<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarterly period ended September 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from to
---------- ----------
Commission file number 0-27444
F.Y.I. INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 75-2560895
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3232 MCKINNEY AVENUE, SUITE 900, DALLAS, TEXAS 75204
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 953-7555
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of October 30, 1998, 13,562,651 shares of the registrant's Common Stock,
$.01 par value per share, were outstanding.
<PAGE> 2
F.Y.I. INCORPORATED AND SUBSIDIARIES
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements 3
Consolidated Balance Sheets - December 31, 1997 and September 30, 1998 (unaudited) 4
Consolidated Statements of Operations - Three months and nine months ended
September 30, 1997 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1997 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements - September 30, 1998 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 2 Changes in Securities II-1
Item 5 Other II-1
Information
Item 6 Exhibits and Reports on Form 8-K II-2
SIGNATURES II-3
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
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F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(SEE NOTE 1)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
----------- ---------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,261 $ 8,608
Accounts receivable, less allowance of $3,219 and $3,716, respectively 32,349 46,713
Inventory 1,675 1,370
Notes receivable, shareholders - short term 351 479
Prepaid expenses and other current assets 2,141 2,751
--------- ---------
Total current assets 45,777 59,921
PROPERTY, PLANT AND EQUIPMENT, NET 21,051 28,028
GOODWILL AND OTHER INTANGIBLES 64,278 92,111
NOTES RECEIVABLE, STOCKHOLDER - LONG TERM 321 -
OTHER NONCURRENT ASSETS 1,315 3,295
--------- ---------
Total assets $ 132,742 $ 183,355
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 17,185 $ 22,542
Current maturities of long-term obligations 856 476
Income taxes payable 2,053 3,584
Current portion of deferred income taxes 980 980
Other current liabilities 1,991 1,948
--------- ---------
Total current liabilities 23,065 29,530
LONG-TERM OBLIGATIONS, net of current maturities 5,692 24,899
DEFERRED INCOME TAXES, net of current portion 914 746
OTHER LONG-TERM OBLIGATIONS 707 768
--------- ---------
Total liabilities 30,378 55,943
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
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,
11,691,286 and 12,710,951 shares issued and outstanding at
December 31, 1997 and September 30, 1998, respectively 117 127
Additional paid-in-capital 89,557 105,159
Retained earnings 13,191 22,627
--------- ---------
102,865 127,913
Less - Treasury stock, $.01 par value, 36,670 shares
at December 31, 1997 and September 30, 1998, respectively (501) (501)
--------- ---------
Total stockholders' equity 102,364 127,412
--------- ---------
Total liabilities and stockholders' equity $ 132,742 $ 183,355
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(SEE NOTE 1)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1997 1998 1997 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE $ 44,267 $ 59,302 $119,979 $172,469
COST OF SERVICES 28,640 36,770 77,009 107,844
DEPRECIATION 867 1,418 2,401 3,934
-------- -------- -------- --------
Gross profit 14,760 21,114 40,569 60,691
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 10,449 13,016 27,152 38,206
AMORTIZATION 450 828 1,303 2,323
-------- -------- -------- --------
Operating income 3,861 7,270 12,114 20,162
OTHER (INCOME) EXPENSE:
Interest expense 162 417 566 969
Interest income (36) (37) (448) (123)
Other (income) expense, net (50) (68) (19) (118)
--------- --------- --------- ---------
Income before income taxes 3,785 6,958 12,015 19,434
PROVISION FOR INCOME TAXES 1,514 2,783 4,869 7,772
-------- -------- -------- --------
NET INCOME $ 2,271 $ 4,175 $ 7,146 $ 11,662
======== ======== ======== ========
PRO FORMA DATA:
Historical net income $ 2,271 $ 4,175 $ 7,146 $ 11,662
Pro forma compensation differential 746 - 1,016 -
Pro forma provision for income taxes 298 - 459 -
-------- -------- -------- --------
PRO FORMA NET INCOME $ 2,719 $ 4,175 $ 7,703 $ 11,662
======== ======== ======== ========
NET INCOME PER COMMON SHARE
BASIC $ 0.20 $ 0.33 $ 0.65 $ 0.93
======== ======== ======== =========
DILUTED $ 0.20 $ 0.32 0.64 $ 0.91
======== ======== ======== =========
PRO FORMA NET INCOME PER COMMON SHARE
BASIC $ 0.24 $ 0.33 $ 0.70 $ 0.93
======== ======== ======== =========
DILUTED $ 0.24 $ 0.32 $ 0.69 $ 0.91
======== ======== ======== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC 11,278 12,670 11,059 12,525
======== ======== ======== =========
DILUTED 11,484 13,046 11,231 12,857
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,146 $ 11,662
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 3,704 6,257
