<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-1084
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY 30, 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 July 30, 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 Quarterly Report on Form 10-Q for the
fiscal period ended June 30, 1996 filed with the Securities and Exchange
Commission on August 12, 1996.
The Common Stock of the Company is included for quotation on the Nasdaq
National Market. On August 8, 1996, the closing price of the Common Stock on the
Nasdaq National Market was $18.00 per share as published in The Wall Street
Journal on August 9, 1996.
The date of this Prospectus is August 12, 1996.
<PAGE> 2
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 June 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 (I.R.S. Employer
incorporation or organization) Identification 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
2911 Turtle Creek Boulevard, Suite 300, Dallas Texas 75219
(Former address)
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 July 31, 1996, 5,523,147 shares of the registrant's Common
Stock, $.01 par value per share, were outstanding.
S-1
<PAGE> 3
F.Y.I. INCORPORATED AND SUBSIDIARIES
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
---------------------
<S> <C> <C>
Item 1 Financial Statements 3
Consolidated Balance Sheets - December 31, 1995 and June 30, 1996 4
(unaudited)
Consolidated Statements of Operations - Three months and six months
ended June 30, 1995 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows - Six months ended June 30,
1995 and 1996 (unaudited) 6
Notes to Consolidated Financial Statements - June 30, 1996 (unaudited) 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
PART II. OTHER INFORMATION
-----------------
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 20
</TABLE>
S-2
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
S-3
<PAGE> 5
F.Y.I. Incorporated and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ -----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 52 $ 2,521
Accounts receivable and notes receivable, less allowance - 12,107
Accounts receivable, officers and employees - 12
Inventory - 536
Prepaid expenses and other current assets 52 678
--------- --------
Total current assets 104 15,854
PROPERTY, PLANT AND EQUIPMENT, net 15 8,995
GOODWILL, DEFERRED OFFERING COSTS AND
OTHER INTANGIBLES 2,190 18,516
ACCOUNTS RECEIVABLE, OFFICER - LONG TERM - 570
OTHER NONCURRENT ASSETS 6 1,760
--------- --------
Total assets $ 2,315 $ 45,695
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,101 $ 10,263
Short-term obligations - 1,049
Current maturities of long-term obligations - 282
--------- -------
Total current liabilities 1,101 11,594
LONG-TERM OBLIGATIONS,
net of current maturities - 11,071
DEFERRED INCOME TAXES,
net of current portion - 114
--------- --------
Total liabilities 1,101 22,779
--------- --------
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 June 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 5,522,867 shares issued and outstanding at
December 31, 1995 and June 30, 1996, respectively 7 55
Additional paid-in-capital 1,207 21,488
Retained earnings - 1,373
--------- --------
Total stockholders' equity 1,214 22,916
--------- --------
Total liabilities and stockholders' equity $ 2,315 $ 45,695
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-4
<PAGE> 6
F.Y.I. Incorporated and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
(see Note 1)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
---------------------------- ---------------------------
1995 1996 1995 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Service revenue $ - $ 14,307 $ - $ 21,714
Product revenue - 1,727 - 2,640
Other revenue - 204 - 297
------------ ----------- ----------- -----------
Total revenue - 16,238 - 24,651
COST OF SERVICES - 8,929 - 13,630
COST OF PRODUCTS SOLD - 1,255 - 1,974
DEPRECIATION - 421 - 633
------------ ----------- ----------- -----------
Gross profit - 5,633 - 8,414
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES - 3,925 - 6,169
AMORTIZATION - 63 - 72
------------ ----------- ----------- -----------
Operating income - 1,645 - 2,173
OTHER (INCOME) EXPENSE:
Interest expense - 104 - 117
Interest income - (74) - (180)
Other income, net - (21) - (60)
------------ ----------- ----------- -----------
Income before income taxes - 1,636 - 2,296
PROVISION FOR INCOME TAXES - 661 - 923
------------ ----------- ----------- -----------
NET INCOME $ - $ 975 $ - $ 1,373
============ =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - 5,454 - 5,335
============ =========== =========== ===========
NET INCOME PER COMMON SHARE $ - $ 0.18 $ - $ 0.26
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-5
<PAGE> 7
F.Y.I. Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
(see Note 1)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------
June 30, June 30,
1995 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ - $ 1,373
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization - 705
Change in operating assets and liabilities:
Accounts receivable - 104
Inventory - (20)
Prepaid expenses and other assets - 100
Accounts payable and accrued liabilities - (578)
--------- --------
Net cash provided by operating activities - 1,684
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1) (1,078)
Cash paid for acquisitions, net of cash received - (20,749)
--------- --------
Net cash used for investing activities (1) (21,827)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance, net of underwriting
discounts and other costs (280) 23,088
Proceeds from preferred stock issuance 135 -
Proceeds from short-term obligations - 1,000
Proceeds from long-term obligations - 8,150
Cash paid for debt issuance costs - (1,487)
Principal payments on short-term obligations - (1,857)
Principal payments on long-term obligations - (6,282)
--------- --------
Net cash (used in) provided by financing activities (145) 22,612
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (146) 2,469
CASH AND CASH EQUIVALENTS, beginning of period 669 52
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 523 $ 2,521
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-6
<PAGE> 8
F.Y.I. Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
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 "Offering") 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 Offering 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 six months ended June 30, 1996,
represent the five months of operations subsequent to the consummation of the
Acquisitions. Supplemental Statement of Operations Data for the six months
ended June 30, 1996 is 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 June 30, 1996,
its results of operations for the three and six months ended June 30, 1995 and
1996, and its cash flows for the six months ended June 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 June 14, 1996, as amended by the Current Report on Form 8-K/A filed July
5, 1996. The results of operations for the interim periods ended June 30, 1996
and 1995, may not be indicative of the results for the full year.
S-7
<PAGE> 9
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND THE ACQUISITIONS
Initial Public Offering
On January 26, 1996, the Company completed the Offering 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 Offering, net of
underwriter commissions and offering costs, were approximately $23.1 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 Offering, and $0.3 million
was used as working capital.
Upon the closing of the Offering, 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 Offering, 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 Offering; (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 six months ended June 30,
1995 represent the audited 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 Offering; 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 six months ended June 30, 1996 represent a combination of: (i) the
unaudited results of the combined Founding Companies for the one month of
operations prior to the consummation of the Acquisitions; and (ii) the
unaudited results of F.Y.I. Incorporated and Subsidiaries for the five
S-8
<PAGE> 10
months subsequent to the consummation of the Acquisitions (which includes
acquisitions subsequent to the Offering 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
Six Months Six Months
Ended Ended
June 30, June 30,
1995 1996
----------------- -----------------
(In thousands, except per share data)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue $20,207 $ 25,201
Product revenue 3,187 3,035
Other revenue 435 331
------- ---------
Total revenue 23,829 28,567
Cost of services 12,729 15,826
Cost of products sold 2,604 2,281
Depreciation 584 723
------- ---------
Gross profit 7,912 9,737
Selling, general and administrative expenses (a) 5,053 6,983
Amortization 32 78
------- ---------
Operating income 2,827 2,676
Interest and other expenses (income),net 99 (168)
------- ---------
Income before income taxes 2,728 2,844
Provision for income taxes (b) 1,024 1,144
------- ---------
Net income $ 1,704 $ 1,700
======= =========
Net income per share $ 0.32
=========
Weighted average shares outstanding 5,335
</TABLE>
(a) Adjusted for Founding Company pro forma Compensation Differential of $897
for 1995 and $683 for 1996.
(b) Adjusted for pro forma provision for taxes of $887 for 1995 and $351 for
1996.
S-9
<PAGE> 11
Weighted Average Shares Outstanding
The number of shares (in thousands) used in calculating net income per
share was determined as follows:
<TABLE>
<CAPTION>
Three Six
Months Months
Ended Ended
June 30, June 30,
1996 1996
---- ----
<S> <C> <C>
Outstanding F.Y.I. shares after the Offering and the acquisitions
of the Operating Companies 5,438 5,319
Warrants to purchase stock under the treasury stock method 16 16
------ ------
Number of shares used in net income
per share calculation 5,454 5,335
===== ======
</TABLE>
3. BUSINESS COMBINATIONS
Since the Offering, the Company has acquired six additional businesses
(together with the Founding Companies, the "Operating Companies") which provide
document management services and are headquartered in Washington, D.C.,
Baltimore (2), San Jose, Sacramento, and Seattle. 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"). B&B, Premier and Cook are considered significant subsidiaries of the
Company. The aggregate consideration paid for B&B, Premier and Cook consisted
of $15,522,000 in cash and 253,252 shares of Common Stock. The preliminary
allocation of the purchase price is set forth below:
<TABLE>
<S> <C>
Consideration Paid $18,979,000
Estimated Fair Value of Tangible Assets 8,133,000
Estimated Fair Value of Liabilities 5,739,000
Goodwill 16,585,000
</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") in February 1996; Microfilm Associated,
Ltd. ("Microfilm") in February 1996 and Octo, Incorporated ("Octo") in June
1996. The aggregate consideration paid for Sacramento, Microfilm and Octo
consisted of $1,567,000 in cash. The preliminary allocation of the purchase
price is set forth below:
S-10
<PAGE> 12
<TABLE>
<S> <C>
Consideration Paid $1,567,000
Estimated Fair Value of Tangible Assets 637,000
Estimated Fair Value of Liabilities 318,000
Goodwill 1,248,000
</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
and Premier acquisitions is not deductible for income tax purposes.
Set forth below is a pro forma income statement for the six months ended June
30, 1996 and for the year ended December 31, 1995. The unaudited pro forma
data gives effect to: (i) the acquisitions of B&B, Premier and Cook; (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 and Octo 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 Six Months Ended
December 31, 1995 June 30, 1996
----------------- -------------
<S> <C> <C>
Revenue $ 70,681 $ 38,330
Income before income taxes 7,667 4,514
Net income 4,737 2,702
Net income per common share $ 0.86 $ 0.49
Average shares outstanding 5,539 5,539
========= =========
</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 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.
S-11
<PAGE> 13
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 shall be due and payable on April 15, 2001. The
Company has $1.0 million in borrowings outstanding under this facility for
working capital and corporate purposes, and $8.2 million in borrowings
outstanding under the term loans for acquisitions.
S-12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
As discussed more fully in Item 1, the Company effected the
Acquisitions of the Founding Companies simultaneously with the Offering on
January 23, 1996. Prior to the consummation of the Offering, the Company had
not conducted any operations and all activities related to completing the
Offering and the Acquisitions. The Company incurred various legal, accounting,
marketing and travel costs in connection with the Offering and the
Acquisitions, which were funded by issuance of shares of Common Stock and
Preferred Stock. Additional costs associated with the Offering and the
Acquisitions were paid with proceeds of the Offering.
The Acquisitions have been accounted for in accordance with generally
accepted accounting principles as a combination of the Founding Companies at
historical cost. For accounting purposes, 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 six
months ended June 30, 1996 represents the five months of operations subsequent
to the consummation of the Acquisitions.
Since the Offering and the Acquisitions, the Company has acquired six
additional document management businesses. All of these acquisitions have been
accounted for using the purchase method of accounting. The results of
operations for these acquisitions are reflected in the Company's financial
statements based upon their individual acquisition dates.
Supplemental statement of operations data are presented in the
footnotes to the financial statements and discussed herein in order to present
the results of the Company since the consummation of the Acquisitions compared
to the results of the combined Founding Companies for periods prior to the
Acquisitions. 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) micrographics; (ii)
electronic imaging; (iii) active document storage; (iv) archival storage of
inactive documents; (v) information and data base management; (vi) litigation
support services; (vii) medical records release services; and (viii) remittance
processing. 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 salaries and benefits,
equipment costs, supplies and occupancy costs and also includes the costs
associated with other revenue discussed above. Cost of products sold relates
to micrographics and business imaging supplies and equipment.
S-13
<PAGE> 15
Selling, general and administrative expenses ("SG&A") includes the
SG&A cost at all of the individual Operating Companies and the corporate
overhead cost required to: (i) execute the acquisition program; (ii) manage the
operations; and (iii) comply with all regulatory, legal and accounting issues
of a public company. The Company expects to realize benefits from consolidating
certain general and administrative functions, including reductions in
accounting, audit, insurance and benefit plan expenses. The Company is in the
process of evaluating the consolidation of certain of these functions. No
significant savings have been realized in the results of operations as of June
30, 1996.
Statements throughout this quarterly report 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 results to differ materially from those in
the forward-looking statements is contained under the "Risk Factors" section
of the Company's Registration Statements on Form S-1 (Registration Nos.
33-98608 and 333-1084).
Results of Operations - The Company
The Company had conducted no significant operations from its inception
through the Offering 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 JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
- -- F.Y.I. INCORPORATED
For the three months ended June 30, 1996, revenue was $16.2 million,
gross profit was $5.6 million, operating income was $1.6 million, and net
income was $1.0 million. As previously mentioned, F.Y.I. had no operations
until February 1996.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 --
F.Y.I. INCORPORATED
For the six months ended June 30, 1996, revenue was $24.7 million,
gross profit was $8.4 million, operating income was $2.2 million, and net
income was $1.4 million. As previously mentioned, F.Y.I. had no operations
until February 1996. For further discussion of supplemental operations for the
six months ended June 30, 1996 and 1995, see "Results of Operations -
Supplemental Data."
S-14
<PAGE> 16
Liquidity and Capital Resources - The Company
As of June 30, 1996, the Company had $4.3 million of working capital
and $2.5 million of cash. Cash flows provided by operating activities for the
six months ended June 30, 1996 were $1.7 million. Cash used for investing
activities was $21.8 million, as the Company paid $20.7 million for
acquisitions, net of cash acquired. Cash provided by financing activities was
$22.6 million. The Company raised $23.1 million in the Offering, net of
underwriting discounts and other costs associated with the Offering. The
Company assumed $8.5 million of debt in the Acquisitions and subsequently
retired all of this debt with the proceeds of the Offering, 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 ("Line of Credit") (see Note 4 in the
Notes to Financial Statements). The Company paid $1.5 million in costs to
secure this financing. In June, the Company borrowed $9.2 million through the
Line of Credit to help fund the acquisition program. The Company assumed $2.8
million of debt in the acquisitions subsequent to the Offering and retired $0.4
million. The assumed debt remaining has interest rates more favorable than the
Company's credit facility.
The Company anticipates that cash from operations, and additional bank
financing available under the Line of Credit will be sufficient to meet the
Company's liquidity requirements for its operations for the next twelve months.
The availability under the Line of Credit is $3.0 million for working capital
and general corporate purposes, and approximately $21.8 million for
acquisitions. The Company expects that additional funds may be required in the
future to successfully continue the acquisition program. Additionally, the
Company has filed a Registration Statement on Form S-1 (Registration No.
333-1084) to register 2,000,000 shares of Common Stock for issuance in its
acquisition program.
Results of Operations - Supplemental Data
The Statement of Operations Data for the six months ended June 30,
1995 represent the audited combined statement of operations of the Founding
Companies for the period adjusted to give effect to: (i) compensation levels
the officers and owners of the Operating Companies have agreed to receive
subsequent to the Offering; 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 six months ended June 30,
1996 represent a combination of: (i) the unaudited results of the combined
Founding Companies for the one month of operations prior to the consummation of
the Acquisitions; and (ii) the unaudited results of F.Y.I. Incorporated and
Subsidiaries for the five months subsequent to the consummation of the
Acquisitions (which includes acquisitions subsequent to the Offering 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.
S-15
<PAGE> 17
<TABLE>
<CAPTION>
Supplemental Data
Six Months Six Months
Ended Ended
June 30, June 30,
1995 1996
----------------- -----------------
(In thousands, except per share data)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue $20,207 $25,201
Product revenue 3,187 3,035
Other revenue 435 331
------- -------
Total revenue 23,829 28,567
Cost of services 12,729 15,826
Cost of products sold 2,604 2,281
Depreciation 584 723
------- -------
Gross profit 7,912 9,737
Selling, general and administrative expenses (a) 5,053 6,983
Amortization 32 78
------- -------
Operating income 2,827 2,676
Interest and other expenses (income),net 99 (168)
------- -------
Income before income taxes 2,728 2,844
Provision for income taxes (b) 1,024 1,144
------- -------
Net income $ 1,704 $ 1,700
======= =======
Net income per share $ 0.32
=======
Weighted average shares outstanding 5,335
</TABLE>
(a) Adjusted for Founding Company pro forma Compensation Differential of $897
for 1995 and $683 for 1996.
(b) Adjusted for pro forma provision for taxes of $887 for 1995 and $351 for
1996.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 --
F.Y.I. INCORPORATED COMBINED WITH FOUNDING COMPANIES
The $4,738,000 or 20% increase in revenue was attributable to a 25%
increase in service revenue of $4,994,000. The increase in service revenue is
offset by a $256,000 or 7% decrease in product and other revenue.
The increase in service revenue was largely due to: (i) an increase in
scanning and microfilming revenue of approximately $1,751,000, primarily due to
the purchase of B&B in May 1996, the purchase of Microfilm in February 1996 and
an overall increase in microfilming projects; (ii) an increase in medical
records release revenue of $1,758,000, primarily attributable to the expansion
into additional healthcare institutions in the U.S. during 1995 and 1996 and
the purchase of Premier in May 1996; (iii) an increase in litigation support
revenue of $1,133,000, primarily due to the purchase of Cook in June 1996; and
(iv) an increase in records storage and retrieval revenue of $537,000
attributable to the purchase of Sacramento in February 1996 and increases in
volume in 1996. These increases were offset by a slight decline in data input
and fulfillment revenue. The decrease in product revenue primarily resulted
from a decline in one major customer's film purchases in the first quarter of
1996, caused by a business interruption at
S-16
<PAGE> 18
that customer. This decline is not expected to be permanent as the
interruption was attributable to the federal government shutdown in late 1995.
