- -------
$ 21,000 $21,000
======== =======
</TABLE>
F-136
<PAGE> 183
PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- RETIREMENT PLAN
The Company sponsors a defined contribution employee retirement plan
qualified under IRC Section 401(k). The plan covers substantially all employees
18 years of age or older with one year of service. The Company makes annual
matching contributions to the plan ranging up to 1.5% of eligible participants'
compensation. Total pension expense for the year ended December 31, 1995 and the
three months ended March 31, 1996 (unaudited) and 1995 (unaudited) was $6,068,
$1,524 and $1,479, respectively. The Company may also make contributions that
are discretionary, as determined by the Board of Directors. No discretionary
contributions were made during 1995 or the first three months of 1996.
NOTE 7 -- COMMITMENTS
The Company is obligated under operating lease agreements for three office
facilities. Future minimum lease payments under these leases for years ending
December 31 are as follows:
<TABLE>
<CAPTION>
SEATTLE SPOKANE TACOMA TOTAL
------- ------- ------ -------
<S> <C> <C> <C> <C>
1996.......................................... $70,400 $ 5,400 $4,300 $80,100
1997.......................................... -- 5,400 2,100 7,500
1998.......................................... -- 4,500 -- 4,500
------- ------- ------ -------
$70,400 $15,300 $6,400 $92,100
======= ======= ====== =======
</TABLE>
Future minimum lease payments at March 31, 1996 were not materially
different from the amounts at December 31, 1995. The Company also leases office
space in San Jose, California for $500 per month. The lease may be terminated by
either party with 60 days notice.
Rent expense for the year ended December 31, 1995 and three months ended
March 31, 1996 (unaudited) and 1995 (unaudited) was approximately $75,500,
$18,200 and $20,100, respectively.
NOTE 8 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Notes payable to stockholder are carried at $34,944, bear interest at 4%,
and are payable on demand. Because of the related party nature of these
financial instruments, which allows for possible modification to their terms and
maturities, it is not practicable to estimate fair value.
NOTE 9 -- CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMER
CONCENTRATIONS OF CREDIT RISK -- Financial instruments that potentially
subject the Company to credit risk consist of cash and cash equivalents and
trade receivables. The Company places its temporary cash investments with major
financial institutions. At times, deposits may exceed federally insured limits.
The Company generally does not require collateral on trade receivables, however,
prepayment is required from customers whose outstanding balance exceeds 90 days.
Historically, credit related losses have not been significant.
MAJOR CUSTOMER -- The Company receives more than ten percent of its revenue
from the State of Washington Department of Social and Human Services. Following
is a summary of the percentage of revenue earned and accounts receivable due
from this customer:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------------------
1995 1996 1995
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues......................................... 15.8% 12.6% 15.2%
===== ===== =====
Accounts receivable.............................. 14.3% 14.9%
----- -----
</TABLE>
F-137
<PAGE> 184
PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- CONTINGENCY
The Company is a co-defendant in a lawsuit alleging improper disclosure of
an individual's medical records. The amount of damages has not been specified.
Defense of the claim has been assumed by the Company's insurance carrier.
Management believes the suit is without merit and will not have a material
effect on the Company's financial position.
NOTE 11 -- PRIOR PERIOD ADJUSTMENT
Management has determined that accrued vacation expense was not recorded in
prior years. Accrual of this liability, net of tax, resulted in a $12,000
decrease in retained earnings at December 31, 1994.
NOTE 12 -- SUBSEQUENT EVENTS
COMPANY MERGER -- On May 31, 1996, the Company merged with Premier
Acquisition Corp. ("Premier"), a wholly-owned subsidiary of F.Y.I. Incorporated
("F.Y.I."). Under the terms of the Agreement and Plan of Reorganization, Company
stockholders received consideration consisting of cash and shares of F.Y.I.
common stock. Additional consideration is contingent on the performance of
Premier during the eight month period ended December 31, 1996.
In connection with the merger, the Company President and majority
stockholder executed a five year noncompetition agreement with Premier and
F.Y.I. All other stockholders executed similar agreements with terms of three
years. The majority stockholder also entered into a three year employment
agreement as President of Premier.
EXECUTIVE BONUS -- On May 30, 1996, the Company paid a $225,000 bonus to
its President.
F-138
<PAGE> 185
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To C.M.R.S. Incorporated:
We have audited the accompanying balance sheet of C.M.R.S. Incorporated (a
California corporation) as of February 29, 1996, and the related statements of
operations, stockholder's equity, and cash flow for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of C.M.R.S. Incorporated as of
February 29, 1996, and the results of its operations and its cash flow for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 28, 1996
F-139
<PAGE> 186
C.M.R.S. INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 29, JUNE 30,
1996 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash.............................................................. $ 38,247 $ 31,873
Accounts receivable, less allowance for doubtful accounts of
$136,000 for each period....................................... 255,830 311,660
Loan receivable -- affiliates..................................... 15,000 33,830
Employee advances................................................. 1,664 6,299
Prepaid expenses.................................................. -- 12,668
Loan receivable -- shareholder.................................... 28,210 8,210
-------- --------
Total current assets...................................... 338,951 404,540
PROPERTY AND EQUIPMENT, net......................................... 66,409 82,038
OTHER ASSETS:
Investment in subsidiary.......................................... 54,621 61,946
Deposits.......................................................... 1,958 1,958
-------- --------
Total other assets........................................ 56,579 63,904
-------- --------
Total assets.............................................. $461,939 $550,482
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................. $ 15,843 $ 16,112
Accrued liabilities............................................... 22,230 19,730
Sales tax payable................................................. 4,552 3,890
Income taxes payable.............................................. 15,268 22,778
Loan payable -- affiliates........................................ 20,568 20,568
Deferred income taxes............................................. 123,565 151,576
-------- --------
Total liabilities......................................... 202,026 234,654
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, par value $1; 100,000 shares authorized, 500 shares
issued and outstanding for all periods......................... 500 500
Retained earnings................................................. 259,413 315,328
-------- --------
Total stockholder's equity................................ 259,913 315,828
-------- --------
Total liabilities and stockholder's equity................ $461,939 $550,482
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-140
<PAGE> 187
C.M.R.S. INCORPORATED.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
JUNE 30,
1996 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
SERVICE REVENUE..................................................... $1,019,960 $492,796
COST OF SERVICES.................................................... 635,887 297,505
DEPRECIATION AND AMORTIZATION....................................... 30,970 3,183
---------- --------
Gross profit.............................................. 353,103 192,108
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....................... 798,535 401,603
---------- --------
Operating loss............................................ (445,432) (209,495)
OTHER INCOME:
Income from investment in subsidiary.............................. 36,164 7,325
Management fees received.......................................... 500,500 314,000
---------- --------
Other income.............................................. 536,664 321,325
INCOME BEFORE INCOME TAXES.......................................... 91,232 111,830
PROVISION FOR INCOME TAXES.......................................... 45,987 55,915
---------- --------
Net income................................................ $ 45,245 $ 55,915
========== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-141
<PAGE> 188
C.M.R.S. INCORPORATED
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED FEBRUARY 29, 1996 AND
FOUR MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, February 28, 1995............................ 500 $500 $214,168 $214,668
Net income.......................................... -- -- 45,245 45,245
--- ---- -------- --------
BALANCE, February 29, 1996............................ 500 500 259,413 259,913
Net income (unaudited).............................. -- -- 55,915 55,915
--- ---- -------- --------
BALANCE, June 30, 1996 (unaudited).................... 500 $500 $315,328 $315,828
=== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-142
<PAGE> 189
C.M.R.S. INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
JUNE 30,
1996 1996
-------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 45,245 $ 55,915
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation and amortization expense........................... 30,970 3,183
Provision for deferred income taxes............................. 26,387 28,011
Income in subsidiary............................................ (36,164) (7,325)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable, net...................................... (36,522) (55,830)
Loan receivable............................................... -- (18,830)
Employee advances............................................. 1,567 (4,635)
Prepaid expenses.............................................. -- (12,668)
Increase (decrease) in --
Accounts payable and accrued liabilities...................... 11,564 (2,231)
Sales tax payable............................................. 3,030 (662)
Income taxes payable.......................................... 14,243 7,510
-------- --------
Net cash provided by (used in) operating activities........ 60,320 (7,562)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of equipment.......................................... (28,019) (18,812)
-------- --------
Net used in provided by investing activities............... (28,019) (18,812)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Disbursement of loan receivable -- shareholder..................... (25,000) --
Collection of loan receivable -- shareholder....................... -- 20,000
-------- --------
Net cash (used in) provided by financing activities........ (25,000) 20,000
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................................ 7,301 (6,374)
CASH, at beginning of period......................................... 30,946 38,247
-------- --------
CASH, at end of period............................................... $ 38,247 $ 31,873
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for --
Income taxes.................................................... $ 5,357 $ 21,680
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-143
<PAGE> 190
C.M.R.S. INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
1. BUSINESS AND ORGANIZATION:
C.M.R.S. Incorporated (the "Company") is a California corporation. The
Company is an in-house correspondence service for doctors and hospitals.
In August 1996, the Company and its stockholders intend to enter into a
definitive agreement with F.Y.I. Incorporated ("F.Y.I.") pursuant to which the
Company will be acquired by F.Y.I. All outstanding shares of the Company will be
exchanged for cash and shares of F.Y.I. common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed using accelerated methods over the estimated useful lives of the
individual assets which range from five to seven years.
Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill. Adoption is required in financial
statements for fiscal years beginning after December 15, 1995. The Company does
not expect the adoption of SFAS 121 would have any material effect on the
financial statements.
Revenue Recognition
Revenue is recognized when services are rendered to the Company's
customers.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Interim Financial Statements
The accompanying balance sheet and statements of operations, stockholder's
equity and cash flow as of and for the four months ended June 30, 1996 are
unaudited. The unaudited financial statements have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments necessary for a fair presentation for the period
presented.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts
receivable. The Company's customers are concentrated in the Western United
States and the primary customers are attorneys and insurance companies. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and other
information.
F-144
<PAGE> 191
C.M.R.S. INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes are provided based upon the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred income taxes under the asset and liability
method.
The Company is a C corporation for income tax purposes and, accordingly,
any income tax liabilities are the responsibility of the corporation.
Deferred income taxes are provided for temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes.
Temporary differences result primarily from the recognition of revenues and
various accruals and reserves being deductible for tax purposes in different
periods.
3. LOAN RECEIVABLE -- AFFILIATE:
The Company has loaned monies to an affiliate, 50% owned by the sole
shareholder, for operations. The loan is due upon demand and non-interest
bearing.
4. LOAN RECEIVABLE -- SHAREHOLDER:
The Company has loaned monies to its shareholder. The loan is due upon
demand and non-interest bearing.
5. INVESTMENT IN SUBSIDIARY:
The Company owns forty-nine percent of the common stock of Texas Medical
Record Service, Inc., a Texas corporation. The Company accounts for this
investment using the equity method.
6. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at February 29:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1996
------------ --------
<S> <C> <C>
Autos......................................................... 5-7 $ 49,407
Equipment..................................................... 7 99,442
Furniture and fixtures........................................ 7 3,854
--------
152,703
Less -- Accumulated depreciation.............................. (86,294)
--------
$ 66,409
========
</TABLE>
7. LOAN PAYABLE -- AFFILIATE:
The Company has borrowed monies from its affiliate (Minnesota Medical
Record Service, Inc.) for operations. The loan is payable upon demand.
8. EMPLOYEE BENEFIT PLAN:
In 1996, the Company adopted a deferred compensation 401(k) plan (the
"Plan"). Employees who have completed twelve months of service and have attained
age 21 are eligible to participate in the Plan. The Plan allows for employee and
employer contributions. Employer contributions are at the discretion of the
Company. The Company's contributions were $453 in fiscal year 1996.