Change in operating assets and liabilities:
Accounts receivable (5,477) (8,854)
Prepaid expenses and other assets (71) (2,168)
Accounts payable and other current liabilities (3,557) 1,990
------------- -------------
Net cash provided by operating activities 1,745 8,887
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,041) (9,261)
Distribution from partnership 60 -
Cash paid for acquisitions, net of cash received (9,428) (19,276)
-------------- --------------
Net cash used in investing activities (14,409) (28,537)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance, net of underwriting
discounts and other costs 690 979
Distribution to shareholders of pooled companies (100) -
Proceeds from short-term obligations 446 -
Proceeds from long-term obligations - 25,500
Principal payments on short-term obligations (527) -
Principal payments on long-term obligations (1,672) (7,482)
-------------- --------------
Net cash (used in) provided by financing activities (1,163) 18,997
NET DECREASE IN CASH AND CASH EQUIVALENTS (13,827) (653)
CASH AND CASH EQUIVALENTS, beginning of period 23,402 9,261
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 9,575 $ 8,608
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements and related notes to
consolidated financial statements include the accounts of F.Y.I. Incorporated
and its subsidiaries (the "Company" or "F.Y.I."), which consist of: (i) the
companies acquired in business combinations accounted for under the purchase
method of accounting from their respective acquisition dates; and (ii) the
companies acquired in business combinations accounted for under the
pooling-of-interests method of accounting either for all periods presented or
from the date of acquisition, based upon their financial materiality.
In the opinion of F.Y.I.'s management, the accompanying consolidated
financial statements include the accounts of the Company and all adjustments
necessary to present fairly the Company's financial position at September 30,
1998, its results of operations for the three months and nine months ended
September 30, 1997 and 1998, and its cash flows for the nine months ended
September 30, 1997 and 1998. All significant intercompany transactions have been
eliminated. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). These consolidated financial statements should be
read in conjunction with the consolidated financial statements of the Company
and the related notes thereto in F.Y.I.'s Annual Report on Form 10-K filed with
the Commission on March 11, 1998. The results of operations for the interim
periods ended September 30, 1998 and 1997 may not be indicative of the results
for the full year.
Certain prior period amounts have been reclassified to make their
presentation consistent with the current year.
2. PRO FORMA NET INCOME
The Company acquired MAVRICC Management Systems, Inc. and a related company,
MMS Escrow and Transfer Agency, Inc., in March 1997; Input of Texas, Inc. in
March 1997; and Micro Publishing Systems, Inc. in December 1997, all in
transactions that were accounted for as poolings-of-interests. These companies
were managed prior to their acquisition dates as independent private companies
and represent a variety of tax structures. Therefore, selling, general and
administrative expenses for the historical periods reflect compensation and
related benefits that the former owners have received from the businesses
during those periods. In connection with the acquisitions, the owners have
entered into employment agreements that provide for compensation and benefits
at levels lower than the historical amounts (the "Compensation Differential").
The pro forma data present compensation at the level the owners have agreed to
receive subsequent to the acquisitions. In addition, the pro forma data present
the incremental provision for income taxes as if all entities had been subject
to federal and state income taxes and the related income tax impact of the
Compensation Differential discussed above.
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3. WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted net income per common share were computed in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
The differences between basic weighted average common shares and diluted
weighted average common shares and common stock equivalents are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic weighted average common shares 11,278 12,670 11,059 12,525
Weighted average options and warrants 206 376 172 332
------- ------- ------- -------
Diluted weighted average common shares 11,484 13,046 11,231 12,857
======= ======= ======= =======
</TABLE>
4. BUSINESS COMBINATIONS
F.Y.I. acquired seven document management services businesses simultaneously
with the closing of its initial public offering (the "IPO") on January 26, 1996.
Since the IPO and through December 31, 1997, the Company acquired 29 additional
document management businesses, of which 25 were accounted for as purchases and
four were accounted for as poolings-of-interests.