Film sales to this customer have resumed at levels greater than the prior year
during the second quarter of 1996. This decline in product revenue was offset
by increased product revenue associated with the purchase of B&B in May 1996.
Gross profit increased $1,825,000 or 23% largely due to the increases
in revenues discussed above. The gross profit margin increased from 33% for
the six months ended June 30, 1995 to 34% for the six months ended June 30,
1996, primarily due to the change in the mix of revenues associated with
acquisitions subsequent to the Offering in 1996.
Selling, general and administrative expenses increased $1,930,000 or
38%, primarily due to the establishment of corporate overhead required to
execute the acquisition program and to manage the consolidated group of
companies and due to the SG&A expenses associated with acquisitions subsequent
to the Offering.
Earnings before taxes increased $116,000 to $2,844,000 and net income
remained flat at $1,700,000 largely attributable to the factors discussed
above. Net income was impacted by a higher effective tax rate attributable to
the elimination of graduated tax rates as the Operating Companies are now taxed
on a consolidated basis and due to the impact of nondeductible goodwill
associated with the B&B and Premier acquisitions.
S-17
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In June 1996, the Company hired Margot T. Lebenberg as Vice President,
Secretary and General Counsel to oversee its legal matters.
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 will pay the former Executive Vice
President and Chief Financial Officer an aggregate of $195,000 payable
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 the
options for 8,000 shares that vested, additional options for 22,000
shares were accelerated and vested and such options shall terminate on
October 22, 1996, if they are not exercised. David Lowenstein,
co-founder of the Company, Executive Vice President and a Director of
the Company, is reassuming the responsibility of Chief Financial
Officer, the position he held prior to the Offering in January 1996.
Additionally, Timothy J. Barker was promoted to the position of Vice
President and Chief Accounting Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.23 Separation Agreement, dated July 17, 1996, by and between F.Y.I.
Incorporated and Robert C. Irvine
10.24 Warrant issued to Timothy J. Barker
27.1 Financial data schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K filed with the
Commission on June 14, 1996, as amended by a Current Report on Form 8-K/A filed
with the Commission on July 5, 1996, reporting under Items 2 and 7 thereto
the consummation of the acquisitions by the Company of B&B, Premier and Cook
and which included the following historical restated and pro forma financial
information of the Company reflecting recently completed significant
acquisitions:
S-18
<PAGE> 20
FINANCIAL STATEMENTS
Cook and Staff, Inc. and Related Company
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholder's Equity
Statements of Cash Flows
Notes to Financial Statements
B&B Information and Image Management, Inc.
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholder's Equity
Statements of Cash Flows
Notes to Financial Statements
Premier Document Management, Inc.
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholder's Equity
Statements of Cash Flows
Notes to Financial Statements
PRO FORMA FINANCIAL STATEMENTS
F.Y.I. Incorporated and Subsidiaries
Pro Forma Balance Sheet - March 31, 1996 (unaudited)
Pro Forma Statement of Operations for the Year Ended December 31, 1995
(unaudited)
Pro Forma Statement of Operations for the Three Months Ended March 31,
1996 (unaudited)
Notes to Pro Forma Financial Statements (unaudited)
S-19
<PAGE> 21
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: August 12, 1996 By: /s/ Ed H. Bowman, Jr.
----------------------------------
Ed H. Bowman, Jr.
Chief Executive Officer
Date: August 12, 1996 By: /s/ David Lowenstein
----------------------------------
David Lowenstein
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1996 By: /s/ Timothy J. Barker
----------------------------------
Timothy J. Barker
Chief Accounting Officer
(Principal Accounting Officer)
S-20
<PAGE> 22
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 Prospectus 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" or "F.Y.I.") 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. It is expected that the terms of acquisitions involving the
issuance of securities covered by this Prospectus will be determined by direct
negotiations with the owners or controlling persons of the businesses or assets
to be merged with or acquired by the Company, and that the shares of Common
Stock issued will be valued at prices reasonably related to market prices
current either at the time the terms of a merger or acquisition are agreed upon
or at or about the time of delivery of shares. No underwriting discounts or
commissions will be paid, although finder's fees may be paid from time to time
with respect to specific mergers or acquisitions. Any person receiving any such
fees may be deemed to be an underwriter within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"). The Company has previously issued
253,252 shares of Common Stock pursuant to this Registration Statement.
The Common Stock of the Company is included for quotation on the Nasdaq
National Market. On July 26, 1996, the closing price of the Common Stock on the
Nasdaq National Market was $17.125 per share as published in The Wall Street
Journal on July 29, 1996.
All expenses of this offering will be paid by the Company. The Company is a
Delaware corporation and all references herein to the Company refer to the
Company and its subsidiaries. The executive offices of the Company are located
at 3232 McKinney Avenue -- Suite 900, Dallas, Texas 75204 and its telephone
number is (214) 953-7555.
The Common Stock offered hereby invokes a high degree of risk. See "Risk
Factors" commencing on page 6 hereof.
The date of this Prospectus is July 30, 1996.
<PAGE> 23
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.
THE COMPANY
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 "Offering"), seven document management services businesses (the "Founding
Companies"). The Founding Companies, which have been in business an average of
22 years, are headquartered in San Francisco (2), San Jose, Fort Worth, Detroit,
Malvern (Philadelphia) and Baltimore, and operate in over 23 states. Since the
Offering, the Company has acquired seven additional companies (together with the
Founding Companies, the "Operating Companies") which provide document management
services and are headquartered in Washington, D.C., Baltimore, San Jose,
Sacramento and Seattle. The Company had pro forma fiscal 1995 annual revenues of
approximately $70.7 million and pro forma fiscal 1995 net income of $4.7 million
after giving effect to the significant acquisitions. The Company operates with a
decentralized management strategy rather than a standardized national model in
order to provide superior customer service and retain the historical customers
of acquired businesses while achieving the operating efficiencies of a large
organization. This strategy also emphasizes the retention of local management,
which the Company believes makes it an attractive acquiror of other document
management services companies. See "The Company."
The Company's three primary client segments are highly document-intensive.
For a variety of regulatory, client service and other reasons, the documents of
the Company's clients must be maintained, accessed and managed for extensive
periods of time, often under strict guidelines and specifications. While the
document management requirements of each target client segment are relatively
unique and require a specialized understanding of that segment, the Company
offers certain common document management services that are transferable across
its targeted client segments. These services, which are offered by one or more
of the Operating Companies, include: (i) micrographic services, including
microfilm and microfiche production and processing; (ii) electronic imaging
services, including the conversion of documents into digitized media using
sophisticated computer technology; (iii) active storage and maintenance of
documents and files; (iv) archival storage of inactive documents; and (v)
information and database management services. In addition, in order to better
fulfill the document management needs of targeted client segments, certain
Operating Companies also offer industry specific services such as litigation
support, including subpoena, authorization, photocopying and service of process
services, medical records release services and remittance processing. The
Company also derives revenue from the sale of certain micrographic and business
imaging products.
Historically, the document management services industry has been highly
fragmented, consisting primarily of small local or regional businesses that
limit their operations to a narrow range of offered services or provide services
only to selected client segments. The Company believes that significant
opportunities are available to a business that can consolidate the capabilities
and resources of a number of existing document management services businesses.
In order to effect such a consolidation, the Company has implemented an
aggressive acquisition program designed to expand its range of offered services
and acquire additional market share in each of its targeted geographic markets.
2
<PAGE> 24
The Company believes that each of its targeted geographic markets can
support the following range of services:
[CHART]
The Company believes that the consolidation of document management services
businesses will provide it with a significant competitive advantage over
existing smaller businesses. In addition to economies of scale, the Company
expects to benefit from enhanced operating efficiencies and significant
cross-selling opportunities. As the Company gains critical mass in certain
geographic markets, it expects to be able to capitalize on its existing client
relationships and technical expertise to: (i) vertically integrate by expanding
the services offered to each of its client segments; and (ii) horizontally
integrate by offering certain transferable services to a larger overall customer
base.
3
<PAGE> 25
SUMMARY COMBINED 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 Offering. The Summary
Combined Financial Data set forth below for the periods prior to February 1,
1996, are derived from the Founding Companies Combined Statements contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS ENDED MARCH 31, 1996
ENDED MARCH (UNAUDITED)(5)
FISCAL YEARS ENDED DECEMBER 31, 31(4) -------------------------------------
----------------------------------------------- ------------ FOUNDING F.Y.I.
1991 1992 1993 1994 1995 1995 COMPANIES INCORPORATED SUPPLEMENTAL
----------- ------- ------- ------- ------- ------------ --------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<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 $ 11,887 $ 3,917 $8,413 $ 12,330
Operating income........ 325 1,653 1,686 1,599 2,990 1,123 (180) 529 349
Interest and other
expense (income),
net................... 132 272 248 29 139 33 (45) (131) (176)
Income before income
taxes................. 193 1,381 1,438 1,570 2,851 1,090 (135) 660 525
Provision for income
taxes................. 6 267 218 211 163 42 (130) 262 132
Net income.............. 187 1,114 1,220 1,359 2,688 1,048 (5) 398 393
Founding Company pro
forma operating
income(1)............. $1,444 $2,708 $3,401 $3,454 $4,966 $1,379 $503 $529 $1,032
Founding Company pro
forma net
income(1)(2).......... 838 1,541 1,892 2,169 3,033 860 327 398 725
Founding Company pro
forma net income per
share................. $0.23 $0.42 $0.52 $0.60 $0.83 $0.16 $0.06 $0.14
====== ===== ===== ===== ===== ====== ===== =====
Pro forma weighted
average shares
outstanding(3)........ 3,644 3,644 3,644 3,644 3,644 5,286 5,286 5,286
======= ======= ======= ======= ======= ======= ====== =======
Net income per share.... $ 0.08
======
Weighted average shares
outstanding........... 5,286
======
</TABLE>
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED FOR
NEW ACQUISITIONS(6)
---------------------------
THREE
YEAR ENDED MONTHS
DECEMBER ENDED MARCH
31, 1995 31, 1996
----------- -----------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Statement of Operations Data:
Total revenue........................................................................ $70,681 $18,597
Operating income..................................................................... 8,713 2,094
Interest and other expense, net...................................................... 1,046 25
Income before income taxes........................................................... 7,667 2,069
Provision for income taxes........................................................... 2,930 827
Net income........................................................................... 4,737 1,242
Pro forma net income per share....................................................... $0.86 $0.22
======= =======
Pro forma weighted average shares outstanding(3)..................................... 5,539 5,539
</TABLE>
4
<PAGE> 26
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31, 1996
1995 1996 --------------
------------ ----------- PRO FORMA
ACTUAL ACTUAL AS ADJUSTED(6)
------------ ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital.................................................... $ 1,663 $11,902 $ 5,850
Total assets....................................................... 19,681 27,399 44,759
Long-term debt less current portion................................ 2,777 634 11,321
Stockholders' equity............................................... 7,111 19,207 22,663
</TABLE>
- ---------------
(1) 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 Offering (the
"Compensation Differential"). See Note 3 of Notes to Combined Financial
Statements of the Founding Companies.
(2) 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 acquisition of each of the Founding Companies (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 for all periods prior to the Offering include: (i)
1,205,682 shares issued by F.Y.I. prior to the consummation of the
Acquisitions and the Offering; (ii) 1,878,933 shares issued to the
stockholders of the Founding Companies in connection with the Acquisitions;
(iii) 543,000 shares sold in the Offering to cover the cash consideration
for the Acquisitions; and (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. Periods subsequent to
the Offering, the comparative interim data and the pro forma data include
the additional 1,642,000 shares (2,185,000 -- 543,000) issued in the
Offering beyond shares sold to cover cash consideration for the
Acquisitions. Does not include (i) an additional 650,000 shares of Common
Stock or 12% of the aggregate number of shares of Common Stock outstanding
reserved for issuance under the Company's 1995 Stock Option Plan, of which
options to purchase 588,800 shares of Common Stock are currently
outstanding; and (ii) warrants outstanding to purchase 50,000 shares of
Common Stock. Pro forma weighted average shares also include an additional
253,252 shares issued in connection with the acquisitions closed in May
1996.
(4) The Statement of Operations Data for the three months ended March 31, 1995,
represent the unaudited results of the combined Founding Companies for the
period.
(5) The Statement of Operations Data for the three months ended March 31, 1996,
for the Founding Companies represent the one month of operations prior to
the consummation of the Acquisitions. The Statement of Operations Data for
the three months ended March 31, 1996, for F.Y.I. Incorporated and
Subsidiaries represent the results of operations subsequent to the
consummation of the Acquisitions. The Supplemental Data represent the
combined operations of the Founding Companies and F.Y.I. during the three
months ended March 31, 1996. The Supplemental Data are provided for
informational purposes only and does 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 is it necessarily indicative of the
results of operations which may be achieved in the future.
(6) Gives effect to: (i) the acquisition of Robert A. Cook and Staff, Inc. and
RAC Services, Inc. ("Cook"), B&B Information and Management, Inc. ("B&B"),
and Premier Document Management, Inc. and PDM Services, Inc. ("Premier")
(collectively the "New Acquisitions") as if the transactions were
consummated for the balance sheet data as of March 31, 1996 and for
statement of operations data as of January 1, 1995; and (ii) the
Acquisitions of the Founding Companies 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.
5
<PAGE> 27
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.
ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATION
F.Y.I. was founded in September 1994 and conducted no operations prior to
the consummation of the Offering. F.Y.I. acquired the Founding Companies
simultaneously with the closing of the Offering. The Company effected seven
additional acquisitions since the Offering. Prior to their acquisition, the
Operating Companies operated as separate independent entities. Currently, the
Company has a decentralized financial reporting system and initially 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 among the Operating
Companies. F.Y.I.'s management group has been assembled only recently and has 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 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 newly assembled management group will effectively be able to
direct the Company through a period of significant growth. See
"Business -- Acquisition Program," "-- Organization" 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 the businesses of the Operating Companies, 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 which 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: adverse short-term effects on the Company's reported
operating results; diversion of management's attention; dependence on retention,
hiring and training of key personnel; risks associated with unanticipated
problems or legal liabilities; and 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 and, 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 Program."
NEED FOR ADDITIONAL FINANCING TO IMPLEMENT ACQUISITION STRATEGY
The Company currently intends to finance future acquisitions by using its
Common Stock, including the Common Stock offered by this Prospectus, for all or
a portion of the consideration to be paid. In the event that the Company's
Common Stock does not maintain sufficient value, or potential acquisition
candidates are
6
<PAGE> 28
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.
The commitments to fund revolving credit loans and term loans expire April 14,
2001 and October 15, 1997, respectively. Loans under the Line of Credit will
bear interest, at the option of the Company, at a rate per annum of (i) Banque
Paribas' prime rate plus 1.50% or (ii) an adjusted London inter-bank offered
rate plus 3.00%. As of July 1, 1996, the availability under the Line of Credit
was approximately $3.0 million for working capital and approximately $21.8
million for acquisitions. There can be no assurance, however, that funds
available under such 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
Program."
DEPENDENCE ON CERTAIN CLIENT SEGMENTS AND TECHNOLOGY
The Company derives its revenues 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. 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 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 by the Operating
Companies."
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, many of which 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 its
revenues and margins may be adversely affected. See "Business -- Competition."
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 revenues are 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. Further, 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. Such fluctuations in operating results may
adversely affect the market price of the Company's Common Stock. The market
price
7
<PAGE> 29
for the Company's shares may also fluctuate in response to material
announcements by the Company or significant clients of the Company, changes in
the economic or other conditions impacting the Company's targeted client
segments and general economic conditions outside of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Fluctuations in Quarterly Results of Operations."
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of Thomas
C. Walker, Ed H. Bowman, Jr., David Lowenstein, Timothy J. Barker, Margot T.
Lebenberg, its other 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 man 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
Operating Companies have established procedures intended to eliminate any
unauthorized disclosure of confidential information and, in some cases, have
contractually limited their potential liability for unauthorized disclosure of
such information, there can be no assurance that unauthorized disclosures will
not result in liability to the Company. It is possible that such liabilities
could have a material adverse effect on the Company.
CONTROL BY MANAGEMENT
The former stockholders of the Operating Companies and the directors and
other executive officers of the Company, and entities affiliated with them,
beneficially own approximately 35.7% of the outstanding shares of Common Stock
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 and to approve or disapprove any matter submitted to a vote
of stockholders. See "Principal 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.
The Company issued 2,185,000 shares of Common Stock in the Offering, all of
which may be sold in the public market. In addition, simultaneously with the
closing of the Offering, the former owners of the Founding Companies received,
in the aggregate, 1,878,933 shares of Common Stock as a portion of the
consideration for their businesses. Such shares are not being offered by this
Prospectus and have not been registered under the Securities Act, and therefore
may not be resold except in transactions registered under the Securities Act or
pursuant to an exemption from registration. Certain other stockholders of F.Y.I.
hold, in the aggregate, an additional 1,205,682 shares of Common Stock. See
"Business -- Organization." None of these 1,205,682 shares of Common Stock were
acquired in transactions registered under the Securities Act, and, accordingly,
such shares may not be sold except in transactions registered under the
Securities Act or pursuant to an exemption from registration. However, the
holders of all such 3,084,615 unregistered shares have certain registration
rights with respect to such shares.
