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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27444
F.Y.I. INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 75-2560895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3232 MCKINNEY AVE., SUITE 900, DALLAS, TEXAS 75204
(Address of principal executive offices) (zip code)
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(214) 953-7555
(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
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 [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. YES [X] NO [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 7, 1997 was $189,152,305, based on the last sale price
($23.25) of the Registrant's Common Stock, $.01 par value per share, on the
Nasdaq National Market on March 7, 1997.
As of March 7, 1997, 8,779,434 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission not later than 120 days
after the end of the Company's fiscal year ended December 31, 1996 are
incorporated by reference into Part III of this Form 10-K.
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F.Y.I. INCORPORATED
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business................................ 1
Item 2. Properties.............................. 11
Item 3. Legal Proceedings....................... 11
Item 4. Submission of Matters to a Vote of
Security Holders........................ 11
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters......... 12
Item 6. Selected Financial Data................. 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 17
Item 8. Financial Statements and Supplementary
Data.................................... 23
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.............................. 138
PART III
Item 10. Directors and Executive Officers of the
Registrant.............................. 138
Item 11. Executive Compensation.................. 138
Item 12. Security Ownership of Certain Beneficial
Owners and Management................... 138
Item 13. Certain Relationships and Related
Transactions............................ 138
PART IV
Item 14. Exhibits, Financial Statements
Schedules, and Reports on Form 8-K...... 139
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PART I
ITEM 1. BUSINESS
GENERAL
F.Y.I. Incorporated ("F.Y.I." or the "Company") was founded in September
1994 to create a national, single source provider of document management
services to three primary client segments: healthcare institutions, professional
services firms and financial institutions. The Company's primary strategy is to
consolidate the highly fragmented document management services industry through
acquisitions. In January 1996, F.Y.I. acquired, simultaneously with the closing
of its initial public offering (the "IPO"), seven document management services
businesses (the "Founding Companies"). Since the IPO, and through December 31,
1996, the Company acquired 18 additional companies (the "Subsequent
Acquisitions"). Since December 31, 1996, the Company has acquired three
additional companies, for a total of 28 acquisitions since the Company's
inception. In December 1996, the Company completed a public offering of
2,783,000 shares of Common Stock (including 420,000 shares of Common Stock sold
by selling stockholders) (the "December Offering"). The proceeds from the
December Offering were used to repay the outstanding balance on its line of
credit, to pay a portion of consideration for acquisitions and to retire
indebtedness assumed in acquisitions. The remaining proceeds are to be used for
general corporate purposes, which are expected to include additional
acquisitions. The Company intends to continue to aggressively pursue strategic
acquisitions in existing and new markets, cross-sell its full range of services
to its current customer base and expand the marketing of its services to new
customers.
An estimated four trillion documents are generated annually in the United
States. A significant portion of the storage, processing and management of these
documents is outsourced to small document management services businesses.
Further, the Company believes that the document management services market is
growing due to several factors, including: (i) government regulations that
require lengthy document retention periods and rapid accessibility for many
types of records; (ii) increased customer expectations of low cost access to
records on short notice and, in many instances, at disparate locations; (iii)
the increasing litigiousness of society, necessitating access to relevant
documents and records for extended periods; and (iv) continuing advancements in
computer, networking, facsimile, printing and other technologies which have
greatly facilitated the production and wide distribution of documents.
The Company's three targeted client segments generate large volumes of
documents and require specialized processing, distribution, storage and
retrieval of these documents and the information they contain. The Company
believes that these client segments will continue to increase their outsourcing
of document management services in order to maintain their focus on core
operating competencies and revenue generating activities; reduce fixed costs,
including labor and equipment costs; and gain access to new technologies without
incurring the expense and risk of near-term obsolescence of such technologies.
The document management services business is highly fragmented. The Company
believes that many small document management services businesses: (i) have
insufficient capital for expansion; (ii) cannot keep abreast of rapidly changing
technologies; (iii) lack effective marketing programs; and (iv) are unable to
meet the needs of large, geographically dispersed clients. In addition, there
are a limited number of options for owners of such businesses to obtain
liquidity by selling their businesses. As a result, the Company believes that
many owners of such businesses will continue to be receptive to its acquisition
program.
BUSINESS STRATEGY
The Company's goal is to become a national, single source provider of
document management services for its three primary target client segments:
healthcare institutions, professional services firms and financial institutions,
as well as governmental entities and Fortune 500 companies. In order to achieve
this goal, the Company is implementing its focused business strategy based on
the following key principles:
Establish Full Service Operations in Multiple Metropolitan Areas. The
Company intends to establish a full range of document management operations to
meet the diverse needs of targeted metropolitan areas by
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implementing its "fill-in-the-grid" strategy through selected acquisitions and
expansion of existing businesses. Ultimately, the Company will seek to achieve a
national scope of coverage so that it can implement a national sales and service
policy.
Capitalize on Cross-Selling Opportunities. The Company intends to continue
to cross-sell in two primary ways. First, the Company intends to leverage its
existing client relationships by selling such clients additional document
management services provided by the Company's other businesses. Second, the
Company intends 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, employee benefits programs and
purchasing certain items, such as paper, microfilm and storage racks, on a
combined basis. To the extent that the Company is able to expand through the
acquisition of additional document management businesses, the Company believes
that such cost savings will continue to accrue.
Operate With a Decentralized Management Strategy. The Company believes that
the experienced local management teams of its acquired businesses have a
valuable understanding of their respective markets and businesses and have
existing client relationships upon which they may capitalize. Accordingly, the
Company is operating and expects to continue to operate with a decentralized
management strategy. Local management will remain empowered to make most of the
day-to-day operating decisions at each location and will be primarily
responsible for the profitability and growth of that location. Although the
Company intends to have local management operate with a high degree of autonomy,
the Company believes that regular communication between the individual
businesses and the Company's executive management team will be integral to
realizing the benefits afforded by the consolidation of these businesses into a
single company.
ACQUISITION STRATEGY
Since the IPO, the Company has acquired 21 additional companies. The
Company believes that there are significant opportunities to consolidate the
capabilities and resources of a number of existing document management services
businesses with the intent of providing customers with a single source document
management solution. Accordingly, the Company is pursuing a "fill-in-the-grid"
strategy aimed at providing comprehensive document management services based on
the demands of the given geographical market. The Company has implemented an
aggressive, three-tiered acquisition program consisting of "beachhead
acquisitions" to enter additional targeted markets, "service expansion
acquisitions" to acquire additional service capabilities within such markets and
"tuck-in" acquisitions to gain market share.
In order to enter a targeted geographic market, the Company makes
"beachhead" acquisitions of leading document management services companies with
strong market positions. In analyzing beachhead acquisition candidates, the
Company focuses on acquiring businesses that have one or more of the following
characteristics: (i) experienced and high quality management; (ii) multiple
locations, preferably with operations in two to three contiguous markets; (iii)
a strong customer franchise; and (iv) a history of profitability.
The second tier of the Company's acquisition program involves the
acquisition of related document management services companies that will either
increase the Company's offered services in a particular region or increase its
share of the market for those services it already offers in that region. In
making such "service expansion" acquisitions, the Company assesses the services
required by the specific market's customer base and then seeks to acquire
leading providers of such services within that geographic area.
Finally, in order to increase its market share and realize economies of
scale, the third tier of the Company's acquisition program is the acquisition of
smaller "tuck-in" businesses that can be easily assimilated into the operations
of the Company's existing businesses. Such tuck-in businesses are intended to
enable the Company to benefit from the operating leverage of its existing
businesses by acquiring additional market share and revenue while eliminating or
reducing certain general, administrative and operating costs
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previously associated with such revenue. Accordingly, the Company targets
tuck-in businesses with strong customer relationships.
The Company believes that it will continue to be an attractive acquiror of
other document management services companies due to its strategy of retaining
selected owners and management of acquired companies, its access to growth
capital and its ability to offer sellers cash for their business as well as an
ongoing equity stake in the Company. Nevertheless, there are numerous risks
associated with the Company's intended acquisition program. See "-- Risk
Factors-Acquisition Strategy," "-- Reliance on Key Personnel" and "-- Need for
Additional Financing to Continue Acquisition Strategy."
SERVICES OFFERED
The Company provides a wide variety of document management services and
draws upon its available services to develop document management solutions for
its clients based on their specific needs. The current document management
services that are provided in certain geographic locations include:
Transferable Services
Document and Data Conversion Services. Document and data conversion
services include micrographics services and electronic imaging services.
Micrographics services involve: (i) the conversion of paper documents into
microfilm images; (ii) film processing; and (iii) computer-based indexing and
formatting. Typically, micrographic services are selected: (i) as a
cost-competitive technology to reduce the physical size of stored records; (ii)
for their long-term (over 100 years) archival capabilities; and (iii) as an
intermediate step in certain imaging or reprographic applications.
Electronic imaging services involve the conversion of paper or microfilm
documents into digitized information through optical scanners. Digitized
information can be either stored as an image or converted to code through
optical character recognition (OCR) or digital imaging storage and retrieval
technologies. Conversion to code provides additional processing capabilities
such as manipulation of data. In both cases, the digitized information can be
stored on either a magnetic medium, such as a computer diskette, or on optical
laser disks, such as compact disks. Electronic imaging is generally used because
of the storage media's high speed of retrieval, its multiple indexing and text
search formatting capabilities, and its ability to be used to distribute output
to multiple locations. Electronic imaging services are typically billed on a
job-by-job basis, based on the number of images and complexity of the retrieval
applications.
Records Management Services. Records management services consist of active
or open shelf storage and archival storage of inactive documents. Active or open
shelf storage services involve the storage, processing (i.e., indexing and
formatting), retrieval, delivery and return to storage of documents on a rapid
time frame. Many of such services are provided electronically. 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 or electronically due to the urgency of the request.
Service fees generally include a monthly fee based on activity levels and
volumes stored, with extra billing for specialized requests.
The archiving of inactive documents involves storage for extended periods
of time with a lesser emphasis on service or accessibility to stored documents.
Typical uses for archival storage of inactive documents include storage of
closed files for professional services firms and documents that may be required
by law to be maintained by hospitals, other healthcare institutions and
financial institutions for extended periods. Service fees generally include
billing for storage space, plus activity charges for each retrieval, delivery
and return to storage, and ultimately for document destruction.
Database Management and Related Services. Database management and related
services include database management, data entry, direct mail and fulfillment
services. Database management services involve data capture (manually or through
scanning or other electronic media), data consolidation and elimination,
storage, maintenance, formatting and report creation. Data entry includes the
conversion of text and handwritten paper media into digital files. An advantage
of digital files is the ability to manipulate large
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amounts of data quickly and efficiently. In some cases, database services
include statistical analysis of data. Direct mail and fulfillment services
provide customers with rapid, reliable and cost-effective methods for making
large-scale distributions of statements, reports and letters to consumers and
other target audiences.
Industry Specific Services
The Company has developed industry specific services in order to address
the document management needs of its particular clients. These industry specific
services include:
Medical Records Release Services. Medical records release services involve
processing a request for a patient's medical records from a physician, insurance
company, attorney, healthcare institution or individual. The medical records
release service provider initially verifies that the release is properly
authorized, coordinates the retrieval of the record, determines the relevant
parts of the record to be copied and delivers the copied records (or portions
thereof) to the requesting party. Medical records release services are provided
on-site and off-site pursuant to contracts with hospitals and other large
healthcare institutions. The medical records release service provider bills the
recipient directly and sometimes pays a fee to the hospital.
Litigation Support. Litigation often involves the production (i.e.,
delivery to opposing counsel) and management of thousands of pages of documents,
extracted in their current working form from the offices and files of litigating
parties and their experts, advisors and legal counsel. Litigation support
services include managing the logistics of high volume document production,
microfilming and/or electronic imaging, document coding, computer indexing,
automated document retrieval and high speed, multiple-set reproduction of
documents. Additional litigation support services include subpoena of business
documents and service of process, discovery assistance, document coding,
forensic analysis and other trial support services to law firms, corporations
and regulated entities. These clients typically look to litigation support
companies to augment their internal operations and capabilities on an as-needed,
job-by-job basis. Clients are generally billed on a per unit basis.
Business Imaging Products Sales
The Company has a five-year agreement with the Eastman Kodak Company that
expires on December 31, 1999 and grants the Company the right to act as a
distributor of a wide range of Kodak microfilm and business imaging supplies in
Delaware, Maryland, Pennsylvania, Virginia, West Virginia and Washington, D.C.
SALES AND MARKETING
The Company has a broad customer base, and none of the Company's customers
accounted for more than 5.0% of revenue for the year ended December 31, 1996.
Historically, the Company's sales efforts have been implemented on a
location-by-location basis and typically have been coordinated either through
separate sales personnel or as part of the local management's responsibilities.
The Company's existing local sales efforts are supplemented through local sales
representatives. The Company strives to increase its client base by attracting
customers away from small, single business operators as a result of its ability
to offer a broader range of solutions for its clients' document management
needs. In addition, the Company intends to continue to focus on increasing
revenue from its existing clients by cross-selling its services and broadening
its product offerings. Once the Company gains critical mass in a number of
metropolitan areas, it will seek to augment local sales and marketing efforts
through the implementation of a national sales/account program.
COMPETITION
The document management services businesses in which the Company competes
and expects to compete are highly competitive. A significant source of
competition is the in-house document handling capability of the Company's target
client base. There can be no assurance that these businesses will outsource more
of their document management needs or that such businesses will not bring
in-house services that they currently outsource. In addition, certain of the
Company's competitors are larger businesses and have greater financial resources
than the Company. Certain of these competitors operate in broader geographic
areas than the
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Company, and others may choose to enter the Company's areas of operation in the
future. In addition, the Company intends to continue to enter new geographic
areas through internal growth and by acquiring existing companies and expects to
encounter significant competition from established competitors in each of such
new areas. As a result of this highly competitive environment, the Company may
lose customers or have difficulty in acquiring new customers and new companies
and its results of operations may be adversely affected.
The Company believes that the principal competitive factors in document
management services include accuracy, reliability and security of service and
client segment specific knowledge and price. The Company competes primarily on
the basis of quality of service and client segment specific knowledge, and
believes that it competes favorably with respect to these factors.
EMPLOYEES
As of December 31, 1996, the Company had approximately 1,830 full-time and
275 part-time employees. As of such date, the Company had approximately 100
employees represented by labor unions. The Company considers its relations with
its employees to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning each of the
executive officers of the Company:
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Thomas C. Walker............................................. 64 Chairman of the Board and Chief Development
Officer
Ed H. Bowman, Jr............................................. 50 President and Chief Executive Officer;
Director
David Lowenstein............................................. 35 Executive Vice President -- Corporate
Development and Acquisitions and Chief
Financial Officer; Director
Timothy J. Barker............................................ 34 Vice President and Chief Accounting Officer
Margot T. Lebenberg.......................................... 29 Vice President, General Counsel and Secretary
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Thomas C. Walker has been Chairman of the Board of F.Y.I. since its
inception in September 1994 and has been Chief Development Officer of F.Y.I.
since November 1995. From September 1994 until November 1995, Mr. Walker held
the positions of President and Chief Executive Officer. From August 1991 to
December 1994, Mr. Walker was Vice President, Corporate Development, of Laidlaw
Waste Systems, Inc., a subsidiary of Laidlaw, Inc., a waste management company,
where he was responsible for its acquisition and divestiture program in the
United States and Mexico. From May 1989 until he joined Laidlaw Waste Systems,
Inc., Mr. Walker was President of Thomas C. Walker Associates, Inc., a company
providing merger, acquisition and financial consulting services focusing on the
waste management industry. During his career, Mr. Walker has been responsible
for the acquisition or divestiture of over 150 businesses over a 30-year period.
Mr. Walker holds a B.S. in Industrial Engineering from Lafayette College.
In May 1989, Mr. Walker resigned from a senior executive position with a
former employer and received a severance payment under the terms of his
employment agreement. In July 1989, such employer commenced a proceeding in
bankruptcy, and, after emerging from such proceeding and in connection with its
liquidation, sought to recover Mr. Walker's severance payment as a preference
claim. Mr. Walker litigated this claim but ultimately entered into a judgment
requiring him to make significant payments to his former employer. In April
1993, Mr. Walker filed a voluntary petition in bankruptcy in order to discharge
such judgment and two mortgage notes relating to two condominiums in Dallas, the
holders of which were unwilling to renegotiate the terms of the mortgages. Mr.
Walker did not seek any other relief from creditors, and the bankruptcy was
discharged in February 1994.
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
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Operating Officer of the Health Systems Group of First Data Corporation, a
financial services company. Mr. Bowman was responsible for the day-to-day
operations of research and development, marketing and customer service. From
1983 to 1993, Mr. Bowman served in a number of executive positions with HBO &
Co. ("HBO"), including VP -- International, VP -- Marketing, Senior
VP -- Customer Services, Group Senior VP -- Research and Development, and last
serving as Executive Vice President and Chief Operating Officer of the Star
Business Unit with responsibility for domestic operations. Prior to joining HBO,
Mr. Bowman was with Andersen Consulting for 10 years, where he was elected a
Partner. Mr. Bowman became a C.P.A. in 1973 and holds an M.S. from Georgia
Institute of Technology and a B.B.A. from Georgia State University. Mr. Bowman
is an investor and former board member of several early-stage, high-technology
companies.
David Lowenstein reassumed the responsibility of Chief Financial Officer of
F.Y.I. in July 1996, the position he held prior to the IPO, and has been
Executive Vice President -- Corporate Development and Acquisitions and a
Director of F.Y.I. since February 1995. Prior to joining the Company, Mr.
Lowenstein served, since February 1994, as Vice President, Business Development
of Laidlaw Waste Systems, Inc., with overall responsibility for Laidlaw Waste
System's acquisition and divestiture program in North America. From April 1990
until February 1994, Mr. Lowenstein served in a variety of capacities, including
Director -- Corporate Development, for Laidlaw, Inc. From November 1988 to March
1990, he served as a business analyst for Tricil, Ltd., a solid and hazardous
waste company that was acquired by Laidlaw, Inc. in 1990. Mr. Lowenstein has
been responsible for the acquisition or divestiture of over 75 businesses in
North America and Europe. Mr. Lowenstein holds a B.A. in Economics from Sir
Wilfred Laurier University and an M.S. in Public and Business Administration
from Carnegie Mellon University. Mr. Lowenstein is a citizen of the Dominion of
Canada residing in the United States.
Timothy J. Barker has been Vice President and Chief Accounting Officer of
F.Y.I. since July 1996. From November 1995 to July 1996, Mr. Barker held the
position of Controller of F.Y.I. Prior to joining F.Y.I. as a full-time
consultant in June 1995, Mr. Barker was a manager with Arthur Andersen LLP,
where he served in various capacities over a nine-year period. Mr. Barker served
as Vice President of Financial Planning and Analysis for Sunbelt National
Mortgage Corporation from June 1993 to October 1994. Mr. Barker holds a B.A. in
Accounting from Texas Tech University and has been a C.P.A. since 1985.
Margot T. Lebenberg has been Vice President, General Counsel and Secretary
of F.Y.I. since May 1996. From 1992 until joining the Company, Ms. Lebenberg was
with Morgan, Lewis & Bockius LLP in New York, where she practiced law primarily
in the areas of securities and mergers and acquisitions, specializing in
consolidation transactions. Ms. Lebenberg holds a B.A. in Economics and History
from the State University of New York at Binghamton and a J.D. from Fordham
University School of Law.
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RISK FACTORS
LIMITED OPERATING HISTORY; RISKS OF INTEGRATION; ABILITY TO MANAGE GROWTH
F.Y.I. was founded in September 1994 and conducted no operations prior to
the consummation of the IPO. F.Y.I. acquired the Founding Companies
simultaneously with the closing of the IPO and has acquired 21 additional
companies since that time (together with the Founding Companies, the "Operating
Companies"). Prior to their acquisition, these companies operated as separate
independent entities. Currently, the Company has a decentralized financial
reporting system and relies on the existing reporting systems of the Operating
Companies. The success of the Company will depend, in part, on the Company's
ability to integrate the operations of the Operating Companies, including
centralizing certain functions to achieve cost savings and developing programs
and processes that will promote cooperation and the sharing of opportunities and
resources. F.Y.I.'s management group has been assembled recently and had no
previous experience in the document management services industry. There can be
no assurance that the management group will effectively be able to oversee the
combined entity and implement the Company's operating or growth strategies.
Further, to the extent that the Company is able to implement fully its
acquisition strategy, the resulting growth of the Company will place significant
demands on management and on the Company's internal systems and controls. There
can be no assurance that the recently assembled management group will
effectively be able to direct the Company through a period of significant
growth. In addition, no assurance can be given that the Company's current
systems will be adequate for its future needs or that the Company will be
successful in implementing new systems.
A number of the Operating Companies offer different services, utilize
different capabilities and technologies and target different geographic markets
and client segments. While the Company believes that there are substantial
opportunities in integrating these businesses, these differences increase the
risk inherent in successfully completing such integration. Further, there can be
no assurance that the Company's strategy to establish a single source provider
for document management services will be successful, or that the Company's
target client segments will accept the Company as a provider of such services.
In addition, there can be no assurance that the operating results of the Company
will match or exceed the combined individual operating results achieved by the
Operating Companies prior to their acquisition.
ACQUISITION STRATEGY
The Company's primary growth strategy is the acquisition of additional
document management services businesses that will complement its existing
businesses. There can be no assurance that the Company will be able to identify
or reach mutually agreeable terms with acquisition candidates and their owners,
or that the Company will be able to profitably manage additional businesses or
successfully integrate such additional businesses into the Company without
substantial costs, delays or other problems. Acquisitions may involve a number
of special risks including: (i) adverse short-term effects on the Company's
reported operating results; (ii) diversion of management's attention; (iii)
dependence on retention, hiring and training of key personnel; (iv) risks
associated with unanticipated problems or legal liabilities; and (v)
amortization of acquired intangible assets. Some or all of these risks could
have a material adverse effect on the Company's operations and financial
performance. In addition, to the extent that consolidation becomes more
prevalent in the industry, the prices for attractive acquisition candidates may
be bid up to higher levels. In any event, there can be no assurance that
businesses acquired in the future will achieve sales and profitability that
justify the investment therein.