F-145
<PAGE> 192
C.M.R.S. INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES:
The provision for income taxes for February 29, 1996 is comprised as
follows:
<TABLE>
<S> <C>
Current provision
Federal................................................................. $ 11,819
State................................................................... 7,781
Deferred provision........................................................ 26,387
--------
Total provision for income taxes................................ $ 45,987
========
</TABLE>
Deferred income tax liabilities for February 29, 1996 are comprised as
follows:
<TABLE>
<S> <C>
Income from investment in subsidiary...................................... 21,824
Cash to accrual........................................................... 93,740
Property and Equipment.................................................... 8,001
--------
Net current deferred tax liability.............................. $123,565
========
</TABLE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following:
<TABLE>
<S> <C>
Tax at statutory rate..................................................... $ 31,019
Add (deduct)
State income taxes, net of federal...................................... 5,419
Nondeductible expenses.................................................. 11,391
Effect of graduated tax rates........................................... (1,842)
--------
Total provision for income taxes................................ $ 45,987
========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office facilities in California under noncancelable
lease agreements which expire at various dates. The leases provide for lease
terms over three to five years through September 2001, with monthly lease
payments of $328 to $3,991. The property lease agreements provide that the
Company pay all related taxes and insurance. The total lease expense for the
year ended 1996 totaled approximately $13,825. Minimum future lease payments
under operating leases as of February 29, 1996, for each of the next five years
and in the aggregate are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 25,890
1998.............................................................. 47,887
1999.............................................................. 47,887
2000.............................................................. 47,887
2001.............................................................. 47,887
Thereafter........................................................ 27,934
--------
Total................................................... $245,372
========
</TABLE>
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of these actions
will have a material adverse effect on the financial position or results of
operations of the Company.
F-146
<PAGE> 193
C.M.R.S. INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. RELATED PARTY:
The Company receives a management fee from its subsidiary (Texas Medical
Record Service, Inc.) and another affiliate (Minnesota Medical Record Service,
Inc.). The management fee income for fiscal year 1996 was $500,500.
F-147
<PAGE> 194
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Minnesota Medical Record Service, Inc.:
We have audited the accompanying balance sheet of Minnesota Medical Record
Service, Inc. (a Minnesota corporation) as of September 30, 1995, and the
related statements of operations, stockholder's equity, and cash flow for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Minnesota Medical Record
Service, Inc. as of September 30, 1995, and the results of its operations and
its cash flow for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
August 28, 1996
F-148
<PAGE> 195
MINNESOTA MEDICAL RECORD SERVICE, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996
------------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................. $ 3,395 $ 16,683
Accounts receivable, less allowance for doubtful accounts of
$107,000 for each period...................................... 173,265 169,151
Prepaid expenses................................................. 328 6,413
Loans receivable -- affiliates................................... 105,568 105,568
-------- --------
Total current assets..................................... 282,556 297,815
PROPERTY AND EQUIPMENT, net........................................ 89,778 101,625
-------- --------
Total assets............................................. $372,334 $399,440
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 1,132 $ 3,038
Accrued liabilities.............................................. 28,001 25,006
Retrieval fees payable........................................... 11,161 14,156
Income taxes payable............................................. 14,218 8,832
Deferred income taxes............................................ 73,355 82,652
-------- --------
Total liabilities........................................ 127,867 133,684
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, no par value, 1,000 shares authorized, 3,000 shares
issued and outstanding for all periods........................ 33,051 33,051
Retained earnings................................................ 211,416 232,705
-------- --------
Total stockholder's equity............................... 244,467 265,756
-------- --------
Total liabilities and stockholder's equity............... $372,334 $399,440
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-149
<PAGE> 196
MINNESOTA MEDICAL RECORD SERVICE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
SERVICE REVENUE..................................................... $2,187,451 $1,733,826
COST OF SERVICES.................................................... 476,207 402,410
DEPRECIATION........................................................ 32,175 28,678
---------- ----------
Gross profit.............................................. 1,679,069 1,302,738
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....................... 1,232,516 930,222
---------- ----------
Operating income.......................................... 446,553 372,516
OTHER EXPENSE:
Management fees expense........................................... 515,000 334,500
---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES................................... (68,447) 38,016
(BENEFIT) PROVISION FOR INCOME TAXES................................ (30,117) 16,727
---------- ----------
Net (loss) income......................................... $ (38,330) $ 21,289
========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-150
<PAGE> 197
MINNESOTA MEDICAL RECORD SERVICE, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1995 AND
NINE MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1994.......................... 3,000 $33,051 $249,746 $ 282,797
Net loss........................................... -- -- (38,330) (38,330)
----- ------- -------- ---------
BALANCE, September 30, 1995.......................... 3,000 33,051 211,416 244,467
Net income (unaudited)............................. -- -- 21,289 21,289
----- ------- -------- ---------
BALANCE, June 30, 1996 (unaudited)................... 3,000 $33,051 $232,705 $ 265,756
===== ======= ======== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-151
<PAGE> 198
MINNESOTA MEDICAL RECORD SERVICE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
1995 1996
-------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................................. $(38,330) $ 21,289
Adjustments to reconcile net (loss) income to net cash provided by
operating activities --
Depreciation expense............................................ 32,175 28,678
Provision for deferred income taxes............................. (44,335) 9,297
Changes in operating assets and liabilities -- (Increase)
decrease in --
Accounts receivable, net...................................... 58,304 4,114
Prepaid expenses.............................................. 917 (6,085)
Increase (decrease) in --
Accounts payable and accrued liabilities...................... 1,132 1,906
Income taxes payable.......................................... 14,218 (5,386)
-------- --------
Net cash provided by operating activities.................. 24,081 53,813
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of equipment.......................................... (34,379) (40,525)
-------- --------
Net cash used in investing activities...................... (34,379) (40,525)
-------- --------
NET (DECREASE) INCREASE IN CASH...................................... (10,298) 13,288
CASH, at beginning of period......................................... 13,693 3,395
-------- --------
CASH, at end of period............................................... $ 3,395 $ 16,683
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for --
Income taxes.................................................... $ -- $ 15,042
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-152
<PAGE> 199
MINNESOTA MEDICAL RECORD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. BUSINESS AND ORGANIZATION:
Minnesota Medical Record Service, Inc. (the "Company") is a Minnesota
corporation. The Company is an in-house correspondence service for doctors and
hospitals.
In August 1996, the Company and its stockholders intend to enter into a
definitive agreement with F.Y.I. Incorporated ("F.Y.I.") pursuant to which the
Company will be acquired by F.Y.I. All outstanding shares of the Company will be
exchanged for cash and shares of F.Y.I. common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed using accelerated methods over the estimated useful lives of the
individual assets which range from five to seven years.
Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill. Adoption is required in financial
statements for fiscal years beginning after December 15, 1995. The Company does
not expect the adoption of SFAS 121 would have any material effect on the
financial statements.
Retrieval Fees Payable
The Company pays retrieval fees to various healthcare organizations with
which it has contracts. Those fees represent charges to the Company by the
healthcare organization for each medical record retrieved from the
organization's records department. Those fees are payable according to specific
contract terms.
Revenue Recognition
Revenue is recognized when services are rendered to the Company's
customers.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Interim Financial Statements
The accompanying balance sheet and statements of operations, stockholder's
equity and cash flow as of and for the nine months ended June 30, 1996 are
unaudited. The unaudited financial statements have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments necessary for a fair presentation for the period
presented.
F-153
<PAGE> 200
MINNESOTA MEDICAL RECORD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts
receivable. The Company's customers are concentrated in Minnesota and the
primary customers are attorneys and insurance companies. The Company establishes
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends, and other information.
Income Taxes
Income taxes are provided based upon the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred income taxes under the asset and liability
method.
The Company is a C corporation for income tax purposes and, accordingly,
any income tax liabilities are the responsibility of the corporation.
Deferred income taxes are provided for temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes.
Temporary differences result primarily from the recognition of revenues and
various accruals and reserves being deductible for tax purposes in different
periods.
3. LOANS RECEIVABLE -- AFFILIATES:
The Company has loaned monies to two affiliate companies, 50% and 100%
(California Medical Record Service, Inc.) owned by the sole shareholder, for
operations. The loans are due upon demand and non-interest bearing.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1995
------------ ---------
<S> <C> <C>
Equipment.................................................. 5-7 $ 195,894
Leasehold improvements..................................... 7 5,850
Furniture and fixtures..................................... 7 7,708
--- ---------
209,452
Less -- Accumulated depreciation and amortization.......... (119,674)
---------
$ 89,778
=========
</TABLE>
5. EMPLOYEE BENEFIT PLAN:
In 1996, the Company adopted a deferred compensation 401(k) plan (the "Plan").
Employees who have completed twelve months of service and have attained age 21
are eligible to participate in the Plan. The Plan allows for employee and
employer contributions. Employer contributions are at the discretion of the
Company.
F-154
<PAGE> 201
MINNESOTA MEDICAL RECORD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES:
The provision for income taxes for September 30 is comprised as follows:
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Current provision
Federal................................................................. $ 7,499
State................................................................... 6,719
Deferred benefit.......................................................... (44,335)
--------
Total provision for income taxes................................ $(30,117)
========
</TABLE>
Deferred income tax liabilities for September 30 are comprised of the
following:
<TABLE>
<S> <C>
Property and equipment.................................................... $ 14,848
Cash to accrual........................................................... 58,507
--------
Net deferred income tax liability............................... $ 73,355
========
</TABLE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following:
<TABLE>
<S> <C>
Tax at statutory rate..................................................... $(23,272)
Add (deduct) State income taxes........................................... (6,845)
--------
Total provision for income taxes........................................ $(30,117)
========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office facilities in Minnesota under month to month
lease agreements. Monthly lease payments range from $254 to $1,008. The property
lease agreements provide that the Company pay all related taxes and insurance.
The total lease expense for the year ended 1995 totaled approximately $42,644.
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of these actions
will have a material adverse effect on the financial position or results of
operations of the Company.
8. RELATED PARTY:
The Company pays a management fee to California Medical Record Service,
Inc. The management fee for fiscal year 1995 was $515,000.