The Company issued 253,252 shares of Common Stock in connection with the
acquisitions which closed in May 1996. These 253,252 shares of Common Stock were
registered under this Registration Statement, but are subject to certain
contractual transfer restrictions until May 31, 1998.
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
8
<PAGE> 30
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. The Company also has warrants
outstanding for the purchase of 165,000 shares of Common Stock.
The former owners of the Founding Companies and the initial stockholders of
the Company are contractually prohibited by the Company from selling such shares
until at least January 26, 1998 (other than certain sales registered under the
Securities Act).
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."
9
<PAGE> 31
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 Offering, F.Y.I. did not conduct any
operations. F.Y.I. acquired simultaneously with the consummation of the
Offering, the following seven well-established businesses. For a description of
the transactions pursuant to which these businesses will be acquired, see
"Business -- Organization" and "Certain Transactions."
Imagent. Imagent Corporation (together with Mobile Information Services
Corporation, an affiliate acquired by F.Y.I., "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 Kodak(C) microfilm and business imaging supplies; (ii)
microfilm processing; and (iii) business services, including microfilming,
database creation and management, and electronic imaging. A large number of
Imagent's microfilm processing clients are banks, including Bank of New York,
Bankers Trust, Chase Manhattan, Citibank, First Union and NationsBank. 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
revenues of $13.5 million.
Researchers. Melanson & Associates, Inc. (d/b/a Researchers) (together with
Bay Area Micrographics ("BAM"), an affiliate acquired by F.Y.I., "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 revenues have been generated by clients who were clients in
1994. Researchers is headquartered in San Francisco and had 1995 revenues of
$9.9 million.
Recordex. Recordex Services, Inc. ("Recordex") provides medical records
release services to over 140 hospitals and other healthcare institutions in 14
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. Recordex
had 1995 net service revenues of $8.5 million.
DPAS. C. & T. Management Services, Inc. (d/b/a DPAS) (together with
Qualidata, Inc., an affiliate acquired by F.Y.I., "DPAS") provides database and
processing services primarily to financial institutions, including Bank of
America, as well as to a number of other corporate clients nationwide. Database
services include: document conversion; customized data capture (manually or
through scanning or other electronic means); database creation, management and
analysis; and 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 revenues of $5.4 million.
Leonard. Leonard Archives, Inc. ("Leonard") provides records storage,
retrieval and processing services to over 30 hospitals and 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
semi-active and inactive documents; (iii) environmental vault storage of
magnetic and micrographic media; (iv) disaster recovery services; and (v)
document destruction. Leonard provides
10
<PAGE> 32
document management services to a wide variety of corporate clients, including
Ford Motor Company, Chrysler Corporation and Ameritech. Headquartered in
Detroit, Leonard had 1995 revenues of $5.9 million.
Deliverex. Deliverex, Incorporated (together with ASK Record Management, an
affiliate acquired by F.Y.I., "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
Stanford University Hospital, Good Samaritan Health Systems, Summit Medical
Center and Santa Clara Valley Medical Center. Founded in 1973, Deliverex offers
off-site management of medical records, including: filling of records requests;
extracting key pages within minutes for transmission to hospitals via facsimile
for emergency cases; computerized tracking of medical records to their
destinations; file system conversion; storage; and purging of files on a regular
basis. In addition, Deliverex is currently developing 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. 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 revenues of
$2.9 million.
Permanent Records. Permanent Records, Inc. ("Permanent Records") provides a
complete document management outsourcing service for its hospital, clinic and
physician clients, including: on-site handling of medical records; off-site
active and inactive storage and retrieval services; microfilming; and 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 revenues of $1.6 million.
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 stockholders of
Imagent and Leonard, which are 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 shareholders. In
addition, prior to the closing of the Acquisitions, 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 was 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 acquisitions, the Company repaid
approximately $3,349,000 of third party indebtedness assumed by the Company in
the Acquisitions, virtually all of which was guaranteed by respective
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 Offering was approximately $4,124,000.
The consideration paid by F.Y.I. for each Founding Company was determined
by arm's-length negotiations between F.Y.I. and representatives of such Founding
Company. See "Business -- Organization" and "Certain Transactions."
The Company's executive offices are located at 3232 McKinney Avenue, Suite
900, Dallas, Texas 75204, and its telephone number is (214) 953-7555.
11
<PAGE> 33
RECENT DEVELOPMENTS
Since the closing of the Offering in January 1996, the Company has
acquired, seven additional document management services businesses. See "Risk
Factors."
Cook. Robert A. Cook and Staff, Inc. and RAC Services, Inc. ("Cook").
Substantially all of the non-cash assets of Cook were acquired by Robert A. Cook
Acquisition Corp. ("Cook Acquisition") and RAC (California) Acquisition Corp.
("RAC Acquisition"), respectively two wholly-owned subsidiaries of the Company
in June 1996. Cook provides litigation support services to hundreds of law firms
and insurance companies throughout the state of California. Founded in 1966,
Cook is headquartered in San Jose, California and had 1995 revenues of $12
million.
B&B. B&B Information and Image Management, Inc. ("B&B"). B&B was acquired
by B&B (Baltimore-Washington) Acquisition Corp., a wholly-owned subsidiary of
the Company in May 1996 and 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, insurance companies,
hospitals, and medical facilities. B&B is headquartered in Upper Marlboro,
Maryland and had 1995 revenues of $8 million.
Premier. Premier Document Management, Inc. and PDM Services, Inc.
("Premier"). Premier was acquired by Premier Acquisition Corp., a wholly-owned
subsidiary of the Company in May 1996 and provides medical records release
services to over 195 clients throughout the State of Washington and northern
California. Based in Seattle, Washington, Premier was founded in 1984. Premier
had 1995 revenues of $3 million.
In addition, substantially all of the assets of Sacramento Valley Records
Management Co. ("Sacramento"), a medical records storage and delivery franchise
company were acquired by Deliverex Sacramento Acquisition Corp. ("Deliverex
Sacramento"), a wholly-owned subsidiary of the Company in March 1996 and reports
to Deliverex. In February 1996, certain of the assets of Microfilm Associates,
Ltd. ("Microfilm"), an imaging company, were acquired by Imagent and in June
1996, certain of the assets of Octo, Incorporated ("Octo"), an imaging company
were acquired by Imagent, both Mircrofilm and Octo have been physically
integrated into Imagent. In July 1996, substantially all of the assets of Domor
Data Processing ("Domor"), a data processing business were acquired by DPAS.
The Company has recently strengthened its management team. The Company has
hired Margot T. Lebenberg as Vice President, Secretary and General Counsel to
oversee its legal matters. Ms. Lebenberg was formerly an associate at Morgan,
Lewis & Bockius LLP, New York, New York. Effective July 22, 1996, David
Lowenstein, co-founder of the Company, Executive Vice President and a Director
of the Company, is reassuming the responsibility of Chief Financial Officer, the
position he held prior to the Offering. Additionally, Timothy J. Barker was
promoted to the position of Vice President and Chief Accounting Officer. See
"Management -- Stock Option Plan."
12
<PAGE> 34
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq National Market since
January 23, 1996. On July 26, 1996, the last sale price of the Common Stock was
$17.125 per share, as published in The Wall Street Journal on July 29, 1996. At
July 1, 1996, there were 39 shareholders of record of the Company's Common
Stock. The following table sets forth the range of high and low sale prices for
the Common Stock for the period from January 23, 1996, the date of the Company's
initial public offering, through July 26, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------ -------
<S> <C> <C>
FISCAL YEAR 1996
January 23, 1996 through
March 31, 1996..................... $20.00 $ 13.00(1)
April 1, 1996 through
June 30, 1996...................... $22.50 $ 16.00
July 1, 1996 through
July 26, 1996...................... $23.00 $17.125
</TABLE>
- ---------------
(1) Represents the initial public offering price
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future because it 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 with respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant. In addition, the Line of Credit
prohibits the payment of dividends without the lender's consent.
13
<PAGE> 35
CAPITALIZATION
The following table sets forth the short-term debt and capitalization at
March 31, 1996 of F.Y.I. and pro forma to reflect: (i) the term debt issued and
the stock issued to consummate the New Acquisitions; and (ii) the debt acquired
with the New Acquisitions. This table should be read in conjunction with the
unaudited pro forma financial statements of F.Y.I. Incorporated and the related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------
ACTUAL PRO FORMA
------- ---------
<S> <C> <C>
Short-term debt (including current portion of long-term debt)... $ 274 $ 605
======= =======
Long-term debt, excluding current portion....................... $ 634 $11,321
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,
5,269,615 issued and outstanding, 5,522,867 issued and
outstanding Pro forma(1)................................... 53 56
Additional paid-in-capital.................................... 18,756 22,209
Retained earnings............................................. 398 398
------- -------
Total Stockholders' equity............................ 19,207 22,663
------- -------
Total Capitalization............................................ $19,841 $33,984
======= =======
</TABLE>
- ---------------
(1) Does not include an additional 650,000 shares of Common Stock or 12% of the
aggregate number of shares of common stock outstanding reserved for issuance
under the Company's 1995 Stock Option Plan and warrants outstanding for the
purchase of 165,000 shares of Common Stock.
14
<PAGE> 36
SELECTED FINANCIAL DATA
F.Y.I. acquired, simultaneously with and as a condition to the closing of
the Offering, 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, because the Founding Companies'
stockholders transferred assets to F.Y.I. in exchange for Common Stock and cash
simultaneously with the Offering, the nature of future operations of the Company
will be substantially identical to the combined operations of the Founding
Companies, and no former stockholder group of any of the Founding Companies
obtained a majority of the outstanding voting shares of the Company.
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 years ended December 31, 1993, 1994 and
1995 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 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
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. The pro forma balance sheet data as of March 31, 1996
gives effect to the New Acquisitions as if they had occurred on March 31, 1996.
The pro forma statement of operations data gives effect to the Acquisitions of
the Founding Companies for periods prior to February 1, 1996, and effect to the
New Acquisitions as if the transactions were consummated as of January 1, 1995.
See the unaudited pro forma financial statements and the related notes thereto
included elsewhere in this Prospectus. The Founding Company pro forma statement
of operations data gives effect to certain compensation adjustments for key
executives who entered into employment agreements with the Company and 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 adjustments. See Note 3 of
Notes to Combined Financial Statements of the Founding Companies. In addition,
the pro forma information is based on available information and certain
assumptions described in the footnotes set forth below, all of which the Company
believes are reasonable. The pro forma information is provided for informational
purposes only and does 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 is it 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
Founding Company, including the related notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
appear elsewhere in this Prospectus.
15
<PAGE> 37
SELECTED COMBINED 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 Offering. The Selected
Combined Financial Data set forth below for the periods prior to December 31,
1995, are derived from the Founding Companies Combined Financial Statements
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS ENDED MARCH 31, 1996
ENDED (UNAUDITED)(5)
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,(4) ---------------------------------------
--------------------------------------------------- ------------ FOUNDING F.Y.I.
1991 1992 1993 1994 1995 1995 COMPANIES INCORPORATED SUPPLEMENTAL
----------- ------- ------- ------- ------- ------------ --------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<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 $ 10,000 $ 3,487 $7,407 $ 10,894
Product
revenue........ 5,899 5,378 5,123 5,923 6,138 1,723 395 913 1,308
Other revenue.... 668 876 1,206 1,028 873 164 35 93 128
------- ------- ------- ------- ------- ------- ------- ------ ------
Total
revenue... 29,525 35,696 38,396 43,032 47,626 11,887 3,917 8,413 12,330
Cost of
services....... 14,742 18,348 20,318 23,650 25,937 6,310 2,195 4,701 6,896
Cost of products
sold........... 5,050 4,628 4,464 4,892 4,972 1,422 308 718 1,026
Depreciation..... 771 873 883 1,055 1,238 305 91 212 303
------- ------- ------- ------- ------- ------- ------- ------ ------
Gross
profit... 8,962 11,847 12,731 13,435 15,479 3,850 1,323 2,782 4,105
Selling, general
and
administrative
expenses....... 8,637 10,194 11,045 11,836 12,489 2,727 1,503 2,253 3,756
------- ------- ------- ------- ------- ------- ------- ------ ------
Operating
income... 325 1,653 1,686 1,599 2,990 1,123 (180) 529 349
Interest and
other expense
(income),
net............ 132 272 248 29 139 33 (45) (131) (176)
------- ------- ------- ------- ------- ------- ------- ------ ------
Income before
income taxes... 193 1,381 1,438 1,570 2,851 1,090 (135) 660 525
Provision for
income taxes... 6 267 218 211 163 42 (130) 262 132
------- ------- ------- ------- ------- ------- ------- ------ ------
Net income....... $ 187 $ 1,114 $ 1,220 $ 1,359 $ 2,688 $ 1,048 $ (5) $ 398 $ 393
======= ======= ======= ======= ======= ======= ======= ====== ======
Founding Company
pro forma
compensation
differential(1)... $1,119 $1,055 $1,715 $1,855 $ 1,976 $ 256 $ 683 $ -- $ 683
Founding Company
pro forma
selling,
general and
administrative
expenses(1).... 7,518 9,139 9,330 9,981 10,513 2,471 820 3,073
Founding Company
pro forma
operating
income(1)...... 1,444 2,708 3,401 3,454 4,966 1,379 503 1,032
Founding Company
pro forma
provision for
taxes(2)....... 468 628 1,043 1,045 1,631 444 351 483
Founding Company
pro forma net
income(1)(2)... 838 1,541 1,892 2,169 3,033 860 327 725
Founding Company
pro forma net
income per
share.......... $0.23 $0.42 $0.52 $0.60 $0.83 $.16 $0.06 $ 0.14
======= ======= ======= ======= ======= ======= ======= ======
Pro forma
weighted
average shares
outstanding(3)... 3,644 3,644 3,644 3,644 3,644 5,286 5,286 5,286
Net income per
share............ $0.08
======
Weighted average
shares
outstanding...... 5,286
</TABLE>
16
<PAGE> 38
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED FOR
NEW ACQUISITIONS(6)
------------------------------
YEAR ENDED THREE MONTHS
DECEMBER ENDED MARCH
31, 1995 31, 1996
----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue.............................................................................. $62,085 $ 16,879
Product revenue.............................................................................. 7,688 1,579
Other revenue................................................................................ 908 139
------- --------
Total revenue.......................................................................... 70,681 18,597
Cost of services............................................................................. 38,656 10,514
Cost of products sold........................................................................ 6,222 1,262
Depreciation................................................................................. 1,577 396
------- --------
Gross profit........................................................................... 24,226 6,425
Selling, general and administrative expenses................................................. 15,513 4,331
------- --------
Operating income....................................................................... 8,713 2,094
Interest and other expense (income), net..................................................... 1,046 25
------- --------
Income before income taxes................................................................... 7,667 2,069
Provision for income taxes................................................................... 2,930 827
------- --------
Net income................................................................................... $ 4,737 $ 1,242
======= ========
Pro forma net income per share............................................................... $0.86 $0.22
======= ========
Pro forma weighted average shares outstanding(3)............................................. 5,539 5,539
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
DECEMBER 31, 1995 ----------------------------
----------------------------------------- ------------ AS ADJUSTED
1991 1992 1993 1994 ACTUAL ACTUAL PRO FORMA(6)
----------- ------- ------- ------- ------------ ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................... $ 1,341 $ 1,223 $ 2,081 $ 1,404 $ 1,663 $11,902 $ 5,850
Total assets.......................... 13,989 14,124 15,143 19,130 19,681 27,399 44,759
Long-term debt less current portion... 2,809 2,713 3,077 3,185 2,777 634 11,321
Stockholders' equity.................. 4,315 4,797 5,223 6,410 7,111 19,207 22,663
</TABLE>
- ---------------
(1) Gives effect to the Compensation Differential. See Note 3 of Notes to
Combined Financial Statements of the Founding Companies.
(2) 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 for all periods prior to the Offering include: (i)
1,205,682 shares issued by F.Y.I. prior to the consummation of the
Acquisitions and the Offering; (ii) 1,878,933 shares issued to the
stockholders of the Founding Companies in connection with the Acquisitions;
(iii) 543,000 shares sold in the Offering to cover the cash consideration
for the Acquisitions; and (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. Periods subsequent to
the Offering, the comparative interim data and the pro forma data include an
additional 1,642,000 shares (2,185,000 -- 543,000) issued in the offering
beyond shares sold to cover cash consideration for the Acquisitions. Does
not include (i) an additional 650,000 shares of Common Stock or 12% of the
aggregate number of shares of Common Stock outstanding reserved for issuance
under the Company's 1995 Stock Option Plan, of which options to purchase
588,800 shares of Common Stock are currently outstanding; and (ii) warrants
outstanding to purchase 50,000 shares of Common Stock. Pro forma weighted
average shares also include an additional 253,252 shares issued in
connection with the acquisitions closed in May 1996.
(4) The Statement of Operations Data for the three months ended March 31, 1995,
represent the unaudited results of the combined Founding Companies for the
period.
(5) The Statement of Operations Data for the three months ended March 31, 1996,
for the Founding Companies represent the one month of operations prior to
the consummation of the Acquisitions. The Statement of Operations Data for
the three months ended March 31, 1996, for F.Y.I. Incorporated and
Subsidiaries represent the results of operations subsequent to the
consummation of the Acquisitions. The Supplemental Data represent the
combined operations of the Founding Companies and F.Y.I. during the three
months ended March 31, 1996. The Supplemental Data are provided for
informational purposes only and does 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 is it necessarily indicative of the
results of operations which may be achieved in the future.