During the first nine months of 1998, the Company acquired eight additional
document management businesses, six of which were accounted for as purchases
(the "Purchased Companies") and two of which were accounted for as poolings-of-
interests. The six acquisitions accounted for as purchases were Medicopy, Inc.,
Associate Record Technician Services, Inc., DeBari Associates, Inc., ACT
Medical Record Services, Inc., Eagle Legal Services, Inc. and Doctex, Inc. The
aggregate consideration paid for the Purchased Companies consisted of $13.8
million in cash and 633,385 shares of Common Stock. The preliminary allocation
of the purchase price is set forth below (in thousands):
<TABLE>
<S> <C>
Consideration Paid $ 26,690
Estimated Fair Value of Tangible Assets 7,163
Estimated Fair Value of Liabilities 7,277
Goodwill 26,804
</TABLE>
The weighted average fair market value of the shares of Common Stock used in
calculating the consideration paid was $20.28, which represents a 20% discount
from the average trading price of the Common Stock based on the length and type
of restrictions in the purchase agreements.
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 allocations are not expected to be materially different than the
final allocations. The consideration paid for certain acquisitions is subject to
adjustment based upon actual earnings over one to three year periods.
The acquisitions of Lifo Systems, Inc. ("Lifo") in February 1998 and
Creative Mailings, Inc. ("CMI") in September 1998 for 1,071,659 shares of Common
Stock were accounted for as
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poolings-of-interests. The consolidated financial statements of the Company were
not restated for Lifo for periods prior to January 1, 1998 due to the financial
immateriality of Lifo. The Company's consolidated financial statements give
retroactive effect to the acquisition of CMI for all periods presented herein.
The interim results of the Company for the period from January 1, 1997 to
September 30, 1997 have been restated for the CMI acquisition. Restated total
revenue, net income, pro forma net income and weighted average shares
outstanding after giving effect to the CMI acquisition are summarized below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
--------------------------- ---------------------------
As Previously As Previously
As Restated Reported As Restated Reported
----------- ------------- ----------- -------------
(unaudited, in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue $ 44,267 $ 40,509 $ 119,979 $ 109,893
Net income 2,271 2,102 7,146 6,645
Net income per common share 0.20 0.20 0.64 0.63
Pro forma net income 2,719 2,550 7,703 7,202
Pro forma net income per common share 0.24 0.24 0.69 0.69
Diluted weighted average common shares outstanding 11,484 10,739 11,231 10,486
</TABLE>
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 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 a majority of the acquisitions
is not deductible for income tax purposes.
5. SUBSEQUENT EVENTS
In October 1998, the Company acquired Economic Research Services, Inc.,
("ERS") for 835,000 shares of Common Stock in a business combination that was
accounted for as a pooling-of-interests. The Company's consolidated financial
statements will give retroactive effect to the acquisition of ERS for all
periods presented. Restated total revenue, net income, pro forma net income and
weighted average shares outstanding after giving effect to the ERS acquisition
are summarized below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
--------------------------- ---------------------------
As Previously As Previously
As Restated Reported As Restated Reported
----------- ------------- ----------- --------------
(unaudited, in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue $ 46,602 $ 44,267 $ 127,086 $ 119,979
Net income 3,035 2,271 9,696 7,146
Net income per common share 0.25 0.20 0.80 0.64
Pro forma net income 3,177 2,719 9,233 7,703
Pro forma net income per common share 0.26 0.24 0.77 0.69
Diluted weighted average common shares outstanding 12,319 11,484 12,066 11,231
</TABLE>
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
--------------------------- ---------------------------
As Previously As Previously
As Restated Reported As Restated Reported
----------- ------------- ----------- -------------
(unaudited, in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenue $ 63,498 $ 59,302 $ 181,571 $ 172,469
Net income 5,247 4,175 14,210 11,662
Net income per common share 0.38 0.32 1.04 0.91
Pro forma net income 4,818 4,175 13,190 11,662
Pro forma net income per common share 0.35 0.32 0.96 0.91
Diluted weighted average common shares outstanding 13,881 13,046 13,692 12,857
</TABLE>
In October 1998, the Company sold the assets of Leonard Archives to Iron
Mountain, Inc. in exchange for cash and the assets of Copyright, Inc., a
Philadelphia-based provider of healthcare release of information services.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto appearing elsewhere in
this Report on Form 10-Q. Additional information concerning factors that could
cause results to differ materially from those in the forward-looking statements
is contained under "Part II. Other Information."