F-155
<PAGE> 202
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Texas Medical Record Service, Inc.:
We have audited the accompanying balance sheet of Texas Medical Record
Service, Inc. (a Texas corporation) as of February 29, 1996, and the related
statements of operations, stockholders' equity, and cash flow for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Texas Medical Record
Service, Inc. as of February 29, 1996, and the results of its operations and its
cash flow for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 28, 1996
F-156
<PAGE> 203
TEXAS MEDICAL RECORD SERVICE, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 29, JUNE 30,
1996 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................... $ 4,326 $ 19,702
Accounts receivable, less allowance for doubtful accounts of
$47,000 for both periods........................................ 172,339 175,265
Employee advances.................................................. 2,475 200
Shareholder loan................................................... 1,500 1,500
-------- ---------
Total current assets....................................... 180,640 196,667
PROPERTY AND EQUIPMENT, net.......................................... 68,994 64,662
OTHER ASSETS......................................................... 2,465 6,004
-------- ---------
Total assets............................................... $252,099 $ 267,333
======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 26,637 $ 27,659
Accrued liabilities................................................ 28,405 30,632
Equipment contract payable......................................... 13,000 9,000
Retrieval fee payable.............................................. 6,879 1,863
Income taxes payable............................................... 1,972 1,416
Deferred income taxes.............................................. 52,972 59,580
-------- ---------
Total liabilities.......................................... 129,865 130,150
-------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $1; 100,000 shares authorized, 1,235 shares
issued and outstanding for all periods.......................... 1,235 1,235
Additional paid-in capital......................................... 3,263 3,263
Retained earnings.................................................. 117,736 132,685
-------- ---------
Total stockholders' equity................................. 122,234 137,183
-------- ---------
Total liabilities and stockholders' equity................. $252,099 $ 267,333
======== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-157
<PAGE> 204
TEXAS MEDICAL RECORD SERVICE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
JUNE 30,
1996 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
SERVICE REVENUE..................................................... $2,280,037 $ 834,849
COST OF SERVICES.................................................... 1,717,441 580,555
DEPRECIATION........................................................ 23,272 5,377
---------- ---------
Gross profit.............................................. 539,324 248,917
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....................... 379,163 165,982
---------- ---------
Operating income.......................................... 160,161 82,935
OTHER EXPENSE:
Management fees expense........................................... 60,000 60,000
---------- ---------
INCOME BEFORE INCOME TAXES.......................................... 100,161 22,935
PROVISION FOR INCOME TAXES.......................................... 33,992 7,986
---------- ---------
Net income................................................ $ 66,169 $ 14,949
========== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-158
<PAGE> 205
TEXAS MEDICAL RECORD SERVICE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED FEBRUARY 29, 1996 AND
FOUR MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, February 28, 1995................... 1,235 $1,235 $3,263 $ 51,567 $ 56,065
Net income................................. -- -- -- 66,169 66,169
----- ------ ------ -------- ---------
BALANCE, February 29, 1996................... 1,235 1,235 3,263 117,736 122,234
Net income (unaudited)..................... -- -- -- 14,949 14,949
----- ------ ------ -------- ---------
BALANCE, June 30, 1996 (unaudited)........... 1,235 $1,235 $3,263 $132,685 $ 137,183
===== ====== ====== ======== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-159
<PAGE> 206
TEXAS MEDICAL RECORD SERVICE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
JUNE 30,
1996 1996
-------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 66,169 $14,949
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation expense........................................... 23,272 5,377
Provision for deferred income taxes............................ 31,428 6,608
Changes in operating assets and liabilities
(Increase) decrease in --
Accounts receivable, net..................................... (70,342) (2,926)
Employee advances............................................ 1,650 2,275
Increase (decrease) in --
Accounts payable, accrued liabilities, equipment contract
payable and retrieval fees payable.......................... 4,466 (5,767)
Income taxes payable......................................... 1,273 (556)
-------- -------
Net cash provided by operating activities................. 57,916 19,960
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment............................ (53,140) (1,045)
Change in other assets............................................ (450) (3,539)
-------- -------
Net cash used in investing activities..................... (53,590) (4,584)
-------- -------
NET INCREASE IN CASH................................................ 4,326 15,376
CASH, at beginning of period........................................ -- 4,326
-------- -------
CASH, at end of period.............................................. $ 4,326 $19,702
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for --
Income taxes................................................... $ 1,291 $ 1,923
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-160
<PAGE> 207
TEXAS MEDICAL RECORD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
1. BUSINESS AND ORGANIZATION:
Texas Medical Record Service, Inc. (the "Company") is a Texas corporation.
The Company is an in-house correspondence service for doctors and hospitals.
In August 1996, the Company and its stockholders intend to enter into a
definitive agreement with F.Y.I. Incorporated ("F.Y.I.") pursuant to which the
Company will be acquired by F.Y.I. All outstanding shares of the Company will be
exchanged for cash and shares of F.Y.I. common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
accelerated methods over the estimated useful lives of the individual assets
which range from five to seven years.
Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill. Adoption is required in financial
statements for fiscal years beginning after December 15, 1995. The Company does
not expect the adoption of SFAS 121 would have any material effect on the
financial statements.
Retrieval Fees Payable
The Company pays retrieval fees to various healthcare organizations with
which it has contracts. Those fees represent charges to the Company by the
healthcare organization for each medical record retrieved from the
organization's records department. Those fees are payable upon the receipt of
cash for the billing of the Company's services or upon the billing of its
services, according to specific contract terms.
Revenue Recognition
Revenue is recognized when services are rendered to the Company's
customers.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Interim Financial Statements
The accompanying balance sheet and statements of operations, stockholders'
equity and cash flow as of and for the four months ended June 30, 1996 are
unaudited. The unaudited financial statements have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments necessary for a fair presentation for the period
presented.
F-161
<PAGE> 208
TEXAS MEDICAL RECORD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts
receivable. The Company's customers are concentrated in the Southern United
States and the primary customers are attorneys and insurance companies. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and other
information.
Income Taxes
Income taxes are provided based upon the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred income taxes under the asset and liability
method.
The Company is a C corporation for income tax purposes and, accordingly,
any income tax liabilities are the responsibility of the corporation.
Deferred income taxes are provided for temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes.
Temporary differences result primarily from the recognition of revenues and
various accruals and reserves being deductible for tax purposes in different
periods.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at February 29:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1996
------------ ---------
<S> <C> <C>
Equipment.................................................... 5-7 218,010
Furniture and fixtures....................................... 5-7 8,985
---------
226,995
Less -- Accumulated depreciation............................. (158,001)
---------
$ 68,994
=========
</TABLE>
4. EMPLOYEE BENEFIT PLAN:
In 1996, the Company adopted a deferred compensation 401(k) plan (the
"Plan"). Employees who have completed twelve months of service and have attained
age 21 are eligible to participate in the Plan. The Plan allows for employee and
employer contributions. Employer contributions are at the discretion of the
Company. The Company's contributions were $585 in fiscal year 1996.
5. INCOME TAXES:
The provision for income taxes for February 29, 1996 is comprised as
follows:
<TABLE>
<S> <C>
Current provision
Federal.................................................................. $ 1,972
State.................................................................... 592
Deferred provision......................................................... 31,428
-------
Total provision for income taxes................................. $33,992
=======
</TABLE>
F-162
<PAGE> 209
TEXAS MEDICAL RECORD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax liabilities for February 29, 1996 are comprised as
follows:
<TABLE>
<S> <C>
Cash to accrual difference................................................. 45,898
Property and equipment..................................................... 7,074
-------
Total deferred tax liability..................................... $52,972
=======
</TABLE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following:
<TABLE>
<S> <C>
Tax at statutory rate...................................................... $34,055
Add (deduct)
State income taxes, net of federal....................................... 592
Nondeductible expenses................................................... 1,381
Effect of graduated tax rates............................................ (2,036)
-------
Total provision for income taxes................................. $33,992
=======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office facilities in Texas and various office equipment
under noncancelable lease agreements which expire at various dates. The leases
provide for lease terms over three to six years commencing June 1993, through
November 2000, with monthly lease payments of $116 to $1,662. The property lease
agreements provide that the Company pay all related taxes and insurance. The
total lease expense for the fiscal year ended 1996 totaled approximately
$42,959. Minimum future lease payments under operating leases as of February 29,
1996, for each of the next five years and in the aggregate are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 50,240
1998.............................................................. 47,085
1999.............................................................. 44,088
2000.............................................................. 16,953
2001.............................................................. 8,649
--------
Total................................................... $167,015
========
</TABLE>
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of these actions
will have a material adverse effect on the financial position or results of
operations of the Company.
7. RELATED PARTY:
The Company pays a management fee to California Medical Record Service,
Inc., who owns 49% of the Company's outstanding common stock. The management fee
for fiscal year 1996 was $60,000.
F-163
<PAGE> 210
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ZIA Information Analysis Group:
We have audited the accompanying balance sheet of ZIA Information Analysis
Group (a California corporation) as of December 31, 1995, and the related
statements of operations, stockholders' equity, and cash flow for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ZIA Information Analysis
Group as of December 31, 1995, and the results of its operations and its cash
flow for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 23, 1996
F-164
<PAGE> 211
ZIA INFORMATION ANALYSIS GROUP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 41,610 $ 107,363
Accounts receivable............................................... 575,302 984,795
Unbilled work-in-process.......................................... 121,651 139,788
Prepaid expenses and other current assets......................... 14,816 34,348
Deferred income taxes............................................. 35,600 --
-------- ----------
Total current assets...................................... 788,979 1,266,294
PROPERTY AND EQUIPMENT, net......................................... 119,596 180,685
-------- ----------
Total assets.............................................. $908,575 $1,446,979
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payable..................................................... $225,025 $ 166,362
Income taxes payable.............................................. 24,800 82,311
Accrued liabilities --
Officers' bonus................................................ 500,000 500,000
Employee bonus................................................. 15,000 57,510
Payroll and related benefits................................... 7,975 96,024
Other.......................................................... 34,572 23,480
Note payable to bank -- revolver.................................. 30,000 --
Current portion of deferred income taxes.......................... -- 114,420
-------- ----------
Total current liabilities................................. 837,372 1,040,107
DEFERRED INCOME TAXES............................................... 19,000 19,000
-------- ----------
Total liabilities......................................... 856,372 1,059,107
-------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 1,000,000 shares authorized, 2,000
issued and outstanding for all periods......................... 50,000 50,000
Retained earnings................................................. 2,203 337,872
-------- ----------
Total stockholders' equity................................ 52,203 387,872
-------- ----------
Total liabilities and stockholders' equity................ $908,575 $1,446,979
======== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-165
<PAGE> 212
ZIA INFORMATION ANALYSIS GROUP
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
SERVICE REVENUE, net................................................ $2,291,032 $1,718,971
COST OF SERVICES.................................................... 999,654 702,767
DEPRECIATION........................................................ 34,710 19,034
---------- ----------
Gross profit.............................................. 1,256,668 997,170
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....................... 1,237,720 436,399
---------- ----------
Operating income.......................................... 18,948 560,771
OTHER (INCOME) EXPENSE:
Interest expense.................................................. 4,016 795
Interest income................................................... (924) (800)
Other expense, net................................................ 2,871 394
---------- ----------
INCOME BEFORE INCOME TAXES.......................................... 12,985 560,382
PROVISION FOR INCOME TAXES.......................................... 7,600 224,713
---------- ----------
Net income................................................ $ 5,385 $ 335,669
========== ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-166
<PAGE> 213
ZIA INFORMATION ANALYSIS GROUP
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED TOTAL
----------------- EARNINGS STOCKHOLDERS'
SHARES AMOUNT (DEFICIT) EQUITY
------ ------- -------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994........................... 2,000 $50,000 $ (3,182) $ 46,818
Net income......................................... -- -- 5,385 5,385
----- ------- -------- --------
BALANCE, December 31, 1995........................... 2,000 50,000 2,203 52,203
Net income (unaudited)............................. -- -- 335,669 335,669
----- ------- -------- --------
BALANCE, June 30, 1996 (unaudited)................... 2,000 $50,000 $337,872 $387,872
===== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-167
<PAGE> 214
ZIA INFORMATION ANALYSIS GROUP
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1995 1996
--------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 5,385 $ 335,669
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation expense........................................... 34,710 19,034
Provision for deferred income taxes............................ (18,000) 150,020
Loss on disposal of property and equipment..................... 598 --
Changes in operating assets and liabilities -- Increase in --
Accounts receivable, net and unbilled work-in-process........ (346,248) (427,630)
Prepaid expenses and other current assets.................... (5,292) (19,532)
Increase (decrease) in --
Trade payable................................................ 82,157 (58,663)
Accrued liabilities.......................................... 306,721 119,467
Income taxes payable......................................... 24,800 57,511
--------- ---------
Net cash provided by operating activities................. 84,831 175,876
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of equipment......................................... (28,124) (80,123)
--------- ---------
Net cash used in investing activities..................... (28,124) (80,123)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes to officers..................................... (13,750) --
Proceeds from line of credit...................................... 876,518 270,000
Repayment of line of credit....................................... (883,018) (300,000)
--------- ---------
Net cash used in financing activities..................... (20,250) (30,000)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................... 36,457 65,753
CASH AND CASH EQUIVALENTS, at beginning of period................... 5,153 41,610
--------- ---------
CASH AND CASH EQUIVALENTS, at end of period......................... $ 41,610 $ 107,363
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for --
Income taxes................................................... $ 800 $ 8,000
Interest....................................................... $ 4,016 $ 411
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-168
<PAGE> 215
ZIA INFORMATION ANALYSIS GROUP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BUSINESS AND ORGANIZATION:
ZIA Information Analysis Group (the "Company") is a California corporation
which commenced operations on June 1, 1994. The Company provides litigation and
regulatory support services, including information management and fact finding
relating to liability, damage and regulatory issues. The Company provides its
services to law firms, corporations and regulated entities throughout
California.