(6) Gives effect to: (i) the New Acquisitions as if the transactions were
consummated for the balance sheet data as March 31, 1996 and for the
Statement of Operations data as of January 1, 1995; and (ii) the
Acquisitions of the Founding Companies for statement of operations data for
periods prior to February 1, 1996. See separate unaudited pro forma
financial statements and the notes thereto located elsewhere in this
Prospectus.
17
<PAGE> 39
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:
Imagent................................................................. $ 1,988 $ 2,197 $ 2,571 $ 2,838
Researchers............................................................. 1,935 2,453 2,619 2,395
Recordex................................................................ 1,906 2,185 2,368 2,923
Leonard................................................................. 1,476 1,544 1,577 1,627
Other................................................................... 2,889 2,666 2,701 2,706
------- ------- ------- -------
Total............................................................. $10,194 $11,045 $11,836 $12,489
======= ======= ======= =======
Net income (loss):
Imagent................................................................. $ 569 $ 532 $ 731 $ 1,071
Researchers............................................................. 464 185 576 201
Recordex................................................................ 8 10 45 58
Leonard................................................................. 234 235 11 660
Other................................................................... (161) 258 (4) 698
------- ------- ------- -------
Total............................................................. $ 1,114 $ 1,220 $ 1,359 $ 2,688
======= ======= ======= =======
Pro forma 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
======= ======= ======= =======
Pro forma 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.
18
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Combined
Financial Statements of the Company and related notes thereto and "Selected
Financial Data" appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's revenue is classified as service revenue, product revenue and
other revenue. Service revenue relates to: (i) micrographic services; (ii)
electronic imaging; (iii) active document storage; (iv) archival storage of
inactive documents; (v) information and database management; (vi) litigation
support; (vii) medical records release services; and (viii) remittance
processing. Product revenue represents sales of Eastman Kodak micrographic and
business imaging supplies, 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 salaries and benefits, equipment
costs, supplies and occupancy costs and also includes the costs associated with
other revenue discussed above. Cost of products sold relates to micrographic and
business imaging supplies.
Selling, general and administrative expenses ("SG&A") for periods prior to
February 1, 1996 reflect compensation and related benefits that former owners
and certain key employees received from their respective businesses. The
Founding Companies were managed throughout the periods presented as independent
private companies, and, as such, their results of operations reflect a variety
of tax structures (S corporation, C corporation and sole proprietorship) which
influenced, among other things, their historical levels of compensation. These
former owners and key employees agreed to certain reductions in salaries and
benefits in connection with the organization of the Company and the Offering.
The differential between the previous compensation of these individuals and the
compensation they agreed to receive subsequent to the Offering is referred to as
"Compensation Differential." See "Management -- Employment Agreements;
Covenants-Not-To-Compete." 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 anticipates that it will
realize 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 Offering. The Company has not and cannot quantify
these savings at the present time. It is anticipated that these savings will be
offset by the costs of being a public company and the incremental increase in
costs related to the Company's new management. However, these costs, like the
savings that they offset, cannot be quantified accurately. Accordingly, neither
the anticipated savings nor the anticipated costs have been included in the
Founding Company combined financial information included herein for the periods
prior to February 1, 1996.
The Company conducted no significant operations until the closing of the
Offering and the Acquisitions on January 23, 1996. The Company seeks to acquire
additional companies to create a national single-source provider of document
management services.
Since the Offering, the Company has acquired seven additional companies
which provide document management services and are headquartered in Washington,
D.C., Baltimore, San Jose, Sacramento and Seattle.
19
<PAGE> 41
RESULTS OF OPERATIONS
Except as otherwise noted, the following table sets forth various items as
a percentage of revenues for the three years ended December 31, 1995 on a
historical basis, as well as adjusted for the Compensation Differential. The
results prior to February 1, 1996 of the combined companies presented in this
table and the results discussed below occurred when the Operating Companies were
not under common control or management and may not be comparable to, or
indicative of, future performance. See "Risk Factors -- Absence of Combined
Operating History; Risks of Integration."
<TABLE>
<CAPTION>
SUPPLEMENTAL
DATA
------------
FISCAL YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,(3)
-------------------------- -----------------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Service revenue..................... 83.5% 83.8% 85.3% 84.1% 88.4%
Product revenue..................... 13.4 13.8 12.9 14.5 10.6
Other revenue....................... 3.1 2.4 1.8 1.4 1.0
------ ------ ------ ------ ------
Total revenues............ 100.0 100.0 100.0 100.0 100.0
Cost of services(1)................. 61.1 63.7 62.5 62.1 62.6
Cost of products sold(2)............ 87.1 82.6 81.0 82.5 78.5
Depreciation and amortization....... 2.3 2.5 2.6 2.6 2.5
------ ------ ------ ------ ------
Gross profit.............. 33.2 31.2 32.5 32.4 33.3
Selling, general and administrative
expenses.......................... 28.8 27.5 26.2 22.9 30.5
------ ------ ------ ------ ------
Operating income.......... 4.4 3.7 6.3 9.5 2.8
Compensation differential........... 4.5 4.3 4.1 2.1 5.6
------ ------ ------ ------ ------
Adjusted operating
income.................. 8.9% 8.0% 10.4% 11.6% 8.4%
====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Shown as a percentage of service revenue and other revenue.
(2) Shown as a percentage of product revenue.
(3) The Statement of Operations Data for the three months ended March 31, 1995,
represent the unaudited results of the combined Founding Companies for the
period. The Supplemental Statement of Operations Data for the three months
ended March 31, 1996, represent a combination of: (i) Statement of
Operations Data for the combined operations of the Founding Companies for
the one month of operations prior to the consummation of the Acquisitions;
and (ii) Statement of Operations Data for F.Y.I. Incorporated and
Subsidiaries for the results of operations subsequent to the consummation of
the Acquisitions. The Supplemental Data are provided for information
purposes only and does not purport to present the results of operations of
the Company had the transaction assumed therein occurred on or as of the
dates indicated, nor is it necessarily indicative of the results of
operations which may be achieved in the future.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995 -- F.Y.I. INCORPORATED
The Company conducted no significant operations from its inception through
the Offering 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. The Company incurred various legal,
accounting, marketing and travel costs in connection with the Offering and the
Acquisitions, which were funded by issuance of Common Stock and Preferred Stock.
Additional costs associated with the Offering and the Acquisitions were repaid
with proceeds of the Offering.
Revenue for the three months ended March 31, 1996, was $8.4 million, and
gross profit for the three months was $2.8 million. Operating income was $0.5
million, and net income was $0.4 million. As previously mentioned, the Company
had no operations until February 1996. For further discussion of pro forma
operations for the three months ended March 31, 1996 and 1995, see the "Results
of Operations -- F.Y.I. Incorporated Combined with Founding Companies".
20
<PAGE> 42
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995 -- F.Y.I. INCORPORATED COMBINED WITH FOUNDING COMPANIES
The Statement of Operations Data for the three months ended March 31, 1995,
represent the unaudited results of the combined Founding Companies for the
period. The Supplemental Statement of Operations Data for the three months ended
March 31, 1996, represent a combination of: (i) Statement of Operations Data for
the combined operations of the Founding Companies for the one month of
operations prior to the consummation of the Acquisitions; and (ii) Statement of
Operations Data for F.Y.I. Incorporated and Subsidiaries for the results of
operations subsequent to the consummation of the Acquisitions. The supplemental
data are provided for information purposes only and does not purport to present
the results of operations of the Company had the transaction assumed therein
occurred on or as of the dates indicated, nor is it necessarily indicative of
the results of operations which may be achieved in the future.
<TABLE>
<CAPTION>
SUPPLEMENTAL
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
1995 1996
--------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue..................................... $10,000 $10,894
Product revenue..................................... 1,723 1,308
Other revenue....................................... 164 128
------- -------
Total revenue............................... 11,887 12,330
Cost of services.................................... 6,310 6,896
Cost of products sold............................... 1,422 1,026
Depreciation........................................ 305 303
------- -------
Gross profit................................ 3,850 4,105
Selling, general and administrative expenses........ 2,727 3,756
------- -------
Operating income............................ 1,123 349
Interest and other expenses (income), net........... 33 (176)
------- -------
Income before income taxes.......................... 1,090 525
Provision for income taxes.......................... 42 132
------- -------
Net income.......................................... $ 1,048 $ 393
======= =======
Founding Company Pro forma compensation
differential..................................... $ 256 $ 683
Founding Company Pro forma selling, general and
administrative expenses.......................... 2,471 3,073
Founding Company Pro forma operating income......... 1,379 1,032
Founding Company Pro forma provision for taxes...... 444 351
Founding Company Pro forma net income............... 860 725
Founding Company Pro forma net income per share..... $ .16 $ .14
======= =======
Founding Company Pro forma weighted average shares
outstanding...................................... 5,286 5,286
</TABLE>
The $443,000 or 4% increase in revenue is attributable to a 9% increase in
service revenue of $894,000. The increase in service revenue is offset by a
$415,000 or 24% decrease in product revenue, and a $36,000 or 22% decrease in
other revenue.
The increase in service revenue was largely due to: (i) an increase in
scanning and microfilming revenue of approximately $225,000 primarily due to an
overall increase in projects; (ii) an increase in medical records release
revenue of $474,000 primarily attributable to the expansion into additional
healthcare institutions in the U.S. during 1995 and 1996; and (iii) an increase
in records storage and retrieval revenue of $100,000
21
<PAGE> 43
attributable to an increase in volume in 1996. The decrease in product revenue
resulted from a decline in one major customer's film purchases caused by
business interruption at that customer. This decline is not expected to be
permanent, as the interruption was attributable to the federal government
shutdown in late 1995.
Costs and expenses increased $582,000 or 6% largely due to: (i) an increase
in cost of services of approximately $586,000 or 9% primarily attributable to
the increases in service revenue; (ii) cost of products decreased $396,000 as a
result of the reduction in film purchases by one major customer; and (iii) an
increase in SG&A of approximately $407,000, primarily due to the establishment
of corporate overhead required to execute the acquisition program and to manage
the consolidated group of companies.
The decrease in earnings before taxes of $139,000 to $1,208,000 and
decrease in net income of $135,000 to $725,000 was largely attributable to the
factors discussed above. Net income prior to the incremental corporate SG&A were
$969,000, up 13% from the first quarter of 1995.
Results of Operations -- 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, Pennsylvania 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 revenues constituting 25.3% of the
increase and due 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 since
December 1994.
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 overall increase in film processing
due to the opening of two new processing labs.
Other revenue. Other revenue decreased approximately $155,000 from
$1,028,000 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 $23.6 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
22
<PAGE> 44
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, 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 year ended December 31, 1994 and 1995,
respectively. This decrease was a result of reduced cost of goods sold
attributable to Eastman Kodak, the supplier implementing additional value added
rebates on selected products.
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 is
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 revenues, for the year
ended December 31, 1994 to $12.5 million, or 26.2% of revenues, 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 revenues, for the year
ended December 31, 1994 to $10.5 million, or 22.1% of revenues, for the year
ended December 31, 1995. Although combined SG&A expenses 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 revenues decreased from 30.3% to 25.3% primarily as a result of
the two storage contracts described above which provided revenues without
proportional increases in overhead; (ii) DPAS' adjusted SG&A as a percentage of
revenues 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
revenues decreased from 33.1% to 31.8% primarily as a result of increased
revenues 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 adjusted for 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
is primarily due to increased borrowings in April through
23
<PAGE> 45
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 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 adjusted for 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,
Pennsylvania 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
24
<PAGE> 46
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,
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.
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 revenues is
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 adjusted for 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 adjusted for 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 revenues. 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
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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.
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, 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.
In January 1996, the Company consummated the Offering and received net
proceeds of $24.6 million.
As of March 31, 1996, the Company had $11.9 million of working capital and
$10.0 million of cash. The Company paid off substantially all of its debt with
the proceeds of the Offering with the exception of approximately $415,000 of
debt with favorable interest rates and capital lease obligations of
approximately $425,000.
Subsequent to March 31, 1996, the Company negotiated a $35.0 million Line
of Credit (see Note 4 in the Notes to F.Y.I. Incorporated's Financial Statements
located elsewhere in this Prospectus).
The Company anticipates that cash from operations, and additional bank
financing available under the Line of Credit will be sufficient to meet the
Company's liquidity requirements for its operations through the end of fiscal
1996. The availability under the Line of Credit is approximately $3.0 million
for working capital and general corporate purposes and $21.8 million for
acquisitions. The Company expects that the amounts available under the Line of
Credit will be used in its acquisition program. However, the Company expects
that additional funds may be required in the future to successfully continue the
acquisition program. See "Risk Factors -- Need for Additional Financing to
Implement Acquisition Strategy."
The consideration paid for the seven businesses recently acquired by the
Company consisted of a combination of cash and shares of Common Stock. See
"Business -- Subsequent Acquisitions."
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Revenues from the Company's services show 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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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. Prior to the Offering, F.Y.I. did not conduct any operations.
F.Y.I. has acquired, simultaneously with the consummation of the Offering, the
seven Founding Companies. The Founding Companies, which have been in business an
average of 22 years, are headquartered in San Francisco (2), San Jose, Fort
Worth, Detroit, Malvern (Philadelphia) and Baltimore, and operate in 23 states.
Since the Offering, the Company has acquired seven additional document
management services businesses headquartered in Washington, D.C., Baltimore, San
Jose, Sacramento and Seattle. See "The Company." The Company, inclusive of the
New Acquisitions, had pro forma 1995 revenue of approximately $70.7 million and
pro forma 1995 annual net income of approximately $4.7 million. The Company
operates with a decentralized management strategy rather than a standardized
national model in order to provide superior customer service and retain the
historical customers of acquired businesses while achieving the operating
efficiencies of a large organization. This strategy also emphasizes the
retention of local management, which the Company believes makes it an attractive
acquiror of other document management services companies.
The Company's three primary client segments are highly document-intensive.
For a variety of regulatory, client service and other reasons, the documents of
the Company's clients must be maintained, accessed and managed for extensive
periods of time, often under strict guidelines and specifications. While the
document management requirements of each target client segment are relatively
unique and require a specialized understanding of that segment, the Company
offers certain common document management services that are transferable across
its targeted client segments. These services, which are offered by one or more
of the Operating Companies, include: (i) micrographic services, including
microfilm and microfiche production and processing; (ii) electronic imaging
services, including the conversion of documents into digitized media using
sophisticated computer technology; (iii) active storage and maintenance of
documents and files; (iv) archival storage of inactive documents; and (v)
information and database management services. In addition, in order to better
fulfill the document management needs of targeted client segments, certain
Operating Companies also offer industry specific services such as litigation
support, including subpoena, authorization, photocopying and service of process
services, medical records release services and remittance processing. The
Company also derives revenue from the sale of certain micrographic and business
imaging products.
Historically, the document management services industry has been highly
fragmented, consisting primarily of small local or regional businesses that
limit their operations to a narrow range of offered services or provide services
only to selected client segments. The Company believes that significant
opportunities are available to a business that can consolidate the capabilities
and resources of a number of existing document management services businesses.
In order to effect such a consolidation, the Company has implemented an
aggressive acquisition program designed to expand its range of offered services
and acquire additional market share in each of its targeted geographic markets.
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The Company believes that each of its targeted geographic markets can
support the following range of services:
[CHART]
The Company believes that the consolidation of document management services
businesses will provide it with a significant competitive advantage over
existing smaller businesses. In addition to economies of scale, the Company
expects to benefit from enhanced operating efficiencies and significant
cross-selling opportunities. As the Company gains critical mass in certain
geographic markets, it expects to be able to capitalize on its existing client
relationships and technical expertise to: (i) vertically integrate by expanding
the services offered to each of its client segments; and (ii) horizontally
integrate by offering certain transferable services to a larger overall customer
base.
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 document management services businesses such as the
Operating Companies. 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, healthcare institutions,
professional services firms and financial institutions, generate large volumes
of documents and require efficient processing, distribution, storage and
retrieval of these documents and the information they contain. The Company
believes that these client segments have increased and will continue to increase
their outsourcing of document management services in order to: (i) maintain a
focus on core operating competencies and revenue generating activities; (ii)
reduce fixed costs, including labor and equipment costs; and (iii) 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
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the needs of large, geographically dispersed clients. In addition, there are a
limited number of options for owners of such businesses to obtain liquidity or
to sell their businesses. As result, the Company believes that many owners of
such businesses will be receptive to a consolidation strategy.
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 intends to implement a focused
business strategy based on the following key principles:
Establish Full Service Operations in Multiple Metropolitan Areas. The
Company intends to establish full service document management operations in
targeted metropolitan areas, including the areas serviced by the Operating
Companies, 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
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 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 intends to implement Company-wide
employee benefits programs and to purchase 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 that exist at the Operating
Companies have a valuable understanding of their respective markets and
businesses and have existing client relationships upon which they may
capitalize. Accordingly, the Company intends 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 PROGRAM
The Company believes that there are significant opportunities to
consolidate the capabilities and resources of a number of existing document
management services businesses. In order to effect this consolidation, the
Company has implemented an aggressive acquisition program in order to enter
additional targeted markets, acquire additional service capabilities within such
markets and gain market share. The Company intends to employ a three-tiered
acquisition program.