Introduction
The Company's revenue relates to the following document and information
outsourcing services: (i) document and data conversion services; (ii) data
capture services; (iii) direct marketing services; (iv) records management
services; (v) systems integration services; (vi) healthcare services; (vii)
litigation support services; and (viii) employee and investor services. The
Company's revenue also consists of sales of micrographic and business imaging
supplies and equipment, primarily in conjunction with film processing and other
micrographic services; sales of filing supplies, shelving and software; and
commissions on the sales of imaging systems and equipment.
Cost of services consists primarily of compensation and benefits to
non-administrative employees, occupancy costs, equipment costs and supplies. The
Company's cost of services also includes the cost of products sold for
micrographics and business imaging supplies and equipment, filing supplies,
shelving and software.
Selling, general and administrative expenses ("SG&A") consist primarily of:
(i) compensation and related benefits to the sales and marketing, executive
management, accounting, human resources and other administrative employees of
the Company; (ii) other sales and marketing costs; (iii) communications costs;
(iv) insurance costs; and (v) legal and accounting professional fees and
expenses.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenue
Revenue increased 34.0% from $44.3 million for the three months ended
September 30, 1997 to $59.3 million for the three months ended September 30,
1998. This increase was largely due to: (i) revenue from the acquisitions
completed subsequent to September 30, 1997; and (ii) internal growth of 9.1% in
revenue at the companies acquired prior to September 30, 1997. Pro forma
internal revenue growth was 13.8% for the three months ended September 30, 1998
assuming all acquisitions were consummated as of January 1, 1997.
Gross profit
Gross profit increased 43.0% from $14.8 million for the three months ended
September 30, 1997 to $21.1 million for the three months ended September 30,
1998, largely due to the increases in revenue discussed above. Gross profit as a
percentage of revenue increased from 33.3% for the three months ended September
30, 1997 to 35.6% for the three months ended September 30, 1998, primarily due
to the higher margin mix of revenue associated with the acquisitions subsequent
to September 30, 1997.
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Selling, general and administrative expenses
SG&A increased 24.6% from $10.4 million, or 23.6% of revenue, for the three
months ended September 30, 1997 to $13.0 million, or 21.9% of revenue, for the
three months ended September 30, 1998, primarily due to SG&A associated with
the acquisitions subsequent to September 30, 1997. After giving effect to the
Compensation Differential in each period, SG&A increased 34.1% from $9.7
million, or 21.9% of revenue, for the three months ended September 30, 1997 to
$13.0 million, or 21.9% of revenue, for the three months ended September 30,
1998. This increase in SG&A was a result of: (i) SG&A incurred at companies
acquired subsequent to September 30, 1997; and (ii) increased corporate
overhead required to manage the consolidated group.
Pro forma operating income
Pro forma operating income adjusted for the Compensation Differential
increased 57.8% from $4.6 million, or 10.4% of revenue, for the three months
ended September 30, 1997 to $7.3 million, or 12.3% of revenue, for the three
months ended September 30, 1998.
Pro forma income before income taxes and pro forma net income
Pro forma income before income taxes adjusted for the Compensation
Differential increased 53.6% from $4.5 million for the three months ended
September 30, 1997 to $7.0 million for the three months ended September 30,
1998, and pro forma net income adjusted for the Compensation Differential and
pro forma provision for taxes increased 53.5% from $2.7 million for the three
months ended September 30, 1997 to $4.2 million for the three months ended
September 30, 1998, largely attributable to the factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenue
Revenue increased 43.7% from $120.0 million for the nine months ended
September 30, 1997 to $172.5 million for the nine months ended September 30,
1998. This increase was largely due to: (i) revenue from the acquisitions
completed subsequent to September 30, 1997; and (ii) internal growth of 8.0% in
revenue at the companies acquired prior to September 30, 1997. Pro forma
internal revenue growth was 13.9% for the nine months ended September 30, 1998
assuming all acquisitions were consummated as of January 1, 1997.
Gross profit
Gross profit increased 49.6% from $40.6 million for the nine months ended
September 30, 1997 to $60.7 million for the nine months ended September 30,
1998, largely due to the increases in revenue discussed above. Gross profit as a
percentage of revenue increased from 33.8% for the nine months ended September
30, 1997 to 35.2% for the nine months ended September 30, 1998, primarily due to
the higher margin mix of revenue associated with the acquisitions subsequent to
September 30, 1997.