The Company is regularly in discussions with additional acquisition
candidates and may from time to time enter into letters of intent with respect
to the acquisition of such businesses. No assurance can be given, however, that
the Company will acquire any additional businesses.
NEED FOR ADDITIONAL FINANCING TO CONTINUE ACQUISITION STRATEGY
The Company currently intends to finance future acquisitions by using cash
and its Common Stock for all or a portion of the consideration to be paid. The
Company's Registration Statement on Form S-1
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(Registration No. 333-1084) (the "Acquisition Shelf") relates to the offering of
2,000,000 shares of Common Stock to be used as consideration for acquisitions by
the Company, of which approximately 918,701 shares remained available as of
March 7, 1997. In the event that the Company's Common Stock does not maintain
sufficient value, or potential acquisition candidates are unwilling to accept
the Company's Common Stock as consideration for the sale of their businesses,
the Company may be required to utilize more of its cash resources, if available,
in order to continue its acquisition program. If the Company does not have
sufficient cash resources, its growth could be limited unless it is able to
obtain capital through additional debt or equity financings. In December 1996,
the Company completed the December Offering. The proceeds from the December
Offering were used to repay the outstanding balance under the Credit Agreement,
as amended (the "Line of Credit"), among the Company and its subsidiaries,
Banque Paribas, as agent, and the lenders named therein, and for general
corporate purposes, which have included and are expected to include additional
acquisitions. Under the Line of Credit, the Company and its subsidiaries
initially could borrow, on a revolving credit basis, loans in an aggregate
outstanding principal amount of $5.0 million for working capital and general
corporate purposes and term loans in an aggregate principal amount of $30.0
million for acquisitions, subject to certain restrictions in the Line of Credit.
As of March 7, 1997, the availability under the Line of Credit was $5.0 million
for working capital and $8.8 million for acquisitions. There can be no
assurance, however, that funds available under the Line of Credit will be
sufficient for the Company's needs.
EFFECT OF POTENTIAL FLUCTUATIONS IN OPERATING RESULTS ON PRICE OF COMMON STOCK;
VOLATILITY OF STOCK PRICE
Results for any quarter are not necessarily indicative of the results that
the Company may achieve for any subsequent quarter or a full fiscal year.
Quarterly results may vary materially as a result of the timing and structure of
acquisitions, the timing and magnitude of costs related to such acquisitions,
the gain or loss of material client relationships and variations in the prices
charged by the Company for the services it provides. In addition, since a
significant portion of the Company's revenue is generated on a
project-by-project basis, the timing or completion of material projects could
result in fluctuations in the Company's results of operations for particular
quarterly periods. Such fluctuations in operating results may adversely affect
the market price of the Company's Common Stock. The market price for the
Company's shares may also fluctuate in response to material announcements by the
Company or significant clients or competitors of the Company, changes in the
economic or other conditions impacting the Company's targeted client segments or
changes in general economic conditions. Further, the securities markets have
experienced significant price and volume fluctuations from time to time that
have often been unrelated or disproportionate to the operating performance of
particular companies. These broad fluctuations may adversely affect the market
price of the Common Stock.
DEPENDENCE ON CERTAIN CLIENT SEGMENTS AND TECHNOLOGY
The Company derives its revenue primarily from its three targeted client
segments: healthcare institutions, professional services firms and financial
institutions. Fundamental changes in the business practices of any of these
client segments, whether due to regulatory, technological or other developments,
could cause a material reduction in demand by such clients for the services
offered by the Company. Any such reduction in demand would have a material
adverse effect on the results of operations of the Company. The document
management services industry is characterized by technological change, evolving
customer needs and emerging technical standards. Although the Company believes
that it will be able to continue to offer services based on the newest
technologies, there can be no assurance that the Company will be able to obtain
the rights to use any such technologies, that it will be able to effectively
implement such technologies on a cost-effective or timely basis or that such
technologies will not render obsolete the Company's role as a third party
provider of document management services.
COMPETITION
The document management services businesses in which the Company competes
and expects to compete are highly competitive. A significant source of
competition is the in-house document handling capability of the Company's
targeted client base. There can be no assurance that these businesses will
outsource more of their document management needs or that such businesses will
not bring in-house services that they currently
8
<PAGE> 11
outsource. In addition, certain of the Company's competitors are larger
businesses and have greater financial resources than the Company. Certain of
these competitors operate in broader geographic areas than the Company, and
others may choose to enter the Company's areas of operation in the future. In
addition, the Company intends to enter new geographic areas through internal
growth and acquisitions and expects to encounter significant competition from
established competitors in each of such new areas. As a result of this highly
competitive environment, the Company may lose customers or have difficulty in
acquiring new customers and new companies, and its results of operations may be
adversely affected.
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of its
executive officers and on senior management of the Operating Companies.
Furthermore, the Company will likely depend 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 currently have key person life insurance covering
any of its executive officers or other members of senior management.
POTENTIAL LIABILITY FOR BREACH OF CONFIDENTIALITY
A substantial portion of the Company's business involves the handling of
documents containing confidential and other sensitive information. Although the
Company has established procedures intended to prevent any unauthorized
disclosure of confidential information and, in some cases, has contractually
limited its potential liability for unauthorized disclosure of such information,
there can be no assurance that unauthorized disclosures will not result in
material liability to the Company.
INCREASE IN MINIMUM WAGE
As of October 1, 1996, the federal minimum wage increased to $4.75 an hour.
The second phase of the increase will be implemented on September 1, 1997,
bringing the federal minimum wage to $5.15 an hour. In addition, California and
other states have increased or may increase their minimum wage above the federal
minimum. A significant number of the Company's employees earn slightly above the
minimum wage and, therefore, the Company may have to increase salaries to remain
competitive. Accordingly, the Company's results of operations may be adversely
affected.
CONTROL BY MANAGEMENT
As of March 7, 1997, the directors and executive officers of the Company
beneficially owned approximately 19.0% 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 of Directors and to approve or disapprove any matter
submitted to a vote of stockholders.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of Common Stock of the Company in
the public market. As of March 7, 1997, there were 8,779,434 shares of Common
Stock outstanding. The 2,783,000 shares sold by the Company and certain selling
stockholders in the December Offering, and the 2,185,000 shares sold in the IPO,
are freely tradable without restriction unless acquired by affiliates of the
Company. Of such 8,779,434 shares, 2,664,615 shares, together with 165,000
shares of Common Stock currently issuable upon exercise of outstanding warrants,
have not been registered under the Securities Act, which means that they may be
resold publicly only upon registration under the Securities Act or in compliance
with an exemption from the registration requirements of the Securities Act,
including the exemption provided by Rule 144 under the Securities Act. Holders
of all of such unregistered shares, however, have certain registration rights
with respect to such shares.
9
<PAGE> 12
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of 90 days from the date of the December Offering
without the prior written consent of Montgomery Securities, except that the
Company may issue Common Stock in connection with acquisitions or upon the
exercise of options. In addition, the former owners of the Founding Companies
and the initial stockholders of the Company have agreed with the Company that
they will not sell any of their shares for a period of two years after January
26, 1996 (other than certain sales registered under the Securities Act and a
limited ability to pledge such shares as collateral). The Company has agreed not
to waive such restriction for a period of 90 days from the date of the December
Offering without the prior written consent of Montgomery Securities. Directors
of the Company who are not subject to these contractual restrictions have agreed
not to contract to sell or otherwise sell or dispose of any of their Common
Stock for a period of 90 days after December 12, 1996 without the prior written
consent of Montgomery Securities.
The Company issued 1,081,299 shares of Common Stock as partial
consideration for acquisitions completed since the IPO. Of these, 1,081,299
shares were registered under the Company's Acquisition Shelf and are freely
tradable (except for 36,670 shares held by a wholly-owned subsidiary of the
Company) unless acquired by parties to the acquisition or affiliates of such
parties, other than the issuer, in which case they may be sold pursuant to Rule
145 under the Securities Act. In addition, these shares are subject to
contractual restrictions on resale which generally expire two years from the
date of issuance.
The Company has an aggressive acquisition program under which it recently
completed, and expects to continue to pursue, acquisitions that are accounted
for under the pooling-of-interests method of accounting. Under the
pooling-of-interests method of accounting, the affiliates of the acquired
companies, which are generally all of the stockholders of the companies acquired
by the Company, must be free to sell or otherwise transfer shares of the Common
Stock received in the acquisition, subject to their compliance with federal
securities laws, as soon as the Company releases results of operations that
reflect the combined operations of the Company and the acquired company for a
minimum of 30 days. In addition, the Company expects to complete additional
acquisitions in the future that will be accounted for under the
pooling-of-interests method. If a significant number of shares of Common Stock
are issued in acquisitions that are consummated in close proximity to each
other, such shares will become freely tradable at the same time. If a large
number of shares are sold by stockholders in the market as soon as their shares
became freely transferable, the price of the Common Stock could be adversely
affected.
The Company has reserved for issuance under the Company's 1995 Stock Option
Plan (the "Plan") an aggregate of 650,000 shares of Common Stock, or 12% of the
aggregate number of shares of the Common Stock outstanding, whichever is
greater. The Company has registered the shares issuable upon exercise of options
granted under the Plan, and such shares will be eligible for resale in the
public market. As of March 7, 1997, the Company had options to purchase 682,590
shares of Common Stock outstanding under the Plan.
EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is empowered to issue preferred stock
without stockholder action. The existence of this "blank-check" preferred could
render more difficult or discourage an attempt to obtain control of the Company
by means of a tender offer, merger, proxy contest or otherwise.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements such as the
Company's or management's intentions, hopes, beliefs, expectations, strategies,
predictions or any other variation thereof or comparable phraseology of the
Company's future activities or other future events or conditions within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, the
sufficiency of the Company's working capital and the ability of the Company to
realize benefits from consolidating certain general and administrative
functions, to continue its aggressive acquisition program, to retain management,
to implement its focused business strategy to expand its document management
services geographically, to
10
<PAGE> 13
attract customers from other businesses, to increase revenue by cross-selling
services and to successfully defend itself in ongoing and future litigation.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and, therefore, there can be no assurance that
the forward-looking statements included in this Report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company operated approximately 74 document
management service facilities in 12 states. Except for the two facilities owned
by the Company, these facilities are leased and are principally used for
operations and general administrative functions. See Note 9 of Notes to
Consolidated Financial Statements of F.Y.I. Incorporated and Subsidiaries for
further information relating to these leases. In March 1996, the Company moved
into its current corporate headquarters in Dallas, Texas.
As of December 31, 1996, the Company also operated on-site at approximately
245 client locations on a contractual basis and from time to time at many other
client locations for specific projects.
In order to secure its obligations under its Line of Credit, the Company
granted to Banque Paribas, as agent for the Company's lenders, a lien on
substantially all of the Company's properties and other assets. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company believes that its properties are generally well maintained, in
good condition and adequate for its present needs. Furthermore, the Company
believes that suitable additional or replacement space will be available when
required.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1996, no matters
were submitted to a vote of the security holders.
11
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "FYII." The Company completed its IPO in January 1996 at a price of
$13.00 per share. The following table sets forth, for the Company's fiscal
periods indicated, the range of high and low last reported sale prices for the
Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR 1996
First Quarter (from January 23, 1996)..................... $20.00 $13.00(1)
Second Quarter............................................ $22.00 $16.00
Third Quarter............................................. $23.00 $17.00
Fourth Quarter............................................ $23.00 $20.00
FISCAL YEAR 1997
First Quarter (through March 7, 1997)..................... $26.25 $21.25
</TABLE>
- ---------------
(1) Represents the initial public offering price.
HOLDERS
On March 7, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $23.25 per share. At March 7, 1997, there were 60
holders of record of the Company's Common Stock, although the Company believes
the number of beneficial holders is substantially greater.
DIVIDENDS
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future and intends to retain its earnings, if any, to
finance the expansion of its business and for general corporate purposes. Any
payment of future dividends will be at the discretion of the Board of Directors
and will depend upon, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
and other factors that the Company's Board of Directors deems relevant. In
addition, the Line of Credit prohibits the payment of dividends by the Company
without the lender's consent.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
F.Y.I. acquired, simultaneously with and as a condition to the closing of
the IPO, the following seven Founding Companies (the "Acquisitions"): Imagent
Corporation (together with Mobile Information Services Corporation, "Imagent");
Melanson & Associates, Inc. d/b/a Researchers (together with Bay Area
Micrographics, "Researchers"); Recordex Services, Inc. ("Recordex"); C.&T.
Management Services, Inc. d/b/a DPAS (together with Qualidata, Inc., "DPAS");
Leonard Archives, Inc. ("Leonard"); Deliverex, Incorporated (together with ASK
Record Management, "Deliverex"); and Permanent Records, Inc. ("Permanent
Records"). The Acquisitions have been accounted for in accordance with generally
accepted accounting principles ("GAAP") as a combination of the Founding
Companies at historical cost. Accordingly, historical financial statements of
these Founding Companies have been combined throughout all relevant periods
herein as if the Founding Companies had always been members of the same
operating group. However, since the Founding Companies were not under common
control or management, historical combined results may not be comparable to, or
indicative of, future performance.
12
<PAGE> 15
The Selected Financial Data for the year ended December 31, 1996 have been
derived from the Consolidated Financial Statements of F.Y.I. Incorporated and
Subsidiaries that have been audited by Arthur Andersen LLP and that appear
elsewhere in this Report. The Selected Financial Data for the years ended
December 31, 1993, 1994, 1995 and for the one month ended January 31, 1996 have
been derived from the Combined Financial Statements of the Founding Companies
that have been audited by Arthur Andersen LLP and that appear elsewhere in this
Report. In their report, Arthur Andersen LLP states that with respect to
Recordex, as of and for the two years in the period ended December 31, 1994, its
opinion is based on the report of other independent public accountants, namely
Elko, Fischer, McCabe & Rudman, Ltd. The Selected Financial Data for the year
ended December 31, 1992 have been derived from financial statements not included
elsewhere in this Report. The Selected Financial Data are based on available
information and certain assumptions described in the footnotes set forth below,
all of which the Company believes are reasonable. The data relating to the
combined Founding Companies, Supplemental Data and pro forma information are
provided for informational purposes only and do not purport to present the
results of operations of the Company had the transactions assumed therein
occurred on or as of the dates indicated, nor are they necessarily indicative of
the results of operations which may be achieved in the future.
The Selected Individual Founding Company Financial Data for the years ended
December 31, 1993, 1994 and 1995 have been derived from the audited financial
statements of the Founding Companies that appear elsewhere in this Report. 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 Report.
The Selected Financial Data provided below should be read in conjunction
with the historical financial statements of F.Y.I., the Combined Financial
Statements of the Founding Companies and the financial statements of each of the
Founding Companies, including the related notes thereto, and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" that appear elsewhere in this Report.
13
<PAGE> 16
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
F.Y.I. was founded in September 1994 and effectively began its operations
on February 1, 1996 following the completion of the IPO. The Selected Financial
Data set forth below for the periods prior to February 1, 1996 are derived from
the Combined Financial Statements of the Founding Companies contained elsewhere
in this Report.
<TABLE>
<CAPTION>
COMBINED FOUNDING COMPANIES
---------------------------------------------------
ONE YEAR ENDED
MONTH DECEMBER 31, 1996
FISCAL YEAR ENDED DECEMBER 31, ENDED ------------------------------
------------------------------------- JANUARY 31, F.Y.I.
1992 1993 1994 1995 1996 INCORPORATED SUPPLEMENTAL(4)
------- ------- ------- ------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue..................... $29,442 $32,067 $36,081 $40,615 $3,487 $68,679 $72,166
Product revenue..................... 5,378 5,123 5,923 6,138 395 6,345 6,740
Other revenue....................... 876 1,206 1,028 873 34 698 732
------- ------- ------- ------- ------ ------- -------
Total revenue............... 35,696 38,396 43,032 47,626 3,916 75,722 79,638
Cost of services.................... 18,348 20,318 23,650 25,937 2,196 43,200 45,396
Cost of products sold............... 4,628 4,464 4,892 4,972 307 4,898 5,205
Depreciation........................ 873 883 1,055 1,238 90 1,608 1,698
------- ------- ------- ------- ------ ------- -------
Gross profit................ 11,847 12,731 13,435 15,479 1,323 26,016 27,339
Selling, general and administrative
expenses(1)....................... 8,940 9,218 9,921 10,449 814 17,494 18,308
Amortization........................ 199 112 60 64 6 599 605
------- ------- ------- ------- ------ ------- -------
Operating income(1)......... 2,708 3,401 3,454 4,966 503 7,923 8,426
Interest and other expense (income),
net............................... 272 248 29 139 (45) 854 809
------- ------- ------- ------- ------ ------- -------
Income before income taxes(1)....... 2,436 3,153 3,425 4,827 548 7,069 7,617
Provision for income taxes(2)....... 895 1,261 1,256 1,794 221 2,897 3,118
------- ------- ------- ------- ------ ------- -------
Net income(1)(2).................... $ 1,541 $ 1,892 $ 2,169 $ 3,033 $ 327 $ 4,172 $ 4,499
======= ======= ======= ======= ====== ======= =======
Net income per share(1)(2)(3)....... $ 0.71 $ 0.77
======= =======
Weighted average shares
outstanding(3).................... 5,856 5,856
</TABLE>
<TABLE>
<CAPTION>
F.Y.I.
COMBINED FOUNDING COMPANIES INCORPORATED
------------------------------------- ------------
DECEMBER 31,
----------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 1,223 $ 2,081 $ 1,404 $ 1,663 $ 22,816
Total assets................................................ 14,124 15,143 19,130 19,681 99,816
Long-term obligations, net of current maturities............ 2,713 3,077 3,185 2,777 3,863
Stockholders' equity........................................ 4,797 5,223 6,410 7,111 77,839
</TABLE>
See footnotes on the following page.
14
<PAGE> 17
SELECTED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA FOR SIGNIFICANT
ACQUISITIONS(5)
-------------------------
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996
--------- ----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue............................................. $78,177 $ 95,076
Product revenue............................................. 7,688 7,102
Other revenue............................................... 908 743
------- --------
Total revenue..................................... 86,773 102,921
Cost of services............................................ 48,259 58,438
Cost of products sold....................................... 6,222 5,518
Depreciation................................................ 1,881 2,074
------- --------
Gross profit...................................... 30,411 36,891
Selling, general and administrative expenses................ 18,954 23,162
Amortization................................................ 1,130 1,159
------- --------
Operating income.................................. 10,327 12,570
Interest and other expense (income), net.................... 2,199 2,030
------- --------
Income before income taxes.................................. 8,128 10,540
Provision for income taxes.................................. 3,115 4,286
------- --------
Net income.................................................. $ 5,013 $ 6,254
======= ========
Net income per share........................................ $ 0.82 $ 0.99
======= ========
Weighted average shares outstanding(3)...................... 6,106 6,317
</TABLE>
- ---------------
(1) Gives effect to the Compensation Differential. See Note 3 of Notes to
Combined Financial Statements of the Founding Companies and Note 3 of Notes
to Consolidated Financial Statements of F.Y.I. Incorporated and
Subsidiaries.
(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 and Note 3 of Notes to Consolidated
Financial Statements of F.Y.I. Incorporated and Subsidiaries.
(3) Weighted average shares include: (i) 1,205,682 shares issued by F.Y.I. prior
to the consummation of the Acquisitions and the IPO; (ii) 1,878,933 shares
issued to the stockholders of the Founding Companies in connection with the
Acquisitions; (iii) 2,185,000 shares sold in the IPO and 2,363,000 shares
sold in the December Offering; (iv) 15,923 shares of Common Stock determined
pursuant to the treasury stock method relating to warrants to purchase
115,000 shares of Common Stock at $10.00 per share; (v) 930,065 shares of
Common Stock issued in acquisitions consummated through December 1996 net of
treasury shares re-acquired in a subsequent acquisition; and (vi) 45,740
shares of Common Stock issued upon the exercise of stock options. Does not
include (i) options to purchase 682,590 shares of Common Stock currently
outstanding under the Plan; and (ii) warrants outstanding to purchase 50,000
shares of Common Stock.
(4) The Supplemental Statement of Operations Data for the year ended December
31, 1996 represents the combined results of (i) the combined Founding
Companies for the one month of operations prior to the consummation of the
IPO and Acquisitions; and (ii) F.Y.I. Incorporated and Subsidiaries for the
11 months of operations subsequent to the consummation of the Acquisitions
and the IPO. The Supplemental Data are provided for informational purposes
only and do not purport to present the results of operations of the Company
had the transactions assumed therein occurred on or as of the dates
indicated, nor are they necessarily indicative of the results of operations
which may be achieved in the future.
(5) Gives effect to: (i) the acquisitions of B&B Information and Management,
Inc., Premier Document Management, Inc. and PDM Services, Inc., Robert A.
Cook and Staff, Inc. and RAC Services, Inc., C.M.R.S. Incorporated,
Minnesota Medical Record Service, Inc., Texas Medical Record Service, Inc.,
ZIA Information Analysis Group, Carton Hodgson, Inc. and CH Direct, Inc.,
and Data Input Services Corporation as if the transactions were consummated
for Statement of Operations Data as of January 1, 1995; and (ii) the
Acquisitions for Statement of Operations Data for periods prior to February
1, 1996. See the separate unaudited pro forma financial statements and the
notes thereto located elsewhere in this Report.