Initially, to enter a targeted geographic market, the Company intends to
make "beachhead" acquisitions of leading document management services companies
with strong market positions. In analyzing beachhead acquisition candidates, the
Company will focus on acquiring businesses that have: (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 increase
the Company's offered services in a particular region. In
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making such acquisitions, the Company will assess the services required by the
specific market's customer base and then seek to acquire leading providers of
such services within that geographic area. As with beachhead acquisitions, the
Company will seek profitable businesses with strong management teams.
Finally, in order to increase its market share and realize economies of
scale, the third tier of the Company's acquisition program will be the
acquisition of smaller "tuck-in" businesses which 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 main selection
criteria for such tuck-in businesses will be strong customer relationships.
The Company believes that it will be an attractive acquiror of other
document management services companies due to: (i) the benefits afforded by an
association with a full service national company, including an enhanced ability
to compete in the local market through an expansion of offered products and
services and increased access to new technologies; (ii) the potential for
increased profitability as a result of the Company's centralization of certain
administrative functions and certain economies of scale; (iii) the Company's
financial strength and visibility as a public company; and (iv) the Company's
decentralized management strategy which will, in many cases, enable existing
local management to remain involved in the operations of acquired companies.
Nevertheless, there are numerous risks associated with the Company's intended
acquisition program. See "Risk Factors -- Acquisition Strategy" and "-- Need for
Additional Financing to Implement Acquisition Strategy."
Since its inception in September 1994, F.Y.I. has gathered and assembled
data with respect to numerous document management services businesses and
believes it is well positioned to commence and continue its acquisition program.
The Company's acquisition program is led by Thomas C. Walker, Chairman of the
Board and Chief Development Officer of the Company, and David Lowenstein,
Executive Vice President -- Corporate Development and Acquisitions, each of whom
has extensive experience in acquiring businesses.
As consideration for acquisitions, the Company intends to use various
combinations of Common Stock, cash and notes, including the shares of Common
Stock being offered hereby.
SERVICES OFFERED BY THE OPERATING COMPANIES
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 through one or more
of the Operating Companies include:
Transferable Services
Micrographics. 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. Imagent, B&B,
Researchers and Permanent Records currently provide micrographics services.
Electronic Imaging. 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-
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job basis, based on the number of images and complexity of the retrieval
applications. Imagent, B&B, Researchers and DPAS currently provide electronic
imaging services.
Active or Open Shelf Storage. 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. Deliverex, Deliverex
Sacramento, Leonard and Permanent Records currently provide active or open shelf
storage.
Archival Storage of Inactive Documents. 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. Leonard and Permanent Records currently provide archival
storage of inactive documents.
Database Services. Database services involve data capture (manually or
through scanning or other electronic media), data consolidation and elimination,
storage, maintenance, formatting and report creation. In some cases, database
services include statistical analysis of data. DPAS, Imagent and B&B currently
provide database services.
Industry Specific Services
Certain of the Founding Companies have developed industry specific services
in order to address the document management needs of their particular clients.
These industry specific services include:
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. Litigation support services are provided to law firms, corporate
legal departments and insurance companies. These clients typically look to
litigation support companies to augment their internal operations and
capabilities on an as-needed, job-by-job basis. Additional litigation support
services include subpoena, authorization, photocopying and service of process
services. Clients are generally billed on a per unit basis. Researchers, Cook,
Imagent and DPAS currently provide litigation support services.
Medical Records Release Services. Medical records release services involve
processing a request for a patient's medical records from a physician, insurance
company, attorney or other healthcare institution. 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
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. Recordex, Premier and Permanent Records
currently provide medical records release services.
Remittance Processing. Remittance processing and order fulfillment
services involve the outsourcing of a client's receivables function, including
generating bills and statements, receiving and processing credit card payments,
encoding checks and depositing payments, and other mailing related activities.
DPAS and Imagent currently provide remittance processing services.
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Business Imaging Products Sales
Imagent has a five-year agreement with the Eastman Kodak Company which
expires on December 31, 1999 and grants Imagent 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.
B&B is also in the business imaging product sales business.
SALES AND MARKETING
The Company has a broad customer base, and none of the Company's customers
accounted for more than 8.0% of revenue for either the year ended December 31,
1994 or December 31, 1995. Historically, the Company's sales efforts have been
implemented on a location-by-location basis at each Operating Company. For most
of the Operating Companies, sales efforts are typically not coordinated through
separate sales personnel, but are part of the local management's
responsibilities. The Company believes that the existing local sales efforts can
be supplemented through the addition of 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
will focus on increasing revenues 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 hopes to augment local sales and
marketing efforts through the implementation of a national sales/account
program.
The Company believes that its ability to attract and retain additional
clients will depend on its ability to offer the broad range of services
necessary to satisfy such clients' document management needs and maintain a high
level of customer satisfaction.
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, many of which 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 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 its revenues and margins may be adversely affected.
The Company believes that the principal competitive factors in document
management services include accuracy, reliability and security of service,
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.
ORGANIZATION
Simultaneously with the closing of the Offering, F.Y.I. acquired seven
well-established document management services businesses. 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 certain Founding Company stockholder; and (iv) the
distribution of cash and certain receivables to stockholders of Imagent and
Leonard, which are S corporations, in the amounts of $2,750,000 and $700,000,
respectively, representing the AAA accounts of these companies. In addition,
prior to the closing of the Acquisitions, 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
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selected liabilities of certain stockholders of the Founding Companies was a net
amount of approximately $5,981,000 (of which $1,120,000 was distributed prior to
December 31, 1995). In addition, upon consummation of the Acquisitions, the
Company repaid approximately $3,349,000 of third party indebtedness assumed by
the Company in the Acquisitions, virtually all of which was guaranteed by
respective stockholders of the Founding Companies, and $584,000 of indebtedness
to such stockholders.
The consideration paid for the Founding Companies was determined through
arm's-length negotiations among F.Y.I. and representatives of the Founding
Companies. The factors considered by the parties in determining the
consideration to be paid include, among others, the historical operating
results, the levels of indebtedness and the future prospects of the Founding
Companies.
In connection with the Acquisitions, the stockholders of the Founding
Companies agreed not to compete with the Company for a period of five years
following the Acquisitions. In addition, each stockholder (other than Michael J.
Bradley) entered into a three-year employment agreement with the Company which
contains a two-year covenant-not-to-compete following termination of such
person's employment. The period of the covenants-not-to-compete will be
shortened to a period of one year following the termination of any such person
without cause. See "Management."
Imagent. Under an agreement with Imagent, Mr. John Shaw and Mr. Ted
Montouri, F.Y.I. acquired by merger all of the issued and outstanding stock of
Imagent. The consideration paid by F.Y.I. for Imagent was $1,500,000 in cash,
331,497 shares of Common Stock of the Company and an S Corporation dividend of
cash and certain receivables in the amount of $2,750,000 representing the AAA
account of Imagent.
Researchers. Under an agreement with Researchers, Mr. Greg Melanson and
Dr. Roger Mansfield, F.Y.I. acquired by merger all of the issued and outstanding
stock of Researchers. The consideration paid by F.Y.I. for Researchers was
$2,750,000 in cash and 681,400 shares of Common Stock of the Company. F.Y.I.
also has an option to acquire an additional start-up document management
business owned by Mr. Melanson, and Mr. Melanson has an option to require F.Y.I.
to purchase such business at such time as its annual audited pre-tax profits
exceed $550,000. In either event, the consideration payable to Mr. Melanson will
consist of F.Y.I. Common Stock with a value equal to six times the amount of
such audited pre-tax profits.
Recordex. Under an agreement with Recordex, Paragon Management Group, Inc.
("Paragon"), the sole shareholder of Recordex, and Mr. G. Michael Bellenghi, Mr.
Gerald E. Pierson and Mr. Michael J. Bradley, the shareholders of Paragon,
F.Y.I. acquired by merger all of the issued and outstanding stock of Recordex.
The consideration paid by F.Y.I. for Recordex was $309,000 in cash, 198,589
shares of Common Stock of the Company and the assumption and repayment of
$191,000 of debt of Paragon to its stockholders upon consummation of the
Acquisition.
DPAS. Under an agreement with DPAS, Mr. Robert Tessler and Mr. John Brown,
F.Y.I. acquired by merger all of the issued and outstanding stock of DPAS. The
consideration paid by F.Y.I. for DPAS was $400,000 in cash and 117,068 shares of
Common Stock of the Company.
Leonard. Under an agreement with Leonard and Mr. Jerry Leonard, F.Y.I.
acquired by merger all of the issued and outstanding stock of Leonard. The
consideration paid by F.Y.I. for Leonard was $1,250,000 in cash, 253,274 shares
of Common Stock of the Company and an S corporation dividend of cash and certain
receivables in the amount of $700,000 representing the AAA account of Leonard.
Deliverex. Under an agreement with Deliverex, Mr. Steven Rowen and Ms.
Andrea Bushnell, F.Y.I. acquired by merger all of the issued and outstanding
stock of Deliverex. The consideration paid by F.Y.I. for Deliverex was $700,000
in cash and 186,147 shares of Common Stock of the Company.
Permanent Records. Under an agreement with Permanent Records, Mr. Kent
Patterson and Mr. Neil Patterson, F.Y.I. acquired by merger all of the issued
and outstanding stock of Permanent Records. The consideration paid by F.Y.I. for
Permanent Records was $150,000 in cash and 110,958 shares of Common Stock of the
Company.
The businesses of each of the Founding Companies is conducted through
separate subsidiaries of the Company.
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SUBSEQUENT ACQUISITIONS
Since the closing of the Offering, the Company has acquired seven
additional document management services businesses, including B&B, Premier and
Cook. The Company's significant subsequent acquisitions are described below:
Cook. Under an agreement with Cook, Robert A. Cook and Anna M. Cook as
Co-Trustees of the Cook 1993 Living Trust, Cook Acquisition and RAC Acquisition,
both wholly-owned subsidiaries of the Company, acquired substantially all of the
non-cash assets of Cook in June 1996. Cook has been operating a litigation
support business for 30 years throughout the State of California. The aggregate
consideration paid by the Company for Cook consisted of $11.3 million in cash.
An amount equal to $1,000,000 in cash will be retained for a period of 90 days
from the date of closing as security against any indemnification claim.
B&B. Under an agreement with B&B and Charles J. Bauer, Jr., B&B
(Baltimore-Washington) Acquisition Corp., a wholly-owned subsidiary of the
Company, acquired by merger all of the issued and outstanding stock of B&B in
May 1996. B&B has been operating a document management services business for 15
years in the Baltimore-Washington, D.C. area. The aggregate consideration paid
by the Company for B&B consisted of $3.1 million in cash and 183,333 shares of
Common Stock. Of such 183,333 shares of Common Stock, a total of 13,889 shares
of Common Stock will be held in escrow for a period of 120 days from the date of
closing as security against any indemnification claim.
Premier. Under an agreement with Premier and Brian E. Whiteside,
Christopher S. Moore, Lynette C. Pomerville and Gary T. Siervert (the "Premier
Stockholders"), Premier Acquisition Corp., a wholly-owned subsidiary of the
Company, acquired by merger all of the outstanding stock of Premier in May 1996.
Premier has been operating as a document management services business for 11
years in the State of Washington and in Northern California. 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 lump-sum,
cash and stock earnout payment on March 1, 1997 to the Premier Stockholders, up
to a maximum earnout of $6,000,000. An amount equal to $200,000 in cash will be
retained by the Company for a period of 120 days from the date of closing as
security against any indemnification claim.
In addition, substantially all of the assets of Sacramento, a medical
records storage and delivery franchise company, were acquired by Deliverex
Sacramento in March 1996. Deliverex Sacramento reports to Deliverex. In February
1996, certain of the assets of Microfilm, an imaging company, were acquired by
Imagent and, in June 1996, certain of the assets of Octo, an imaging company,
were acquired by Imagent. Microfilm and Octo have been physically integrated
into Imagent. In July 1996, substantially all of the assets of Domor, a data
processing company, were acquired by DPAS.
The aggregate consideration for Sacramento, Microfilm Associates, Octo and
Domor consisted of approximately $2.2 million in cash.
EMPLOYEES
As of May 31, 1996, the Company had approximately 1,359 full-time
employees, 218 of whom were employed primarily in management and administration.
In addition, the Company utilized the services of approximately 171 part-time
and 82 temporary employees. As of such date, the Company had 135 employees
represented by a labor union. The Company considers its relations with its
employees to be good.
PROPERTY AND EQUIPMENT
The Company operates 41 document management service facilities. Except as
noted, all of these facilities are leased and are principally used for
operations and general administrative functions. The chart below summarizes the
Company's facilities.
34
<PAGE> 56
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION OF FACILITY SQUARE FOOTAGE FUNCTION
- ---------------------------- -------------- ----------------------------------------
<S> <C> <C>
Imagent
Baltimore, MD 12,000 Film Processing Lab, Supplies Warehouse
and Administrative Offices
Baltimore, MD 18,000 Microfilming and Imaging Operation
Baltimore, MD 3,000 Warehouse
Philadelphia, PA 2,000 Film Processing Lab
Claymont, DE 2,000 Film Processing Lab
Falls Church, VA 2,000 Film Processing Lab
Richmond, VA 2,000 Film Processing Lab
Roanoke, VA 1,000 Film Processing Lab
Researchers
San Francisco, CA 11,000 Microfilming, Imaging and Administrative
Offices
San Francisco, CA 8,000 Copying Operation
San Jose, CA 3,500 Records Retrieval Operation
San Jose, CA 1,000 Equipment Repair
Sacramento, CA 2,000 Records Retrieval Operation
Los Angeles, CA 2,000 Copying, Microfilming and Imaging
Operation
Palo Alto, CA 1,734 Overnight Copy Center
Recordex
Malvern, PA 6,000 Administrative Offices
DPAS
San Francisco, CA 10,000 Database Services and Administrative
Offices
San Francisco, CA 15,000 Mail Services
San Francisco, CA 1,400 Storage
Tamal, CA 1,500 Data Entry and Assembly Services
Leonard
Detroit, MI(1) 80,000 Archive Storage and Administrative
Offices
Detroit, MI 120,000 Archive Storage
Detroit, MI 20,000 Archive Storage
Detroit, MI 20,000 Archive Storage
Detroit, MI 500 Service Center
Farmington Hills, MI 45,000 Archive Storage
Ann Arbor, MI 16,000 Archive Storage
Ann Arbor, MI 10,000 Archive Storage
Toledo, OH 63,000 Archive Storage
Toledo, OH 20,000 Archive Storage
Deliverex
San Jose, CA 27,000 Medical Records Storage and
Administrative Offices
San Jose, CA 18,000 Medical Records Storage
San Jose, CA 12,500 Medical Records Storage
Hayward, CA 40,000 Medical Records Storage
Sacramento, CA 41,000 Off-Site Records Management
</TABLE>
35
<PAGE> 57
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION OF FACILITY SQUARE FOOTAGE FUNCTION
- ---------------------------- -------------- ----------------------------------------
<S> <C> <C>
Permanent Records
Ft. Worth, TX 22,000 Medical Records Microfilming, Storage
and Administrative Offices
B&B
Marlboro, Maryland(1) 30,000 Administrative Office, Warehouse and
Production
Premier
Seattle, WA 4,644 Administrative Office, Processing Center
and Medical Records Reproduction
Tacoma, WA 217 Warehouse and Production Hub
Spokane, WA 400 Processing Center and Production Hub
San Jose, CA 500 Production, Processing Center and
Warehouse
Cook
San Jose, CA 17,388 Administrative Office and Legal Copy
Operations
Santa Rosa, CA 2,578 Copy Operations
Sacramento, CA 2,650 Copy Operations
Fresno, CA 2,534 Copy Operations
Culver City, CA 3,372 Copy Operations
</TABLE>
- ---------------
(1) Owned facility.
The Company also operates on-site at over 155 client locations on a
contractual basis and from time to time at many other client locations for
specific projects.
The aggregate lease or rental expense for the Company was approximately
$2.2 million during 1995. See Note 8 of Notes to Combined Financial Statements
of the Founding Companies for further information relating to these leases. In
March 1996, the Company occupied its new premises for its corporate headquarters
in Dallas, Texas, consisting of approximately 4,700 square feet.
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.
The Company owns or leases under both financial and capital leases
substantial computer, scanning and imaging equipment which it believes to be
adequate for its current needs. Additionally, the Company owns or leases
approximately 87 cars or trucks of various types.
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.
Recordex is one of several defendants in one federal and three state
lawsuits contesting the reasonableness of the fees charged for medical records
reproduction. 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 in
January 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 remaining Pennsylvania lawsuits
was concluded favorably to the Company. While the outcome of the remaining
litigation is uncertain, the Company believes that Recordex has meritorious
defenses to these
36
<PAGE> 58
claims, and that there will not be a material adverse effect on the Company's
financial position or results of operations as a result thereof.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local laws, regulations and
ordinances that: (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water as well as handling
and disposal practices for solid and hazardous wastes; or (ii) impose liability
for the costs of cleaning up, and certain damages resulting from, sites of past
spills, disposal or other releases of solid wastes and hazardous substances.
The Company is 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 of 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.
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 under "Risk Factors."
37
<PAGE> 59
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(3)(4)...... 63 Chairman of the Board and Chief Development
Officer
Ed H. Bowman, Jr.(3)(5)..... 49 President and Chief Executive Officer; Director
David Lowenstein(3)......... 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......... 28 Vice President, Secretary and General Counsel
G. Michael Bellenghi(3)..... 48 Chairman -- Recordex; Director
Jerry F. Leonard, Jr.(4).... 56 President -- Leonard; Director
Greg Melanson(5)............ 43 President -- Researchers; Director
Jonathan B. Shaw(5)......... 41 President -- Imagent; Director
Michael J. Bradley(1)(2).... 51 Director
Donald F. Moorehead,
Jr.(1)(2)................. 45 Director
Hon. Edward M.