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Selling, general and administrative expenses
SG&A increased 40.7% from $27.2 million, or 22.6% of revenue, for the nine
months ended September 30, 1997 to $38.2 million, or 22.2% of revenue, for the
nine months ended September 30, 1998, primarily due to SG&A associated with the
acquisitions subsequent to September 30, 1997. After giving effect to the
Compensation Differential in each period, SG&A increased 46.2% from $26.1
million, or 21.8% of revenue, for the nine months ended September 30, 1997 to
$38.2 million, or 22.2% of revenue, for the nine months ended September 30,
1998. This increase in SG&A was a result of: (i) SG&A incurred at companies
acquired subsequent to September 30, 1997; and (ii) increased corporate overhead
required to manage the consolidated group.
Pro forma operating income
Pro forma operating income adjusted for the Compensation Differential
increased 53.6% from $13.1 million, or 10.9% of revenue, for the nine months
ended September 30, 1997 to $20.2 million, or 11.7% of revenue, for the nine
months ended September 30, 1998.
Pro forma income before income taxes and pro forma net income
Pro forma income before income taxes adjusted for the Compensation
Differential increased 49.1% from $13.0 million for the nine months ended
September 30, 1997 to $19.4 million for the nine months ended September 30,
1998, and pro forma net income adjusted for the Compensation Differential and
pro forma provision for taxes increased 51.4% from $7.7 million for the nine
months ended September 30, 1997 to $11.7 million for the nine months ended
September 30, 1998, largely attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $30.4 million of working capital and
$8.6 million of cash. Cash flows provided by operating activities for the nine
months ended September 30, 1998 were $8.9 million and were impacted primarily by
an increase in accounts receivable associated with the Company's revenue growth.
Net cash used in investing activities was $28.5 million, as the Company paid
$19.3 million for acquisitions, net of cash acquired. Net cash provided by
financing activities was $19.0 million primarily due to borrowings on the
Company's line of credit.
During the nine months ended September 30, 1997, cash flows provided by
operating activities were $1.7 million. Net cash used in investing activities
was $14.4 million, as the Company paid $9.4 million for acquisitions, net of
cash acquired. Net cash used in financing activities was $1.2 million.
The Company anticipates that cash on hand, cash from operations, additional
bank financing available under the 1998 Credit Agreement (as defined below), and
shares of Common Stock available under the Acquisition Shelf (as defined below)
will provide sufficient liquidity to execute the Company's acquisition and
internal growth plans for at least the next 12 months. In February 1998, the
Company entered into a new credit agreement, as amended, (the "1998 Credit
Agreement") with Banque Paribas and Bank of America Texas, N.A., as co-agents
and the lenders named therein. Under the 1998 Credit Agreement, the Company and
its subsidiaries can borrow on a revolving credit basis loans in an aggregate
outstanding principal amount up to $50.0 million, subject to certain customary
borrowing capacity requirements. In August 1998, the 1998 Credit Agreement was
amended to increase the aggregate outstanding principal limit to $65 million.
The availability under the 1998
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Credit Agreement as of October 30, 1998 was $31.2 million. 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 an effective
acquisition shelf Registration Statement on Form S-4 (Registration No.
333-24015) registering 2,500,000 shares of Common Stock for issuance in
connection with its acquisition program (the "Acquisition Shelf"), of which
1,267,843 shares were available at September 30, 1998.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" describes the use of two digits rather than four
digits to define the applicable year in certain computer programs. In the year
2000, any of the Company's computer programs that have two digit date-sensitive
software may interpret a date of "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or send invoices or engage in similar normal business
activities.