15
<PAGE> 18
SELECTED INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31,(1)
----------------------------------------
1992 1993 1994 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Imagent................................ $10,258 $10,252 $12,135 $13,544
Researchers............................ 7,231 8,738 9,973 9,874
Recordex............................... 4,655 5,465 6,826 8,550
Leonard................................ 4,041 4,372 5,007 5,858
Other.................................. 9,511 9,569 9,091 9,800
------- ------- ------- -------
Total.......................... $35,696 $38,396 $43,032 $47,626
======= ======= ======= =======
Gross profit:
Imagent................................ $ 2,562 $ 2,713 $ 3,293 $ 3,829
Researchers............................ 2,708 2,841 3,384 2,611
Recordex............................... 1,942 2,258 2,494 3,092
Leonard................................ 1,787 1,843 1,640 2,415
Other.................................. 2,848 3,076 2,624 3,532
------- ------- ------- -------
Total.......................... $11,847 $12,731 $13,435 $15,479
======= ======= ======= =======
Selling, general and administrative
expenses:(2)
Imagent................................ $ 1,775 $ 2,036 $ 2,264 $ 2,471
Researchers............................ 1,425 1,458 1,590 1,458
Recordex............................... 1,729 1,978 2,216 2,715
Leonard................................ 1,359 1,385 1,517 1,482
Other.................................. 2,652 2,361 2,334 2,323
------- ------- ------- -------
Total.......................... $ 8,940 $ 9,218 $ 9,921 $10,449
======= ======= ======= =======
Operating income:(2)
Imagent................................ $ 787 $ 677 $ 1,012 $ 1,294
Researchers............................ 1,283 1,383 1,794 1,153
Recordex............................... 35 168 235 376
Leonard................................ 429 459 123 933
Other.................................. 174 714 290 1,210
------- ------- ------- -------
Total.......................... $ 2,708 $ 3,401 $ 3,454 $ 4,966
======= ======= ======= =======
Net income:(2)(3)
Imagent................................ $ 499 $ 429 $ 632 $ 860
Researchers............................ 712 731 1,118 684
Recordex............................... 8 66 118 183
Leonard................................ 231 264 35 527
Other.................................. 91 402 266 779
------- ------- ------- -------
Total.......................... $ 1,541 $ 1,892 $ 2,169 $ 3,033
======= ======= ======= =======
</TABLE>
- ---------------
(1) Researchers' amounts for 1992 and 1993 are reported for fiscal years ended
July 31. See Note 2 of Notes to Combined Financial Statements of the
Founding Companies.
(2) Gives effect to the Compensation Differential. See Note 3 of Notes to
Combined Financial Statements of the Founding Companies.
(3) Gives effect to certain tax adjustments related to the taxation of certain
Founding Companies as S corporations or sole proprietorships prior to the
consummation of the Acquisitions and the tax impact of the Compensation
Differential in each period. See Note 3 of Notes to Combined Financial
Statements of the Founding Companies.
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto and "Item 6. Selected
Financial Data" appearing elsewhere in this Report. Additional information
concerning factors that could cause results to differ materially from those in
the forward-looking statements is contained under "Item 1. Business -- Risk
Factors."
INTRODUCTION
F.Y.I. was founded in September 1994 to create a national, single source
provider of document management services. In January 1996, F.Y.I. acquired,
simultaneously with the closing of the IPO, the Founding Companies. The
Acquisitions have been accounted for in accordance with GAAP as a combination of
the Founding Companies at historical cost, and January 31, 1996 has been used as
the effective date of the Acquisitions. Between September 1994 and the
consummation of the IPO, F.Y.I. did not conduct any operations. Accordingly, the
actual operating results of the Company included in the Statement of Operations
for the year ended December 31, 1996 represent the 11 months of operations
subsequent to the consummation of the Acquisitions and the IPO. During the
period prior to the IPO, F.Y.I. incurred various legal, accounting, marketing,
travel and other costs in connection with the Acquisitions and the IPO which
were funded by the issuance of equity securities. Additional costs associated
with the Acquisitions and the IPO were paid with proceeds of the IPO.
Subsequent to the IPO and through December 31, 1996, the Company acquired
18 additional document management businesses. Of these Subsequent Acquisitions,
17 have been accounted for as purchases and one was accounted for as a
pooling-of-interests. The Company's results of operations include the Subsequent
Acquisitions from the date of their respective acquisition and the pooled
company from January 1996.
Supplemental Statement of Operations Data represents the combined results
of: (i) the Founding Companies for the one month of operations prior to the
consummation of the Acquisitions and the IPO; and (ii) F.Y.I. Incorporated and
Subsidiaries for the 11 months of operations subsequent to the consummation of
the Acquisitions and the IPO. Such data are presented and discussed herein in
order to present the results of the Company since the consummation of the IPO
compared to the results of the combined Founding Companies for periods prior to
the IPO. The Supplemental Data are provided for information purposes only and do
not purport to present the results of operations of the Company had the
transactions assumed therein occurred on or as of the dates indicated. The
Founding Companies were not under common control or management. Accordingly,
such historical combined results may not be comparable to, or indicative of,
future performance.
The Company's revenue is classified as service revenue, product revenue and
other revenue. Service revenue relates to: (i) document and data conversion
services; (ii) records management services; (iii) database management and
related services; (iv) medical records release of information services; and (v)
litigation support services. Product revenue represents sales of micrographic
and business imaging supplies and equipment, primarily in conjunction with film
processing and other micrographic services. Other revenue consists of
commissions on the sales of imaging systems and equipment and franchising fees.
Cost of services consists primarily of compensation and benefits to
non-administrative employees, occupancy costs, equipment costs and supplies, and
also includes the costs associated with other revenue discussed above. Cost of
products sold relates to micrographics and business imaging supplies and
equipment.
Selling, general and administrative expenses ("SG&A") consist primarily of
compensation and related benefits to the sales and marketing, executive
management, accounting, human resources and other administrative employees of
the Company, other sales and marketing costs, communications costs, insurance
costs and legal and accounting professional fees. SG&A subsequent to the IPO
include the costs of being a public company and the Company's executive
management team.
17
<PAGE> 20
THE COMPANY
The Company conducted no significant operations from its inception through
the IPO and the Acquisitions. For accounting purposes and the presentation of
the actual financial results herein, January 31, 1996 has been used as the
effective date of the Acquisitions.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, revenue was $75.7 million, gross
profit was $26.0 million, operating income was $7.7 million and net income was
$4.0 million. As previously mentioned, F.Y.I. had no operations until February
1996. For further discussion of supplemental operations for the years ended
December 31, 1996 and 1995, see "-- Supplemental."
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had $22.8 million of working capital
and $21.0 million of cash. Cash flows provided by operating activities for the
year ended December 31, 1996 were $4.9 million. Cash used for investing
activities was $40.5 million, as the Company paid $37.2 million for
acquisitions, net of cash acquired. Cash provided by financing activities was
$56.5 million. The Company raised $68.2 million in the IPO and the December
Offering, net of underwriting discounts and other costs associated with the
offerings. The Company assumed $8.5 million of debt in the Acquisitions and
subsequently retired such debt with the proceeds of the IPO, with the exception
of approximately $0.4 million of debt with favorable interest rates and capital
lease obligations of approximately $0.4 million. In April 1996, the Company
entered into a $35.0 million Line of Credit (see Note 8 of the Notes to
Consolidated Financial Statements of F.Y.I. Incorporated and Subsidiaries). The
Company paid $1.6 million in costs to secure this financing. During the year
ended December 31, 1996, the Company borrowed $22.8 million under the Line of
Credit to help fund the acquisition program, all of which was subsequently
repaid with cash from operations and the proceeds of the December Offering. The
Company assumed $4.0 million of debt in the Subsequent Acquisitions and retired
$1.0 million, leaving $0.3 million of capital lease obligations assumed and $2.7
million of debt with interest rates more favorable than the Line of Credit.
In the year ended December 31, 1995, the Company raised $0.1 million
through the sale of preferred stock. During this period, the Company spent $0.7
million in activities related to the IPO and the Acquisitions and ended the
period with $0.1 million in cash. The Company had no operations during this
period.
The Company anticipates that cash on hand, cash from operations, additional
bank financing available under the Line of Credit, and shares of Common Stock
available under the Acquisition Shelf will provide sufficient liquidity to
execute the Company's acquisition and internal growth plans for approximately
the next 12 months. The availability under the Line of Credit as of December 31,
1996 was $5.0 million for working capital and general corporate purposes, and
approximately $8.8 million for acquisitions. Should the Company accelerate its
acquisition program, the Company may need to seek additional financing through
the public or private sale of equity or debt securities. There can be no
assurance that the Company could secure such financing if and when it is needed
or on terms the Company deems acceptable. The Company has registered pursuant to
the Acquisition Shelf 2,000,000 shares of Common Stock for issuance in its
acquisition program, of which 1,033,265 shares were available at December 31,
1996.
SUPPLEMENTAL
The Statement of Operations Data for the year ended December 31, 1995
represents the audited combined statement of operations of the Founding
Companies for the period adjusted to give effect to: (i) the Compensation
Differential; and (ii) provision for income taxes as if all entities had been
subject to federal and state income taxes for the period. The Supplemental
Statement of Operations Data for the year ended December 31, 1996 represents a
combination of: (i) the audited results of the combined Founding Companies for
the one month of operations prior to the consummation of the IPO and the
Acquisitions adjusted for the compensation and tax adjustments discussed above;
and (ii) the audited results of F.Y.I. Incorporated and Subsidiaries for the 11
months subsequent to the consummation of the IPO and the Acquisitions (which
18
<PAGE> 21
include the Subsequent Acquisitions from the date of their respective
acquisition and The Rust Consulting Group, Inc. ("Rust") from January 1, 1996)
adjusted to give effect to the Compensation Differential for Rust. The
Supplemental Data are provided for informational purposes only and do not
purport to present the results of operations of the Company had the transactions
assumed therein occurred on or as of the dates indicated, nor are they
necessarily indicative of the results of operations which may be achieved in the
future.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue
Total revenue. Total revenue increased 67.2%, from $47.6 million for the
year ended December 31, 1995 to $79.6 million for the year ended December 31,
1996. This increase was comprised of a 77.7% increase in service revenue and a
6.6% increase in product and other revenue.
Service revenue. Service revenue increased $31.6 million, from $40.6
million for the year ended December 31, 1995 to $72.2 million for the year ended
December 31, 1996. This increase was largely due to: (i) the Subsequent
Acquisitions; and (ii) internal growth in service revenue at the Founding
Companies of 9.6%. This internal growth was primarily attributable to: (i) an
increase in medical records release revenue at Recordex and Permanent of $1.7
million, primarily attributable to the expansion into 29 additional healthcare
institutions in the Eastern United States and Texas during 1996 and due to
increased production volumes at facilities contracted during 1995; (ii) an
increase in litigation support revenue at Researchers of $1.3 million primarily
due to increased overnight document production and increased medical records
subpoena and service of process requests; and (iii) an increase in micrographics
and electronic imaging revenue at Imagent of $447,000 attributable to an overall
increase in imaging, coding and indexing projects, offset by a reduction in
microfilm processing revenue due to the reduced volumes of duplicate film
processing for one customer and the loss of a customer in early 1996.
Product and other revenue. Product and other revenue increased
approximately $461,000, from $7.0 million for the year ended December 31, 1995
to $7.5 million for the year ended December 31, 1996. The increase in product
revenue primarily resulted from increased product revenue associated with the
purchase of B&B in May 1996 and Rust in December 1996. This increase in product
revenue was offset by a decline in Imagent's sales to governmental and related
entities associated with the federal government shutdown in late 1995. The
decrease in other revenue was attributable to decreased commissions on the sales
of micrographics equipment in 1996.
Gross profit
Gross profit increased 76.6%, from $15.5 million for the year ended
December 31, 1995 to $27.3 million for the year ended December 31, 1996, largely
due to the increases in revenue discussed above. Gross profit as a percentage of
revenue increased from 32.5% for the year ended December 31, 1995 to 34.3% for
the year ended December 31, 1996, primarily due to the higher margin mix of
revenue associated with the Subsequent Acquisitions.
Selling, general and administrative expenses
SG&A increased 75.2%, from $10.5 million for the year ended December 31,
1995 to $18.3 million for the year ended December 31, 1996, primarily due to:
(i) the establishment of corporate overhead required to execute the acquisition
program and to manage the consolidated group of companies; and (ii) the SG&A
associated with the Subsequent Acquisitions. SG&A as a percentage of revenue
(excluding corporate overhead) decreased from 21.9% for the year ended December
31, 1995 to 20.8% for the year ended December 31, 1996. This decrease was a
result of: (i) a decrease in SG&A as a percentage of revenue at the Founding
Companies from 22.1% for the year ended December 31, 1995 to 21.1% for the year
ended December 31, 1996, primarily due to spreading the Company's fixed costs
over a larger revenue base; and (ii) lower average SG&A as a percentage of
revenue associated with the Subsequent Acquisitions relative to the Founding
Companies.
19
<PAGE> 22
Income before income taxes and net income.
Income before income taxes increased 57.8% from $4.8 million for the year
ended December 31, 1995 to $7.6 million for the year ended December 31, 1996,
and net income increased 48.3% from $3.0 million for the year ended December 31,
1995 to $4.5 million for the year ended December 31, 1996, largely attributable
to the factors discussed above. Net income for the year ended December 31, 1996
was impacted by a higher effective tax rate attributable to the elimination of
graduated tax rates as the Founding Companies are now taxed on a consolidated
basis and due to the impact of nondeductible goodwill associated with certain of
the Subsequent Acquisitions.
FOUNDING COMPANIES COMBINED
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue
Total revenue. Total revenue increased 10.7%, from $43.0 million for the
year ended December 31, 1994 to $47.6 million for the year ended December 31,
1995. This increase was comprised of a 12.6% increase in service revenue, a 3.6%
increase in product revenue and a 15.1% decrease in other revenue.
Service revenue. Service revenue increased $4.5 million, from $36.1 million
for the year ended December 31, 1994 to $40.6 million for the year ended
December 31, 1995. This increase was largely due to: (i) an increase in
Imagent's revenue of $1.4 million, primarily attributable to opening a microfilm
processing laboratory in Philadelphia in December 1994, the revenue of which
represented approximately 56% of the increase in Imagent's revenue, and to an
overall increase in scanning and microfilming projects; (ii) an increase in
Leonard's revenue of $851,000 attributable to the addition of two new storage
contracts in 1994, to the opening of new records storage and retrieval
facilities in Toledo, Ohio in April 1994 and in Ann Arbor, Michigan in January
1995, which new facilities had revenue constituting 25.3% of the increase, and
to increased paper prices received in the first half of 1995 for sales of scrap
paper in the data disintegration area; and (iii) an increase in Recordex's
revenue of $1.7 million and in Permanent's revenue of $414,000 primarily
attributable to the expansion of medical records release services into 38
additional healthcare institutions in the Eastern U.S. and Texas during 1995.
Product revenue. Product revenue increased approximately $215,000, from
$5.9 million for the year ended December 31, 1994 to $6.1 million for the year
ended December 31, 1995. This resulted from obtaining a large contract to supply
micrographics products in March 1994 and an increase in film sales associated
with an overall increase in film processing due to the opening of two new
processing labs.
Other revenue. Other revenue decreased approximately $155,000, from $1.0
million for the year ended December 31, 1994 to $873,000 for the year ended
December 31, 1995. This decrease was primarily attributable to Imagent selling
lower volumes of imaging systems and equipment.
Costs and expenses
Cost of services. Cost of services increased 9.7%, from $23.7 million for
the year ended December 31, 1994 to $25.9 million for the year ended December
31, 1995. Cost of services as a percentage of service and other revenue was
63.7% for the year ended December 31, 1994 and 62.5% for the year ended December
31, 1995. Combined cost of services as a percentage of revenue decreased 1.2% as
a result of fluctuations in several service areas: (i) Researchers' cost of
services increased $631,000, and as a percentage of revenue increased from 63.3%
to 70.3%, as it benefited from several large litigation projects in the first
half of 1994 and was negatively impacted in the year ended December 1995 by
expenses incurred in connection with the expansion of its imaging business and
the addition of personnel and increased rental expense associated with the
expansion of its San Francisco facility; (ii) Leonard's cost of services
increased $1,000, but as a percentage of revenue decreased from 62.6% to 53.5%,
primarily as a result of increased revenue and operating leverage in 1995
associated with the addition of two storage contacts in 1994 and expenses
incurred in 1994 in connection with the opening of new document storage and
retrieval facilities in Toledo, Ohio and Farmington Hills, Michigan; (iii)
Deliverex's cost of services decreased $41,000, and as a percentage of revenue
decreased from
20
<PAGE> 23
64.6% to 57.3%, as a result of price increases and certain cost reduction
programs; and (iv) DPAS' cost of services decreased $414,000, and as a
percentage of revenue decreased from 74.5% to 66.3%, primarily as a result of a
cost reduction program implemented in April 1995.
Cost of products sold. Cost of products sold increased 1.6%, from $4.9
million for the year ended December 31, 1994 to $5.0 million for the year ended
December 31, 1995. Cost of products sold as a percentage of product revenue
decreased from 82.6% to 81.0% for the years ended December 31, 1994 and 1995,
respectively. This decrease was a result of additional value added rebates on
selected products from Eastman Kodak.
Depreciation
Depreciation increased 17.3%, from $1.1 million for the year ended December
31, 1994 to $1.2 million for the year ended December 31, 1995. This increase was
primarily associated with machinery and equipment purchased for the expansions
at Leonard and Recordex discussed above.
Gross profit
As a result of the foregoing, gross profit increased 15.2%, from $13.4
million, or 31.2% of total revenue, for the year ended December 31, 1994 to
$15.5 million, or 32.5% of total revenue, for the year ended December 31, 1995.
Selling, general and administrative expenses
SG&A increased 5.5%, from $11.8 million, or 27.5% of revenue, for the year
ended December 31, 1994 to $12.5 million, or 26.2% of revenue, for the year
ended December 31, 1995. After giving effect to the Compensation Differential in
each year, SG&A increased from $10.0 million, or 23.2% of revenue, for the year
ended December 31, 1994 to $10.5 million, or 22.1% of revenue, for the year
ended December 31, 1995. Although combined SG&A adjusted for the Compensation
Differential as a percentage of total revenue decreased 1.1%, there were
fluctuations in several service areas: (i) Leonard's adjusted SG&A as a
percentage of revenue decreased from 30.3% to 25.3%, primarily as a result of
the two storage contracts described above which provided revenue without
proportional increases in overhead; (ii) DPAS' adjusted SG&A as a percentage of
revenue decreased from 24.9% to 23.2%, primarily as a result of a cost reduction
program implemented in April 1995; and (iii) Recordex's SG&A as a percentage of
revenue decreased from 33.1% to 31.8%, primarily as a result of increased
revenue related to its expansion of medical records release services into
additional healthcare institutions without a commensurate increase in overhead.
Pro forma operating income
Pro forma operating income giving effect to the Compensation Differential
increased 43.8%, from $3.5 million, or 8.0% of total revenue, for the year ended
December 31, 1994 to $5.0 million, or 10.4% of total revenue, for the year ended
December 31, 1995.
Interest expense, net
Interest expense, net of interest income increased 16.1%, from $304,000 for
the year ended December 31, 1994 to $353,000 for the same period in 1995. This
was primarily due to increased borrowings in April through December for the
purchase of equipment associated with Leonard's opening of new document storage
facilities.
Provision for income taxes
The combined provision for income taxes and pro forma provision for income
taxes increased 42.8%, from $1.3 million, or an effective tax rate of 36.7%, for
the year ended December 31, 1994 to $1.8 million, or an 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.
21
<PAGE> 24
Pro forma net income
Pro forma net income giving effect to the Compensation Differential and pro
forma provision for income taxes increased 39.8%, from $2.2 million, or 5.0% of
total revenue, for the year ended December 31, 1994 to $3.0 million, or 6.4% of
total revenue, for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4.1 million, $2.0 million
and $2.3 million, respectively, for the years ended December 31, 1995, 1994 and
1993. Net cash provided by operating activities for the year ended December 31,
1995 was primarily impacted by: (i) an increase in net income; (ii) an increase
in revenue without a corresponding increase in accounts receivable; (iii) the
settlement of a significant portion of Researchers' stockholder receivable; and
(iv) a decrease in accounts payable and accrued liabilities. Net cash provided
by operating activities for the year ended December 31, 1994 was impacted by
increased revenue and increases in accounts receivable and accounts payable and
accrued liabilities associated with facility expansions and was also impacted by
an increase in Researchers' stockholder receivable. Cash used in investing
activities was $1.3 million, $2.0 million and $1.1 million, respectively, for
the years ended December 31, 1995, 1994 and 1993. Cash used in investing
activities for the year ended December 31, 1995 and for the year ended December
31, 1994 was primarily used for purchases of property, plant and equipment
associated with facility expansions, and was also impacted in 1994 by the
purchase by Imagent of a microfilm processing business and the associated
intangible assets. Cash used in investing activities for 1993 was primarily used
for purchases of property, plant and equipment associated with facility
expansions. Cash used for financing activities was $2.1 million, $124,000 and
$1.2 million, respectively, for the years ended December 31, 1995, 1994 and
1993. Cash used for financing activities for the year ended December 31, 1995
consisted primarily of net payments on debt and payments of dividends. Cash used
for financing activities for the year ended December 31, 1994 consisted
primarily of payments of dividends offset by net proceeds from debt associated
with facility expansions. Cash used for financing activities for 1993 included
net payments on debt, advances to Recordex's parent company and payments of
dividends. As a result of the foregoing, cash and cash equivalents increased by
$686,000 for the year ended December 31, 1995, decreased by $86,000 in 1994 and
decreased by $79,000 in 1993.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Revenue from the Company's services shows no significant seasonal
variations. However, service revenue can vary from period to period due to the
impact of specific projects, primarily in the litigation support area. Quarterly
results may also vary as a result of the timing of acquisitions and the timing
and magnitude of costs related to such acquisitions. In addition, because the
anticipated financial benefits of the combination of the Operating Companies may
not be generated immediately, the Company's initial results as a combined
company may reflect corporate overhead that exceeds the realized benefits.
22
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
F.Y.I. INCORPORATED AND SUBSIDIARIES
Report of Independent Public Accountants.................. 25
Consolidated Balance Sheets............................... 26
Consolidated Statements of Operations..................... 27
Consolidated Statements of Stockholders' Equity........... 28
Consolidated Statements of Cash Flows..................... 29
Notes to Consolidated Financial Statements................ 30
FOUNDING COMPANIES
Report of Independent Public Accountants.................. 43
Report of Independent Public Accountants.................. 44
Combined Balance Sheets................................... 45
Combined Statements of Operations......................... 46
Combined Statements of Stockholders' Equity............... 47
Combined Statements of Cash Flows......................... 48
Notes to Combined Financial Statements.................... 49
IMAGENT CORPORATION AND RELATED COMPANY
Report of Independent Public Accountants.................. 62
Combined Balance Sheets................................... 63
Combined Statements of Operations......................... 64
Combined Statements of Stockholders' Equity............... 65
Combined Statements of Cash Flows......................... 66
Notes to Combined Financial Statements.................... 67
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
Report of Independent Public Accountants.................. 72
Combined Balance Sheets................................... 73
Combined Statements of Operations......................... 74
Combined Statements of Stockholders' Equity............... 75
Combined Statements of Cash Flows......................... 76
Notes to Combined Financial Statements.................... 77
RECORDEX SERVICES, INC.