Rowell(1)(2)(4)........... 64 Director
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Executive Committee.
(4) Member of Nominating Committee.
(5) Member of Technology Committee.
At the annual meeting of stockholders, directors will be elected by the
holders of the Common Stock to succeed those directors whose terms are expiring.
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 and Chief Development
Officer of F.Y.I. since its inception in September 1994 and November 1995,
respectively. From September 1994 until November 1995, Mr. Walker held the
positions of President and Chief Executive Officer of F.Y.I. 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 100 businesses over a 29-year period.
Mr. Walker holds a B.S. degree 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> 60
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 day to day operations of research and development, marketing and
customer services. From 1983 to 1993, Mr. Bowman served in a number of
marketing, customer service and research and development executive positions for
HBO & Company, last serving as Executive Vice President of the STAR Business
Unit with responsibility for domestic operations. Prior to joining HBO &
Company, Mr. Bowman was with Andersen Consulting for 10 years. Mr. Bowman holds
an M.S. from Georgia Institute of Technology and a B.B.A. from Georgia State
University.
David Lowenstein has reassumed the responsibility of Chief Financial
Officer of F.Y.I., the position he held prior to the Offering 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 30 businesses in
North America and Europe. Mr. Lowenstein holds a B.A. degree in Economics from
Sir Wilfred Laurier University and an M.S. degree 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. Prior to July 1996, Mr. Barker held the position of
Controller of F.Y.I. His primary responsibilities have included: (i) the
preparation of combined financial statements of the Founding Companies; and (ii)
the financial analysis, due diligence, audit coordination and completion and SEC
reporting compliance for the acquisitions of the Founding Companies and all
acquisitions since the Offering. Prior to joining F.Y.I., 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. degree in Accounting from Texas Tech University
and has been a C.P.A. since 1985.
Margot T. Lebenberg has been Vice President, Secretary and General Counsel
of F.Y.I. since June 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. Ms.
Lebenberg holds a B.A. degree in Economics and History from the State University
of New York at Binghamton and a J.D. degree from Fordham University School of
Law.
G. Michael Bellenghi has been a director since the closing of the Offering,
is a principal of Paragon, a healthcare consulting firm, and has served as
Chairman of the Board, Vice President and Secretary of Recordex since December
1990. Prior to joining Recordex, 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 public company. Mr.
Bellenghi is a certified public accountant and holds a B.A. degree in Accounting
from LaSalle University.
Jerry F. Leonard, Jr. has been a director since the closing of the Offering
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 27 years.
Greg Melanson has been a director since the closing of the Offering 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. degree from the University of Southern
California.
39
<PAGE> 61
Jonathan B. Shaw has been a director since the closing of the Offering 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 Offering.
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 has also 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. degree in Business Administration from Drexel University.
Donald F. Moorehead, Jr. has been a director of the Company since January
1995. Since June 1995, 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
May 1994 until June 1995, he was Chairman of the Board and Chief Development
Officer of U.S.A. Waste Services and from September 1990 to May 1994, 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., from its inception in December 1985 until August 1990 and continued as a
director until February 1991. From 1977 until 1984, Mr. Moorehead served in
various management positions with Waste Management, Inc. Mr. Moorehead holds a
B.S. degree in Engineering from the University of Tulsa.
Hon. Edward M. Rowell has been a director since the closing of the
Offering. 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. degree 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 will receive a fee of $1,500 for attendance at each Board of
Director's meeting and $1,000 for each committee meeting (unless held on the
same day as a Board of Director's meeting) and an initial grant of nonqualified
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 nonqualified 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 Offering, did
not conduct any operations. The Company anticipates that during fiscal 1996 its
most highly compensated officers and their annualized base salaries will be: Mr.
Bowman -- $200,000, Mr. Walker -- $150,000, Mr. Bellenghi -- $150,000, Mr.
Melanson -- $150,000, Mr. Shaw -- $140,000, Mr. Lowenstein -- $120,000, Ms.
Lebenberg -- $100,000 and Mr. Leonard -- $100,000 (collectively, the "named
executive officers"). Each named executive officer, other than Mr. Barker has
entered into an employment agreement with the Company or a subsidiary thereof
commencing on completion of the Offering, except that Messrs. Bowman, Walker,
Lowenstein and Lebenberg commenced employment with F.Y.I. in November 1995,
December 1994, January 1996, February 1995 and May 1996, respectively. See
"-- Employment Agreements; Covenants-Not-To-Compete." Pursuant to such
employment agreements, each such officer is eligible to earn additional year-end
bonus compensation. From
40
<PAGE> 62
January 1 through December 31, 1995, Messrs. Walker and Lowenstein had been paid
cash compensation from F.Y.I. of $150,000 and $130,000, respectively.
EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE
Mr. Bowman and Ms. Lebenberg entered into employment agreements with F.Y.I.
dated as of November 1995 and July 1996, respectively. Messrs. Walker and
Lowenstein entered into employment agreements with F.Y.I. in December 1994 and
February 1995, respectively. Messrs. Bellenghi, Melanson, Shaw and Leonard
entered into employment agreements with the Company which commenced on the date
of the Offering. Pursuant to such agreements, each of such persons receives an
annual base salary and is eligible for additional year-end bonus compensation.
Each employment agreement is for a term of three years and 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 one year (two years in the case of Messrs. Bowman, Walker, Lowenstein
and Lebenberg) 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 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
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.
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 Offering. 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 ("NQSOs").
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 nonqualified 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.
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<PAGE> 63
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 has outstanding nonqualified options to purchase a total of
439,000 shares of Common Stock granted in November 1995 at $13.00 per share
(including options granted to non-employee directors of the Company). The
outstanding 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. Since the
Offering, the Company has granted additional options to purchase 56,800 shares
of Common Stock to its key employees. 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.
Additional nonqualified options to purchase 70,000 shares of Common Stock
were granted at fair market value at the date of grant in connection with the
B&B and Premier acquisitions in May 1996, and nonqualified options to purchase
23,000 shares of Common Stock were granted at fair market value at the date of
grant in connection with the Cook and Octo acquisitions in June 1996.
No options were granted during fiscal year 1994. The following table sets
forth certain information concerning the grant of options and warrants to
purchase Common Stock of the Company in 1995 to Mr. Bowman and Mr. Barker and in
1996 to Ms. Lebenberg. None of the other named executives has been granted
options or warrants.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
TOTAL OF STOCK PRICE APPRECIATION
OPTIONS/ OPTIONS AND FOR OPTION/WARRANT TERM(1)
WARRANT WARRANTS EXERCISE --------------------------------
NAME(5) GRANTED OUTSTANDING PRICE EXPIRATION DATE 0% 5% 10%
- ----------------------------------------------- ----------- -------- --------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ed H. Bowman, Jr. (options)............ 80,000 10.6% $13.00 (2) $ -- $654,048 $1,657,496
Ed H. Bowman, Jr. (warrant)............ 100,000 13.3% $10.00 (3) $300,000 $874,960 $1,660,000
Ed H. Bowman, Jr. (warrant)............ 50,000 6.6% $20.00 (4) $ [--] $407,100 $ 948,717
Timothy J. Barker (options)............ 15,000 2.0% $13.00 (2) $ -- $122,634 $ 310,780
Timothy J. Barker (warrant)............ 15,000 2.0% $10.00 (3) $ -- $ 86,244 $ 204,000
Margot T. Lebenberg (options).......... 45,000 6.0% $16.00 (2) $ [--] $452,804 $1,147,495
</TABLE>
- ---------------
(1) These values have been determined based on assumed rates of appreciation and
are not intended to forecast the possible future appreciation mandated by
rules of the Commission, if any, of the price or value of the Company's
Common Stock.
(2) The options will expire 10 years from the date of grant.
(3) Fifty percent of the warrants expire in 2003 and the remaining 50% of the
warrants expire in 2004.
(4) May 21, 2003.
(5) 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 will pay the former Executive Vice President and
Chief Financial Officer an aggregate of $195,000 payable 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 the options for 8,000 shares
that vested, additional options for 22,000 shares were accelerated and
vested and such vested options shall terminate on October 22, 1996 if they
are not exercised.
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,
42
<PAGE> 64
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.
43
<PAGE> 65
PRINCIPAL 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 5% or more thereof; (ii) each director; (iii) each
named executive officer; and (iv) all executive officers and directors as a
group. 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
BENEFICIALLY PERCENTAGE
NAME OWNED OWNERSHIP
--------------------------------------------------------- ------------ ----------
<S> <C> <C>
Greg Melanson............................................ 613,260 11.1%
Thomas C. Walker......................................... 337,590 6.1
Jerral W. Jones Family Limited Partnership............... 301,420 5.5
David Lowenstein......................................... 265,250 4.8
Jonathan B. Shaw......................................... 265,198 4.8
Jerry F. Leonard, Jr..................................... 253,274 4.6
Michael J. Bradley(1).................................... 68,196 1.2
G. Michael Bellenghi..................................... 66,196 1.2
Donald F. Moorehead, Jr.(2).............................. 62,284 1.1
Ed H. Bowman, Jr.(3)..................................... 26,000 *
Margot T. Lebenberg(4)................................... 9,200 *
Timothy J. Barker(5)..................................... 4,000 *
Hon. Edward M. Rowell(6)................................. 2,000 *
All executive officers and directors as a group (12
persons)(7)............................................ 1,972,448 35.7%
</TABLE>
- ---------------
* Represents less than 1%.
(1) Does not include 8,000 shares which may be acquired upon the exercise of
options not exercisable within 60 days.
(2) Does not include 8,000 shares which may be acquired upon the exercise of
options not exercisable within 60 days.
(3) Includes 10,000 shares which Mr. Bowman purchased directly from the
Underwriters in the Offering and does not include 214,000 shares which may
be acquired upon the exercise of options and warrants not exercisable within
60 days.
(4) Includes 200 shares Ms. Lebenberg purchased directly from the Underwriters
in the Offering and does not include 36,000 shares which may be acquired
upon the exercise of options not exercisable within 60 days.
(5) Includes 1,000 shares Mr. Barker purchased directly from the Underwriters in
the Offering and does not include 27,000 shares which may be acquired upon
the exercise of options and warrants not exercisable within 60 days.
(6) Does not include 8,000 shares which may be acquired upon the exercise of
options not exercisable within 60 days.
(7) Includes 11,200 shares which Mr. Bowman, Ms. Lebenberg and Mr. Barker
purchased directly from the Underwriters in the Offering and does not
include 301,000 shares which may be acquired upon the exercise of options
and warrants not exercisable within 60 days.
44
<PAGE> 66
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 July 1, 1996, the
Company had outstanding 5,522,867 shares of Common Stock and no shares of
Preferred Stock and had 39 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 "Dividends." 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.
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
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
45
<PAGE> 67
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.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer and Trust Company.
46
<PAGE> 68
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 Jerry Jones.
In connection with the Acquisitions, and as consideration for their
interests in the Founding 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
"Business -- Organization."
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 the Company's Common Stock with a value equal to six
times the amount of such pre-tax profits. For the ten months ending October 31,
1995 the pre-tax loss of such business was $26,000. Consequently, it is unlikely
that the Company will be purchasing such business during fiscal 1996.
WARRANT 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 at
$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 $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.
47
<PAGE> 69
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
The Company has outstanding 5,522,867 shares of Common Stock. The 2,185,000
shares sold in the Offering are freely tradeable without restriction unless
purchased by affiliates of the Company. The 253,252 outstanding shares issued in
connection with the B&B and Premier acquisitions are subject to contractual
restrictions on the transfer therefor. These contractual restrictions expire two
years from the date of issuance and may only be resold in compliance with Rule
145 under the Securities Act. None of the remaining 3,084,615 outstanding shares
of Common Stock (collectively, the "Restricted Shares") has been registered
under 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 thereunder.
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 the Company or any affiliate of the Company, the acquiror or
subsequent holder thereof may sell, within any three-month, 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. 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 requirements.
The former owners of the Founding Companies and the initial stockholders of
the Company are contractually prohibited by the Company from selling such shares
until at least January 26, 1998 (other than certain sales registered under the
Securities Act).
Sales 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.
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,
101 Park Avenue, New York, New York 10178.
48
<PAGE> 70
EXPERTS
The audited financial statements of F.Y.I.; 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 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
reports 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 reports of Moss
Adams LLP, independent certified 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. 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 reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
49
<PAGE> 71
ADDITIONAL INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (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, Washington, D.C., 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.
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.
50
<PAGE> 72
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
F.Y.I. INCORPORATED
Report of Independent Public Accountants........................................... F-3
Balance Sheet as of December 31, 1995 and Consolidated Balance Sheet as of March
31, 1996........................................................................ F-4
Consolidated Statements of Operations.............................................. F-5
Consolidated Statements of Cash Flows.............................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
FOUNDING COMPANIES
Report of Independent Public Accountants........................................... F-11
Report of Independent Public Accountants........................................... F-12
Combined Balance Sheets............................................................ F-13
Combined Statements of Operations.................................................. F-14
Combined Statements of Stockholders' Equity........................................ F-15
Combined Statements of Cash Flows.................................................. F-16
Notes to Combined Financial Statements............................................. F-17
IMAGENT CORPORATION AND RELATED COMPANY
Report of Independent Public Accountants........................................... F-30
Combined Balance Sheets............................................................ F-31
Combined Statements of Operations.................................................. F-32
Combined Statements of Stockholders' Equity........................................ F-33
Combined Statements of Cash Flows.................................................. F-34
Notes to Combined Financial Statements............................................. F-35
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
Report of Independent Public Accountants........................................... F-40
Combined Balance Sheets............................................................ F-41
Combined Statements of Operations.................................................. F-42
Combined Statements of Stockholders' Equity........................................ F-43
Combined Statements of Cash Flows.................................................. F-44
Notes to Combined Financial Statements............................................. F-45
RECORDEX SERVICES, INC.
Report of Independent Public Accountants........................................... F-51
Report of Independent Public Accountants........................................... F-52
Balance Sheets..................................................................... F-53
Statements of Operations........................................................... F-54
Statements of Changes in Stockholder's Equity...................................... F-55
Statements of Cash Flows........................................................... F-56
Notes to Financial Statements...................................................... F-57
LEONARD ARCHIVES, INC.
Report of Independent Public Accountants........................................... F-63
Combined Balance Sheets............................................................ F-64
Combined Statements of Operations.................................................. F-65
Combined Statements of Stockholder's Equity........................................ F-66
Combined Statements of Cash Flows.................................................. F-67
Notes to Combined Financial Statements............................................. F-68
</TABLE>
F-1
<PAGE> 73
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
C. & T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
Report of Independent Public Accountants........................................... F-74
Combined Balance Sheets............................................................ F-75
Combined Statements of Operations.................................................. F-76
Combined Statements of Stockholders' Equity........................................ F-77
Combined Statements of Cash Flows.................................................. F-78
Notes to Combined Financial Statements............................................. F-79
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
Report of Independent Public Accountants........................................... F-84
Combined Balance Sheets............................................................ F-85
Combined Statements of Operations.................................................. F-86
Combined Statements of Stockholders' Equity........................................ F-87
Combined Statements of Cash Flows.................................................. F-88
Notes to Combined Financial Statements............................................. F-89
PERMANENT RECORDS, INC.
Report of Independent Public Accountants........................................... F-95
Balance Sheets..................................................................... F-96
Statements of Operations........................................................... F-97
Statements of Stockholders' Equity................................................. F-98
Statements of Cash Flows........................................................... F-99
Notes to Financial Statements...................................................... F-100
NEW ACQUISITIONS
COOK AND STAFF, INC. AND RELATED COMPANY
Report of Independent Public Accountants........................................... F-103
Balance Sheets..................................................................... F-104
Statements of Operations........................................................... F-105
Statements of Stockholder's Equity................................................. F-106
Statements of Cash Flows........................................................... F-107
Notes to Financial Statements...................................................... F-108
B&B INFORMATION AND IMAGE MANAGEMENT, INC.