In August 1996, the Company and its stockholders intend to enter into a
definitive agreement with F.Y.I. Incorporated ("F.Y.I.") pursuant to which the
Company will be acquired by F.Y.I. All outstanding shares of the Company will be
exchanged for cash and shares of F.Y.I. common stock.
During 1995, the Company outsourced approximately $230,000 of services to
companies that were acquired by F.Y.I. in 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the lives of the individual assets which range
from five to seven years.
Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill. Adoption is required in financial
statements for fiscal years beginning after December 15, 1995. The Company does
not expect the adoption of SFAS 121 would have any material effect on the
financial statements.
Revenue Recognition
Service revenue consists of fee revenue and client job expenses. Fee
revenue, net of adjustments, is recognized when services are rendered. Client
job expenses consist of out-of-pocket expenditures made on behalf of clients.
Client job expense is recognized when the expense is incurred.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Interim Financial Statements
The accompanying balance sheet and statements of operations, stockholders'
equity and cash flow as of and for the six months ended June 30, 1996 are
unaudited. The unaudited financial statements have been
F-169
<PAGE> 216
ZIA INFORMATION ANALYSIS GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
prepared on the same basis as the audited financial statements and, in the
opinion of management, include all adjustments necessary for a fair presentation
for the period presented.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts
receivable. The Company's customers are concentrated in the Western United
States and the primary customers are legal institutions. The Company establishes
an allowance for doubtful accounts when factors surrounding the credit risk of
specific customers, historical trends, and other information indicate that such
reserve is needed.
Income Taxes
Income taxes are provided based upon the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred income taxes under the asset and liability
method.
The Company is a C corporation for income tax purposes and, accordingly,
any income tax liabilities are the responsibility of the corporation.
Deferred income taxes are provided for temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes.
Temporary differences result primarily from the recognition of revenues and
various accruals and reserves being deductible for tax purposes in different
periods.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(YEARS) 1995
------------ --------
<S> <C> <C>
Computer equipment............................................ 5 $ 73,622
Office equipment.............................................. 7 50,422
Furniture and fixtures........................................ 7 45,915
--------
169,959
Less -- Accumulated depreciation (50,363)
--------
$119,596
========
</TABLE>
4. NOTE PAYABLE TO BANK:
At December 31, 1995, the Company had a bank line of credit that provided
for maximum borrowings of $150,000 at an interest rate of 2% over the bank's
index rate. The credit line was secured by accounts receivable and property and
equipment and was personally guaranteed by the Company's three officers. The
line of credit agreement contained certain terms and conditions including
financial covenants with respect to tangible net worth and profitability. As of
December 31, 1995, the Company had complied with all terms and conditions of the
agreement, except for the completion of annual financial statements within
ninety days after the fiscal year end. The Company has received a waiver from
the Bank for this breach of the agreement. The bank line of credit expired May
20, 1996. The Company executed a credit agreement on June 20, 1996 which
consisted of a $250,000 revolving credit facility (the "Revolver"). Under the
Revolver, the outstanding balance is due June 30, 1997. Interest accrues at
prime plus 1.5%, and is payable monthly. As of June 30, 1996, there was no
outstanding balance under the Revolver.
F-170
<PAGE> 217
ZIA INFORMATION ANALYSIS GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. EMPLOYEE BENEFIT PLAN:
In 1995, the Company adopted a defined compensation (401(k) plan, the
"Plan"). Employees who have completed three months of service and have attained
age 21 are eligible to participate in the Plan. The Plan allows for employee and
employer contributions. Employer contributions are at the discretion of the
Company's board of directors. The Company's contributions were $10,637 in 1995,
to be funded during 1996.
6. INCOME TAXES:
The provision for income taxes for December 31, 1995 is comprised as
follows:
<TABLE>
<S> <C>
Current provision
Federal................................................................. $ 15,200
State................................................................... 10,400
Deferred benefit.......................................................... (18,000)
--------
Total provision for income taxes................................ $ 7,600
========
</TABLE>
Deferred income tax liabilities and assets for December 31, 1995 are
comprised as follows:
<TABLE>
<S> <C>
Deferred income tax liabilities --
Property and equipment.................................................. $ 19,000
Accrual to cash differences, net........................................ 195,500
--------
Total deferred income tax liabilities........................... 214,500
Deferred income tax assets --
Accrued expenses........................................................ 231,100
--------
Total deferred income tax assets................................ 231,100
--------
Net current deferred tax asset.................................. $ 16,600
========
</TABLE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following:
<TABLE>
<S> <C>
Tax at statutory rate..................................................... $ 4,415
Add (deduct)
State income taxes...................................................... 6,346
Nondeductible expenses.................................................. 3,381
Effect of graduated tax rates........................................... (6,542)
--------
Total provision for income taxes................................ $ 7,600
========
</TABLE>
F-171
<PAGE> 218
ZIA INFORMATION ANALYSIS GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases its office facility in California and various office
equipment under noncancelable lease agreements which expire at various dates.
The leases provide for lease terms over two to three years commencing February
1995, through June 1998, with monthly lease payments of $200 to $18,686. The
property lease agreements provide that the Company pay all related taxes and
insurance. The total lease expense for the year ended 1995 totaled approximately
$190,248. Future minimum future lease payments under operating leases as of
December 31, 1995, for the remainder of the term and in the aggregate are as
follows:
<TABLE>
<S> <C>
1996.............................................................. $224,235
1997.............................................................. 205,549
--------
Total................................................... $429,784
========
</TABLE>
Subleases
The Company subleases a portion of its office facility in California under
noncancelable lease agreements which expire at various dates to two unrelated
businesses. Future minimum sublease rental income as of December 31, 1995, for
the remainder of the term and in the aggregate are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 56,870
1997.............................................................. 53,064
--------
Total................................................... $109,934
========
</TABLE>
8. SIGNIFICANT CUSTOMER:
At December 31, 1995, the Company had two customers which each accounted
for 56% and 14% of gross service revenue and 22% and 3% of accounts receivable,
respectively.
F-172
<PAGE> 219
F.Y.I. INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
These pro forma combined Financial Statements should be read in conjunction
with the historical financial statements of the Founding Companies Combined,
F.Y.I. Incorporated and Subsidiaries and the individual Founding Companies and
Significant Acquisitions. See "Index to Financial Statements."
F.Y.I. acquired, simultaneously with and as a condition to the closing of
the IPO in January 1996, Imagent, Researchers, Recordex, DPAS, Leonard,
Deliverex and Permanent Records. The Acquisitions have been accounted for in
accordance with generally accepted accounting principles ("GAAP") as a
combination of the Founding Companies at historical cost and January 31, has
been used as the effective date of the Acquisitions. Accordingly, historical
financial statements of these Founding Companies have been combined throughout
all periods prior to February 1, 1996 as if the Founding Companies had always
been members of the same operating group. However, since the Founding Companies
were not under common control or management, historical combined results may not
be comparable to, or indicative of, future performance.
In May 1996, the Company acquired B&B and Premier. In June 1996, the
Company acquired all of the non-cash assets of Cook.
In August 1996, the Company acquired Medical Record. CMRS and Texas Medical
Record have previously reported on a fiscal year ending February 29 and
Minnesota Medical Record has previously reported on a fiscal year ending
September 30. As such, the accounts of CMRS, Texas Medical Record and Minnesota
Medical Record for their last fiscal year have been combined with the results of
F.Y.I. for the year ended December 31, 1995. The results of CMRS, Texas Medical
Record and Minnesota Medical Record for the interim period from January 1, 1996
through September 30, 1996 have been recast and combined with the results of
F.Y.I. for the nine months ended September 30, 1996. Also, as of August 1996,
the Company acquired ZIA.
All of the Significant Acquisitions are accounted for under the purchase
method of accounting.
The unaudited pro forma financial statements of F.Y.I. for the year ended
December 31, 1995 gives effect to: (i) the acquisitions of B&B, Premier, Cook,
Medical Record, and ZIA (collectively, the "Significant Acquisitions") as if the
transactions were consummated as of January 1, 1995 and (ii) the acquisition of
the Founding Companies as if the transactions were consummated as of January 1,
1995.
The unaudited pro forma financial statements of F.Y.I. for the nine months
ended September 30, 1996 is based upon:
(i) the audited statement of operations of F.Y.I. for the period from
February 1, 1996 to September 30, 1996 combined with the audited statement
of operations for the Founding Companies for the one month ended January
31, 1996;
(ii) the unaudited statements of operations for B&B, Premier, Cook,
ZIA and Medical Record from January 1, 1996 to the respective effective
date of the acquisition.
The pro forma Financial Statements have been prepared based upon certain
assumptions and include all adjustments as detailed in the Notes to Pro Forma
Financial Statements.
The Company has preliminarily analyzed the savings that it expects to be
realized by consolidating certain general and administrative functions,
including reductions in accounting, audit, insurance and benefit plan expenses.
In addition, the Company has realized benefits from: (i) the reduction in
interest payments related to the prepayment of outstanding Founding Company
debt; (ii) its ability to borrow at lower interest rates than the Founding
Companies; and (iii) the interest earned on the net proceeds of the IPO
remaining after payment of the expenses of the IPO and the cash portion of the
consideration for the Founding Companies. These savings are offset by the costs
of being a public company and the incremental increase in costs related to the
Company's new management. Neither the savings nor the costs have been included
in the
F-173
<PAGE> 220
pro forma financial information of F.Y.I. Incorporated and Subsidiaries for the
periods prior to the Acquisitions.
The pro forma financial data do not purport to represent what the Company's
financial position or results of operations would actually have been if such
transaction in fact had occurred on those dates or to project the Company's
financial position or results of operations for any future period.