Report of Independent Public Accountants.................. 83
Report of Independent Public Accountants.................. 84
Balance Sheets............................................ 85
Statements of Operations.................................. 86
Statements of Changes in Stockholder's Equity............. 87
Statements of Cash Flows.................................. 88
Notes to Financial Statements............................. 89
LEONARD ARCHIVES, INC.
Report of Independent Public Accountants.................. 95
Balance Sheets............................................ 96
Statements of Operations.................................. 97
Statements of Stockholders' Equity........................ 98
Statements of Cash Flows.................................. 99
Notes to Financial Statements............................. 100
C. & T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
Report of Independent Public Accountants.................. 106
Combined Balance Sheets................................... 107
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C>
Combined Statements of Operations........................................................................ 108
Combined Statements of Stockholders' Equity.............................................................. 109
Combined Statements of Cash Flows........................................................................ 110
Notes to Combined Financial Statements................................................................... 111
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
Report of Independent Public Accountants................................................................. 116
Combined Balance Sheets.................................................................................. 117
Combined Statements of Operations........................................................................ 118
Combined Statements of Stockholders' Equity.............................................................. 119
Combined Statements of Cash Flows........................................................................ 120
Notes to Combined Financial Statements................................................................... 121
PERMANENT RECORDS, INC.
Report of Independent Public Accountants................................................................. 127
Balance Sheets........................................................................................... 128
Statements of Operations................................................................................. 129
Statements of Stockholders' Equity....................................................................... 130
Statements of Cash Flows................................................................................. 131
Notes to Financial Statements............................................................................ 132
</TABLE>
PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<S> <C>
F.Y.I. INCORPORATED AND SUBSIDIARIES
Pro Forma Statement of Operations for the Years Ended
December 31, 1995 and December 31, 1996 (unaudited).... 133
Notes to Pro Forma Statements of Operations (unaudited)... 137
</TABLE>
24
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To F.Y.I. Incorporated:
We have audited the accompanying consolidated balance sheets of F.Y.I.
Incorporated (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996 and the related consolidated statements of operations, stockholders'
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 F.Y.I. Incorporated and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 14, 1997
25
<PAGE> 28
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 52 $20,954
Accounts receivable and notes receivable, less allowance for
doubtful accounts of $0 and $1,182, respectively.......... -- 18,256
Inventory................................................... -- 522
Prepaid expenses and other current assets................... 52 847
------ -------
Total current assets.............................. 104 40,579
PROPERTY, PLANT AND EQUIPMENT, net.......................... 15 12,944
GOODWILL AND OTHER INTANGIBLES, net of amortization of $0
and $690, respectively.................................... -- 43,236
DEFERRED OFFERING COSTS..................................... 2,190 --
NOTE RECEIVABLE, SHAREHOLDERS -- LONG TERM.................. -- 643
OTHER NONCURRENT ASSETS..................................... 6 2,414
------ -------
Total assets...................................... $2,315 $99,816
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................... $1,101 $13,089
Short-term obligations...................................... -- --
Current maturities of long-term obligations................. -- 530
Unearned revenue............................................ -- 754
Income taxes payable........................................ -- 2,616
Current portion of deferred income taxes.................... -- 774
------ -------
Total current liabilities......................... 1,101 17,763
LONG-TERM OBLIGATIONS, net of current maturities............ -- 3,863
DEFERRED INCOME TAXES, net of current portion............... -- 351
------ -------
Total liabilities................................. 1,101 21,977
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $.01 par value, 1,000,000 and 0
shares authorized, 9,000 and 0 shares issued and
outstanding at December 31, 1995 and December 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 8,645,090 shares issued and outstanding at
December 31, 1995 and December 31, 1996, respectively..... 7 86
Additional paid-in-capital.................................. 1,207 74,140
Retained earnings........................................... -- 4,114
------ -------
1,214 78,340
Less -- Treasury stock, $.01 par value, 0 and 36,670 shares
at December 31, 1995 and December 31, 1996,
respectively.............................................. -- (501)
------ -------
Total stockholders' equity........................ 1,214 77,839
Total liabilities and stockholders' equity........ $2,315 $99,816
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 29
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
REVENUE:
Service revenue........................................... $ -- $68,679
Product revenue........................................... -- 6,345
Other revenue............................................. -- 698
------- -------
Total revenue..................................... -- 75,722
COST OF SERVICES............................................ -- 43,200
COST OF PRODUCTS SOLD....................................... -- 4,898
DEPRECIATION................................................ -- 1,608
------- -------
Gross profit.............................................. -- 26,016
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ -- 17,729
AMORTIZATION................................................ -- 599
------- -------
Operating income.......................................... -- 7,688
OTHER (INCOME) EXPENSE:
Interest expense.......................................... -- 1,058
Interest income........................................... -- (284)
Other expense, net........................................ -- 80
------- -------
Income before income taxes............................. -- 6,834
PROVISION FOR INCOME TAXES.................................. -- 2,803
------- -------
NET INCOME.................................................. $ -- $ 4,031
======= =======
PRO FORMA DATA (Unaudited -- See Note 3):
Historical net income..................................... $ 4,031
Pro forma compensation differential....................... 235
Pro forma provision for income taxes...................... 94
-------
PRO FORMA NET INCOME........................................ $ 4,172
=======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 5,856
=======
NET INCOME PER COMMON SHARE................................. $ 0.69
=======
PRO FORMA NET INCOME PER COMMON SHARE....................... $ 0.71
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 30
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK TREASURY STOCK
------------------ --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT APIC R/E TOTAL S/E
--------- ------ ------ ------ ------ ------ ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........... 663,125 $ 7 9,000 $-- -- $ -- $ 1,207 $ -- $ 1,214
Pooling of interests adjustment at
January 1, 1996.................... 110,000 1 -- -- -- -- 242 83 326
Initial public offering, net of
costs.............................. 2,185,000 22 -- -- -- -- 21,830 -- 21,852
Conversion of preferred stock into
common stock....................... 542,557 5 (9,000) -- -- -- (5) -- --
Issuance of common stock for Founding
Companies.......................... 1,878,933 19 -- -- -- -- (4,586) -- (4,567)
Deferred tax liability:
S corporation to C corporation
conversion for Founding
Companies........................ -- -- -- -- -- -- (691) -- (691)
Common stock issued in connection
with subsequent acquisitions....... 856,735 9 -- -- -- -- 11,827 -- 11,836
Treasury stock re-acquired in
connection with subsequent
acquisitions....................... -- -- -- -- 36,670 (501) -- -- (501)
Exercise of options, net............. 45,740 -- -- -- -- -- 711 -- 711
Secondary offering, net of costs..... 2,363,000 23 -- -- -- -- 43,605 -- 43,628
Net income........................... -- -- -- -- -- -- -- 4,031 4,031
--------- --- ------ --- ------ ----- ------- ------ -------
Balance, December 31, 1996........... 8,645,090 $86 -- $-- 36,670 $(501) $74,140 $4,114 $77,839
========= === ====== === ====== ===== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 31
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ -- $ 4,031
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................. -- 2,207
Deferred tax benefit...................................... -- (219)
Change in operating assets and liabilities:
Accounts receivable and notes receivable.................. -- (178)
Inventory................................................. -- 4
Prepaid expenses and other assets......................... -- (709)
Accounts payable and accrued liabilities.................. -- (309)
Unearned revenue.......................................... -- 81
------- ---------
Net cash provided by operating activities......... -- 4,908
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................. (11) (3,317)
Cash paid for acquisitions, net of cash acquired.......... -- (37,200)
------- ---------
Net cash used for investing activities............ (11) (40,517)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance, net of underwriting
discounts and other costs.............................. (741) 68,227
Proceeds from preferred stock issuance.................... 135 --
Proceeds from short-term obligations...................... -- 7,701
Proceeds from long-term obligations....................... -- 18,757
Cash paid for debt issuance costs......................... -- (1,627)
Principal payments on short-term obligations.............. -- (9,297)
Principal payments on long-term obligations............... -- (27,250)
------- ---------
Net cash (used in) provided by financing
activities...................................... (606) 56,511
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (617) 20,902
CASH AND CASH EQUIVALENTS, beginning of period.............. 669 52
------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 52 $ 20,954
======= =========
SUPPLEMENTAL DATA:
Cash paid for:
Income taxes.............................................. $ -- $ 1,731
Interest.................................................. $ -- $ 836
NONCASH FINANCING TRANSACTIONS:
Debt assumed in acquisitions.............................. $ -- $ 12,485
Equipment acquired via capital lease...................... $ -- $ 863
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 32
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
F.Y.I. Incorporated (the "Company" or "F.Y.I.") was founded in September
1994 to create a national, single source provider of document management
services to three primary client segments: healthcare institutions, professional
services firms and financial institutions. In January 1996, F.Y.I. acquired (the
"Acquisitions") simultaneously with the closing of its initial public offering
(the "IPO") on January 26, 1996, seven document management services businesses
(the "Founding Companies"). The Founding Companies are headquartered in San
Francisco (2), San Jose, Fort Worth, Detroit, Malvern (Philadelphia) and
Baltimore, and operate in over 23 states. The consideration for the Founding
Companies consisted of a combination of cash and common stock (the "Common
Stock") of F.Y.I.
Between September 1994 and the consummation of the IPO and the
Acquisitions, F.Y.I. did not conduct any operations. For accounting purposes and
for the purposes of the presentation of the financial statements herein, January
31, 1996 has been used as the effective date of the Acquisitions. Accordingly,
the actual operating results of the Company included in the Statement of
Operations for the twelve months ended December 31, 1996 represent the eleven
months of operations subsequent to the consummation of the Acquisitions.
Supplemental Statement of Operations Data for the twelve months ended December
31, 1996 is presented in Note 15 herein.
The consolidated financial statements of F.Y.I. include the accounts of
F.Y.I. Incorporated and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND THE ACQUISITIONS:
Initial Public Offering
On January 26, 1996, the Company completed the IPO of 2,185,000 shares of
Common Stock (including the exercise of the underwriters' over-allotment option)
at $13.00 per share. Proceeds from the IPO, net of underwriting commissions and
offering costs, were approximately $22.9 million. Of these net proceeds,
approximately $7.1 million was used to pay a portion of the consideration for
the Acquisitions, approximately $7.7 million was used to retire certain
indebtedness of the Founding Companies, approximately $8.0 million was used for
acquisitions subsequent to the IPO, and $0.1 million was used as working
capital.
Upon the closing of the IPO, the Company converted the 9,000 shares of
Series A Preferred Stock then outstanding into 542,557 shares of Common Stock.
Acquisitions of the Founding Companies
Simultaneously with the closing of the IPO, the Company acquired the
Founding Companies. The aggregate consideration paid by F.Y.I. to acquire the
Founding Companies was approximately $35 million, consisting of: (i) $7,059,000
in cash; (ii) 1,878,933 shares of Common Stock; (iii) the assumption and
repayment of approximately $191,000 of indebtedness owed by a Founding Company
stockholder; and (iv) the distribution of cash and certain receivables to
certain Founding Company stockholders of S corporations in the amount of
$3,450,000, representing the undistributed retained earnings of S corporations,
upon which taxes have been paid by the stockholders.
The Acquisitions have been accounted for in accordance with generally
accepted accounting principles ("GAAP") as a combination of F.Y.I. and the
Founding Companies at historical cost, because: (i) the Founding Companies'
stockholders transferred assets to F.Y.I. in exchange for Common Stock and cash
simultaneously, with the IPO; (ii) the nature of future operations of the
Company will be substantially 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.
30
<PAGE> 33
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.
Inventory
Inventory is stated at the lower of cost or market with cost determined on
a first-in, first-out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
computed using straight-line and accelerated methods over the estimated useful
lives of the assets. Leasehold improvements are depreciated over the lesser of
the useful life or the term of the lease.
Intangible Assets
Intangible assets consist primarily of excess purchase price over net
assets, which are amortized over 30 years. In conformance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company's
management continually evaluates whether events and circumstances indicate the
remaining estimated useful life of intangible assets may warrant revisions or
that the remaining balance of intangibles or other long-lived assets may not be
recoverable. To make this evaluation, management uses an estimate of
undiscounted net income over the remaining life of the intangibles or other
long-lived assets.
Revenue Recognition
Revenue is recognized when the services are rendered, or products are
shipped, to the Company's customers. Microfilm processing revenue is recognized
on a percentage-of-completion basis. Unearned revenue represents customer
storage and certain services which are billed in advance.
Income Taxes
Income taxes are provided based upon the provisions of SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred income
taxes under the asset and liability method.
Deferred income taxes are provided for temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes.
Temporary differences result primarily from accelerated depreciation and
amortization for tax purposes, deferred contract revenues being taxed when
billed, and various accruals and reserves being deductible for tax purposes in
different periods.
Net Income Per Share
Net income per common share has been computed by dividing income by the
weighted average number of common shares and equivalent shares outstanding for
the period. For purposes of computing income per common share for the year
period ended December 31, 1996, the common stock equivalent impact of stock
options outstanding during the period, are not included as their effect is not
material.
31
<PAGE> 34
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with GAAP 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.
Pro Forma Net Income (Unaudited)
The Company acquired The Rust Consulting Group, Inc. ("Rust") in December
1996 in a transaction that was accounted for as a pooling-of-interests. Rust has
previously been managed as an independent closely owned company and therefore,
selling, general and administrative expenses for the historical periods reflect
compensation and related benefits that the owner had received from the business
during those periods. In connection with the acquisition, the owner has entered
into a three year employment agreement that provides for compensation and
benefits at levels lower than the historical amounts (the "Compensation
Differential"). The unaudited pro forma data presents compensation at the level
the owner has agreed to receive subsequent to the acquisition and the related
income tax impact of the Compensation Differential discussed above.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
The activity in the allowance for doubtful accounts and notes receivable is
as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING BALANCE COSTS AND END OF
OF PERIOD ACQUIRED EXPENSES WRITE-OFFS PERIOD
---------- -------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Twelve months Ended December 31, 1996
Allowance for doubtful accounts..... $-- $1,304 $951 $1,073 $1,182
=== ====== ==== ====== ======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, DECEMBER 31,
YEARS 1995 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land.......................................... N/A $-- $ 602
Buildings and improvements.................... 7-18 -- 2,335
Leasehold improvements........................ 5-10 -- 783
Vehicles...................................... 5-7 -- 1,253
Machinery and equipment....................... 5-15 -- 15,548
Computer equipment............................ 5-7 15 1,345
Furniture and fixtures........................ 5-15 -- 902
--- -------
15 22,768
Less -- Accumulated depreciation and
amortization................................ -- 9,824
--- -------
$15 $12,944
=== =======
</TABLE>
32
<PAGE> 35
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued liabilities................... $ 954 $ 4,224
Accrued compensation and benefits.......................... 147 2,329
Customer deposits.......................................... -- 883
Accrued liabilities from acquisitions...................... -- 4,386
Accrued professional fees.................................. -- 1,035
Other...................................................... -- 232
------ -------
$1,101 $13,089
====== =======
</TABLE>
7. BUSINESS COMBINATIONS:
Since the IPO and through December 31, 1996, the Company has acquired 18
additional businesses (the "Subsequent Acquisitions") that provide document
management services, of which 17 were accounted for as purchases and one was
accounted for as a pooling-of-interests. The Subsequent Acquisitions consist of:
Sacramento Valley Records Management, Inc. ("Sacramento"); Microfilm
Associates, Ltd. ("Microfilm"); B&B Information and Image Management, Inc.
("B&B"); Premier Document Management, Inc. and PDM Services, Inc. ("Premier");
Robert A. Cook and Staff, Inc. and RAC Services, Inc. ("Cook"); Octo, Inc.
("Octo"); Domor Data Processing ("Domor"); Index Record Management ("Index");
Rushmore Legal Support ("Rushmore"); C.M.R.S. Incorporated ("CMRS"), Minnesota
Medical Record Service, Inc. ("Minnesota Medical Record"), and Texas Medical
Record Service, Inc. ("Texas Medical Record") (collectively "Medical Record");
ZIA Information Analysis Group ("ZIA"); Carton Hodgson, Inc. and CH Direct, Inc.
(collectively "Carton"); Data Input Services Corporation ("DISC"); Deliverex of
Seattle ("Deliverex Seattle"); Researchers Litigation Support, L.L.C.
("Researchers LLC"); and Rust. The aggregate consideration paid for the 17
acquisitions accounted for as purchases consisted of $32.3 million in cash,
820,065 shares of Common Stock net of stock repurchased by the Company, and
future contingent payment estimates of $2,664,000 to be paid in cash and stock.
The preliminary allocation of the purchase price is set forth below:
<TABLE>
<S> <C>
Consideration Paid.......................................... $46,323,000
Estimated Fair Value of Tangible Assets..................... 15,261,000
Estimated Fair Value of Liabilities......................... 12,012,000
Goodwill.................................................... 43,074,000
</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.
The fair market value of the shares of Common Stock used in calculating the
consideration paid ranged from $13.65 to $14.25, which is based on approximately
a 35% discount from the average trading price of the Common Stock based on the
length and type of stock resale restrictions outlined in the purchase
agreements.
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 is being amortized over a period of 30 years.
Management continually evaluates whether events and circumstances indicate that
the remaining estimated
33
<PAGE> 36
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
useful life of intangible assets may warrant revisions or that the remaining
balance of intangibles or other long-lived assets may not be recoverable. To
make this evaluation, management uses an estimate of undiscounted net income
over the remaining life of the intangibles or other long-lived assets. The
goodwill associated with the B&B, Premier, Medical Record, ZIA, Carton and DISC
acquisitions is not deductible for income tax purposes.
The acquisition of Rust in December 1996 for 110,000 shares of Common Stock
was accounted for as a pooling-of-interests. The consolidated financial
statements of the Company were not restated for periods prior to January 1, 1996
due to the financial immateriality of Rust. The December 31, 1995 retained
earnings of Rust have been presented as a restatement of the Company's beginning
retained earnings. The interim results of the Company for the period from
January 1, 1996 through September 30, 1996 have been restated for the Rust
acquisition. Restated total revenue, net income, pro forma net income and
weighted average shares outstanding after giving effect to the
pooling-of-interests with Rust are summarized below. Pro forma net income
reflects adjustments for the Compensation Differential and the related income
tax effect.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996
---------------------------------
AS PREVIOUSLY
AS RESTATED REPORTED
----------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Total revenue............................................ $48,884 $45,971
Net income............................................... 2,478 2,561
Net income per share..................................... $ 0.45 $ 0.47
Pro forma net income..................................... 2,591 --
Pro forma net income per share........................... $ 0.47 $ --
Weighted average common shares outstanding............... 5,560 5,450
</TABLE>
Set forth below are unaudited pro forma financial data for the years ended
December 31, 1995 and December 31, 1996. The unaudited pro forma data give
effect to: (i) the acquisitions of B&B, Premier, Cook, Medical Record, ZIA,
Carton and DISC; (ii) the acquisitions of the Founding Companies; and (iii)
compensation and tax adjustments for all transactions as if the transactions had
occurred on January 1, 1995. The acquisitions of Sacramento, Microfilm, Octo,
Domor, Rushmore, Index, Deliverex Seattle and Researchers LLC 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 YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- -------------------
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Revenue............................................ $86,773 $102,921
Income before income taxes......................... 8,128 10,540
Net income......................................... 5,013 6,254
Net income per common share........................ $ 0.82 $ 0.99
Average shares outstanding......................... 6,106 6,317
</TABLE>
Subsequent to December 31, 1996, the Company acquired three document services
businesses in transactions accounted for as purchases.
34
<PAGE> 37
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CREDIT FACILITIES:
Long-term Obligations
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Line of credit, expiring at April 14, 2001, interest at
prime plus 1.5% or the Eurodollar rate plus 3% (8.75% to
9.75% at December 31, 1996).............................. $-- $ --
Industrial Revenue Bonds: Variable Rate (3.5% at December
31, 1996) Demand/Fixed Rate Revenue Bonds, Prince
George's County, Maryland; due beginning in 1996 through
2014 secured by all real estate equipment and other
tangible property of a subsidiary of the Company......... -- 2,346
Notes payable -- Small Business Administration, monthly
payment of $3,000, including principal and interest at
4%, maturing November 17, 2014, secured by deed of trust
on real estate and non-real estate assets of the Company,
guaranteed by a stockholder and the stockholder's wife... -- 395
Capital lease obligations.................................. -- 1,420
All other obligations...................................... -- 232
--- ------
Total............................................ -- 4,393
Less -- Current maturities of long-term obligations........ -- 530
--- ------
Total long-term obligations...................... $-- $3,863
=== ======
</TABLE>
In April 1996, the Company and its subsidiaries entered into a credit
agreement, as amended (the "Line of Credit"), with Banque Paribas, as agent, and
the lenders named therein. Under the Line of Credit, the Company and its
subsidiaries initially could borrow on a revolving credit basis loans in an
aggregate outstanding principal amount up to $35.0 million from time to time
under the secured revolving credit and acquisition facility, subject to certain
customary borrowing capacity requirements. The Line of Credit is secured by the
receivables and equipment of F.Y.I. and its subsidiaries and by the stock of the
subsidiaries. As of December 31, 1996, the availability under the Line of Credit
was $13.8 million.
The Company and its subsidiaries may borrow revolving credit loans up to an
aggregate $5.0 million under the Line of Credit for working capital and general
corporate purposes. The commitment to fund revolving credit loans expires April
14, 2001. The commitment to fund term loans expires October 15, 1997. The annual
interest rate applicable to borrowings under this facility is, at the option of
the Company, (i) 1.50% plus the prime rate or (ii) 3.00% plus the Eurodollar
rate.
The Company also has outstanding an irrevocable letter of credit in the
amount of approximately $2.4 million to serve as guarantee for periodic
principal and interest payments related to the Industrial Revenue Bonds.
The Line of Credit requires mandatory prepayments in certain circumstances.
The outstanding principal balance of term loans as of October 15, 1997 is
thereafter 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 is due and payable on April 15, 2001.