Report of Independent Public Accountants........................................... F-111
Balance Sheets..................................................................... F-112
Statements of Operations........................................................... F-113
Statements of Stockholder's Equity................................................. F-114
Statements of Cash Flows........................................................... F-115
Notes to Financial Statements...................................................... F-116
PREMIER DOCUMENT 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
PRO FORMA FINANCIAL STATEMENTS
F.Y.I. INCORPORATED AND SUBSIDIARIES
Pro Forma Balance Sheet -- March 31, 1996 (unaudited).............................. F-132
Pro Forma Statement of Operations for the Year Ended December 31, 1995
(unaudited)..................................................................... F-133
Pro Forma Statement of Operations for the Three Months Ended March 31, 1996
(unaudited)..................................................................... F-134
Notes to Pro Forma Financial Statements (unaudited)................................ F-135
</TABLE>
F-2
<PAGE> 74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To F.Y.I. Incorporated:
We have audited the accompanying balance sheet of F.Y.I. Incorporated (a
Delaware corporation) as of December 31, 1995. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of F.Y.I. Incorporated as of December
31, 1995, in accordance with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 15, 1996
F-3
<PAGE> 75
F.Y.I. INCORPORATED AND SUBSIDIARIES
BALANCE SHEET AS OF DECEMBER 31, 1995
AND CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 52 $10,037
Accounts receivable and notes receivable, less allowance.......... -- 8,369
Accounts receivable, officers and employees....................... -- 77
Inventory......................................................... -- 349
Prepaid expenses and other current assets......................... 52 499
------ -------
Total current assets...................................... 104 19,331
PROPERTY, PLANT AND EQUIPMENT, net.................................. 15 5,116
GOODWILL, DEFERRED OFFERING COSTS AND OTHER INTANGIBLES............. 2,190 1,749
ACCOUNTS RECEIVABLE, OFFICER-LONG TERM.............................. -- 644
OTHER NONCURRENT ASSETS............................................. 6 559
------ -------
Total assets.............................................. $2,315 $27,399
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.......................... $1,101 $ 7,155
Short-term obligations............................................ -- 47
Current maturities of long-term obligations....................... -- 227
------ -------
Total current liabilities................................. 1,101 7,429
LONG-TERM OBLIGATIONS,
net of current maturities......................................... -- 634
DEFERRED INCOME TAXES,
net of current portion............................................ -- 129
------ -------
Total liabilities......................................... 1,101 8,192
------ -------
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 March 31, 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 5,269,615 shares issued and outstanding at December
31, 1995 and March 31, 1996, respectively...................... 7 53
Additional paid-in-capital........................................ 1,207 18,756
Retained earnings................................................. -- 398
------ -------
Total stockholders' equity................................ 1,214 19,207
------ -------
Total liabilities and stockholders' equity........... $2,315 $27,399
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 76
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
1995 1996
--------- ---------
<S> <C> <C>
REVENUE:
Service revenue...................................................... $-- $7,407
Product revenue...................................................... -- 913
Other revenue........................................................ -- 93
--- ------
Total revenue................................................ -- 8,413
COST OF SERVICES....................................................... -- 4,701
COST OF PRODUCTS SOLD.................................................. -- 718
DEPRECIATION........................................................... -- 212
--- ------
Gross profit................................................. -- 2,782
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................... -- 2,253
--- ------
Operating income............................................. -- 529
OTHER (INCOME) EXPENSE:
Interest expense..................................................... -- 14
Interest income...................................................... -- (106)
Other................................................................ -- (39)
--- ------
Income before income taxes................................... -- 660
PROVISION FOR INCOME TAXES............................................. -- 262
--- ------
NET INCOME............................................................. $-- $ 398
=== ======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................. -- 5,286
=== ======
NET INCOME PER COMMON SHARE............................................ $-- $ .08
=== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 77
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
1995 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ -- $ 398
Adjustments to reconcile net income to net cash provided by operating
activities
Amortization and depreciation..................................... -- 305
Change in operating assets and liabilities:
Accounts receivable............................................. -- (220)
Inventories..................................................... -- (51)
Prepaid expenses and other assets............................... -- 2,022
Accounts payable and accrued liabilities........................ -- 59
----- -------
Net cash provided by operating activities.................... -- 2,513
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............................ (4) (617)
Cash paid for acquisitions, net of cash received..................... -- (6,509)
----- -------
Net cash used for investing activities....................... (4) (7,126)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of underwriting discounts
and other costs................................................... (128) 22,280
Proceeds from preferred stock issuance............................... 135 --
Principal payments on short-term obligations......................... -- (2)
Principal payments on long-term obligations.......................... -- (7,680)
----- -------
Net cash provided by financing activities.................... 7 14,598
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 3 9,985
CASH AND CASH EQUIVALENTS, beginning of period......................... 669 52
----- -------
CASH AND CASH EQUIVALENTS, end of period............................... $ 672 $10,037
===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 78
F.Y.I. INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
F.Y.I. Incorporated ("F.Y.I." or the "Company") was founded in September
1994 to create a national company to provide document management services to
companies in various industries. F.Y.I. intends to acquire various local and
regional companies, complete an initial public offering ("IPO") of its common
stock and, subsequent to the IPO, continue to acquire, through merger or
purchase, similar companies to build a national publicly owned enterprise.
In October 1995, F.Y.I. and separate wholly owned subsidiaries signed
definitive agreements to acquire by merger seven companies ("Founding
Companies") to be effective with the closing of an initial public offering of
the common stock of F.Y.I. The aggregate consideration that will be paid by
F.Y.I. to acquire the Founding Companies is approximately $35 million consisting
of a combination of cash and common stock. In addition, the preferred stock will
be converted to common stock.
Simultaneously with the closing of its initial public offering (the
"Offering") on January 23, 1996, F.Y.I. and separate wholly owned subsidiaries
acquired by merger (the "Acquisitions") the Founding Companies located in
California, Maryland, Texas, Pennsylvania, and Michigan. The consideration for
the stock of the Founding Companies consisted of a combination of cash and
common stock of F.Y.I.
F.Y.I.'s primary asset at December 31, 1995, was deferred offering costs.
The Company conducted no significant operations prior to the Offering. 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. The
Company incurred various legal, accounting, marketing and travel costs in
connection with the Acquisitions, which were funded by issuance of Common Stock
and Preferred Stock, discussed in Note 2. Additional costs associated with the
Offering and the Acquisitions were repaid with proceeds of the Offering.
In the opinion of F.Y.I.'s management, the accompanying interim
consolidated financial statements include the accounts of the Company and all
adjustments necessary to present fairly the Company's financial position at
March 31, 1996, its results of operations for the three months ended March 31,
1996 and 1995, and cash flows for the three months ended March 31, 1996, and
1995. 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. These
consolidated financial statements should be read in conjunction with the
combined financial statements of the Founding Companies and the related notes
thereto included elsewhere in this Prospectus. The results of operations for the
three month periods ended March 31, 1996 and 1995, may not be indicative of the
results for the full year.
2. STOCKHOLDERS' EQUITY:
In connection with the organization and initial capitalization of F.Y.I. in
September 1994, F.Y.I. issued 602,841 shares of common stock at par value. In
March 1995, 21,099 additional shares were issued as consideration for services
provided by a consultant. The shares were valued at $35,000, and a corresponding
amount was recorded in deferred offering costs. In September 1995, F.Y.I. issued
an additional 39,185 shares of common stock for $325,000.
In October 1994, F.Y.I. issued a total of 9,000 shares of Series A, 6%
cumulative, convertible, voting preferred stock ("Series A Preferred") for
proceeds of $900,000, net of offering costs of $46,000. The Series A Preferred
is convertible into common stock on a one for one basis (pre-split) at the
shareholders' discretion after a five-month holding period from the date of
issuance, and will be converted in connection with the IPO. All Series A
Preferred shares outstanding at December 31, 1995, were convertible. The Series
A Preferred is entitled to a 6% cumulative preference on any dividends paid by
F.Y.I.
F-7
<PAGE> 79
F.Y.I. INCORPORATED
NOTES TO BALANCE SHEET -- (CONTINUED)
In October 1995, F.Y.I. outstanding common stock was split 60.28 for one.
In addition, F.Y.I. increased the number of authorized shares of preferred stock
and common stock to 1,000,000 shares and 26,000,000 shares, respectively. The
common stock split and shares authorized have been retroactively reflected on
the balance sheet and in the accompanying Notes.
In November 1995, the Company issued warrants to purchase 115,000 shares of
common stock at $10.00 per share. The warrants are exercisable as to 50% on the
second anniversary of the date of grant and as to the remaining 50% on the third
anniversary date of the grant.
In January 1996, the Company issued warrants to purchase 50,000 shares of
common stock at $13.00 per share. The warrants are exercisable as to 50% on the
second anniversary of the date of the grant and as to the remaining 50% on the
third anniversary date of the grant.
In October 1995, the Board of Directors and F.Y.I.'s stockholders approved
the Company's 1995 Stock Option Plan (the "Plan") which will become effective on
the date of the Offering. Awards of options to purchase common stock may include
incentive stock options ("ISOs") and/or non-qualified stock options ("NQSOs").
The maximum number of shares of common stock that may be subject to outstanding
options, determined immediately after the grant of any option, is equal to 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. In November
1995, the Company issued NQSOs to purchase a total of 472,500 shares of common
stock at the IPO price and in March 1996, the Company issued NQSOs to purchase
6,000 shares of common stock at $17.25 per share.
3. INITIAL PUBLIC OFFERING AND MERGER:
Initial Public Offering
On January 26, 1996, F.Y.I. completed the Offering of 2,185,000 (including
the exercise of the underwriters' over-allotment option) shares of common stock
at $13.00 per share for proceeds, net of underwriting commissions and offering
costs, of $24.7 million. Of these net proceeds, approximately $14.4 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,
and $2.6 million was used as working capital.
Upon closing of the Offering, the Company converted the 9,000 shares of
Series A Preferred Stock into 542,557 shares of common stock.
Merger
Simultaneously with the closing of the Offering mentioned above, the
Company acquired the Founding Companies. The Company issued 1,878,933 shares of
common stock to the stockholders of the Founding Companies, in addition to the
consideration mentioned above, to effect the Merger.
F-8
<PAGE> 80
F.Y.I. INCORPORATED
NOTES TO BALANCE SHEET -- (CONTINUED)
Supplemental Data
The Statement of Operations Data for the three months ended March 31, 1995,
represents the unaudited results of the combined Founding Companies for the
period. The Supplemental Statement of Operations Data for the three months ended
March 31, 1996, represents a combination of: (i) Statement of Operations Data
for the combined operations of the Founding Companies for the one month of
operations prior to the consummation of the Acquisitions; and (ii) Statement of
Operations Data for F.Y.I. Incorporated and Subsidiaries for the results of
operations subsequent to the consummation of the Acquisitions. The supplemental
data is provided for information purposes only and does not purport to present
the results of operations of the Company had the transaction assumed therein
occurred on or as of the dates indicated, nor is it necessarily indicative of
the results of operations which may be achieved in the future.
<TABLE>
<CAPTION>
SUPPLEMENTAL
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
1995 1996
--------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue..................................... $10,000 $10,894
Product revenue..................................... 1,723 1,308
Other revenue....................................... 164 128
------- -------
Total revenue............................... 11,887 12,330
Cost of services.................................... 6,310 6,896
Cost of products sold............................... 1,422 1,026
Depreciation........................................ 305 303
------- -------
Gross profit................................ 3,850 4,105
Selling, general and administrative expenses........ 2,727 3,756
------- -------
Operating income............................ 1,123 349
Interest and other expenses (income), net........... 33 (176)
------- -------
Income before income taxes.......................... 1,090 525
Provision for income taxes.......................... 42 132
------- -------
Net income.......................................... $ 1,048 $ 393
======= =======
Founding Company Pro forma compensation
differential..................................... $ 256 $ 683
Founding Company Pro forma selling, general and
administrative expenses.......................... 2,471 3,073
Founding Company Pro forma operating income......... 1,379 1,032
Founding Company Pro forma provision for taxes...... 444 351
Founding Company Pro forma net income............... 860 725
Founding Company Pro forma net income per share..... $ .16 $ .14
======= =======
Founding Company Pro forma weighted average shares
outstanding...................................... 5,286 5,286
</TABLE>
F-9
<PAGE> 81
F.Y.I. INCORPORATED
NOTES TO BALANCE SHEET -- (CONTINUED)
The number of shares (in thousands) used in calculating net income per
share and pro forma net income per share was determined as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
---------
<S> <C>
Outstanding FYI shares after the Offering and the Merger................... 5,270
Warrants to purchase stock under the treasury stock method................. 16
-----
Number of shares used in pro forma net income per share
calculation..................................................... 5,286
=====
</TABLE>
4. SUBSEQUENT EVENT:
In April 1996, the Company entered into a credit agreement (the "Credit
Agreement") with a lending group (the "Lenders"). The Company may borrow 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 Company and its subsidiaries may borrow up to $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 $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 borrowing 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 shall be due and payable on April 15, 2001.
The Company currently has no borrowings outstanding under this facility.
F-10
<PAGE> 82
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 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 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 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
accordance with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 15, 1996
F-11
<PAGE> 83
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-12
<PAGE> 84
FOUNDING COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 1,056 $ 1,742
Accounts and notes receivable, less allowance for doubtful accounts
and notes of $677 and $562, respectively............................. 7,802 7,939
Accounts receivable, officer and employee............................... 971 692
Accounts receivable, affiliates......................................... 280 279
Inventory............................................................... 257 331
Current portion of deferred income taxes................................ 78 24
Prepaid and other current assets........................................ 216 320
------- -------
Total current assets............................................ 10,660 11,327
------- -------
PROPERTY AND EQUIPMENT, net............................................... 6,142 6,467
INTANGIBLE ASSETS, net of accumulated amortization
of $17 and $82, respectively............................................ 836 770
ACCOUNTS RECEIVABLE, OFFICERS -- LONG-TERM................................ 795 890
OTHER NONCURRENT ASSETS................................................... 262 193
NOTES RECEIVABLE, LONG-TERM............................................... 435 34
------- -------
Total assets.................................................... $19,130 $19,681
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities................................ $ 5,674 $ 5,587
Short-term obligations.................................................. 1,970 1,430
Current maturities of long-term obligations............................. 715 1,250
Officers payable -- short-term.......................................... 520 1,064
Unearned revenue........................................................ 377 333
Current portion of deferred income taxes................................ -- --
------- -------
Total current liabilities....................................... 9,256 9,664
------- -------
LONG-TERM OBLIGATIONS, net of current..................................... 3,107 2,738
LONG-TERM OBLIGATIONS -- AFFILIATES, net of current....................... 43 19
LONG-TERM OBLIGATIONS -- OFFICERS, net of current......................... 35 20
DEFERRED INCOME TAXES..................................................... 229 129
OTHER NONCURRENT LIABILITIES.............................................. 50 --
------- -------
Total liabilities............................................... 12,720 12,570
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock (Note 9)................................................... 173 173
Additional paid-in capital.............................................. 775 775
Retained earnings....................................................... 5,463 6,163
------- -------
6,411 7,111
Less -- Treasury stock, 10,000 shares in 1994, no par,
$1,000 assigned value................................................ 1 --
------- -------
Total stockholders' equity...................................... 6,410 7,111
------- -------
Total liabilities and stockholders' equity...................... $19,130 $19,681
======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-13
<PAGE> 85
FOUNDING COMPANIES
COMBINED STATEMENTS OF OPERATIONS (NOTE 1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Service revenue............................................. $32,067 $36,081 $40,615
Product revenue............................................. 5,123 5,923 6,138
Other revenue............................................... 1,206 1,028 873
------- ------- -------
Total revenue....................................... 38,396 43,032 47,626
COST OF SERVICES.............................................. 20,318 23,650 25,937
COST OF PRODUCTS SOLD......................................... 4,464 4,892 4,972
DEPRECIATION.................................................. 883 1,055 1,238
------- ------- -------
Gross profit........................................ 12,731 13,435 15,479
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES................. 11,045 11,836 12,489
------- ------- -------
Operating income.................................... 1,686 1,599 2,990
OTHER (INCOME) EXPENSE:
Interest expense............................................ 339 388 492
Interest income............................................. (40) (84) (139)
Other....................................................... (51) (275) (214)
------- ------- -------
Income before income taxes.......................... 1,438 1,570 2,851
PROVISION FOR INCOME TAXES.................................... 218 211 163
------- ------- -------
NET INCOME.................................................... $ 1,220 $ 1,359 $ 2,688
======= ======= =======
PRO FORMA DATA (Unaudited -- See Note 3):
HISTORICAL NET INCOME......................................... $ 1,220 $ 1,359 $ 2,688
PRO FORMA COMPENSATION DIFFERENTIAL........................... 1,715 1,855 1,976
PRO FORMA PROVISION FOR INCOME TAXES.......................... 1,043 1,045 1,631
------- ------- -------
PRO FORMA NET INCOME.......................................... $ 1,892 $ 2,169 $ 3,033
======= ======= =======
PRO FORMA NET INCOME PER COMMON SHARE......................... $ .52 $ .60 $ .83
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................................. 3,644 3,644 3,644
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-14
<PAGE> 86
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
======= ==== ===== ======= ======= ==== ==== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-15
<PAGE> 87
FOUNDING COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 1,220 $ 1,359 $ 2,688
Adjustment to reconcile net income to net cash provided
by operating activities-
Amortization and depreciation.......................... 995 1,115 1,302
Loss (gain) on sale-retirement of assets............... -- (38) (3)
Loss on investment..................................... -- 17 --
Deferred tax expense (benefit)......................... 39 (555) (60)
Changes in operating assets and liabilities-
Accounts receivable................................. (446) (1,058) 220
Prepaid expenses and other assets................... (54) (142) (53)
Stockholder receivable.............................. -- (272) 331
Inventory........................................... (164) 171 (74)
Accounts payable.................................... 557 1,366 (162)
Unearned revenue.................................... 74 94 (44)
Other.................................................. 77 (46) (62)
------- ------- -------
Net cash provided by operating activities...... 2,298 2,011 4,083
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................... (1,119) (1,734) (1,423)
Sale of property, plant and equipment....................... 40 203 76
Purchase of intangibles..................................... -- (438) --
Other, net.................................................. (70) (4) --
------- ------- -------
Net cash used for investing activities......... (1,149) (1,973) (1,347)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on short-term obligations................ (425) (578) (2,063)
Principal payments on long-term obligations................. (1,802) (443) (704)
Proceeds from short-term borrowing.......................... 427 1,068 1,825
Proceeds from long-term borrowings.......................... 1,605 316 642
Borrowings (payments) on line of credit..................... 155 38 219
Payment of dividends........................................ (823) (401) (2,032)
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)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (79) (86) 686
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR..................................................... 1,221 1,142 1,056
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 1,142 $ 1,056 $ 1,742
======= ======= =======
SUPPLEMENTAL DATA:
Interest paid............................................... $ 334 $ 379 $ 486
Income taxes paid........................................... 55 67 296
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 -- --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-16
<PAGE> 88
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Concurrently with the initial public offering of its common stock (the
"Offering"), F.Y.I. Incorporated ("FYI") will merge 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, FYI and separate wholly
owned subsidiaries of FYI will merge with the Founding Companies (the
"Mergers"). 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-17
<PAGE> 89
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 and Equipment
Property 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
Revenues are 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-18
<PAGE> 90
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 presents 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 presents 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.