F-174
<PAGE> 221
F.Y.I. INCORPORATED AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
F.Y.I. FOUNDING SIGNIFICANT PRO FORMA
INCORPORATED COMPANIES ADJUST ACQUISITIONS ADJUST COMBINED
------------ --------- ------ ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Service revenue....................... $ -- $40,615 $ -- $29,248 $ (299)(H) $69,564
Product revenue....................... -- 6,138 -- 1,550 -- 7,688
Other revenue......................... -- 873 -- 35 -- 908
------ ------- ------ ------- ------- -------
Total revenue................... -- 47,626 -- 30,833 (299) 78,160
COST OF SERVICES........................ -- 25,937 -- 16,548 (299)(H) 42,186
COST OF PRODUCTS SOLD................... -- 4,972 -- 1,250 -- 6,222
DEPRECIATION............................ -- 1,238 -- 765 (371)(A) 1,632
------ ------- ------ ------- ------- -------
Gross profit.................... -- 15,479 -- 12,270 371 28,120
SELLING, GENERAL AND ADMINISTRATIVE..... -- 12,425 (1,976)(E) 8,463 (1,412)(B) 17,500
AMORTIZATION............................ 64 832 (A) 896
------ ------- ------ ------- ------- -------
Operating income................ -- 2,990 1,976 3,807 951 9,724
OTHER (INCOME) EXPENSE:
Interest expense...................... -- 492 -- 229 1,135 (G) 1,856
Interest income....................... -- (139) -- (59) -- (198)
Other................................. -- (214) -- 48 (38)(I) (204)
------ ------- ------ ------- ------- -------
Income before income taxes...... -- 2,851 1,976 3,589 (146) 8,270
PROVISION FOR INCOME TAXES.............. -- 163 1,631 (F) 130 1,248 (C) 3,172
------ ------- ------ ------- ------- -------
NET INCOME.............................. $ -- $ 2,688 $ 345 $ 3,459 $(1,394) $ 5,098
====== ======= ====== ======= ======= =======
NET INCOME PER COMMON SHARE............. $ 0.87
=======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................... 5,286 586 (D) 5,872
====== ======= =======
</TABLE>
F-175
<PAGE> 222
F.Y.I. INCORPORATED AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
F.Y.I. FOUNDING SIGNIFICANT PRO FORMA
INCORPORATED COMPANIES ADJUST ACQUISITIONS ADJUST COMBINED
------------ --------- ------ ------------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Service revenue........................... $41,262 $3,487 $ -- $14,854 $(150)(H) $59,453
Product revenue........................... 4,211 395 -- 362 -- 4,968
Other revenue............................. 498 34 -- 11 -- 543
------- ------ ----- ------- ----- -------
Total revenue....................... 45,971 3,916 -- 15,227 (150) 64,964
COST OF SERVICES............................ 26,020 2,196 -- 8,166 (150)(H) 36,232
COST OF PRODUCTS SOLD....................... 3,225 307 -- 313 -- 3,845
DEPRECIATION................................ 1,023 90 -- 337 (146)(A) 1,304
------- ------ ----- ------- ----- -------
Gross profit........................ 15,703 1,323 -- 6,411 146 23,583
SELLING, GENERAL AND ADMINISTRATIVE......... 10,891 1,497 (683)(E) 4,150 (752)(B) 15,103
AMORTIZATION................................ 290 6 1 370 (A) 667
------- ------ ----- ------- ----- -------
Operating income.................... 4,522 (180) 683 2,260 528 7,813
OTHER (INCOME) EXPENSE
Interest expense.......................... 479 24 -- 60 602 (G) 1,165
Interest income........................... (207) -- -- (15) -- (222)
Other..................................... (40) (69) -- (32) 25 (I) (116)
------- ------ ----- ------- ----- -------
Income before income taxes.......... 4,290 (135) 683 2,247 (99) 6,986
PROVISION FOR INCOME TAXES.................. 1,729 (130) 351 (F) 214 644 (C) 2,808
------- ------ ----- ------- ----- -------
NET INCOME.................................. $ 2,561 $ (5) $ 332 $ 2,033 $(743) $ 4,178
======= ====== ===== ======= ===== =======
NET INCOME PER COMMON SHARE................. $ 0.47 $ 0.71
======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... 5,450 422 (D) 5,872
======= ===== =======
</TABLE>
F-176
<PAGE> 223
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
THE PRO FORMA ADJUSTMENTS TO THE ACCOMPANYING STATEMENTS OF OPERATIONS ARE
SUMMARIZED BELOW:
A. Adjustment to depreciation and amortization expense related to the
preliminary purchase price allocations.
B. To record the difference between the compensation paid to the stockholders
of B&B, Premier, ZIA and Medical Record for the historical periods
presented and the F.Y.I. employment contract compensation to the
stockholders.
C. Adjustment of the federal and state income tax provisions based on the pro
forma combined operations.
D. To adjust the weighted average shares outstanding to reflect the pro forma
effect of the shares issued for the purchase of B&B, Premier, ZIA and
Medical Record.
E. To record the difference between the compensation paid to the stockholders
of the Founding Companies and the F.Y.I. employment contract compensation
for the one month ended January 31, 1996 and the year ended December 31,
1995.
F. Adjustment of the federal and state income tax provisions based on the pro
forma combined operations of F.Y.I. and the Founding Companies.
G. To record interest expense on the $12,757,000 term debt issued for the
purchase of Cook, ZIA and Medical Record. Proceeds remaining from the IPO
were used for the purchase of B&B and Premier, and a portion of Cook.
H. To eliminate intercompany revenue between the Significant Acquisitions and
the Founding Companies.
I. To eliminate net management fees due to the different fiscal year ends of
Medical Record.
Statements throughout this Prospectus that state the Company's or
management's intentions, hopes, beliefs, anticipations, expectations or
predictions of the future are forward-looking statements. It is important to
note that the Company's actual results could differ materially from those
projected in such forward-looking statements. Additional information concerning
factors that could cause actual results to differ materially from those in the
forward-looking statements is contained in the "Risk Factors" section of this
Prospectus.
F-177
<PAGE> 224
------------------------------------------------------
------------------------------------------------------
No dealer, representative or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and if given or made, such information or representations must not
be relied upon as having been authorized by the Company, the Selling
Stockholders or any Underwriter. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities offered hereby by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to
anyone to whom it is unlawful to make such offer or solicitation.
-------------------------------
TABLE OF CONTENTS
-------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
The Company............................ 11
Use of Proceeds........................ 14
Price Range of Common Stock............ 14
Dividend Policy........................ 14
Capitalization......................... 15
Selected Financial Data................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 28
Management............................. 33
Principal and Selling Stockholders..... 38
Description of Capital Stock........... 39
Certain Transactions................... 40
Shares Eligible for Future Sale........ 41
Underwriting........................... 43
Legal Matters.......................... 44
Experts................................ 44
Available Information.................. 45
Index to Financial Statements.......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
2,420,000 SHARES
LOGO
COMMON STOCK
---------------
PROSPECTUS
---------------
MONTGOMERY SECURITIES
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY
December 12, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 225
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarterly period ended September 30, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from ____________ to ____________
Commission file number 0-27444
F.Y.I. INCORPORATED
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2560895
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification
organization) No.)
3232 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS 75204
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 953-7555
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -----
As of November 12, 1996, 6,165,450 shares of the registrant's Common Stock,
$.01 par value per share, were outstanding.
1
<PAGE> 226
F.Y.I. INCORPORATED AND SUBSIDIARIES
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
---------------------
Item 1 Financial Statements 3
Consolidated Balance Sheets - December 31, 1995 and September 30, 1996 4
Consolidated Statements of Operations - Three months and nine months
ended September 30, 1995 and 1996 5
Consolidated Statements of Cash Flows - Nine months ended September 30,
1995 and 1996 6
Notes to Consolidated Financial Statements - September 30, 1996 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
PART II. OTHER INFORMATION
-----------------
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE> 227
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE> 228
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 52 $ 3,336
Accounts receivable and notes receivable, less allowance - 14,191
Inventory - 567
Prepaid expenses and other current assets 52 687
------ --------
Total current assets 104 18,781
PROPERTY, PLANT AND EQUIPMENT, net 15 10,105
GOODWILL AND OTHER INTANGIBLES - 28,099
DEFERRED OFFERING COSTS 2,190 -
ACCOUNTS RECEIVABLE, SHAREHOLDER - LONG TERM - 643
OTHER NONCURRENT ASSETS 6 2,273
------ --------
Total assets $2,315 $ 59,901
====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $1,101 $ 7,177
Short-term obligations - 3,545
Current maturities of long-term obligations - 294
Unearned revenue - 686
Federal income taxes payable - 1,752
Current portion of deferred income taxes - 289
------ -------
Total current liabilities 1,101 13,743
LONG-TERM OBLIGATIONS, net of current maturities - 16,956
DEFERRED INCOME TAXES, net of current portion - 278
------ -------
Total liabilities 1,101 30,977
------ -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $.01 par value, 1,000,000 and
0 shares authorized, 9,000 and 0 shares issued and
outstanding at December 31, 1995 and September 30, 1996,
respectively - -
Preferred stock, $.01 par value, 1,000,000 shares authorized,
0 shares issued and outstanding - -
Common stock, $.01 par value, 26,000,000 shares authorized,
663,125 and 5,928,074 shares issued and outstanding at
December 31, 1995 and September 30, 1996, respectively 7 59
Additional paid-in-capital 1,207 26,805
Retained earnings - 2,561
------ -------
1,214 29,425
Less - Treasury stock, $.01 par value, 0 and 36,670 shares
at December 31, 1995 and September 30, 1996, respectively - (501)
------ -------
Total stockholders' equity 1,214 28,924
------ -------
Total liabilities and stockholders' equity $2,315 $59,901
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 229
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(See Note 1)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ----------------
1995 1996 1995 1996
------ ------- ------- -------
(unaudited)
<S> <C> <C> <C>
REVENUE:
Service revenue $ - $19,548 $ - $ 41,262
Product revenue - 1,571 - 4,211
Other revenue - 201 - 498
-------- ------- ----- --------
Total revenue - 21,320 - 45,971
COST OF SERVICES - 12,390 - 26,020
COST OF PRODUCTS SOLD - 1,251 - 3,225
DEPRECIATION - 390 - 1,023
-------- ------- ----- --------
Gross profit - 7,289 - 15,703
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES - 4,722 - 10,891
AMORTIZATION - 218 - 290
-------- ------- ----- --------
Operating income - 2,349 - 4,522
OTHER (INCOME) EXPENSE:
Interest expense - 362 - 479
Interest income - (27) - (207)
Other (income) expense, net - 20 - (40)
-------- ------- ----- --------
Income before income taxes - 1,994 - 4,290
PROVISION FOR INCOME TAXES - 806 - 1,729
-------- ------- ----- --------
NET INCOME $ - $ 1,188 $ - $ 2,561
======== ======== ===== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - 5,784 - 5,450
======== ======= ===== ========
NET INCOME PER COMMON SHARE $ - $ 0.21 $ - $ 0.47
======== ======= ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 230
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(See Note 1)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30, September 30,
1995 1996
------------- --------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ 2,561
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization - 1,313
Deferred tax benefit (274)
Change in operating assets and liabilities:
Accounts receivable and notes receivable - (159)
Inventory - (58)
Prepaid expenses and other assets - (325)
Accounts payable and accrued liabilities - (1,798)
Unearned revenue - 95
----- --------
Net cash provided by operating activities - 1,355
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (7) (2,328)
Cash paid for acquisitions, net of cash received - (27,365)
----- --------
Net cash used for investing activities (7) (29,693)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance, net of underwriting
discounts and other costs (251) 23,448
Proceeds from preferred stock issuance 135 -
Proceeds from short-term obligations - 3,500
Proceeds from long-term obligations - 14,101
Cash paid for debt issuance costs - (1,602)
Principal payments on short-term obligations - (5,252)
Principal payments on long-term obligations - (2,573)
----- --------
Net cash (used in) provided by financing activities (116) 31,622
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (123) 3,284
CASH AND CASH EQUIVALENTS, beginning of period 669 52
----- --------
CASH AND CASH EQUIVALENTS, end of period $ 546 $ 3,336
===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 231
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
F.Y.I. Incorporated (the "Company" or "F.Y.I.") was founded in September
1994 to create a national, single source provider of document management
services to three primary client segments: healthcare institutions, professional
services firms and financial institutions. In January 1996, F.Y.I. acquired (the
"Acquisitions"), simultaneously with the closing of its initial public offering
(the "IPO") on January 23, 1996, seven document management services businesses
(the "Founding Companies"). The consideration for the Founding Companies
consisted of a combination of cash and common stock (the "Common Stock") of
F.Y.I.
Between September 1994 and the consummation of the IPO and the
Acquisitions, F.Y.I. did not conduct any significant operations. For accounting
purposes and for the purposes of the presentation of the financial statements
herein, January 31, 1996 has been used as the effective date of the
Acquisitions. Accordingly, the actual operating results of the Company
included in the Statement of Operations for the nine months ended September 30,
1996 represent the eight months of operations subsequent to the consummation
of the Acquisitions. Supplemental Statement of Operations Data for the nine
months ended September 30, 1996 are presented in Note 2 herein.
In the opinion of F.Y.I.'s management, the accompanying consolidated
financial statements include the accounts of the Company and all adjustments
necessary to present fairly the Company's financial position at September 30,
1996, its results of operations for the three and nine months ended September
30, 1995 and 1996, and its cash flows for the nine months ended September 30,
1995 and 1996. All significant intercompany accounts have been eliminated.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). These consolidated financial statements should
be read in conjunction with the combined financial statements of the Founding
Companies and the related notes thereto in F.Y.I.'s Annual Report on Form 10-K
filed with the Commission on April 10, 1996, as amended by F.Y.I.'s Annual
Report on Form 10-K/A filed with the Commission on April 29, 1996, and the
Company's Current Report on Form 8-K filed on September 9, 1996. The results of
operations for the interim periods ended September 30, 1996 and 1995 will not
be indicative of the results for the full year because the Company only had
operations for eight of the nine months and the impact of acquisitions recorded
as purchases, whose results are only included subsequent to the purchase date.