35
<PAGE> 38
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average interest rate on short and long-term obligations at
December 31, 1996 was 5.27%. The Line of Credit contains certain reporting
requirements and financial covenants, including requirements that the Company
maintain minimum levels of net worth and other financial ratios. As of December
31, 1996, the Company has complied with all loan covenants.
Maturities of Long-Term Obligations
As of December 31, 1996, maturities of long-term obligations are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1997.............................................. $ 530
1998.............................................. 583
1999.............................................. 325
2000.............................................. 332
2001.............................................. 323
Thereafter........................................ 2,300
------
Total............................................. $4,393
======
</TABLE>
9. LEASE COMMITMENTS:
The operating companies lease various office buildings, machinery,
equipment, and vehicles. Future minimum lease payments under capital leases and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
----------------------
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
- ------------------------- ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1997......................................... $ 551 $ 4,273
1998......................................... 388 3,846
1999......................................... 313 3,366
2000......................................... 276 1,950
2001......................................... 252 1,379
Thereafter................................... -- 4,057
------ -------
Total minimum lease payments................. $1,780 $18,871
=======
Less -- Amounts representing interest........ 360
------
Net minimum lease payments................... 1,420
Less -- Current portion of obligations under
capital leases............................. 430
------
Long-term portion of obligations under
capital leases............................. $ 990
======
</TABLE>
Rent expense for all operating leases for the year ended December 31, 1996
was approximately $3,854,000.
Certain operating companies sublease a portion of their office facilities
under noncancelable lease agreements which expire at various dates to three
unrelated businesses. Future minimum sublease rental
36
<PAGE> 39
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income as of December 31, 1996 for the remainder of the term and in the
aggregate are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C> <C>
1997............................................................... $190
1998............................................................... 111
1999............................................................... 104
2000............................................................... 104
2001............................................................... 24
----
$533
====
</TABLE>
10. INCOME TAXES:
The provision for federal and state income taxes consists of the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Federal --
Current................................................... $2,475
Deferred.................................................. (179)
State --
Current................................................... 547
Deferred.................................................. (40)
------
$2,803
======
</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>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Tax at statutory rate....................................... $2,323
Add (deduct) --
State income taxes..................................... 339
Nondeductible expenses................................. 141
------
$2,803
======
</TABLE>
37
<PAGE> 40
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income tax liabilities and assets are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Deferred income tax liabilities --
Tax over book depreciation and amortization.............. $-- $ 441
Accrual to cash differences, net......................... -- 1,067
Other, net............................................... -- 7
--- ------
Total deferred income tax liabilities............ -- 1,515
Deferred income tax assets --
Allowance for doubtful accounts.......................... -- 290
Other reserves, net...................................... -- 100
--- ------
Total deferred income tax assets................. -- 390
--- ------
Total net deferred income tax liabilities.................. $-- $1,125
=== ======
Current portion of deferred income tax liabilities......... -- 774
Long-term deferred tax liabilities......................... -- 351
--- ------
$-- $1,125
=== ======
</TABLE>
11. STOCKHOLDERS' EQUITY:
December Public Stock Offering:
On December 17, 1996, the Company completed a follow-on public offering
(the "December Offering") of 2,363,000 shares of Common Stock (including the
exercise of the underwriters' over-allotment option) at $20.00 per share.
Proceeds from the December Offering, net of underwriting commissions and
offering costs, were approximately $43.6 million. Of these net proceeds,
approximately $22.4 million was used to retire indebtedness, approximately $3.5
million was used to pay a portion of consideration for acquisitions in December,
$0.6 million was used to retire indebtedness assumed in acquisitions, and the
remaining $17.1 million is being used as working capital and for additional
acquisitions.
Stock Options and Warrants:
At December 31, 1996, the Company had one stock-based compensation plan,
the 1995 Stock Option Plan ("the Plan"), which is described below. The Company
applies APB Opinion 25 and related Interpretations in accounting for the Plan.
Accordingly, no compensation cost has been recognized for the Plan. Had
compensation cost for the Plan been determined based upon the fair value at
grant dates for awards under the Plan consistent with the method of SFAS No.
123, "Accounting for Stock Based Compensation", the Company's net income and
earnings per share would have been $3,444,000 and $0.59, respectively. As
reported net income and earnings per share were $4,031,000 and $0.69,
respectively.
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions for
1996: risk free interest rate ranging from 5.4% to 6.9%, no dividend yield,
expected life of 3 years, and volatility of 36%.
In October 1995, the Board of Directors and F.Y.I.'s stockholders approved
the Plan, which became effective on the date of the IPO. The Plan provides
awards of options to purchase Common Stock and may include incentive stock
options ("ISOs") and/or non-qualified stock options.
The Plan also provides for automatic option grants to directors who are not
otherwise employed by the Company or its subsidiaries. Upon commencement of
service (or upon agreeing to serve in the case of the initial non-employee
directors), a non-employee director will receive a non-qualified option to
purchase 10,000
38
<PAGE> 41
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of Common Stock, and continuing non-employee directors will receive
annual options to purchase 5,000 shares of Common Stock. Options granted to
non-employee directors become exercisable one-third on the date of grant and
one-third on each of the next two anniversaries of the date of grant.
Non-employee directors' options have a term of five years from the date of
grant.
The maximum number of shares of Common Stock that may be subject to
outstanding options, determined immediately after the grant of any option, is
the greater of 650,000 shares or 12% of the aggregate number of shares of the
Company's Common Stock outstanding, provided, however, that options to purchase
no more than 650,000 shares of Common Stock may be granted as ISOs. At December
31, 1996 and December 31, 1995, approximately 1,037,000 and 650,000 shares,
respectively, were subject to outstanding options.
The Company had options to purchase 690,370 shares outstanding at December
31, 1996. These options, other than those granted to employee directors, are
generally exercisable within 180 days from the date of grant as to 20% of the
underlying shares, and as to an additional 20% on each of the next four
anniversaries of the date of grant. Options are granted at the market price of
the Common Stock on the date of grant.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Balance at inception................................... -- --
Granted................................................ 473 $13.00
--- -------
Balance, December 31, 1995............................. 473 $13.00
Granted................................................ 316 $19.58
Exercised.............................................. 46 $13.00
Forfeited.............................................. 53 $13.28
--- -------
Balance, December 31, 1996............................. 690 $15.99
=== =======
Exercisable, December 31, 1996......................... 197 $14.18
=== =======
</TABLE>
The following table summarizes information about stock options granted
under the Plan that were outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
$13.00 376,620 8.5 years $13.00 158,207 $13.00
$16.00-$22.00 313,750 9.6 $19.59 39,200 $18.95
</TABLE>
Warrants to Purchase Common Stock
In November 1995, the Company granted to the Chief Executive Officer and
the Chief Accounting Officer warrants to purchase 100,000 and 15,000 shares of
common stock, respectively, each with an exercise price of $10.00 per share. The
warrants are exercisable as to 50% on January 26, 1998, and as to the remaining
50% on January 26, 1999. In May 1996, the Company granted to the Chief Executive
Officer an additional warrant to purchase 50,000 shares of Common Stock at an
exercise price of $20.00 per share. The additional warrant is exercisable as to
50% on May 21, 1998 and as to the remaining 50% on May 21, 1999.
39
<PAGE> 42
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS:
Certain of the operating companies have qualified defined contribution
employee benefit plans (the "Plans"), the majority of which allow for voluntary
pre-tax contributions by employees. The operating companies pay all general and
administrative expenses of the Plans and, in some cases, the operating companies
make matching and discretionary contributions to the Plans. The operating
companies offer no post-employment or post-retirement benefits. The expense
incurred related to the Plans by the Company was approximately $91,000 for the
year ended December 31, 1996.
13. RELATED-PARTY TRANSACTIONS:
Leasing Transactions
Certain of the Operating Companies lease their operating facilities, along
with certain equipment, from selling parties who remained employees or directors
of the Company. These leases are for various lengths and annual amounts. The
rental expense for these operating leases for the year ended December 31, 1996
was approximately $487,100.
Notes Receivable
In the Acquisitions, the Company acquired $613,000 of notes receivable from
two Founding Company shareholders. At the time of the Merger, the shareholders
entered into new notes receivable with a stated interest rate (5%) and principal
payment schedules. Interest is payable on a semi-annual basis, and principal is
due as follows: 1998 -- $321,000; and 1999 -- $322,000.
Other Transactions
An operating company purchases digital coding services from an entity in
which an F.Y.I. stockholder had a controlling interest. Effective December 1,
1996, the Company purchased this entity from the shareholder for $2,700,000. The
expense incurred to the entity for the 11 months ended November 30, 1996 was
$32,000 and billings to the entity were $49,000. Additionally, the Company
charged the entity a management fee for accounting services. Management fees
were $25,000 for the eleven months ended November 30, 1996.
14. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of these actions
will have a material adverse effect on the financial position or results of
operations of the Company.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company maintains cash and cash equivalents and certain other
financial instruments at various major financial institutions across many
geographic areas. Credit risk on trade receivables is minimized as a result of
the large number of entities comprising the Company's customer base and their
dispersion across many industries and geographic areas.
40
<PAGE> 43
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUPPLEMENTAL DATA (UNAUDITED):
Statement of Operations -- Supplemental Data
The Statement of Operations Data for the year ended December 31, 1995
represents the unaudited combined statement of operations of the Founding
Companies for the period adjusted to give effect to: (i) compensation levels the
officers and owners have agreed to receive subsequent to the IPO; and (ii)
provision for income taxes as if all entities had been subject to federal and
state income taxes for the period. The Statement of Operations Data for the year
ended December 31, 1996 represents a combination of: (i) the audited results of
the combined Founding Companies for the one month of operations prior to the
consummation of the Acquisitions adjusted for the compensation and tax
adjustments discussed above; and (ii) the audited results of F.Y.I. Incorporated
and Subsidiaries for the eleven months subsequent to the consummation of the
Acquisitions (which includes acquisitions subsequent to the IPO from the date of
their respective acquisition and Rust from January 1, 1996) adjusted to give
effect to the Compensation Differential for Rust. 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>
FOR THE YEAR
ENDED DECEMBER 31,
------------------
1995 1996
------- -------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue............................................. $40,615 $72,166
Product revenue............................................. 6,138 6,740
Other revenue............................................... 873 732
------- -------
Total revenue..................................... 47,626 79,638
Cost of services............................................ 25,937 45,396
Cost of products sold....................................... 4,972 5,205
Depreciation................................................ 1,238 1,698
------- -------
Gross profit.............................................. 15,479 27,339
Selling, general and administrative expenses(a)............. 10,449 18,308
Amortization................................................ 64 605
------- -------
Operating income.......................................... 4,966 8,426
Interest and other expenses, net............................ 139 809
------- -------
Income before income taxes.................................. 4,827 7,617
Provision for income taxes(b)............................... 1,794 3,118
------- -------
Net income.................................................. $ 3,033 $ 4,499
======= =======
Net income per share........................................ $ 0.77
=======
Weighted average shares outstanding......................... 5,856
=======
</TABLE>
- ---------------
(a) Adjusted for pro forma Compensation Differential of $1,976 for 1995 and $918
for 1996.
(b) Adjusted for pro forma provision for taxes of $1,631 for 1995 and $446 for
1996.
41
<PAGE> 44
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. QUARTERLY INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
FOUNDING
COMPANIES F.Y.I. F.Y.I.
COMBINED INCORPORATED SUPPLEMENTAL F.Y.I. INCORPORATED INCORPORATED SUPPLEMENTAL
--------- ------------ ------------ --------------------------- ------------ ------------
ONE
MONTH 1996 QUARTER ENDED
ENDED ---------------------------------------------------------
JAN 31 MAR 31 MAR 31 JUN 30 SEP 30 DEC 31 YEAR ENDED DEC 31, 1996
--------- ------------ ------------ ------- ------- ------- ---------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA):
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue........ $3,916 $9,208 $13,124 $17,063 $22,613 $26,838 $75,222 $79,638
Gross profit......... 1,323 3,078 4,401 5,951 7,828 9,158 26,016 27,339
Earnings before
taxes.............. (135) 638 503 1,614 1,899 2,683 6,834 6,699
Net income (loss).... (5) 385 380 962 1,131 1,553 4,031 4,026
Net income (loss) per
share.............. $ 0.00 $ 0.07 $ 0.07 $ 0.17 $ 0.19 $ 0.24 $ 0.69 $ 0.69
Weighted average
shares
outstanding........ 5,396 5,396 5,396 5,564 5,894 6,571 5,856 5,856
Pro forma earnings
before taxes....... 548 646 1,194 1,624 2,069 2,730 7,069 7,617
Pro forma net
income............. 327 390 717 968 1,233 1,581 4,172 4,499
Pro forma net income
per share.......... $ 0.06 $ 0.07 $ 0.13 $ 0.17 $ 0.21 $ 0.24 $ 0.71 $ 0.77
</TABLE>
Amounts reported differ from amounts previously reported due to the
pooling-of-interests discussed in Note 7.
42
<PAGE> 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To F.Y.I. Incorporated:
We have audited the accompanying combined balance sheets of the Founding
Companies (Note 1) as of December 31, 1994 and 1995 and January 31, 1996, and
the related combined statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995 and the
one month ended January 31, 1996. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined financial statements based on our audits. We did not
audit the financial statements of Recordex Services, Inc., as of and for the two
years in the period ended December 31, 1994 which statements reflect total
assets of 14% of the combined totals as of December 31, 1994, and total revenue
of 14% and 16% of the combined totals for each of the two years in the period
ended December 31, 1994. Those statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for those entities, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of the Founding Companies as of December 31,
1994 and 1995 and January 31, 1996, and the results of their combined operations
and their combined cash flows for each of the three years in the period ended
December 31, 1995 and the one month ended January 31, 1996, in accordance with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
November 4, 1996
43
<PAGE> 46
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
44
<PAGE> 47
FOUNDING COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JANUARY 31,
1994 1995 1996
------- ------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,056 $ 1,742 $ 1,581
Accounts and notes receivable, less allowance for doubtful
accounts and notes of $677, $562 and $581,
respectively........................................... 7,802 7,939 7,881
Accounts receivable, officer and employee................. 971 692 412
Accounts receivable, affiliates........................... 280 279 256
Inventory................................................. 257 331 298
Current portion of deferred income taxes.................. 78 24 24
Prepaid and other current assets.......................... 216 320 326
------- ------- -------
Total current assets.............................. 10,660 11,327 10,778
------- ------- -------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 6,142 6,467 4,824
INTANGIBLE ASSETS, net of accumulated amortization
of $17, $82 and $88, respectively......................... 836 770 764
ACCOUNTS RECEIVABLE, OFFICERS -- LONG-TERM.................. 795 890 73
OTHER NONCURRENT ASSETS..................................... 262 193 111
NOTES RECEIVABLE, LONG-TERM................................. 435 34 34
------- ------- -------
Total assets...................................... $19,130 $19,681 $16,584
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 5,674 $ 5,587 5,467
Short-term obligations.................................... 1,970 1,430 4,213
Current maturities of long-term obligations............... 715 1,250 1,109
Officers payable -- short-term............................ 520 1,064 1,064
Unearned revenue.......................................... 377 333 374
------- ------- -------
Total current liabilities......................... 9,256 9,664 12,227
------- ------- -------
LONG-TERM OBLIGATIONS, net of current....................... 3,107 2,738 1,528
LONG-TERM OBLIGATIONS -- AFFILIATES, net of current......... 43 19 195
LONG-TERM OBLIGATIONS -- OFFICERS, net of current........... 35 20 20
DEFERRED INCOME TAXES....................................... 229 129 122
OTHER NONCURRENT LIABILITIES................................ 50 -- --
------- ------- -------
Total liabilities................................. 12,720 12,570 14,092
------- ------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock (Note 9)..................................... 173 173 173
Additional paid-in capital................................ 775 775 579
Retained earnings......................................... 5,463 6,163 1,740
------- ------- -------
6,411 7,111 2,492
Less -- Treasury stock, 10,000 shares in 1994, no par,
$1,000 assigned value.................................. 1 -- --
------- ------- -------
Total stockholders' equity........................ 6,410 7,111 2,492
------- ------- -------
Total liabilities and stockholders' equity........ $19,130 $19,681 $16,584
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
45
<PAGE> 48
FOUNDING COMPANIES
COMBINED STATEMENTS OF OPERATIONS (NOTE 1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ONE
MONTH
FISCAL YEAR ENDED DECEMBER 31, ENDED
------------------------------ JANUARY 31,
1993 1994 1995 1996
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Service revenue.................................... $32,067 $36,081 $40,615 $3,487
Product revenue.................................... 5,123 5,923 6,138 395
Other revenue...................................... 1,206 1,028 873 34
------- ------- ------- ------
Total revenue.............................. 38,396 43,032 47,626 3,916
COST OF SERVICES..................................... 20,318 23,650 25,937 2,196
COST OF PRODUCTS SOLD................................ 4,464 4,892 4,972 307
DEPRECIATION......................................... 883 1,055 1,238 90
------- ------- ------- ------
Gross profit............................... 12,731 13,435 15,479 1,323
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES........ 11,045 11,836 12,489 1,503
------- ------- ------- ------
Operating income (loss).................... 1,686 1,599 2,990 (180)
OTHER (INCOME) EXPENSE:
Interest expense................................... 339 388 492 24
Interest income.................................... (40) (84) (139) --
Other.............................................. (51) (275) (214) (69)
------- ------- ------- ------
Income (loss) before income taxes.......... 1,438 1,570 2,851 (135)
PROVISION (BENEFIT) FOR INCOME TAXES................. 218 211 163 (130)
------- ------- ------- ------
NET INCOME (LOSS).................................... $ 1,220 $ 1,359 $ 2,688 $ (5)
======= ======= ======= ======
PRO FORMA DATA (Unaudited -- See Note 3):
HISTORICAL NET INCOME................................ $ 1,220 $ 1,359 $ 2,688 $ (5)
PRO FORMA COMPENSATION DIFFERENTIAL.................. 1,715 1,855 1,976 683
PRO FORMA PROVISION FOR INCOME TAXES................. 1,043 1,045 1,631 351
------- ------- ------- ------
PRO FORMA NET INCOME................................. $ 1,892 $ 2,169 $ 3,033 $ 327
======= ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
46
<PAGE> 49
FOUNDING COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 1)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TREASURY
---------------- PAID-IN RETAINED ---------------- STOCK TOTAL
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT SUBSCRIBED EQUITY
------- ------ ------- -------- ------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992....... 208,109 $173 $775 $ 3,850 10,000 $ (1) $ -- $ 4,797
Dividends declared............. -- -- -- (823) -- -- -- (823)
Adjustment to conform fiscal
year-ends of certain combined
companies.................... -- -- -- 29 -- -- -- 29
Net income..................... -- -- -- 1,220 -- -- -- 1,220
------- ---- ---- ------- ------- ---- --- -------
BALANCE, December 31, 1993....... 208,109 173 775 4,276 10,000 (1) -- 5,223
Dividends declared............. -- -- -- (401) -- -- -- (401)
Adjustment to conform fiscal
year-ends of certain
combined companies........... -- -- -- 229 -- -- -- 229
Net income..................... -- -- -- 1,359 -- -- -- 1,359
------- ---- ---- ------- ------- ---- --- -------
BALANCE, December 31, 1994....... 208,109 173 775 5,463 10,000 (1) -- 6,410
Reissuance of treasury stock... -- -- -- -- (10,000) 1 (1) --
Dividends declared............. -- -- -- (2,032) -- -- -- (2,032)
Adjustment to conform fiscal
year-ends of certain combined
companies.................... -- -- -- 44 -- -- 1 45
Net income..................... -- -- -- 2,688 -- -- -- 2,688
------- ---- ---- ------- ------- ---- --- -------
BALANCE, December 31, 1995....... 208,109 173 775 6,163 -- -- -- 7,111
Dividends declared............. -- -- -- (4,418) -- -- -- (4,418)
Debt assumed................... (196) (196)
Net income (loss).............. -- -- -- (5) -- -- -- (5)
------- ---- ---- ------- ------- ---- --- -------
BALANCE, January 31, 1996........ 208,109 $173 $579 $ 1,740 -- $ -- $ -- $ 2,492
======= ==== ==== ======= ======= ==== === =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
47
<PAGE> 50
FOUNDING COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ONE
FISCAL YEAR ENDED MONTH
DECEMBER 31, ENDED
--------------------------- JANUARY 31,
1993 1994 1995 1996
------- ------- ------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,220 $ 1,359 $ 2,688 $ (5)
Adjustment to reconcile net income to net cash provided
by operating activities-
Amortization and depreciation......................... 995 1,115 1,302 108
Loss (gain) on sale-retirement of assets.............. -- (38) (3) --
Loss on investment.................................... -- 17 -- --
Deferred tax expense (benefit)........................ 39 (555) (60) (7)
Changes in operating assets and liabilities-
Accounts receivable................................ (446) (1,058) 220 (355)
Prepaid expenses and other assets.................. (54) (142) (53) 97
Stockholder receivable............................. -- (272) 331 252
Inventory.......................................... (164) 171 (74) 34
Accounts payable................................... 557 1,366 (162) 33
Unearned revenue................................... 74 94 (44) 41
Other................................................. 77 (46) (62) (128)
------- ------- ------- -------
Net cash provided by operating activities...... 2,298 2,011 4,083 70
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................. (1,119) (1,734) (1,423) (84)
Sale of property, plant and equipment..................... 40 203 76 17
Purchase of intangibles................................... -- (438) -- --
Other, net................................................ (70) (4) -- --
------- ------- ------- -------
Net cash used for investing activities......... (1,149) (1,973) (1,347) (67)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on short-term obligations.............. (425) (578) (2,063) (19)
Principal payments on long-term obligations............... (1,802) (443) (704) (51)
Proceeds from short-term borrowing........................ 427 1,068 1,825 2,790
Proceeds from long-term borrowings........................ 1,605 316 642 --
Borrowings (payments) on line of credit................... 155 38 219 185
Payment of dividends...................................... (823) (401) (2,032) (3,069)
Advances to parent........................................ (352) (98) -- --
Other, net................................................ -- 78 55 --
Net change in cash due to conforming fiscal year-end...... (13) (104) 8 --
------- ------- ------- -------
Net cash used for financing activities......... (1,228) (124) (2,050) (164)
------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (79) (86) 686 (161)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR................................................... 1,221 1,142 1,056 1,742
------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 1,142 $ 1,056 $ 1,742 $ 1,581
======= ======= ======= =======
SUPPLEMENTAL DATA:
Interest paid............................................. $ 334 $ 379 $ 486 $ 24
Income taxes paid......................................... 55 67 296 3
NONCASH TRANSACTIONS:
Equipment acquired through capital lease obligations...... $ 117 $ 310 $ 225 --
Sale of investment........................................ -- 13 -- --
Acquisition of intangible assets with debt................ -- 414 -- --
Note receivable received in connection with sale of
building................................................ 550 -- -- --
Dividend of note receivable............................... -- -- -- 425
Dividend of property and equipment........................ -- -- -- 1,607
Dividend of long-term obligation.......................... -- -- -- 1,374
Dividend of advances to parent............................ -- -- -- 835
Dividend of short-term obligation......................... -- -- -- 144
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
48
<PAGE> 51
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Concurrently with the initial public offering of its common stock (the
"IPO"), F.Y.I. Incorporated ("F.Y.I.") merged with the following seven companies
(the "Founding Companies"): Imagent Corporation and Mobile Information Services
("Imagent"); Melanson and Associates, Inc. ("Melanson") dba Researchers and Bay
Area Micrographics ("Researchers"); Recordex Services, Inc. (a wholly owned
subsidiary of Paragon Management Group, Inc.) ("Recordex"); C.&T. Management
Services, Inc. dba DPAS, and Qualidata, Inc. dba The Mail House ("DPAS");
Leonard Archives, Inc. ("Leonard"); Deliverex, Incorporated ("DLX") and
Peninsula Records Management, a wholly owned subsidiary of DLX ("PRM"), and an
affiliate, ASK Record Management, Inc. ("ASK") (collectively "Deliverex"); and
Permanent Records, Inc. ("Permanent"). The merger will be effected by FYI
through issuance of its common stock and cash.