Pro Forma Net Income Per Share (Unaudited)
The computation of pro forma net income per share is based upon 3,643,538
weighted average shares of common stock outstanding, which includes (i)
1,205,682 shares to be issued with the conversion of FYI preferred stock to
common stock and the stock split of FYI common stock at the date of the
registration statement filing, (ii) 1,878,933 shares to be issued to the
stockholders of the Founding Companies in connection with the Mergers, (iii)
543,000 shares being sold in the Offering to cover the cash portion of the
F-19
<PAGE> 91
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
purchase price (based upon the Offering price of $13 per share) and (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 granted at $10.00 per
share. Does not include (i) an additional 650,000 shares of common stock
reserved for issuance under F.Y.I.'s 1995 Stock Option Plan, of which options to
purchase 478,500 shares of common stock are currently outstanding, and (ii) a
warrant outstanding to purchase 50,000 shares of common stock.
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 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-20
<PAGE> 92
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-21
<PAGE> 93
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-22
<PAGE> 94
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-23
<PAGE> 95
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-24
<PAGE> 96
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-25
<PAGE> 97
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-26
<PAGE> 98
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-27
<PAGE> 99
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 the 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 the 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,
Researcher's 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-28
<PAGE> 100
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, a party 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 its 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.
14. SUBSEQUENT EVENTS:
In October 1995, FYI entered into definitive agreements to acquire the
Founding Companies. On January 26, 1996, the Founding Companies were acquired by
FYI and separate wholly owned subsidiaries, effective with the closing of the
Offering of 2,185,000 shares of FYI common stock.
F-29
<PAGE> 101
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-30
<PAGE> 102
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-31
<PAGE> 103
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-32
<PAGE> 104
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-33
<PAGE> 105
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-34
<PAGE> 106
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-35
<PAGE> 107
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-36
<PAGE> 108
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-37
<PAGE> 109
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-38
<PAGE> 110
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-39
<PAGE> 111
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-40
<PAGE> 112
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-41
<PAGE> 113
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-42
<PAGE> 114
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-43
<PAGE> 115
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-44
<PAGE> 116
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-45
<PAGE> 117
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-46
<PAGE> 118
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-47
<PAGE> 119
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-48
<PAGE> 120
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-49
<PAGE> 121
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-50
<PAGE> 122
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-51
<PAGE> 123
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-52
<PAGE> 124
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-53
<PAGE> 125
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-54
<PAGE> 126
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-55
<PAGE> 127
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-56
<PAGE> 128
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-57
<PAGE> 129
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-58
<PAGE> 130
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-59
<PAGE> 131
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-60
<PAGE> 132
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
</TABLE>
<TABLE>
<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-61
<PAGE> 133
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-62
<PAGE> 134
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-63
<PAGE> 135
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-64
<PAGE> 136
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-65
<PAGE> 137
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-66
<PAGE> 138
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-67
<PAGE> 139
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-68
<PAGE> 140
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-69
<PAGE> 141
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-70
<PAGE> 142
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-71
<PAGE> 143
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-72
<PAGE> 144
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-73
<PAGE> 145
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-74
<PAGE> 146
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-75
<PAGE> 147
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-76
<PAGE> 148
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-77
<PAGE> 149
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-78
<PAGE> 150
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-79
<PAGE> 151
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-80
<PAGE> 152
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-81
<PAGE> 153
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-82
<PAGE> 154
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-83
<PAGE> 155
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-84
<PAGE> 156
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-85
<PAGE> 157
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-86
<PAGE> 158
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-87
<PAGE> 159
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-88
<PAGE> 160
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-89
<PAGE> 161
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-90
<PAGE> 162
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-91
<PAGE> 163
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-92
<PAGE> 164
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-93
<PAGE> 165
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-94
<PAGE> 166
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-95
<PAGE> 167
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-96
<PAGE> 168
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-97
<PAGE> 169
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-98
<PAGE> 170
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-99
<PAGE> 171
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-100
<PAGE> 172
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-101
<PAGE> 173
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-102
<PAGE> 174
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-103
<PAGE> 175
COOK AND STAFF, INC. AND RELATED COMPANY
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
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-104
<PAGE> 176
COOK AND STAFF, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 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-105
<PAGE> 177
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-106
<PAGE> 178
COOK AND STAFF, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 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-107
<PAGE> 179
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-108
<PAGE> 180
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-109
<PAGE> 181
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-110
<PAGE> 182
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-111
<PAGE> 183
B & B INFORMATION AND IMAGE MANAGEMENT, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1996
------------------------- ----------
1994 1995
---------- ---------- (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-112
<PAGE> 184
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-113
<PAGE> 185
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-114
<PAGE> 186
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-115
<PAGE> 187
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-116
<PAGE> 188
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.
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
F-117
<PAGE> 189
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-118
<PAGE> 190
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-119
<PAGE> 191
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 income, 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-120
<PAGE> 192
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-121
<PAGE> 193
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-122
<PAGE> 194
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-123
<PAGE> 195
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-124
<PAGE> 196
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-125
<PAGE> 197
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-126
<PAGE> 198
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 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-127
<PAGE> 199
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
YEAR ENED MARCH 31,
DECEDMBER 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-128
<PAGE> 200
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-129
<PAGE> 201
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 financial statements and the individual Founding Company
financial statements. See "Index to Financial Statements."
F.Y.I. acquired, simultaneously with and as a condition to the closing of
the Offering 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, because the Founding
Companies' stockholders transferred assets to F.Y.I. in exchange for Common
Stock and cash simultaneously with F.Y.I.'s initial public offering, the nature
of future operations of the Company will be substantially identical to the
combined operations of the Founding Companies, and no former stockholder group
of any of the Founding Companies obtained a majority of the outstanding voting
shares of the Company. Accordingly, historical financial statements of these
Founding Companies have been combined throughout all relevant periods 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. For accounting purposes the acquisitions of the Founding Companies
were recorded by the Company as of January 31, 1996.
In May 1996, the Company acquired 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"). All of the new
acquisitions are accounted for under the purchase method of accounting.
The following unaudited pro forma financial statements of F.Y.I.
Incorporated and subsidiaries gives effect to: (i) the acquisitions of B&B,
Premier and Cook and (ii) the acquisition of the Founding Companies for the
periods prior to the consummation of the Acquisitions (January 31, 1996).
The unaudited pro forma balance sheet is based upon:
(i) the unaudited consolidated balance sheet of F.Y.I. as of March 31,
1996; and
(ii) the unaudited balance sheet of B&B and Premier purchased during
May 1996 and Cook purchased during June 1996 as if the acquisitions had
occurred on March 31, 1996.
The unaudited pro forma statement of operations for the three months ended
March 31, 1996 is based upon:
(i) the unaudited statement of operations of F.Y.I. for the period
from February 1, 1996 to March 31, 1996 combined with the unaudited
statement of operations for the Founding Companies for the one month ended
January 31, 1996;
(ii) the unaudited statement of operations for B&B, Premier and Cook
from January 1, 1996 to March 31, 1996.
The unaudited pro forma statement of operations for the year ended December
31, 1995 is based upon:
(i) the audited combined financial statements of the Founding
Companies for the year ended December 31, 1995; and
(ii) the audited financial statements of B&B, Premier and Cook for the
year ended December 31, 1995.
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.
F-130
<PAGE> 202
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 anticipates that it will realize significant 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 Offering remaining after payment of the expenses of the Offering
and the cash portion of the consideration for the Founding Companies. The
Company has not and cannot quantify these savings at the present time. These
savings will be offset by the costs of being a public company and the
incremental increase in costs related to the Company's new management. However,
these costs, like the savings that they offset, cannot be quantified accurately.
Accordingly, neither the anticipated savings nor the anticipated costs have been
included in the pro forma financial information of F.Y.I. Incorporated and
Subsidiaries for the periods prior to the acquisition of the Founding Companies.
The pro forma financial data does 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-131
<PAGE> 203
F.Y.I. INCORPORATED AND SUBSIDIARIES
PRO FORMA BALANCE SHEET (UNAUDITED)
MARCH 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
F.Y.I. NEW PRO FORMA
INCORPORATED ACQUISITIONS COMBINED
------------ ------------ ---------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 10,037 $ (7,098)(A) $ 2,939
Accounts receivable, less allowance.................. 8,369 3,577(A) 11,946
Prepaids and other current assets.................... 925 598(A) 1,523
------- ------- -------
Total current assets......................... 19,331 (2,923) 16,408
PROPERTY AND EQUIPMENT, net............................ 5,116 3,407(A) 8,523
INTANGIBLE ASSETS, net................................. 1,749 16,673(A) 18,422
OTHER NON CURRENT ASSETS............................... 1,203 203(A) 1,406
------- ------- -------
Total assets................................. $ 27,399 $ 17,360 $44,759
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities............. $ 7,155 $ 2,798(A) $ 9,953
Short-term obligations............................... 47 88(A) 135
Current maturities of long-term obligations.......... 227 243(A) 470
------- ------- -------
Total current liabilities.................... 7,429 3,129 10,558
LONG-TERM OBLIGATIONS, net of current.................. 634 10,687(A) 11,321
DEFERRED INCOME TAXES, net............................. 129 88(A) 217
------- ------- -------
Total liabilities............................ 8,192 13,904 22,096
STOCKHOLDERS' EQUITY
Preferred Stock...................................... -- -- --
Common Stock......................................... 53 3(A) 56
Additional paid-in capital........................... 18,756 3,453(A) 22,209
Retained earnings.................................... 398 -- 398
------- ------- -------
Total stockholders' equity................... 19,207 3,456 22,663
------- ------- -------
Total liabilities and stockholders' equity... $ 27,399 $ 17,360 $44,759
======= ======= =======
</TABLE>
F-132
<PAGE> 204
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 NEW PRO FORMA
INCORPORATED COMPANIES ADJUST ACQUISITIONS ADJUST COMBINED
------------ --------- ------ ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Service revenue........................ $ -- $40,615 $ -- $ 21,470 $ -- $62,085
Product revenue........................ -- 6,138 -- 1,550 -- 7,688
Other revenue.......................... -- 873 -- 35 -- 908
------ ------ ------ ------ ------ ------
Total revenue.................... -- 47,626 -- 23,055 -- 70,681
COST OF SERVICES......................... -- 25,937 -- 12,719 -- 38,656
COST OF PRODUCTS SOLD.................... -- 4,972 -- 1,250 -- 6,222
DEPRECIATION............................. -- 1,238 -- 644 (305)(B) 1,577
------ ------ ------ ------ ------ ------
Gross profit..................... -- 15,479 -- 8,442 305 24,226
SELLING, GENERAL AND ADMINISTRATIVE...... -- 12,489 (1,976)(F) 4,815 563(B) 15,513
(378)(C)
------ ------ ------ ------ ------ ------
Operating income................. -- 2,990 1,976 3,627 120 8,713
OTHER (INCOME) EXPENSE:
Interest expense....................... -- 492 -- 225 733(H) 1,450
Interest income........................ -- (139) -- (58) -- (197)
Other.................................. -- (214) -- 7 -- (207)
------ ------ ------ ------ ------ ------
Income before income taxes....... -- 2,851 1,976 3,453 (613) 7,667
PROVISION FOR INCOME TAXES............... -- 163 1,631 (G) 72 1,064(D) 2,930
------ ------ ------ ------ ------ ------
NET INCOME............................... $ -- $ 2,688 $ 345 $ 3,381 $(1,677) $ 4,737
====== ====== ====== ====== ====== ======
NET INCOME PER COMMON SHARE.............. $ 0.86
======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................ 5,286 253(E) 5,539
====== ====== ======
</TABLE>
F-133
<PAGE> 205
F.Y.I. INCORPORATED AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS MARCH 31, 1996 (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
F.Y.I. FOUNDING NEW PRO FORMA
INCORPORATED COMPANIES ADJUST ACQUISITIONS ADJUST COMBINED
------------ --------- ------ ------------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Service revenue............................ $7,407 $ 3,487 $ -- $5,985 $ -- $16,879
Product revenue............................ 913 395 -- 271 -- 1,579
Other revenue.............................. 93 35 -- 11 -- 139
------ ------- ----- ------ ----- -------
Total revenue........................ 8,413 3,917 -- 6,267 -- 18,597
COST OF SERVICES............................. 4,701 2,195 -- 3,618 -- 10,514
COST OF PRODUCTS SOLD........................ 718 308 -- 236 -- 1,262
DEPRECIATION................................. 212 91 -- 170 (77)(B) 396
------ ------- ----- ------ ----- -------
Gross profit......................... 2,782 1,323 -- 2,243 77 6,425
SELLING, GENERAL AND ADMINISTRATIVE.......... 2,253 1,503 (683)(F) 1,206 (88)(C) 4,331
140 (B)
------ ------- ----- ------ ----- -------
Operating income..................... 529 (180) 683 1,037 25 2,094
OTHER (INCOME) EXPENSE
Interest expense........................... 14 24 -- 43 180 (H) 261
Interest income............................ (106) -- -- (7) -- (113)
Other...................................... (39) (69) -- (15) -- (123)
------ ------- ----- ------ ----- -------
Income before income taxes........... 660 (135) 683 1,016 (155) 2,069
PROVISION FOR INCOME TAXES................... 262 (130) 351 (G) 21 323 (D) 827
------ ------- ----- ------ ----- -------
NET INCOME................................... $ 398 $ (5) $ 332 $ 995 $(478) $ 1,242
====== ======= ===== ====== ===== =======
NET INCOME PER COMMON SHARE.................. $ 0.08 $ 0.22
====== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING... 5,286 253 (E) 5,539
====== ===== =======
</TABLE>
F-134
<PAGE> 206
NOTES TO PRO FORMA FINANCIAL STATEMENTS
THE PRO FORMA ADJUSTMENTS TO THE ACCOMPANYING BALANCE SHEET AS OF MARCH 31,
1996 ARE SUMMARIZED AS BELOW:
A. To record the purchase of B&B, Premier and Cook assets and liabilities
including the preliminary allocation of the purchase price (including
estimated direct costs) and the disbursement of $15,522,000 cash and
issuance of 253,252 shares of Common Stock to consummate the acquisitions.
The estimated fair market values reflected below 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. The fair market value of the shares of
Common Stock used in calculating the Consideration Paid was $13.65 which is
based on a 35% discount from the average trading price of the Common Stock
based on the length and type of restrictions in the purchase agreements.
<TABLE>
<S> <C>
Consideration Paid............................................... 18,979,000
Estimated Fair Value of Assets................................... 8,060,000
Estimated Fair Value of Liabilities.............................. 5,754,000
Goodwill......................................................... 16,673,000
</TABLE>
All intangibles are considered enterprise goodwill. Based on the historical
profitability of the purchased companies and the trends in the legal,
healthcare and other industries to outsource document management functions
further in the foreseeable future, the enterprise goodwill will be
amortized over a period of 30 years. The carrying value of intangible
assets will be reviewed at each reporting period on an acquisition by
acquisition basis to determine if facts and circumstances exist which would
suggest that the intangible assets may be impaired or that the amortization
period needs to be modified.
THE PRO FORMA ADJUSTMENTS TO THE ACCOMPANYING STATEMENTS OF OPERATIONS ARE
SUMMARIZED BELOW:
B. Adjustment to depreciation and amortization expense related to the
preliminary purchase price allocations described above.
C. To record the difference between the compensation paid to the stockholders
of B&B and Premier for the historical periods presented and the F.Y.I.
employment contract compensation to the stockholders.
D. Adjustment of the federal and state income tax provisions based on the pro
forma combined operations.
E. To adjust the weighted average shares outstanding to reflect the pro forma
effect of the shares issued for the purchase of B&B and Premier.
F. 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.
G. Adjustment of the federal and state income tax provisions based on the pro
forma combined operations of F.Y.I. and the Founding Companies.
H. To record interest expense on the $8,150,000 term debt issued for the
purchase of Cook. Proceeds remaining from the Offering were used for the
purchase of B&B and Premier, and a portion of Cook.
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-135
<PAGE> 207
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. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE 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>
SECTION PAGE SECTION PAGE
------- ---- ------- ----
<S> <C> <C> <C>
Prospectus Summary..................... 2 Business............................... 27
Risk Factors........................... 6 Management............................. 38
The Company............................ 10 Principal Stockholders................. 44
Recent Developments.................... 12 Description of Capital Stock........... 45
Price Range of Common Stock............ 13 Certain Transactions................... 47
Dividend Policy........................ 13 Shares Eligible for Future Sale........ 48
Capitalization......................... 14 Legal Matters.......................... 48
Selected Financial Data................ 15 Experts................................ 49
Management's Discussion and Analysis of Additional Information................. 50
Financial Condition and Results of Index to Financial Statements.......... F-1
Operations........................... 19
</TABLE>
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