7
<PAGE> 232
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND THE ACQUISITIONS
Initial Public Offering
On January 26, 1996, the Company completed the IPO of 2,185,000 shares of
Common Stock (including the exercise of the underwriters' over-allotment
option) at $13.00 per share. Proceeds from the IPO, net of underwriting
discount and IPO costs, were approximately $22.9 million. Of these net
proceeds, approximately $7.1 million was used to pay a portion of the
consideration for the Acquisitions, approximately $7.7 million was used to
retire certain indebtedness of the Founding Companies, approximately $8.0
million was used for acquisitions subsequent to the IPO, and $0.1 million was
used as working capital.
Upon the closing of the IPO, the Company converted the 9,000 shares of
Series A Preferred Stock then outstanding into 542,557 shares of Common Stock.
Acquisitions of the Founding Companies
Simultaneously with the closing of the IPO, the Company acquired the
Founding Companies. The aggregate consideration paid by F.Y.I. to acquire the
Founding Companies was approximately $35 million, consisting of: (i)
$7,059,000 in cash; (ii) 1,878,933 shares of Common Stock; (iii) the assumption
and repayment of approximately $191,000 of indebtedness owed by a Founding
Company stockholder; and (iv) the distribution of cash and certain receivables
to certain stockholders of Founding Companies that were S corporations in the
amount of $3,450,000, representing the undistributed retained earnings of such
S corporations, upon which taxes have been paid by the stockholders.
The Acquisitions have been accounted for in accordance with generally
accepted accounting principles ("GAAP") as a combination of F.Y.I. and the
Founding Companies at historical cost, because: (i) the Founding Companies'
stockholders transferred assets to F.Y.I. in exchange for Common Stock and cash
simultaneously with the IPO; (ii) the nature of future operations of the
Company will be substantially identical to the combined operations of the
Founding Companies; and (iii) no former stockholder group of any of the
Founding Companies obtained a majority of the outstanding voting shares of the
Company.
Supplemental Data
Statement of Operations - Supplemental Data
The Statement of Operations Data for the nine months ended September 30,
1995 represent the unaudited combined statement of operations of the Founding
Companies for the period adjusted to give effect to: (i) compensation levels the
officers and owners have agreed to receive subsequent to the IPO; and (ii)
provision for income taxes as if all entities had been subject to federal and
state income taxes for the period. The Supplemental Statement of Operations Data
for the nine months ended September 30, 1996 represent a combination of: (i) the
audited results of the combined Founding Companies for the one month of
operations prior to the consummation of the Acquisitions adjusted for the
compensation and tax adjustments discussed above; and (ii) the audited results
of F.Y.I. Incorporated and Subsidiaries for the
8
<PAGE> 233
eight months subsequent to the consummation of the Acquisitions (which include
acquisitions subsequent to the IPO from the date of their respective
acquisition). The Supplemental Data are provided for information purposes only
and do not purport to present the results of operations of the Company had the
transactions assumed therein occurred on or as of the dates indicated, nor are
they necessarily indicative of the results of operations which may be achieved
in the future.
<TABLE>
<CAPTION>
SUPPLEMENTAL DATA
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------------- -------------------
(UNAUDITED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue $ 29,997 $ 44,749
Product revenue 4,815 4,606
Other revenue 674 532
-------- --------
Total revenue 35,486 49,887
Cost of services 19,064 28,216
Cost of products sold 3,890 3,532
Depreciation 898 1,113
-------- --------
Gross profit 11,634 17,026
Selling, general and administrative expenses (a) 7,657 11,705
Amortization 48 296
-------- --------
Operating income 3,929 5,025
Interest and other expenses, net 159 187
-------- --------
Income before income taxes 3,770 4,838
Provision for income taxes (b) 1,399 1,950
-------- --------
Net income $ 2,371 $ 2,888
======== ========
Net income per share $ 0.53
========
Weighted average shares outstanding 5,450
</TABLE>
(a) Adjusted for Founding Company pro forma Compensation Differential of $1,532
for 1995 and $683 for 1996.
(b) Adjusted for pro forma provision for taxes of $1,411 for 1995 and $351 for
1996.
9
<PAGE> 234
Weighted Average Shares Outstanding
The number of shares (in thousands) used in calculating net income per
share was determined as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1996
------------- -------------
<S> <C> <C>
Outstanding F.Y.I. shares after the IPO and the acquisitions
of the Operating Companies (as defined below) 5,768 5,434
Warrants to purchase stock under the treasury stock method 16 16
----- -----
Number of shares used in net income
per share calculation 5,784 5,450
===== =====
</TABLE>
3. BUSINESS COMBINATIONS
Since the IPO, the Company has acquired 13 additional businesses (together
with the Founding Companies, the "Operating Companies") which provide document
management services. All of the acquisitions are accounted for under the
purchase method of accounting.
In May 1996, the Company acquired the stock of B&B Information and Image
Management, Inc. ("B&B") and Premier Document Management, Inc. and PDM Services,
Inc. ("Premier"). In June 1996, the Company acquired all of the non-cash assets
of Robert A. Cook and Staff, Inc. and RAC Services, Inc. ("Cook"). In August
1996, the Company acquired C.M.R.S. Inc. ("CMRS"), Minnesota Medical Record
Service, Inc. ("Minnesota Medical Record") and Texas Medical Record Service,
Inc. ("Texas Medical Record") (collectively "Medical Record"). Also, as of
August 1996, the Company acquired ZIA Information Analysis Group ("ZIA"). B&B,
Premier, Cook, Medical Record and ZIA are considered significant subsidiaries
of the Company. The aggregate consideration paid for B&B, Premier, Cook,
Medical Record and ZIA consisted of $20,129,000 in cash and 585,589 shares of
Common Stock. The preliminary allocation of the purchase price is set forth
below:
<TABLE>
<S> <C>
Consideration Paid $28,123,000
Estimated Fair Value of Tangible Assets 10,758,000
Estimated Fair Value of Liabilities 7,527,000
Goodwill 24,892,000
</TABLE>
The fair market value of the shares of Common Stock used in calculating the
consideration paid was $13.65, which represents a 35% discount from the average
trading price of the Common Stock based on the length and type of restrictions
in the purchase agreements.
The Company acquired substantially all of the assets of Sacramento Valley
Records Management Co. ("Sacramento") and Microfilm Associates, Ltd.
("Microfilm) in February 1996; Octo, Incorporated ("Octo") in June 1996 and
Domor Data Processing ("Domor"), Rushmore Legal Support ("Rushmore"), and Index
Record Management ("Index") in July 1996. The aggregate consideration paid for
Sacramento, Microfilm, Octo, Domor, Rushmore and Index consisted of $3,017,000
in cash. The preliminary allocation of the purchase price is set forth below:
10
<PAGE> 235
<TABLE>
<S> <C>
Consideration Paid $3,017,000
Estimated Fair Value of Tangible Assets 720,000
Estimated Fair Value of Liabilities 433,000
Goodwill 2,730,000
</TABLE>
The estimated fair market values reflected above are based on preliminary
estimates and assumptions and are subject to revision. In management's
opinion, the preliminary allocation is not expected to be materially different
than the final allocation.
All intangibles are considered enterprise goodwill. Based on the historical
profitability of the purchased companies and trends in the legal, healthcare
and other industries to outsource document management functions in the
foreseeable future, the enterprise goodwill will be amortized over a period of
30 years. Management continually evaluates whether events and circumstances
indicate that the remaining estimated useful life of intangible assets may
warrant revisions or that the remaining balance of intangibles or other
long-lived assets may not be recoverable. To make this evaluation, management
uses an estimate of undiscounted net income over the remaining life of the
intangibles or other long-lived assets. The goodwill associated with the B&B,
Premier, Medical Record and ZIA acquisitions is not deductible for income tax
purposes.
Set forth below is a pro forma income statement for the nine months ended
September 30, 1996 and for the year ended December 31, 1995. The unaudited pro
forma data give effect to: (i) the acquisitions of B&B, Premier, Cook, Medical
Record and ZIA; (ii) the acquisitions of the Founding Companies; and (iii)
compensation and tax adjustments for all transactions as if the transactions
had occurred on January 1, 1995. The acquisitions of Sacramento, Microfilm,
Octo, Domor, Rushmore and Index have not been included in the pro forma
financial statements for periods prior to their acquisition date as the effect
is immaterial.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year Ended Nine Months Ended
December 31, 1995 September 30, 1996
----------------- ------------------
(Unaudited In Thousands,
Except Per Share Data)
<S> <C> <C>
Revenue $ 78,160 $64,964
Income before income taxes 8,270 6,986
Net income 5,098 4,178
Net income per common share $ 0.87 $ 0.71
Average shares outstanding 5,872 5,872
======== =======
</TABLE>
4. CREDIT FACILITY
In April 1996, the Company and its subsidiaries entered into a credit
agreement, as amended (the "Line of Credit"), with Banque Paribas, as agent,
and the lenders named therein. Under the Line of Credit, the Company and its
subsidiaries may borrow, on a revolving credit basis, loans in an aggregate
outstanding principal amount up to $35.0 million from time to time
11
<PAGE> 236
under the secured revolving credit and acquisition facility, subject to certain
customary borrowing capacity requirements. The Company and its subsidiaries may
borrow up to an aggregate $30.0 million of term loans under the Credit
Agreement for acquisitions under prescribed conditions. The Company and its
subsidiaries may borrow revolving credit loans up to an aggregate $5.0 million
under the Credit Agreement for working capital and general corporate purposes.
The commitment to fund revolving credit loans expires April 14, 2001. The
commitment to fund term loans expires October 15, 1997. The annual interest
rate applicable to borrowings under this facility is, at the option of the
Company, (i) 1.50% plus the prime rate or (ii) 3.00% plus the Eurodollar rate.
The Credit Agreement requires mandatory prepayments in certain
circumstances. The outstanding principal balance of term loans as of October
15, 1997 shall thereafter be due and payable in 14 equal quarterly payments
beginning January 15, 1998, and ending April 15, 2001. The outstanding
principal balance of revolving credit loans will be due and payable on April
15, 2001. As of September 30, 1996, the Company had $3.5 million in borrowings
outstanding under this facility for working capital and corporate purposes, and
$14.1 million in borrowings outstanding under the term loans for acquisitions.
12
<PAGE> 237
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto appearing elsewhere in
this Report on Form 10-Q. Additional information concerning factors that could
cause results to differ materially from those in the forward-looking statements
is contained under the section "Risk Factors."
Introduction
F.Y.I. was founded in September 1994 to create a national, single source
provider of document management services. In January 1996, F.Y.I. acquired,
simultaneously with the closing of the IPO, the Founding Companies. The
Acquisitions have been accounted for in accordance with GAAP as a combination of
the Founding Companies at historical cost, and January 31, 1996 has been used as
the effective date of the Acquisitions. Between September 1994 and the
consummation of the IPO, F.Y.I. did not conduct any operations. Accordingly, the
actual operating results of the Company included in the Statement of Operations
for the nine months ended September 30, 1996 represent only the eight months of
operations subsequent to the consummation of the Acquisitions and the IPO.
During the period prior to the IPO, F.Y.I. incurred various legal, accounting,
marketing, travel and other costs in connection with the Acquisitions and the
IPO which were funded by the issuance of equity securities. Additional costs
associated with the Acquisitions and the IPO were paid with proceeds of the IPO.
Subsequent to the IPO and through September 30, 1996, the Company acquired
13 additional document management businesses. All of these Subsequent
Acquisitions have been accounted for using the purchase method of accounting.
The results of operations for these Subsequent Acquisitions are reflected in the
Company's financial statements based upon their individual acquisition dates.