The Founding Companies are providers of document management services to
three primary client groups: healthcare institutions, professional services
firms, and financial institutions.
2. BASIS OF PRESENTATION:
Simultaneously with the closing of the IPO, F.Y.I. and separate wholly
owned subsidiaries of F.Y.I. merged with the Founding Companies (the
"Acquisitions"). The accompanying combined financial statements and related
notes represent the combined financial position, results of operations and cash
flows of the Founding Companies excluding FYI without giving effect to the
Mergers and the Offering. The assets and liabilities of the Founding Companies
are reflected at their historical amounts. The Founding Companies were not under
common control or management during any of the periods presented.
Melanson has previously reported on a fiscal year ending July 31. As such,
the accounts of Melanson for its 1993 fiscal year has been combined with the
accounts of the other Founding Companies for the year ended December 31, 1993.
The fiscal 1994 and 1995 accounts of Melanson have been recast to a December 31
year-end and have been combined with the accounts of the other Founding
Companies for the years ended December 31, 1994 and 1995. The exclusion of
Melanson's net income for the period from August 1 through December 31, 1993 of
$229,000 is reflected as an adjustment to retained earnings in the December 31,
1994 combined statement of stockholders' equity. The results of operations
related to the adjustment to retained earnings for Melanson included revenues of
$3,820,000 and costs and expenses of $3,591,000 from August 1, through December
31, 1993.
Deliverex's affiliate, ASK, has previously reported on a fiscal year ending
December 31. DLX and PRM have previously reported on a fiscal year ending
September 30. The 1995 accounts of DLX and PRM have been recast to a December 31
year-end and have been combined with the accounts of the other Founding
Companies for the year ended December 31, 1995. The exclusion of DLX and PRM's
net income for the period from October 1 through December 31, 1994 of $44,000 is
reflected as an adjustment to retained earnings in the December 31, 1995
combined statement of stockholders' equity. The results of operations related to
the adjustment to retained earnings for DLX and PRM included revenue of $553,000
and costs and expenses of $509,000 from October 1 through December 31, 1994.
The affiliate of Imagent Corporation, Mobile Information Services, had
previously reported on a fiscal year ending June 30 through fiscal 1992. As
such, the accounts of the affiliate for its 1992 fiscal year have been combined
with the accounts of the other Founding Companies for the years ended December
31, 1992. The exclusion of the affiliate's net income for the period from July 1
through December 31, 1992 of $29,000 is reflected as an adjustment to retained
earnings in the December 31, 1992 combined statement of stockholders' equity.
The results of operations related to the adjustment to retained earnings for the
affiliate of Imagent Corporation included revenue of $656,000 and costs and
expenses of $627,000 from July 1 through December 31, 1992.
49
<PAGE> 52
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Founding Companies consider highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
Inventory
Inventory is stated at the lower of cost or market with cost determined on
a first-in, first-out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
computed using straight-line and accelerated methods over the estimated useful
lives of the assets. Leasehold improvements are depreciated over the lesser of
the useful life or the term of the lease.
Intangible Assets
Intangible assets consist primarily of customer lists, acquired by a
founding company in October of 1994, which are amortized over 15 years. The
Founding Companies continually evaluate whether events and circumstances
indicate the remaining estimated useful life of intangible assets may warrant
revisions or that the remaining balance of intangibles or other long-lived
assets may not be recoverable. To make this evaluation, the Founding Companies
use an estimate of undiscounted net income over the remaining life of the
intangibles or other long-lived assets. The Financial Accounting Standards Board
has issued Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS 121), which established accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill. Adoption is
required in financial statements for fiscal years beginning after December 15,
1995. FYI and the Founding Companies do not expect the adoption of SFAS 121 to
have any material effect on the combined financial statements. FYI and the
Founding Companies will adopt SFAS 121 in 1996.
Revenue Recognition
Revenue is recognized when the services are rendered, or products are
shipped, to the Founding Companies' customers. Unearned revenue represents
customer storage and certain services which are billed in advance.
Income Taxes
Income taxes are provided based upon the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," for the
Founding Companies that are C corporations for income tax purposes, which
requires recognition of deferred income taxes under the asset and liability
method.
Certain of the Founding Companies are S corporations or a sole
proprietorship for income tax purposes and, accordingly, any income tax
liabilities are the responsibility of the respective owners. The historical
combined net income of the Founding Companies includes no provision for income
taxes of the S corporations or sole proprietorship.
Deferred income taxes are provided for temporary differences in the
recognition of revenue and expenses for tax and financial reporting purposes.
Temporary differences result primarily from accelerated depreciation and
amortization for tax purposes, deferred contract revenue being taxed when
billed, cash basis of accounting
50
<PAGE> 53
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
for tax purposes versus accrual basis accounting for financial reporting
purposes, and various accruals and reserves being deductible for tax purposes in
different periods.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to make their
presentation consistent with the current year.
Pro Forma Net Income (Unaudited)
The Founding Companies have been managed throughout the periods presented
as independent private companies and represent a variety of tax structures (S
corporation, C corporation, and sole proprietorship). Therefore, selling,
general, and administrative expenses for the periods presented reflect
compensation and related benefits that owners and certain key employees received
from their respective businesses during these periods. These owners and key
employees have agreed to certain reductions in salaries and benefits in
connection with the Mergers. Each stockholder (other than one Paragon Management
Group stockholder) has entered into a three year employment agreement with FYI
which contains a set base salary, participation in any future FYI incentive
plans, four weeks vacation, car allowance, health benefits, and a two-year
covenant-not-to-compete following termination of such person's employment. The
employment agreements provide for the following compensation levels by company:
<TABLE>
<CAPTION>
COMPANY COMPENSATION
------- ------------
<S> <C>
Imagent..................................................... $ 250,000
Researchers................................................. 250,000
Recordex.................................................... 300,000
DPAS........................................................ 220,000
Leonard..................................................... 100,000
Deliverex................................................... 247,000
Permanent................................................... 120,000
----------
$1,487,000
==========
</TABLE>
The unaudited pro forma data present compensation at the level the officers
and owners of the Founding Companies have agreed to receive subsequent to the
Offering. In addition, the pro forma data present the provision for income taxes
as if all entities had been subject to federal and state income taxes and
adjusted for the impact of the compensation differential discussed above.
51
<PAGE> 54
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
The activity in the allowance for doubtful accounts and notes receivable is
as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1993
Allowance for doubtful accounts........ $599 $715 $(572) $742
==== ==== ===== ====
Year Ended December 31, 1994
Allowance for doubtful accounts........ $742 $835 $(900) $677
==== ==== ===== ====
Year Ended December 31, 1995
Allowance for doubtful accounts........ $677 $710 $(825) $562
==== ==== ===== ====
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------
YEARS 1994 1995
------------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Land................................................ N/A $ 415 $ 415
Buildings and improvements.......................... 7-18 2,203 2,194
Leasehold improvements.............................. 5-10 452 477
Vehicles............................................ 5-7 1,114 1,163
Machinery and equipment............................. 5-15 8,223 9,589
Furniture and fixtures.............................. 5-15 382 500
------- -------
12,789 14,338
Less -- Accumulated depreciation and amortization... 6,647 7,871
------- -------
$ 6,142 $ 6,467
======= =======
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued liabilities.................... $3,298 $3,255
Accrued compensation and benefits........................... 731 827
Sales tax payable........................................... 119 94
Income tax payable.......................................... 907 818
Other accrued liabilities................................... 619 593
------ ------
$5,674 $5,587
====== ======
</TABLE>
52
<PAGE> 55
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>
53
<PAGE> 56
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>
54
<PAGE> 57
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>
55
<PAGE> 58
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>
56
<PAGE> 59
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.
57
<PAGE> 60
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
pre-tax 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 post-employment or post-retirement 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.
58
<PAGE> 61
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>
59
<PAGE> 62
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED-PARTY TRANSACTIONS:
Leasing Transactions
Leonard leases its operating facilities from Leonard Investments and a
former stockholder. These leases are for various lengths and annual amounts. The
rental expense for these operating leases for the years ended December 31, 1993,
1994, and 1995 was approximately $189,000, $188,000, and $189,000, respectively.
Leonard also has obligations to Leonard Investments. Leonard Investments is a
partnership owned by the stockholder and former stockholder of Leonard.
Researchers leases office facilities in Sacramento and San Francisco,
California, along with certain equipment from Researcher's principal
shareholder. The leases provide for lease terms on a month-to-month basis as
well as over five to ten-year periods commencing on August 1, 1991, through July
31, 2001, with monthly lease payments of $2,000 to $9,000. The total lease
payments to Researcher's principal shareholder for these operating leases for
the years ended July 31, 1993, and December 31, 1994 and 1995 was approximately
$187,000, $177,000, and $242,000, respectively. The lease agreements provide
that the Researchers pay all related taxes and insurance.
Permanent entered into an agreement to lease a building, beginning on July
1, 1995, from Permanent's stockholders. Lease expense per year will be
approximately $90,000.
Other Transactions
Researchers purchases digital coding services from an affiliated entity,
Researchers LLC. Researchers' principal shareholder has a controlling interest
in Researchers LLC. During the years ended December 31, 1994 and 1995,
Researchers incurred expenses of $28,000 and $11,000, and had billings to
Researchers LLC of approximately $4,000 and $40,000.
Receivables and Advances
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------ ------
<S> <C> <C>
Accounts receivable, officer and employee --
Deliverex -- noninterest bearing.......................... $ 315 $ 315
Leonard -- noninterest bearing............................ 14 67
Researchers -- noninterest bearing........................ 642 310
------ ------
971 692
Accounts receivable, affiliates --
Leonard -- noninterest bearing............................ 280 259
Researchers -- noninterest bearing........................ -- 20
------ ------
280 279
------ ------
Accounts receivable, officers -- long-term --
Deliverex -- noninterest bearing.......................... 74 74
Recordex -- noninterest bearing........................... 721 816
------ ------
795 890
------ ------
Total related-party receivables................... $2,046 $1,861
====== ======
</TABLE>
Leonard has guaranteed a promissory note in the principal amount of
approximately $636,000 as of December 31, 1995, with interest at 10%, payable in
monthly installments in varying amounts through December 1, 2004. The promissory
note is from the stockholder to the former joint owner in Leonard.
60
<PAGE> 63
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Leonard's guarantee and security interest are subordinate to all other notes
payable to the bank and the Detroit Economic Growth Council.
13. COMMITMENTS AND CONTINGENCIES:
Litigation
The Founding Companies are, from time to time, parties to litigation
arising in the normal course of their business, most of which involve claims for
workers' compensation, unemployment and property damage incurred in connection
with their operations. Management of the Founding Companies believes that none
of this litigation will have a material adverse effect on the combined financial
position or combined results of operations of the Founding Companies.
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.
61
<PAGE> 64
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
62
<PAGE> 65
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.
63
<PAGE> 66
IMAGENT CORPORATION AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
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.
64
<PAGE> 67
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.
65
<PAGE> 68
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.
66
<PAGE> 69
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 revenue 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
67
<PAGE> 70
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>
68
<PAGE> 71
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>
69
<PAGE> 72
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 present 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 present 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.
70
<PAGE> 73
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's stockholders. 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.
71
<PAGE> 74
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
72
<PAGE> 75
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.
73
<PAGE> 76
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.
74
<PAGE> 77
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.
75
<PAGE> 78
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.
76
<PAGE> 79
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
77
<PAGE> 80
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 consist 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
78
<PAGE> 81
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>
79
<PAGE> 82
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, and 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 post-retirement or post-employment 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>
80
<PAGE> 83
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.
81
<PAGE> 84
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 present 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 present 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.
82
<PAGE> 85
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
83
<PAGE> 86
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
84
<PAGE> 87
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)
STOCKHOLDER'S 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 stockholder's equity........ $2,668,751 $3,226,076
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
85
<PAGE> 88
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.
86
<PAGE> 89
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.
87
<PAGE> 90
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.
88
<PAGE> 91
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.
89
<PAGE> 92
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
90
<PAGE> 93
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>
91
<PAGE> 94
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.
92
<PAGE> 95
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.
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:
93
<PAGE> 96
RECORDEX SERVICES, INC.
(A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<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 from time to time, a party to litigation arising in the
normal course of business, most 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 the operations of the Company.
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.)
94
<PAGE> 97
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
95
<PAGE> 98
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.
96
<PAGE> 99
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.
97
<PAGE> 100
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.
98
<PAGE> 101
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.
99
<PAGE> 102
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.
100
<PAGE> 103
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>
101
<PAGE> 104
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>
102
<PAGE> 105
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.
103
<PAGE> 106
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.
104
<PAGE> 107
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.
105
<PAGE> 108
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
106
<PAGE> 109
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.
107
<PAGE> 110
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.
108
<PAGE> 111
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.
109
<PAGE> 112
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.
110
<PAGE> 113
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
111
<PAGE> 114
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>
112
<PAGE> 115
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,
113
<PAGE> 116
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.
114
<PAGE> 117
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.
115
<PAGE> 118
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
116
<PAGE> 119
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.
117
<PAGE> 120
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.
118
<PAGE> 121
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.
119
<PAGE> 122
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.
120
<PAGE> 123
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
121
<PAGE> 124
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.
122
<PAGE> 125
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.
123
<PAGE> 126
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>
124
<PAGE> 127
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.
125
<PAGE> 128
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.
126
<PAGE> 129
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
127
<PAGE> 130
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.
128
<PAGE> 131
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.
129
<PAGE> 132
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.
130
<PAGE> 133
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.
131
<PAGE> 134
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.
132
<PAGE> 135
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, F.Y.I.
Incorporated and Subsidiaries and the individual Founding Companies. See "Index
to Financial Statements."
F.Y.I. acquired, simultaneously with and as a condition to the closing of
the IPO in January 1996, Imagent, Researchers, Recordex, DPAS, Leonard,
Deliverex and Permanent Records (the "Acquisitions"). The Acquisitions have been
accounted for in accordance with GAAP as a combination of the Founding Companies
at historical cost and January 31, 1996 has been used as the effective date of
the Acquisitions. Accordingly, historical financial statements of these Founding
Companies have been combined throughout all periods prior to February 1, 1996 as
if the Founding Companies had always been members of the same operating group.
However, since the Founding Companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance.
In May 1996, the Company acquired B&B and Premier. In June 1996, the
Company acquired all of the non-cash assets of Cook. In August 1996, the Company
acquired Medical Record. CMRS and Texas Medical Record have previously reported
on a fiscal year ending February 29 and Minnesota Medical Record has previously
reported on a fiscal year ending September 30. As such, the accounts of CMRS,
Texas Medical Record and Minnesota Medical Record for their last fiscal year
have been combined with the results of F.Y.I. for the year ended December 31,
1995. The results of CMRS, Texas Medical Record and Minnesota Medical Record for
the interim period from January 1, 1996 through the date of acquisition have
been recast and combined with the results of F.Y.I. for the year ended December
31, 1996. Also, as of August 1996, the Company acquired ZIA. In October 1996,
the Company acquired Carton, and in November 1996, the Company acquired DISC.
All of these acquisitions are accounted for under the purchase method of
accounting.
The unaudited pro forma financial statements of F.Y.I. for the year ended
December 31, 1995 give effect to: (i) the acquisitions of B&B, Premier, Cook,
Medical Record, ZIA, Carton and DISC (collectively, the "Significant
Acquisitions") as if the transactions were consummated as of January 1, 1995 and
(ii) the acquisition of the Founding Companies as if the transactions were
consummated as of January 1, 1995.
The unaudited pro forma financial statements of F.Y.I. for the year ended
December 31, 1996 are based upon:
(i) the audited statement of operations of F.Y.I. for the period from
February 1, 1996 to December 31, 1996 combined with the audited statement
of operations for the Founding Companies for the one month ended January
31, 1996;
(ii) the unaudited statements of operations for B&B, Premier, Cook,
ZIA, Medical Record, Carton and DISC from January 1, 1996 to the respective
effective date of the acquisition.
The pro forma financial statements have been prepared based upon certain
assumptions and include all adjustments as detailed in the Notes to Pro Forma
Financial Statements.
The Company has preliminarily analyzed the savings that it expects to be
realized by consolidating certain general and administrative functions,
including reductions in accounting, audit, insurance and benefit plan expenses.
In addition, the Company has realized benefits from: (i) the reduction in
interest payments related to the prepayment of outstanding Founding Company
debt; (ii) its ability to borrow at lower interest rates than the Founding
Companies; and (iii) the interest earned on the net proceeds of the IPO
remaining after payment of the expenses of the IPO and the cash portion of the
consideration for the Founding Companies. These savings are offset by the costs
of being a public company and the incremental increase in costs related to the
Company's new management. Neither the savings nor the costs have been included
in the
133
<PAGE> 136
pro forma financial information of F.Y.I. Incorporated and Subsidiaries for the
periods prior to the Acquisitions.
The pro forma financial data do not purport to represent what the Company's
financial position or results of operations would actually have been if such
transaction in fact had occurred on those dates or to project the Company's
financial position or results of operations for any future period.
134
<PAGE> 137
F.Y.I. INCORPORATED AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
F.Y.I. FOUNDING SIGNIFICANT PRO FORMA
INCORPORATED COMPANIES ADJUST ACQUISITIONS ADJUST COMBINED
------------ --------- ------ ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Service revenue....................... $ -- $40,615 $ -- $37,861 $ (299)(H) $78,177
Product revenue....................... -- 6,138 -- 1,550 -- 7,688
Other revenue......................... -- 873 -- 35 -- 908
------ ------- ------ ------- ------- -------
Total revenue................... -- 47,626 -- 39,446 (299) 86,773
COST OF SERVICES........................ -- 25,937 -- 22,621 (299)(H) 48,259
COST OF PRODUCTS SOLD................... -- 4,972 -- 1,250 -- 6,222
DEPRECIATION............................ -- 1,238 -- 979 (336)(A) 1,881
------ ------- ------ ------- ------- -------
Gross profit.................... -- 15,479 -- 14,596 336 30,411
SELLING, GENERAL AND ADMINISTRATIVE..... -- 12,425 (1,976)(E) 10,079 (1,574)(B) 18,954
AMORTIZATION............................ 64 114 952(A) 1,130
------ ------- ------ ------- ------- -------
Operating income................ -- 2,990 1,976 4,403 958 10,327
OTHER (INCOME) EXPENSE:
Interest expense...................... -- 492 -- 327 1,569(G) 2,388
Interest income....................... -- (139) -- (59) -- (198)
Other................................. -- (214) -- 261 (38)(I) 9
------ ------- ------ ------- ------- -------
Income before income taxes...... -- 2,851 1,976 3,874 (573) 8,128
PROVISION FOR INCOME TAXES.............. -- 163 1,631(F) 130 1,191(C) 3,115
------ ------- ------ ------- ------- -------
NET INCOME.............................. $ -- $ 2,688 $ 345 $ 3,744 $(1,764) $ 5,013
====== ======= ====== ======= ======= =======
NET INCOME PER COMMON SHARE............. $ 0.82
=======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................... 5,286 820(D) 6,106
====== ======= =======
</TABLE>
135
<PAGE> 138
F.Y.I. INCORPORATED AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
F.Y.I. FOUNDING SIGNIFICANT PRO FORMA
INCORPORATED COMPANIES ADJUST ACQUISITIONS ADJUST COMBINED
------------ --------- ------ ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Service revenue.......................... $68,679 $3,487 $ -- $23,060 $ (150)(H) $ 95,076
Product revenue.......................... 6,345 395 -- 362 -- 7,102
Other revenue............................ 698 34 -- 11 -- 743
------- ------ ------ ------- ------- --------
Total revenue...................... 75,722 3,916 -- 23,433 (150) 102,921
COST OF SERVICES........................... 43,200 2,196 -- 13,192 (150)(H) 58,438
COST OF PRODUCTS SOLD...................... 4,898 307 -- 313 -- 5,518
DEPRECIATION............................... 1,608 90 -- 495 (119)(A) 2,074
------- ------ ------ ------- ------- --------
Gross profit....................... 26,016 1,323 -- 9,433 119 36,891
SELLING, GENERAL AND ADMINISTRATIVE........ 17,729 1,497 (918)(E) 6,195 (1,341)(B) 23,162
AMORTIZATION............................... 599 6 82 472(A) 1,159
------- ------ ------ ------- ------- --------
Operating income................... 7,688 (180) 918 3,156 988 12,570
OTHER (INCOME) EXPENSE
Interest expense......................... 1,058 24 -- 132 943(G) 2,157
Interest income.......................... (284) -- -- (15) -- (299)
Other.................................... 80 (69) -- 136 25(I) 172
------- ------ ------ ------- ------- --------
Income before income taxes......... 6,834 (135) 918 2,903 20 10,540
PROVISION FOR INCOME TAXES................. 2,803 (130) 445(F) 214 954(C) 4,286
------- ------ ------ ------- ------- --------
NET INCOME................................. $ 4,031 $ (5) $ 473 $ 2,689 $ (934) $ 6,254
======= ====== ====== ======= ======= ========
NET INCOME PER COMMON SHARE................ $ 0.69 $ 0.99
======= ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING.............................. 5,856 461(D) 6,317
======= ======= ========
</TABLE>
136
<PAGE> 139
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
THE PRO FORMA ADJUSTMENTS TO THE ACCOMPANYING STATEMENTS OF OPERATIONS ARE
SUMMARIZED BELOW:
A. Adjustment to depreciation and amortization expense related to the
preliminary purchase price allocations.
B. To record the difference between the compensation paid to the stockholders
of B&B, Premier, ZIA and Medical Record for the historical periods presented
and the F.Y.I. employment contract compensation to the stockholders.
C. Adjustment of the federal and state income tax provisions based on the pro
forma combined operations.
D. To adjust the weighted average shares outstanding to reflect the pro forma
effect of the shares issued for the purchase of B&B, Premier, ZIA, Medical
Record, Carton and DISC.
E. To record the difference between the compensation paid to the stockholders
of the Founding Companies and Rust and the F.Y.I. employment contract
compensation for the one month ended January 31, 1996 and the year ended
December 31, 1995.
F. Adjustment of the federal and state income tax provisions based on the pro
forma combined operations of F.Y.I. and the Founding Companies.
G. To record interest expense on the $17,106,000 term debt issued for the
purchase of Cook, ZIA, Medical Record, Carton and DISC. Proceeds remaining
from the IPO were used for the purchase of B&B and Premier, and a portion of
Cook.
H. To eliminate intercompany revenue between the acquired companies and the
Founding Companies.
I. To eliminate net management fees due to the different fiscal year ends of
Medical Record.
Statements throughout this 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 actual results to differ materially from those in the forward-looking
statements is contained in "Item 1. Business -- Risk Factors" in this Report.
137
<PAGE> 140
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 will be set forth under the caption
"Election of Directors" in the Company's 1997 Proxy Statement, which will be
filed not later than 120 days after the end of the Company's fiscal year end
December 31, 1996 and which is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 will be set forth under the caption
"Executive Compensation" in the Company's 1997 Proxy Statement, which will be
filed not later than 120 days after the end of the Company's fiscal year end
December 31, 1996 and which is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 will be set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's 1997 Proxy Statement, which will be filed not later than 120 days
after the end of the Company's fiscal year end December 31, 1996 and which is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 will be set forth under the caption
"Certain Relationships and Related Transactions" in the Company's 1997 Proxy
Statement, which will be filed not later than 120 days after the end of the
Company's fiscal year end December 31, 1996 and which is incorporated herein by
this reference.
138
<PAGE> 141
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are being filed as part of this Report:
(a)(1) The following financial statements are included in Part II,
Item 8 of this Report:
(a)(2) Financial Statement Schedules
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
F.Y.I. INCORPORATED AND SUBSIDIARIES
Report of Independent Public Accountants.................. 25
Consolidated Balance Sheets............................... 26
Consolidated Statements of Operations..................... 27
Consolidated Statements of Stockholders' Equity........... 28
Consolidated Statements of Cash Flows..................... 29
Notes to Consolidated Financial Statements................ 30
FOUNDING COMPANIES
Report of Independent Public Accountants.................. 43
Report of Independent Public Accountants.................. 44
Combined Balance Sheets................................... 45
Combined Statements of Operations......................... 46
Combined Statements of Stockholders' Equity............... 47
Combined Statements of Cash Flows......................... 48
Notes to Combined Financial Statements.................... 49
IMAGENT CORPORATION AND RELATED COMPANY
Report of Independent Public Accountants.................. 62
Combined Balance Sheets................................... 63
Combined Statements of Operations......................... 64
Combined Statements of Stockholders' Equity............... 65
Combined Statements of Cash Flows......................... 66
Notes to Combined Financial Statements.................... 67
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
Report of Independent Public Accountants.................. 72
Combined Balance Sheets................................... 73
Combined Statements of Operations......................... 74
Combined Statements of Stockholders' Equity............... 75
Combined Statements of Cash Flows......................... 76
Notes to Combined Financial Statements.................... 77
RECORDEX SERVICES, INC.
Report of Independent Public Accountants.................. 83
Report of Independent Public Accountants.................. 84
Balance Sheets............................................ 85
Statements of Operations.................................. 86
Statements of Changes in Stockholder's Equity............. 87
Statements of Cash Flows.................................. 88
Notes to Financial Statements............................. 89
LEONARD ARCHIVES, INC.
Report of Independent Public Accountants.................. 95
Balance Sheets............................................ 96
</TABLE>
139
<PAGE> 142
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statements of Operations.................................. 97
Statements of Stockholders' Equity........................ 98
Statements of Cash Flows.................................. 99
Notes to Financial Statements............................. 100
C. & T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
Report of Independent Public Accountants.................. 106
Combined Balance Sheets................................... 107
Combined Statements of Operations......................... 108
Combined Statements of Stockholders' Equity............... 109
Combined Statements of Cash Flows......................... 110
Notes to Combined Financial Statements.................... 111
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
Report of Independent Public Accountants.................. 116
Combined Balance Sheets................................... 117
Combined Statements of Operations......................... 118
Combined Statements of Stockholders' Equity............... 119
Combined Statements of Cash Flows......................... 120
Notes to Combined Financial Statements.................... 121
PERMANENT RECORDS, INC.
Report of Independent Public Accountants.................. 127
Balance Sheets............................................ 128
Statements of Operations.................................. 129
Statements of Stockholders' Equity........................ 130
Statements of Cash Flows.................................. 131
Notes to Financial Statements............................. 132
</TABLE>
PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<S> <C>
F.Y.I. INCORPORATED AND SUBSIDIARIES
Pro Forma Statement of Operations for the Years Ended
December 31, 1995 and December 31, 1996 (unaudited).... 133
Notes to Pro Forma Statements of Operations (unaudited)... 137
</TABLE>
All other schedules are omitted because they are not applicable, not
required or the required information is in the Financial Statements or the Notes
thereto.
(a)(3) The following Exhibits are filed as part of this Report as
required by Item 601 of Regulation S-K. The Exhibits designated
by an asterisk are management contracts and compensatory plans
and arrangements required to be filed as Exhibits to this
Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I., Incorporated, Deliverex,
Incorporated, ASK Record Management, Inc., Deliverex
Acquisition Corp., and the Stockholders named therein
(Incorporated by reference to Exhibit 2.1 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
2.2 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I. Incorporated, C. & T.
Management Services, Inc., Qualidata, Inc., DPAS
Acquisition Corp., and the Stockholders named therein
(Incorporated by reference to Exhibit 2.2 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
</TABLE>
140
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.3 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I. Incorporated, Melanson &
Associates, Inc., Bay Area Micrographics, Researchers
Acquisition Corp., and the Stockholders named therein
(Incorporated by reference to Exhibit 2.3 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
2.4 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I. Incorporated, Paragon
Management Group, Inc., Recordex Acquisition Corp.,
Recordex Services, Inc., and the Stockholders named
therein (Incorporated by reference to Exhibit 2.4 to
Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
2.5 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I. Incorporated, Permanent
Records Inc., Permanent Records Acquisition Corp., and
the Stockholders named therein (Incorporated by reference
to Exhibit 2.5 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
2.6 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I. Incorporated, Leonard
Archives Inc., Leonard Acquisition Corp. and the
Stockholders named therein (Incorporated by reference to
Exhibit 2.6 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
2.7 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among Imagent Corporation, Imagent
Acquisition Corp. and the Stockholders named therein
(Incorporated by reference to Exhibit 2.7 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
2.8 -- Agreement and Plan of Reorganization dated as of October
25, 1995, by and among Mobile Information Services
Corporation, Inc., Imagent Acquisition Corp. and the
Stockholders named therein (Incorporated by reference to
Exhibit 2.8 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
2.9 -- First Amendment to Agreement and Plan of Reorganization,
dated as of October 25, 1995, by and among F.Y.I.
Incorporated, Leonard Archives Inc., Leonard Acquisition
Corp. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.9 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-98608) effective January 12, 1996)
2.10 -- First Amendment to Agreement and Plan of Reorganization,
dated as of November 14, 1995, by and among F.Y.I.
Incorporated, C. & T. Management Services, Inc.,
Qualidata, Inc., DPAS Acquisition Corp., and the
Stockholders named therein (Incorporated by reference to
Exhibit 2.10 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
2.11 -- Agreement and Plan of Reorganization, dated as of May 31,
1996, by and among F.Y.I. Incorporated, B&B
(Baltimore-Washington) Acquisition Corp., B&B Information
and Image Management, Inc. and Charles J. Bauer, Jr.
(Incorporated by reference to Exhibit 10.17 to
Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-1084) effective July 11, 1996)
</TABLE>
141
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.12 -- Agreement and Plan of Reorganization, dated as of May 31,
1996, by and among F.Y.I. Incorporated, Premier
Acquisition Corp., Premier Document Management, Inc., PDM
Services, Inc., Brian E. Whiteside, Christopher S. Moore,
Lynnette C. Pomerville and Gary T. Sievert (Incorporated
by reference to Exhibit 10.18 to Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective July 11, 1996)
2.13 -- Asset Purchase Agreement, dated as of June 28, 1996, by
and among F.Y.I. Incorporated, Robert A. Cook Acquisition
Corp., Robert A. Cook and Staff, Inc. and RAC Services,
Inc., Robert A. Cook and Robert A. Cook and Anna M. Cook,
as Co-Trustees of the Cook 1993 Living Trust
(Incorporated by reference to Exhibit 10.19 to
Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-1084) effective July 11, 1996)
2.14 -- Agreement and Plan of Reorganization, dated as of August
30, 1996, by and among F.Y.I. Incorporated, California
Medical Record Service Acquisition Corp., C.M.R.S.
Incorporated and Alan Simon (Incorporated by reference to
Exhibit 2.14 to Post-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-1084) effective September 11, 1996)
2.15 -- Agreement and Plan of Reorganization, dated as of August
30, 1996, by and among F.Y.I. Incorporated, Texas Medical
Record Service Acquisition Corp., Texas Medical Record
Service, Inc., California Medical Record Service
Acquisition Corp. and Karen Jill Simon (Incorporated by
reference to Exhibit 2.15 to Post-Effective Amendment No.
3 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-1084) effective September 11, 1996)
2.16 -- Agreement and Plan of Reorganization, dated as of August
30, 1996, by and among F.Y.I. Incorporated, Minnesota
Medical Record Service Acquisition Corp., Minnesota
Medical Record Service, Inc. and Alan Simon (Incorporated
by reference to Exhibit 2.16 to Post-Effective Amendment
No. 3 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective September 11,
1996)
2.17 -- Agreement and Plan of Reorganization, dated as of August
30, 1996, by and among F.Y.I. Incorporated, ZIA
Acquisition Corp., ZIA Information Analysis Group and the
shareholders named therein (Incorporated by reference to
Exhibit 2.17 to Post-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-1084) effective September 11, 1996)
3.1 -- Amended and Restated Certificate of Incorporation of
F.Y.I. Incorporated (Incorporated by reference to Exhibit
3.1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
3.2 -- By-Laws of F.Y.I. Incorporated (Incorporated by reference
to Exhibit 3.2 to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-98608) effective January
12, 1996)
4 -- Form of certificate evidencing ownership of Common Stock
of F.Y.I. Incorporated (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
10.1* -- F.Y.I. Incorporated 1995 Stock Option Plan (Incorporated
by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
</TABLE>
142
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.2* -- Employment Agreement between F.Y.I. Incorporated and
Thomas C. Walker (Incorporated by reference to Exhibit
10.2 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.3* -- Employment Agreement between F.Y.I. Incorporated and
David Lowenstein (Incorporated by reference to Exhibit
10.3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.4* -- Employment Agreement between F.Y.I. Incorporated and
Jerry F. Leonard, Jr. (Incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
10.5* -- Employment Agreement between F.Y.I. Incorporated and Greg
Melanson (Incorporated by reference to Exhibit 10.5 to
Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.6* -- Employment Agreement between F.Y.I. Incorporated and
Jonathan B. Shaw (Incorporated by reference to Exhibit
10.6 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.7* -- Employment Agreement between F.Y.I. Incorporated and G.
Michael Bellenghi (Incorporated by reference to Exhibit
10.7 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.8 -- Form of Indemnification Agreement between F.Y.I. and each
director (Incorporated by reference to Exhibit 10.8 to
Registrant's Registration Statement on Form S-1
(Registration No. 33-98608) effective January 12, 1996)
10.9* -- Employment Agreement between F.Y.I. Incorporated and Ed
H. Bowman, Jr. (Incorporated by reference to Exhibit 10.9
to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.10 -- Form of Registration Rights Agreement, dated as of
November 14, 1995, by and among Thomas C. Walker, David
Lowenstein and the persons named therein (Incorporated by
reference to Exhibit 10.10 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-98608) effective January 12, 1996)
10.11* -- Warrant issued to Ed H. Bowman, Jr. (Incorporated by
reference to Exhibit 10.11 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-98608) effective January 12, 1996)
10.12 -- Five Year Media Purchase Agreement, dated as of August 9,
1994, between Eastman Kodak Company and Jonathan B. Shaw
(Incorporated by reference to Exhibit 10.12 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
10.13* -- Employment Agreement between F.Y.I. Incorporated and
Robert C. Irvine (Incorporated by reference to Exhibit
10.13 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective February 16,
1996)
</TABLE>
143
<PAGE> 146
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.14 -- Credit Agreement, dated as of April 18, 1996, by and
among F.Y.I. Incorporated and its subsidiaries and Banque
Paribas, IBJ Schroder Bank & Trust, and First Source
Financial LLP (Incorporated by reference to Exhibit 10.14
to Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-1084) effective April 30, 1996)
10.15 -- Lease Agreement between F.Y.I. Incorporated and One
McKinney Plaza, Inc. (Incorporated by reference to
Exhibit 10.15 to Post-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-1084) effective April 30, 1996)
10.16* -- Employment Agreement between F.Y.I. Incorporated and
Margot T. Lebenberg (Incorporated by reference to Exhibit
10.16 to Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-1084) effective July 11, 1996)
10.17 -- First Amendment to Credit Agreement, dated as of June 26,
1996, by and among F.Y.I. Incorporated and its
subsidiaries and Banque Paribas, IBJ Schroder Bank &
Trust, and First Source Financial LLP (Incorporated by
reference to Exhibit 10.20 to Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective July 11, 1996)
10.18* -- Warrant issued to Ed H. Bowman, Jr. (Incorporated by
reference to Exhibit 10.21 to Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective July 11, 1996)
10.19* -- Warrant issued to Robert C. Irvine (Incorporated by
reference to Exhibit 10.22 to Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective July 11, 1996)
10.20* -- Employment Agreement between F.Y.I. Incorporated and
Timothy J. Barker (Incorporated by reference to Exhibit 2
to Post-Effective Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-1084) effective July 11, 1996)
10.21* -- Separation Agreement, dated July 17, 1996, by and between
F.Y.I. Incorporated and Robert C. Irvine (Incorporated by
reference to Exhibit 10.21 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-16057) effective December 11, 1996)
10.22* -- Warrant issued to Timothy J. Barker (Incorporated by
reference to Exhibit 10.22 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-16057) effective December 11, 1996)
10.23 -- Second Amendment to Credit Agreement, dated as of August
30, 1996, by and among F.Y.I. Incorporated and its
subsidiaries and Banque Paribas, IBJ Schroder Bank &
Trust, and First Source Financial LLP (Incorporated by
reference to Exhibit 10.23 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-16057) effective December 11, 1996)
10.24 -- Third Amendment to Credit Agreement, dated as of December
18, 1996, by and among F.Y.I. Incorporated and its
subsidiaries and Banque Paribas, IBJ Schroder Bank &
Trust, and First Source Financial LLP.
21 -- List of subsidiaries of F.Y.I. Incorporated
23.1 -- Consent of Arthur Andersen LLP
</TABLE>
144
<PAGE> 147
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2 -- Consent of Elko, Fischer, McCabe & Rudman, Ltd.
24 -- Power of Attorney (included with the signature page
hereof)
27 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
The Company did not file any Form 8-K Current Reports during the
last quarter of the fiscal year ended December 31, 1996.
145
<PAGE> 148
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
F.Y.I. INCORPORATED
By: /s/ ED H. BOWMAN, JR.
----------------------------------
Ed H. Bowman, Jr.,
Chief Executive Officer and
President
Date: March 11, 1997
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and constitutes
Ed H. Bowman, Jr. and Margot T. Lebenberg, and each of them singly, his true and
lawful attorneys-in-fact with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities to sign and file
any and all amendments to this report with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and he hereby ratifies and confirms all that said attorneys-in-fact or any of
them, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
<C> <S> <C>
/s/ ED H. BOWMAN, JR. Director, President and Chief March 11, 1997
- ----------------------------------------------------- Executive Officer (Principal
Ed H. Bowman, Jr. Executive Officer)
/s/ DAVID LOWENSTEIN Director, Executive Vice March 11, 1997
- ----------------------------------------------------- President and Chief Financial
David Lowenstein Officer (Principal Financial
Officer)
/s/ TIMOTHY J. BARKER Vice President and Chief March 11, 1997
- ----------------------------------------------------- Accounting Officer (Principal
Timothy J. Barker Accounting Officer)
/s/ THOMAS C. WALKER Chairman of the Board and March 11, 1997
- ----------------------------------------------------- Chief Development Officer
Thomas C. Walker
/s/ DONALD F. MOOREHEAD, JR. Director March 11, 1997
- -----------------------------------------------------
Donald F. Moorehead, Jr.
/s/ G. MICHAEL BELLENGHI Director March 11, 1997
- -----------------------------------------------------
G. Michael Bellenghi
/s/ JERRY F. LEONARD, JR. Director March 11, 1997
- -----------------------------------------------------
Jerry F. Leonard, Jr.
</TABLE>
146
<PAGE> 149
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
<C> <S> <C>
/s/ GREGORY MELANSON Director March 11, 1997
- -----------------------------------------------------
Gregory Melanson
/s/ JONATHAN B. SHAW Director March 11, 1997
- -----------------------------------------------------
Jonathan B. Shaw
/s/ MICHAEL J. BRADLEY Director March 11, 1997
- -----------------------------------------------------
Michael J. Bradley
/s/ HON. EDWARD M. ROWELL Director March 11, 1997
- -----------------------------------------------------
Hon. Edward M. Rowell
</TABLE>
147
<PAGE> 150
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I., Incorporated, Deliverex,
Incorporated, ASK Record Management, Inc., Deliverex
Acquisition Corp., and the Stockholders named therein
(Incorporated by reference to Exhibit 2.1 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
2.2 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I. Incorporated, C. & T.
Management Services, Inc., Qualidata, Inc., DPAS
Acquisition Corp., and the Stockholders named therein
(Incorporated by reference to Exhibit 2.2 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
2.3 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I. Incorporated, Melanson &
Associates, Inc., Bay Area Micrographics, Researchers
Acquisition Corp., and the Stockholders named therein
(Incorporated by reference to Exhibit 2.3 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
2.4 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I. Incorporated, Paragon
Management Group, Inc., Recordex Acquisition Corp.,
Recordex Services, Inc., and the Stockholders named
therein (Incorporated by reference to Exhibit 2.4 to
Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
2.5 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I. Incorporated, Permanent
Records Inc., Permanent Records Acquisition Corp., and
the Stockholders named therein (Incorporated by reference
to Exhibit 2.5 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
2.6 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among F.Y.I. Incorporated, Leonard
Archives Inc., Leonard Acquisition Corp. and the
Stockholders named therein (Incorporated by reference to
Exhibit 2.6 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
2.7 -- Agreement and Plan of Reorganization, dated as of October
25, 1995, by and among Imagent Corporation, Imagent
Acquisition Corp. and the Stockholders named therein
(Incorporated by reference to Exhibit 2.7 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
2.8 -- Agreement and Plan of Reorganization dated as of October
25, 1995, by and among Mobile Information Services
Corporation, Inc., Imagent Acquisition Corp. and the
Stockholders named therein (Incorporated by reference to
Exhibit 2.8 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
2.9 -- First Amendment to Agreement and Plan of Reorganization,
dated as of October 25, 1995, by and among F.Y.I.
Incorporated, Leonard Archives Inc., Leonard Acquisition
Corp. and the Stockholders named therein (Incorporated by
reference to Exhibit 2.9 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-98608) effective January 12, 1996)
</TABLE>
<PAGE> 151
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.10 -- First Amendment to Agreement and Plan of Reorganization,
dated as of November 14, 1995, by and among F.Y.I.
Incorporated, C. & T. Management Services, Inc.,
Qualidata, Inc., DPAS Acquisition Corp., and the
Stockholders named therein (Incorporated by reference to
Exhibit 2.10 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
2.11 -- Agreement and Plan of Reorganization, dated as of May 31,
1996, by and among F.Y.I. Incorporated, B&B
(Baltimore-Washington) Acquisition Corp., B&B Information
and Image Management, Inc. and Charles J. Bauer, Jr.
(Incorporated by reference to Exhibit 10.17 to
Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-1084) effective July 11, 1996)
2.12 -- Agreement and Plan of Reorganization, dated as of May 31,
1996, by and among F.Y.I. Incorporated, Premier
Acquisition Corp., Premier Document Management, Inc., PDM
Services, Inc., Brian E. Whiteside, Christopher S. Moore,
Lynnette C. Pomerville and Gary T. Sievert (Incorporated
by reference to Exhibit 10.18 to Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective July 11, 1996)
2.13 -- Asset Purchase Agreement, dated as of June 28, 1996, by
and among F.Y.I. Incorporated, Robert A. Cook Acquisition
Corp., Robert A. Cook and Staff, Inc. and RAC Services,
Inc., Robert A. Cook and Robert A. Cook and Anna M. Cook,
as Co-Trustees of the Cook 1993 Living Trust
(Incorporated by reference to Exhibit 10.19 to
Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-1084) effective July 11, 1996)
2.14 -- Agreement and Plan of Reorganization, dated as of August
30, 1996, by and among F.Y.I. Incorporated, California
Medical Record Service Acquisition Corp., C.M.R.S.