Supplemental Statement of Operations Data represent the combined results
of: (i) the Founding Companies for the one month of operations prior to the
consummation of the Acquisitions and the IPO and (ii) F.Y.I. Incorporated and
Subsidiaries for the eight months of operations subsequent to the consummation
of the Acquisitions and the IPO. Such data are presented and discussed herein
in order to present the results of the Company since the consummation of the IPO
compared to the results of the combined Founding Companies for periods prior to
the IPO. The Supplemental Data are provided for information purposes only and do
not purport to present the results of operations of the Company had the
transactions assumed therein occurred on or as of the dates indicated. The
Founding Companies were not under common control or management. Accordingly,
such historical combined results may not be comparable to, or indicative of,
future performance.
The Company's revenue is classified as service revenue, product revenue and
other revenue. Service revenue relates to: (i) document and data conversion
services; (ii) records management services; (iii) database management and
related services; (iv) medical records release of information services; and (v)
litigation support services. Product revenue represents sales of micrographic
and business imaging supplies and equipment, primarily in conjunction with film
processing and other micrographic services. Other revenue consists of
commissions on the sales of imaging systems and equipment and franchising fees.
Cost of services consists primarily of compensation and benefits to
non-administrative employees, occupancy costs, equipment costs and supplies and
also includes the costs associated with other revenue discussed above. Cost of
products sold relates to micrographics and business imaging supplies and
equipment.
Selling, general and administrative expenses ("SG&A") consist primarily of
compensation and related benefits to the sales and marketing, executive
management, accounting, human resources and other administrative employees of
the Company, other sales and marketing costs, communications costs, insurance
costs and legal and accounting professional fees. SG&A subsequent to the IPO
include the costs of being a public company and the Company's executive
management team.
13
<PAGE> 238
The Company
The Company had conducted no significant operations from its inception
through the IPO and the Acquisitions. For accounting purposes and the
presentation of the actual financial results herein, January 31, 1996 has been
used as the effective date of the Acquisitions.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995 -- F.Y.I. INCORPORATED
For the three months ended September 30, 1996, revenue was $21.3 million,
gross profit was $7.3 million, operating income was $2.3 million, and net
income was $1.2 million. As previously mentioned, F.Y.I. had no operations
until February 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995 -- F.Y.I. INCORPORATED
For the nine months ended September 30, 1996, revenue was $46.0 million,
gross profit was $15.7 million, operating income was $4.5 million, and net
income was $2.6 million. As previously mentioned, F.Y.I. had no operations
until February 1996. For further discussion of supplemental operations for the
nine months ended September 30, 1996 and 1995, see "-- Supplemental."
Liquidity and Capital Resources
As of September 30, 1996, the Company had $5.0 million of working capital
and $3.3 million of cash. Cash flows provided by operating activities for the
nine months ended September 30, 1996 were $1.4 million. Cash used for investing
activities was $29.7 million, as the Company paid $27.4 million for
acquisitions, net of cash acquired. Cash provided by financing activities was
$31.6 million. The Company raised $22.9 million in the IPO, net of underwriting
discount and other costs associated with the IPO. The Company assumed $8.5
million of debt in the acquisition of the Founding Companies and subsequently
retired all of this debt with the proceeds of the IPO, with the exception of
approximately $0.4 million of debt with favorable interest rates and capital
lease obligations of approximately $0.4 million. In April 1996, the Company
negotiated a $35.0 million Line of Credit (see Note 4 of Notes to Consolidated
Financial Statements of F.Y.I. Incorporated and Subsidiaries). The Company paid
$1.6 million in costs to secure this financing. As of September 30, 1996, the
Company had borrowed $17.6 million under the Line of Credit to help fund the
acquisition program. The Company assumed $2.9 million of debt in the Subsequent
Acquisitions and retired $0.4 million of such debt. The assumed debt remaining
has interest rates more favorable than the Company's credit facility.
In the nine months ended September 30, 1995, the Company raised an
additional $0.1 million through the sale of Preferred Stock. During this period
the Company spent $0.3 million in activities related to the IPO and Acquisition
and ended the period with $0.5 million in cash. The Company had no other
operations during this period.
The Company anticipates that cash from operations, additional bank
financing available under the Line of Credit, the net proceeds of the proposed
Offering (the "Offering"), of 2,000,000 Company shares of Common Stock filed on
a Form S-1 Registration Statement on November 13, 1996 with the Securities and
Exchange Commission (the "Commission") and shares of Common Stock available
under the Acquisition Shelf (as defined below) will provide sufficient liquidity
to execute the Company's acquisition and internal growth plans for approximately
the next 12 months. The availability under the Line of Credit as of September
30, 1996 was $1.5 million for working capital and general corporate purposes,
and approximately $13.5 million for acquisitions. Should the Company accelerate
its acquisition program, the Company may need to seek additional financing
through the public or private sale of equity or debt securities. There can be
no assurance that the Company could secure such financing if and when it is
needed or on terms the Company deems acceptable. The Company has filed an
acquisition shelf Registration Statement on Form S-1 (Registration No. 333-108)
registering 2,000,000 shares of Common Stock for issuance in its acquisition
program (the "Acquisition Shelf"), of which 1,377,741 shares were available at
September 30, 1996. The Company expects to renegotiate the Line of Credit upon
consummation of the Offering in order to increase its flexibility in executing
acquisition strategy.
14
<PAGE> 239
Supplemental
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995 -- F.Y.I. INCORPORATED COMBINED WITH FOUNDING COMPANIES
Revenue
Total revenue. Total revenue increased 40.6% from $35.5 million for the
nine months ended September 30, 1995 to $49.9 million for the nine months
ended September 30, 1996. This increase was comprised of a 49.2% increase in
service revenue and was offset by a 6.0% decrease in product and other revenue.
Service revenue. Service revenue increased $14.8 million from $30.0
million for the nine months ended September 30, 1995 to $44.8 million for the
nine months ended September 30, 1996. This increase was largely due to: (i) the
Subsequent Acquisitions and (ii) internal growth in service revenue at the
Founding Companies of 9.0%. This internal growth was primarily attributable to
(i) an increase in medical records release revenue at Recordex and Permanent of
$1.5 million primarily attributable to the expansion into 32 additional
healthcare institutions in the Eastern U.S. and Texas during 1995 and 1996;
(ii) an increase in litigation support revenue at Researchers of $700,000
primarily due to increased overnight document production and increased medical
records subpoena and service of process requests; and (iii) an increase in
micrographics and electronic imaging revenue at Imagent of $323,000 attributable
to an overall increase in microfilming, scanning and coding projects, offset by
the reduction in microfilm processing revenue due to the loss of a customer in
early 1996.
Product and other revenue. Product and other revenue decreased
approximately $351,000 from $5.5 million for the nine months ended September 30,
1995 to $5.1 million for the nine months ended September 30, 1996. The decrease
in product revenue primarily resulted from a decline in sales to governmental
and related entities during the federal government shutdown in late 1995. This
decline in product revenue was offset by increased product revenue associated
with the purchase of B&B in May 1996. The decrease in other revenue was
attributable to decreased sales of micrographics equipment in 1996.
Gross profit
Gross profit increased 46.3% from $11.6 million for the nine months ended
September 30, 1995 to $17.0 million for the nine months ended September 30,
1996, largely due to the increases in revenue discussed above. Gross profit as
a percentage of revenue increased from 32.8% for the nine months ended
September 30, 1995 to 34.1% for the nine months ended September 30, 1996,
primarily due to the higher margin mix of revenue associated with the Subsequent
Acquisitions.
Selling, general and administrative expenses
SG&A increased 52.9%, from $7.7 million for the nine months ended
September 30, 1995 to $11.7 million for the nine months ended September 30,
1996, primarily due to: (i) the establishment of corporate overhead required to
execute the acquisition program and to manage the consolidated group of
companies; and (ii) SG&A associated with the Subsequent Acquisitions. SG&A as a
percentage of revenue (excluding corporate overhead) decreased from 21.7% for
the nine months ended September 30, 1995 to 20.7% for the nine months ended
September 30, 1996. This decrease was a result of: (i) a decrease in SG&A as a
percentage of revenue at the Founding Companies from 21.7% for the nine months
ended September 30, 1995 to 21.4% for the nine months ended September 30, 1996
primarily due to spreading the Company's fixed cost over a larger revenue base;
and (ii) lower average SG&A as a percentage of revenue associated with the
Subsequent Acquisitions relative to the Founding Companies.
Income before income taxes and net income
Income before income taxes increased 28.3% from $3.8 million for the nine
months ended September 30, 1995 to $4.8 million for the nine months ended
September 30, 1996, and net income increased 21.8%, from $2.4 million for the
nine months ended September 30, 1995 to $2.9 million for the nine months ended
September 30, 1996, largely attributable to the factors discussed above. Net
income for the nine months ended September 30, 1996 was impacted by a higher
effective tax rate attributable to the elimination of graduated tax rates as
the Founding Companies are now taxed on a consolidated basis and due to the
impact of nondeductible goodwill associated with certain of the Subsequent
Acquisitions.
15
<PAGE> 240
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Since September 30, 1996, the Company has acquired two additional
businesses. First, as of October 1996, the Company acquired
Carton-Hodgson, Inc. and CH Direct, Inc., direct mail and fulfillment
businesses.
Second, in November 1996, the Company acquired Data Input Services
Corporation, Inc., a data input business.
The Company has contemporaneously with the filing of this Form 10-Q filed
with the Commission a Registration Statement on Form S-1 registering
2,783,000 shares of Common Stock in connection with the Offering. The
shares being registered include 2,000,000 shares to be sold by the
Company, 420,000 shares to be sold by selling stockholders and 363,000
shares subject to an over-allotment option granted by the Company to the
underwriters.
RISK FACTORS
LIMITED OPERATING HISTORY; RISKS OF INTEGRATION; ABILITY TO MANAGE GROWTH
F.Y.I. was founded in September 1994 and conducted no operations
prior to the consummation of the IPO. F.Y.I. acquired the Founding
Companies simultaneously with the closing of the IPO and has acquired 15
additional companies since that time (together with the Founding
Companies, the "Operating Companies"). Prior to their acquisition, these
companies operated as separate independent entities. Currently, the
Company has a decentralized financial reporting system and relies on the
existing reporting systems of the Operating Companies. The success of the
Company will depend, in part, on the Company's ability to integrate the
operations of the Operating Companies, including centralizing certain
functions to achieve cost savings and developing programs and processes
that will promote cooperation and the sharing of opportunities and
resources. F.Y.I.'s management group has been assembled recently and had
no previous experience in the document management services industry.
There can be no assurance that the management group will effectively be
able to oversee the combined entity and implement the Company's operating
or growth strategies. Further, to the extent that the Company is able to
implement fully its acquisition strategy, the resulting growth of the
Company will place significant demands on management and on the Company's
internal systems and controls. There can be no assurance that the
recently assembled management group will effectively be able to direct
the Company through a period of significant growth. In addition, no
assurance can be given that the Company's current systems will be
adequate for its future needs or that the Company will be successful in
implementing new systems.
A number of the Operating Companies offer different services, utilize
different capabilities and technologies and target different geographic
markets and client segments. While the Company believes that there are
substantial opportunities in integrating these businesses, these
differences increase the risk inherent in successfully completing such
integration. Further, there can be no assurance that the Company's
strategy to establish a single source provider for document management
services will be successful, or that the Company's target client segments
will accept the Company as a provider of such services. In addition,
there can be no assurance that the operating results of the Company will
match or exceed the combined individual operating results achieved by the
Operating Companies prior to their acquisition.