Incorporated and Alan Simon (Incorporated by reference to
Exhibit 2.14 to Post-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-1084) effective September 11, 1996)
2.15 -- Agreement and Plan of Reorganization, dated as of August
30, 1996, by and among F.Y.I. Incorporated, Texas Medical
Record Service Acquisition Corp., Texas Medical Record
Service, Inc., California Medical Record Service
Acquisition Corp. and Karen Jill Simon (Incorporated by
reference to Exhibit 2.15 to Post-Effective Amendment No.
3 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-1084) effective September 11, 1996)
2.16 -- Agreement and Plan of Reorganization, dated as of August
30, 1996, by and among F.Y.I. Incorporated, Minnesota
Medical Record Service Acquisition Corp., Minnesota
Medical Record Service, Inc. and Alan Simon (Incorporated
by reference to Exhibit 2.16 to Post-Effective Amendment
No. 3 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective September 11,
1996)
2.17 -- Agreement and Plan of Reorganization, dated as of August
30, 1996, by and among F.Y.I. Incorporated, ZIA
Acquisition Corp., ZIA Information Analysis Group and the
shareholders named therein (Incorporated by reference to
Exhibit 2.17 to Post-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-1084) effective September 11, 1996)
3.1 -- Amended and Restated Certificate of Incorporation of
F.Y.I. Incorporated (Incorporated by reference to Exhibit
3.1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
</TABLE>
<PAGE> 152
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.2 -- By-Laws of F.Y.I. Incorporated (Incorporated by reference
to Exhibit 3.2 to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-98608) effective January
12, 1996)
4 -- Form of certificate evidencing ownership of Common Stock
of F.Y.I. Incorporated (Incorporated by reference to
Exhibit 4.2 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
10.1* -- F.Y.I. Incorporated 1995 Stock Option Plan (Incorporated
by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
10.2* -- Employment Agreement between F.Y.I. Incorporated and
Thomas C. Walker (Incorporated by reference to Exhibit
10.2 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.3* -- Employment Agreement between F.Y.I. Incorporated and
David Lowenstein (Incorporated by reference to Exhibit
10.3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.4* -- Employment Agreement between F.Y.I. Incorporated and
Jerry F. Leonard, Jr. (Incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-98608) effective January 12, 1996)
10.5* -- Employment Agreement between F.Y.I. Incorporated and Greg
Melanson (Incorporated by reference to Exhibit 10.5 to
Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.6* -- Employment Agreement between F.Y.I. Incorporated and
Jonathan B. Shaw (Incorporated by reference to Exhibit
10.6 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.7* -- Employment Agreement between F.Y.I. Incorporated and G.
Michael Bellenghi (Incorporated by reference to Exhibit
10.7 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.8 -- Form of Indemnification Agreement between F.Y.I. and each
director (Incorporated by reference to Exhibit 10.8 to
Registrant's Registration Statement on Form S-1
(Registration No. 33-98608) effective January 12, 1996)
10.9* -- Employment Agreement between F.Y.I. Incorporated and Ed
H. Bowman, Jr. (Incorporated by reference to Exhibit 10.9
to Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-98608)
effective January 12, 1996)
10.10 -- Form of Registration Rights Agreement, dated as of
November 14, 1995, by and among Thomas C. Walker, David
Lowenstein and the persons named therein (Incorporated by
reference to Exhibit 10.10 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-98608) effective January 12, 1996)
</TABLE>
<PAGE> 153
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.11* -- Warrant issued to Ed H. Bowman, Jr. (Incorporated by
reference to Exhibit 10.11 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-98608) effective January 12, 1996)
10.12 -- Five Year Media Purchase Agreement, dated as of August 9,
1994, between Eastman Kodak Company and Jonathan B. Shaw
(Incorporated by reference to Exhibit 10.12 to Amendment
No. 1 to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-98608) effective January 12,
1996)
10.13* -- Employment Agreement between F.Y.I. Incorporated and
Robert C. Irvine (Incorporated by reference to Exhibit
10.13 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective February 16,
1996)
10.14 -- Credit Agreement, dated as of April 18, 1996, by and
among F.Y.I. Incorporated and its subsidiaries and Banque
Paribas, IBJ Schroder Bank & Trust, and First Source
Financial LLP (Incorporated by reference to Exhibit 10.14
to Post-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-1084) effective April 30, 1996)
10.15 -- Lease Agreement between F.Y.I. Incorporated and One
McKinney Plaza, Inc. (Incorporated by reference to
Exhibit 10.15 to Post-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-1084) effective April 30, 1996)
10.16* -- Employment Agreement between F.Y.I. Incorporated and
Margot T. Lebenberg (Incorporated by reference to Exhibit
10.16 to Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form S-1
(Registration No. 333-1084) effective July 11, 1996)
10.17 -- First Amendment to Credit Agreement, dated as of June 26,
1996, by and among F.Y.I. Incorporated and its
subsidiaries and Banque Paribas, IBJ Schroder Bank &
Trust, and First Source Financial LLP (Incorporated by
reference to Exhibit 10.20 to Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective July 11, 1996)
10.18* -- Warrant issued to Ed H. Bowman, Jr. (Incorporated by
reference to Exhibit 10.21 to Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective July 11, 1996)
10.19* -- Warrant issued to Robert C. Irvine (Incorporated by
reference to Exhibit 10.22 to Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-1084) effective July 11, 1996)
10.20* -- Employment Agreement between F.Y.I. Incorporated and
Timothy J. Barker (Incorporated by reference to Exhibit 2
to Post-Effective Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-1084) effective July 11, 1996)
10.21* -- Separation Agreement, dated July 17, 1996, by and between
F.Y.I. Incorporated and Robert C. Irvine (Incorporated by
reference to Exhibit 10.21 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-16057) effective December 11, 1996)
10.22* -- Warrant issued to Timothy J. Barker (Incorporated by
reference to Exhibit 10.22 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-16057) effective December 11, 1996)
</TABLE>
<PAGE> 154
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.23 -- Second Amendment to Credit Agreement, dated as of August
30, 1996, by and among F.Y.I. Incorporated and its
subsidiaries and Banque Paribas, IBJ Schroder Bank &
Trust, and First Source Financial LLP (Incorporated by
reference to Exhibit 10.23 to the Registrant's
Registration Statement on Form S-1 (Registration No.
333-16057) effective December 11, 1996)
10.24 -- Third Amendment to Credit Agreement, dated as of December
18, 1996, by and among F.Y.I. Incorporated and its
subsidiaries and Banque Paribas, IBJ Schroder Bank &
Trust, and First Source Financial LLP.
21 -- List of subsidiaries of F.Y.I. Incorporated
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Elko, Fischer, McCabe & Rudman, Ltd.
24 -- Power of Attorney (included with the signature page
hereof)
27 -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.24
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "Third Amendment") is
entered into to be effective as of December 18, 1996, by and among F.Y.I.
Incorporated, a Delaware corporation ("F.Y.I."), Imagent Acquisition Corp., a
Delaware corporation ("Imagent"), Researchers Acquisition Corp., a Delaware
corporation ("Researchers"), Recordex Acquisition Corp., a Delaware corporation
(successor by merger to Recordex Services, Inc., a Pennsylvania corporation)
("Recordex"), DPAS Acquisition Corp., a Delaware corporation ("DPAS"), Leonard
Archives Acquisition Corp., a Delaware corporation ("Leonard"), Deliverex
Acquisition Corp., a Delaware corporation ("Deliverex"), Permanent Records
Acquisition Corp., a Delaware corporation ("Permanent"), Deliverex Sacramento
Acquisition Corp., a Delaware corporation ("Sacramento"), (F.Y.I., Imagent,
Researchers, Recordex, DPAS, Leonard, Deliverex, Permanent and Sacramento are
collectively referred to as the "Original Borrowers"), B&B
(Baltimore-Washington) Acquisition Corp., a Delaware corporation ("B&B"),
Premier Acquisition Corp., a Delaware corporation ("Premier"), Robert A. Cook
Acquisition Corp., a Delaware corporation ("Cook"), Peninsula Record
Management, Inc., a California corporation ("Peninsula"), RAC (California)
Acquisition Corp., a Delaware corporation ("RAC"), California Medical Record
Service Acquisition Corp., a Delaware corporation ("California Medical"),
Minnesota Medical Record Service Acquisition Corp., a Delaware corporation
("Minnesota Medical"), Texas Medical Record Service Acquisition Corp., a
Delaware corporation ("Texas Medical"), ZIA Information Analysis Group, Inc.,
formerly known as ZIA Acquisition Corp., a Delaware corporation ("Zia"), CH
Acquisition Corp. ("CH"), a Delaware corporation, and DISC Acquisition Corp.
("DISC"), a Delaware corporation (B&B, Premier, Cook, Peninsula, RAC,
California Medical, Minnesota Medical, Texas Medical, Zia, CH and DISC are
referred to collectively as the "New Borrowers") (the Original Borrowers and
the New Borrowers are referred to collectively as the "Borrowers"), Banque
Paribas, a bank organized under the laws of the Republic of France, as Agent
(the "Agent"), and the Lenders (as such term is defined in the Credit
Agreement, as hereinafter defined) which are parties hereto.
RECITALS
A. The Original Borrowers, the Agent and the Lenders entered into
that certain Credit Agreement dated as of April 18, 1996 (the "Original Credit
Agreement"), pursuant to which, among other things, the Lenders agreed to make
certain loans available to the Original Borrowers upon the terms and conditions
set forth therein;
B. The Borrowers, certain of the New Borrowers, the Agent and the
Lenders entered into that certain First Amendment to Credit Agreement dated as
of June 26, 1996 and that certain Second Amendment to Credit Agreement dated as
of August 30, 1996 (the Original Credit Agreement, as amended, is hereinafter
referred to as the "Credit Agreement").
C. The Borrowers, the Agent and the Lenders desire to amend the
Credit Agreement in certain respects as more fully set out herein.
THIRD AMENDMENT TO CREDIT AGREEMENT Page 1
<PAGE> 2
AGREEMENT
NOW, THEREFORE, for and in consideration of the premises and other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrowers, the Lenders, and the Agent hereby agree as
follows:
1. Terms. All terms used herein which begin with an initial
capital letter shall, unless otherwise expressly defined herein, have the same
definitions assigned to such terms in the Credit Agreement, as modified by this
Third Amendment.
2. Amendment to Letter of Credit Fees. Effective as of the date
hereof, Section 2.14(c) is hereby amended and restated to read in its entirety
as follows:
"(c) Each of the Revolving Loans Borrowers jointly and
severally agree to pay to the Agent for the account of each Lender
(except as provided in the proviso below), in arrears on each
Quarterly Date beginning on June 30, 1996 and on the Revolving Credit
Loans Maturity Date, a nonrefundable letter of credit fee with respect
to each Letter of Credit issued in an amount equal to (i) the rate per
annum equal to the remainder of (a) the Applicable Margin for
Eurodollar Loans in effect on the date of issuance of such Letter of
Credit (with respect to the fee due on the first Quarterly Date after
issuance) or on the first day of the applicable quarterly or other
period beginning after the calendar quarter during which the issuance
of such Letter of Credit occurred (with respect to the fee due on each
subsequent Quarterly Date or on the Revolving Credit Loans Maturity
Date) minus (b) two percent (2%), multiplied by (ii) the daily average
face amount of the Letters of Credit in effect during the applicable
period. The Agent agrees to pay to each Lender or Issuing Bank (as
applicable), promptly after receiving any payment of letter of credit
fees referred to above in this subsection (c), such Lender's
Commitment Percentage of such fees or such Issuing Bank's fees (as
applicable), respectively. The Borrower further agrees to pay to the
Issuing Bank for its own account, on the date of issuance of such
Letter of Credit and on each anniversary of such date of issuance (if
such Letter of Credit then remains outstanding), an amount equal to
the greater of one-quarter of one-percent (0.25%) of the face amount
of the Letter of Credit being issued or $750.00. In addition to the
foregoing fees, each of the Revolving Loans Borrowers shall pay or
reimburse the Issuing Bank for such normal and customary costs and
expenses, including, without limitation, administrative, issuance,
amendment, payment and negotiation charges, as are incurred or charged
by the Issuing Bank in issuing, effective payment under, amending or
otherwise administering any Letter of Credit."
3. Amendment to Capital Expenditures. Effective as of the date
hereof, Section 10.6 is hereby amended and restated to read in its entirety as
follows:
"Section 10.6 Capital Expenditures. F.Y.I. will not permit
the aggregate Capital Expenditures of F.Y.I. and its Subsidiaries
during any fiscal year of F.Y.I.
THIRD AMENDMENT TO CREDIT AGREEMENT Page 2
<PAGE> 3
to exceed an amount equal to the corresponding amount for such fiscal
year indicated below (each such sum being "Permitted Capital
Expenditures" for such fiscal year):
<TABLE>
<CAPTION>
Ending on December 31 Amount
--------------------- ----------
<S> <C>
1996 $1,750,000
1997 $1,750,000
1998 $1,800,000
1999 $2,000,000
2000 or thereafter $2,200,000
</TABLE>
; plus an amount equal to 110% of the annual depreciation of any
entity acquired in a Permitted Acquisition (i) for the fiscal year in
which such Permitted Acquisition is made, for the twelve-month period
preceding the date of the Permitted Acquisition multiplied by a
fraction the numerator of which is the number of calendar days
remaining in the fiscal year in which such Permitted Acquisition is
consummated after the date of consummation of such Permitted
Acquisition and the denominator of which is 365, and (ii) for each
subsequent fiscal year, increasing at a rate of three percent (3%).
The Permitted Capital Expenditures amount for fiscal year 1996 shall
be increased by any Capital Expenditures (up to $600,000 in the
aggregate) made by F.Y.I. and its Subsidiaries to implement a contract
between Deliverex and the United States Veterans Administration of
California.
If any Permitted Capital Expenditures consist of the purchase
of all or substantially all of the assets of any Person, F.Y.I. shall,
at least 30 days prior to such purchase, provide evidence satisfactory
to the Agent that the contingent liabilities to be assumed by the
purchaser with respect to such assets (including, without limitation,
contingent liabilities relating to ERISA, environmental matters and
litigation) do not exceed ten percent of the purchase price paid for
such assets."
4. Amendment to Section 9.18. Effective as of the date hereof,
Section 9.18 of the Credit Agreement is hereby amended and restated to reach in
its entirety as follows:
Section 9.18 Second-Tier Subsidiaries. No Borrower other
than F.Y.I. shall have any Subsidiaries and F.Y.I. shall not
have any Subsidiaries which are Subsidiaries of Subsidiaries;
provided, however, that (i) Deliverex may have as a Subsidiary
Peninsula Record Management, Inc., a California corporation
and (ii) The Rust Consulting Group, Inc. may have as a
Subsidiary Rust Federal Systems, L.C. and Rust Redfern Limited
("Rust Redfern").
5. Representations and Warranties. The representations and
warranties made by the Borrowers in the Loan Documents, as the same are amended
hereby, are true and correct at the
THIRD AMENDMENT TO CREDIT AGREEMENT Page 3
<PAGE> 4
time this Third Amendment is executed and delivered, except to the extent that
such representations and warranties are expressly by their terms made only as
of the Closing Date or another specified date.
6. Costs. The Borrowers jointly and severally agree to pay all
costs incurred in connection with the negotiation, preparation, execution and
consummation of this Third Amendment and the transactions preceding and
contemplated by this Third Amendment including, without limitation, the fees
and expenses of counsel to the Agent and the Lenders.
7. Miscellaneous.
(a) Headings. Section headings are for reference only,
and shall not affect the interpretation or meaning of any provision of
this Third Amendment.
(b) No Waiver. No failure on the part of the Agent or
the Lenders to exercise, and no delay in exercising, and no course of
dealing with respect to, any right, power, or privilege under the Loan
Documents shall operate as a waiver thereof, and no single or partial
exercise of any right, power, or privilege under the Loan Documents
shall preclude any other or further exercise thereof or the exercise
of any other right, power, or privilege.
(c) Effect of this Third Amendment. The Credit
Agreement, as amended by this Third Amendment, shall remain in full
force and effect except that any reference therein, or in any other
Loan Document, referring to the Credit Agreement, shall be deemed to
refer to the Credit Agreement, as amended by this Third Amendment.
(d) Governing Law. EXCEPT TO THE EXTENT THAT THE CREDIT
AGREEMENT EXPRESSLY PROVIDES OTHERWISE, THIS THIRD AMENDMENT SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF TEXAS.
(e) Counterparts. This Third Amendment may be executed
by the different parties hereto on separate counterparts, each of
which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same Third Amendment.
(f) NO ORAL AGREEMENTS. THE CREDIT AGREEMENT, AS AMENDED
BY THIS THIRD AMENDMENT, TOGETHER WITH THE OTHER LOAN DOCUMENTS,
REPRESENTS THE ENTIRE AGREEMENT AMONG THE PARTIES, AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
AMONG THE PARTIES.
THIRD AMENDMENT TO CREDIT AGREEMENT Page 4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Third
Amendment to be executed by their respective duly authorized officers as of the
date first above written.
BORROWERS:
F.Y.I. INCORPORATED
By: /s/ DAVID LOWENSTEIN
-----------------------------------
David Lowenstein
Executive Vice President
IMAGENT ACQUISITION CORP.
RESEARCHERS ACQUISITION CORP.
RECORDEX ACQUISITION CORP.
DPAS ACQUISITION CORP.
LEONARD ARCHIVES ACQUISITION CORP.
DELIVEREX ACQUISITION CORP.
PERMANENT RECORDS ACQUISITION CORP.
DELIVEREX SACRAMENTO ACQUISITION CORP.
B&B (BALTIMORE-WASHINGTON) ACQUISITION
CORP.
PREMIER ACQUISITION CORP.
ROBERT A. COOK ACQUISITION CORP.
PENINSULA RECORD MANAGEMENT, INC.
RAC (CALIFORNIA) ACQUISITION CORP.
CALIFORNIA MEDICAL RECORD SERVICE
ACQUISITION CORP.
MINNESOTA MEDICAL RECORD SERVICE
ACQUISITION CORP.
TEXAS MEDICAL RECORD SERVICE
ACQUISITION CORP.
ZIA INFORMATION ANALYSIS GROUP, INC.
CH ACQUISITION CORP.
DISC ACQUISITION CORP.
By: /s/ DAVID LOWENSTEIN
-----------------------------------
David Lowenstein
Executive Vice President, acting
on behalf of each of the above
THIRD AMENDMENT TO CREDIT AGREEMENT Page 5
<PAGE> 6
AGENT:
BANQUE PARIBAS, as Agent
By: /s/ CLARK C. KING, III
-----------------------------------
Name: Clark C. King, III
---------------------------------
Title: Vice President
--------------------------------
By: /s/ GERALD O'KEEFE
-----------------------------------
Name: Gerald O'Keefe
---------------------------------
Title: Vice President
--------------------------------
LENDERS:
BANQUE PARIBAS
By: /s/ CLARK C. KING, III
-----------------------------------
Name: Clark C. King, III
---------------------------------
Title: Vice President
--------------------------------
By: /s/ GERALD O'KEEFE
-----------------------------------
Name: Gerald O'Keefe
---------------------------------
Title: Vice President
--------------------------------
FIRST SOURCE FINANCIAL LLP
By: FIRST SOURCE FINANCIAL, INC., its
Agent/Manager
By: /s/ JOHN WALDING
-------------------------------
Name: John Walding
-----------------------------
Title: Vice President
----------------------------
IBJ SCHRODER
By: /s/ ALLAN J. PAGNOTTA
-------------------------------
Name: Allan J. Pagnotta
-----------------------------
Title: Vice President
----------------------------
THIRD AMENDMENT TO CREDIT AGREEMENT Page 6
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
Deliverex Acquisition Corp.
DPAS Acquisition Corp.
Imagent Acquisition Corp.
Leonard Archives Acquisition Corp.
Permanent Records Acquisition Corp.
Recordex Acquisition Corp.
California Medical Record Service Acquisition Corp.
Texas Medical Record Service Acquisition Corp.
Minnesota Medical Record Service Acquisition Corp.
ZIA Information Analysis Group, Inc.
Researchers Acquisition Corp.
Deliverex Sacramento Acquisition Corp.
B&B (Baltimore-Washington) Acquisition Corp.
Premier Acquisition Corp.
Robert A. Cook Acquisition Corp.
RAC (California) Acquisition Corp.
CH Acquisition Corp.
DISC Acquisition Corp.
The Rust Consulting Group, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Annual Report on Form 10-K of F.Y.I. Incorporated for the year ended December
31, 1996. We hereby consent to the incorporation by reference of our report in
Registration Statement No. 333-5493 on Form S-8.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 7, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Annual Report on Form 10-K of F.Y.I. Incorporated for the year ended December
31, 1996. We hereby consent to the incorporation by reference of our report in
Registration Statement No. 333-5493 on Form S-8.
ELKO, FISCHER, McCABE & RUDMAN, Ltd.
Media, Pennsylvania
March 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 20,954
<SECURITIES> 0
<RECEIVABLES> 18,256
<ALLOWANCES> 1,182
<INVENTORY> 522
<CURRENT-ASSETS> 40,579
<PP&E> 22,768
<DEPRECIATION> 9,824
<TOTAL-ASSETS> 99,816
<CURRENT-LIABILITIES> 17,763
<BONDS> 4,393
0
0
<COMMON> 86
<OTHER-SE> 77,753
<TOTAL-LIABILITY-AND-EQUITY> 99,816
<SALES> 6,345
<TOTAL-REVENUES> 75,722
<CGS> 4,898
<TOTAL-COSTS> 65,827
<OTHER-EXPENSES> (204)
<LOSS-PROVISION> 951
<INTEREST-EXPENSE> 1,058
<INCOME-PRETAX> 6,834
<INCOME-TAX> 2,803
<INCOME-CONTINUING> 4,031
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,031
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