ACQUISITION STRATEGY
The Company's primary growth strategy is the acquisition of
additional document management services businesses that will complement
its existing businesses. There can be no assurance that the Company will
be able to identify or reach mutually agreeable terms with acquisition
candidates and their owners, or that the Company will be able to
profitably manage additional businesses or successfully integrate such
additional businesses into the Company without substantial costs, delays
or other problems. Acquisitions may involve a number of special risks
including: (i) adverse short-term effects on the Company's reported
operating results; (ii) diversion of management's attention; (iii)
dependence on retention, hiring and training of key personnel; (iv) risks
associated with unanticipated problems or legal liabilities; and (v)
amortization of acquired intangible assets. Some or all of these risks
could have a material adverse effect on the Company's operations and
financial performance. In addition, to the extent that consolidation
becomes more prevalent in the industry, the prices for attractive
acquisition candidates may be bid up to higher levels. In any event,
there can be no assurance that businesses acquired in the future will
achieve sales and profitability that justify the investment therein.
The Company is regularly in discussions with additional acquisition
candidates and may from time to time enter into letters of intent with
respect to the acquisition of such businesses. No assurance can be given,
however, that the Company will acquire any additional businesses.
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NEED FOR ADDITIONAL FINANCING TO CONTINUE ACQUISITION STRATEGY
The Company currently intends to finance future acquisitions by
using cash and its Common Stock for all or a portion of the consideration
to be paid. The Company filed the Acquisition Shelf with the Commission
relating to the separate offering of up to 2,000,000 shares of Common
Stock to be used as consideration for acquisitions effected by the
Company, of which 1,143,265 shares of Common Stock were available as of
November 12, 1996. In the event that the Company's Common Stock does not
maintain sufficient value, or potential acquisition candidates are
unwilling to accept the Company's Common Stock as consideration for the
sale of their businesses, the Company may be required to utilize more of
its cash resources, if available, in order to continue its acquisition
program. If the Company does not have sufficient cash resources, its
growth could be limited unless it is able to obtain capital through
additional debt or equity financings. In April 1996, the Company and its
subsidiaries entered into the Line of Credit, with Banque Paribas, as
agent, and the lenders named therein. Under the Line of Credit, the
Company and its subsidiaries may borrow, on a revolving credit basis,
loans in an aggregate outstanding principal amount of $5.0 million for
working capital and general corporate purposes and term loans in an
aggregate principal amount of $30.0 million for acquisitions, subject to
certain restrictions in the Line of Credit. As of November 12, 1996, the
availability under the Line of Credit was $2.5 million for working capital
and $8.8 million for acquisitions. There can be no assurance, however,
that funds available under the Line of Credit will be sufficient for the
Company's needs.
EFFECT OF POTENTIAL FLUCTUATIONS IN OPERATING RESULTS ON PRICE OF COMMON
STOCK; VOLATILITY OF STOCK PRICE
Results for any quarter are not necessarily indicative of the
results that the Company may achieve for any subsequent quarter or a full
fiscal year. Quarterly results may vary materially as a result of the
timing and structure of acquisitions, the timing and magnitude of costs
related to such acquisitions, the gain or loss of material client
relationships and variations in the prices charged by the Company for the
services it provides. In addition, since a significant portion of the
Company's revenue is generated on a project-by-project basis, the timing
or completion of material projects could result in fluctuations in the
Company's results of operations for particular quarterly periods. Such
fluctuations in operating results may adversely affect the market price
of the Company's Common Stock. The market price for the Company's shares
may also fluctuate in response to material announcements by the Company
or significant clients or competitors of the Company, changes in the
economic or other conditions impacting the Company's targeted client
segments or general economic conditions outside of the Company. Further,
the securities markets have experienced significant price and volume
fluctuations from time to time that have often been unrelated or
disproportionate to the operating performance of particular companies.
These broad fluctuations may adversely affect the market price of the
Common Stock.
DEPENDENCE ON CERTAIN CLIENT SEGMENTS AND TECHNOLOGY
The Company derives its revenue primarily from its three targeted
client segments: healthcare institutions, professional services firms and
financial institutions. Fundamental changes in the business practices of
any of these client segments, whether due to regulatory, technological or
other developments, could cause a material reduction in demand by such
clients for the services offered by the Company. Any such reduction in
demand would have a material adverse effect on the results of operations
of the Company. The document management services industry is characterized
by technological change, evolving customer needs and emerging technical
standards. Although the Company believes that it will be able to continue
to offer services based on the newest technologies, there can be no
assurance that the Company will be able to obtain the rights to use any
such technologies, that it will be able to effectively implement such
technologies on a cost-effective or timely basis or that such technologies
will not render obsolete the Company's role as a third party provider of
document management services.
COMPETITION
The document management services businesses in which the Company
competes and expects to compete are highly competitive. A significant
source of competition is the in-house document handling capability of the
Company's targeted client base. There can be no assurance that these
businesses will outsource more of their document management needs or that
such businesses will not bring in-house services that they currently
outsource. In addition, certain of the Company's competitors are larger
businesses and have greater financial resources than the Company. Certain
of these competitors operate in broader geographic areas than the
Company, and others may choose to enter the Company's areas of operation
in the future. In addition, the Company intends to enter new geographic
areas through internal growth and acquisitions and expects to encounter
significant competition from established competitors in each of such new
areas. As a result of this highly competitive environment, the Company
may lose customers or have difficulty in acquiring new customers and new
companies, and its results of operations may be adversely affected.
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RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of
its executive officers and on senior management of the Operating
Companies. Furthermore, the Company will also be dependent on the senior
management of businesses acquired in the future. If any of these people
is unable or unwilling to continue in his or her present role, or if the
Company is unable to attract and retain other skilled employees, the
Company's business could be adversely affected. The Company does not
intend to obtain key person life insurance covering any of its executive
officers or other members of senior management.
POTENTIAL LIABILITY FOR BREACH OF CONFIDENTIALITY
A substantial portion of the Company's business involves the handling
of documents containing confidential and other sensitive 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 material liability to the
Company.
INCREASE IN MINIMUM WAGE
As of October 1, 1996, the federal minimum wage increased to $4.75
an hour. The second phase of the increase will be implemented on September
1, 1997, bringing the federal minimum wage to $5.15 an hour. In addition,
California and other states have increased or may increase their minimum
wage above the federal minimum. A significant number of the Company's
employees earn slightly above the minimum wage and, therefore, the Company
may have to increase salaries to remain competitive. Accordingly, the
Company's results of operations may be adversely affected.
CONTROL BY MANAGEMENT
Following the completion of the Offering, the directors and
executive officers of the Company will beneficially own approximately
20.4% of the then outstanding shares of Common Stock (19.5% if the
Underwriters' over-allotment option is exercised in full) and exercise
substantial control over the Company's affairs. These stockholders acting
together would likely be able to elect a sufficient number of directors to
control the Board of Directors and to approve or disapprove any matter
submitted to a vote of stockholders.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK
The market price of the Common Stock of the Company could be
adversely affected by the sale of substantial amounts of Common Stock of
the Company in the public market. After the completion of the Offering,
there will be 8,165,450 shares of Common Stock outstanding. The 2,420,000
shares offered in the Offering will be, and the 2,185,000 shares sold in
the IPO are, freely tradable without restriction unless acquired by
affiliates of the Company. Of such 8,165,450 shares, 2,664,615 shares,
together with 165,000 shares of Common Stock currently issuable upon
exercise of outstanding warrants, have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), which means
that they may be resold publicly only upon registration under the
Securities Act or in compliance with an exemption from the registration
requirements of the Securities Act, including the exemption provided by
Rule 144 under the Securities Act. Holders of all such unregistered
shares, however, have certain registration rights with respect to such
shares.
The Company has agreed not to sell or otherwise dispose of any shares
of Common Stock for a period of 90 days from the date of the Offering
without the prior written consent of Montgomery Securities, except that
the Company may issue Common Stock in connection with acquisitions or upon
the exercise of options. In addition, the former owners of the Founding
Companies and the initial stockholders of the Company (which together
include the Selling Stockholders) have agreed with the Company that they
will not sell any of their shares for a period of two years after January
26, 1996 (other than certain sales registered under the Securities Act and
a limited ability to pledge such shares as collateral). The Company has
agreed not to waive such restriction for a period of 90 days from the date
of the Offering without the prior written consent of Montgomery
Securities. Directors of the Company who are not subject to these
contractual restrictions have agreed not to contract to sell or otherwise
sell or dispose of any of their Common Stock for a period of 90 days after
the date of the Offering without the prior written consent of Montgomery
Securities.
The Company issued 856,735 shares of Common Stock as partial
consideration for acquisitions completed since the IPO. Such 856,735
shares were registered under the Acquisition Shelf and are freely tradable
(except for 36,670 shares held by a wholly-owned subsidiary of the
Company) unless acquired by parties to the acquisition or affiliates of
such parties, in which case they may be sold pursuant to Rule 145 under
the Securities Act. In addition, these shares are subject to contractual
restrictions on resale which generally expire two years from the date of
issuance.
The Company has reserved for issuance under its 1995 Stock Option
Plan (the "Plan") an aggregate of 650,000 shares of Common Stock, or 12%
of the aggregate number of shares of the Common Stock outstanding,
whichever is greater. The Company has registered the shares issuable upon
exercise of options granted under the Plan, and such shares will be
eligible for resale in the public market. As of November 12, 1996, the
Company had options to purchase 635,300 shares of Common Stock outstanding
under the Plan.
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<PAGE> 243
EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is empowered to issue preferred
stock without stockholder action. The existence of this "blank-check"
preferred could render more difficult or discourage an attempt to obtain
control of the Company by means of a tender offer, merger, proxy contest
or otherwise.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This filing contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. Investors are cautioned that
all forward-looking statements involve risks and uncertainty, including
without limitation, the sufficiency of the Company's working capital and
the ability of the Company to realize benefits from consolidating certain
general and administrative functions, to continue its aggressive
acquisition program, to retain management, to implement its focused
business strategy to expand its document management services
geographically, to attract customers from other businesses, to increase
revenue by cross-selling services and to successfully defend itself in
ongoing and future litigation. Although the Company believes that the
assumptions underlying the forward looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and, therefore,
there can be no assurance that the forward-looking statements included in
this filing will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein,
the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and
plans of the Company will be achieved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
- -------------- -----------
10.23 -- Second Amendment to Credit Agreement, dated as of August
30, 1996, by and among F.Y.I. Incorporated and its
subsidiaries and Banque Paribas, IBJ Schroder Bank &
Trust, and First Source Financial LLP
21 -- List of subsidiaries of F.Y.I. Incorporated
27 -- Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Commission on
September 9, 1996, reporting under Items 2, 5 and 7 thereto the acquisitions
by the Company of Medical Record and ZIA and including the following historical
restated and pro forma financial information of the Company reflecting recently
completed significant acquisitions:
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FINANCIAL STATEMENTS
NEW ACQUISITIONS
<TABLE>
<S> <C>
C.M.R.S. INCORPORATED
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Shareholder's Equity
Statements of Cash Flows
Notes to Financial Statements
MINNESOTA MEDICAL RECORD SERVICE, INC.
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholder's Equity
Statements of Cash Flows
Notes to Financial Statements
TEXAS MEDICAL RECORD SERVICE INC.
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Shareholders' Equity
Statements of Cash Flows
Notes to Financial Statements
ZIA INFORMATION ANALYSIS GROUP
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Shareholders' Equity
Statements of Cash Flows
Notes to Financial Statements
PRO FORMA FINANCIAL STATEMENTS
F.Y.I. Incorporated and Subsidiaries
Pro Forma Balance Sheet - June 30, 1996 (unaudited)
Pro Forma Statement of Operations for the Year Ended December 31, 1995
(unaudited)
Pro Forma Statement of Operations for the Six Months Ended June 30, 1996
(unaudited)
Notes to Pro Forma Financial Statements (unaudited)
</TABLE>
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<PAGE> 245
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
F.Y.I. Incorporated
Date: November 12, 1996 By: /s/ Ed H. Bowman, Jr.
--------------------------
Ed H. Bowman, Jr.
Chief Executive Officer
Date: November 12, 1996 By: /s/ David Lowenstein
--------------------------
David Lowenstein
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1996 By: /s/ Timothy J. Barker
--------------------------
Timothy J. Barker
Chief Accounting Officer
(Principal Accounting Officer)
21