The Company has approached the Year 2000 Issue in phases. A Year 2000
project director, together with a strong support organization revolving around
technology committees organized by business unit, has designed a Year 2000 work
plan that is currently being implemented. The Year 2000 work plan includes (i)
awareness of the Year 2000 issue, (ii) inventory of all Year 2000 items, (iii)
assessment and prioritization of all Year 2000 issues, (iv) renovation,
including replacing, repairing, or retiring any Year 2000 related problems, (v)
verification, including testing and certifying Year 2000 compliance, (vi)
implementation, and (vii) contingency planning. The work plan includes assessing
the Year 2000 compliance of customers and vendors and related interfaces. The
Company is progressing in its completion of the various tasks and target dates
identified in the Year 2000 work plan. The Company believes it has identified
and prioritized all major Year 2000 related items. The Company expects to
complete all of the currently identified and planned Year 2000 tasks before the
end of 1999. The Company estimates that the total costs of the Year 2000 project
will be approximately $2.5 to $3.0 million of which about $1.5 to $2.0 million
will be capital costs and approximately $500,000 represent internal salaries. As
of September 30, 1998, the Company had incurred approximately $900,000 of Year
2000 costs. The costs are being funded through operating cash flow. Due to the
general uncertainty inherent in the Year 2000 process, resulting in part from
the uncertainty surrounding the Year 2000 readiness of third party vendors and
customers, the Company is unable to determine a reasonable worst case scenario
at this time. Although currently considered unlikely, failure of public utility
companies to provide telephone and electrical services or the inability of the
Company's customers to conduct their operations are some of the areas of
concern. The development of contingency plans is scheduled for the first quarter
of 1999 after the Company has received and evaluated responses from all its
major vendors, customers and the other third parties with whom the Company has a
material relationship. The costs of the Year 2000 project and the date on which
the Company plans to complete the Year 2000 project tasks are based on
management's best estimates, which were determined utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification factors and other factors. Additionally, the
costs of the Year 2000 project are based on the companies owned as of September
30, 1998 and do not include the impact of any future acquisitions. The Year 2000
costs for any future acquisitions will be evaluated in the due diligence
process. As a result, there can be no assurance that these forward looking
estimates will be achieved, and the actual costs and compliance by vendors,
customers and other third parties could differ materially from the Company's
current expectations, resulting in material financial risk.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the General Instructions to Item 305 of Regulation S-K, the
quantitative and qualitative disclosures called for by Item 3 of Form 10-Q and
by Item 305 of Regulation S-K are inapplicable to the Company at this time.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The following information relates to securities of the Company issued or
sold during the third quarter of 1998 which were not registered under the
Securities Act of 1933, as amended (the "Securities Act"):
In September 1998, the Company issued 745,000 shares of Common Stock to the
stockholders of Creative Mailings, Inc. ("CMI") in connection with the
acquisition by the Company of all of the outstanding shares of capital stock of
CMI.
Since September 30, 1998, the Company issued 835,000 shares of Common Stock
to the stockholders of Economic Research Services, Inc. ("ERS") in connection
with the acquisition by the Company of all of the outstanding shares of capital
stock of ERS.
Each of these transactions was completed without registration of the
relevant securities under the Securities Act in reliance upon the exemption
provided by Section 4(2) of the Securities Act for transactions not involving
any public offering.
ITEM 5. OTHER INFORMATION
RECENT DEVELOPMENTS
Since December 31, 1997, the Company has acquired the following document
and information outsourcing solutions businesses (the "Recent Acquisitions"):
(i) ACT Medical Record Services, Inc., a medical records release of information
business in Wisconsin; (ii) Lifo Systems, Inc., a database creation and
management business in Texas; (iii) Medicopy, Inc., a medical records release of
information business in Mississippi; (iv) Associate Record Technician Services,
Inc., a medical temporary staffing agency in California; (v) DeBari Associates,
Inc., a litigation support and systems integration company in New York City and
St. Vincent, The Grenadines; (vi) Eagle Legal Services, Inc., a litigation
support company in Kansas and Missouri; (vii) Doctex, a systems integration
company in Missouri; (viii) Creative Mailings, Inc., a direct mail company in
California; (ix) Copyright, Inc., a medical records release of information
business in Pennsylvania; and (x) Economic Research Services, Inc., a litigation
support business specializing in consulting, research and information services
headquartered in Tallahassee, Florida. In addition, the Company sold
substantially all of the assets of Leonard Archives Acquisition Corp., an
archive storage business, to Iron Mountain, Inc.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This filing 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,
variations in quarterly results, volatility of the Company's stock price,
development by competitors of new or superior products or services, entry into
the market of new competitors, 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 assimilate and integrate acquisitions,
to continue its aggressive acquisition program, to attract and retain
management, to implement its focused business strategy to expand its document
management services geographically, to attract or retain customers
II-1
<PAGE> 17
from other businesses, to increase revenue by cross-selling services and to
successfully defend itself in ongoing and future litigation. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate,
and, therefore, there can be no assurance that the forward-looking statements
included in this filing will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
21 List of Subsidiaries of F.Y.I. Incorporated
27.1 Financial Data Schedule
27.2 1998 Restated Financial Data Schedule
27.3 1997 Restated Financial Data Schedule
27.4 1996 Restated Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1998.
II-2
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
F.Y.I. Incorporated
Date: November 16, 1998 By: /s/ Ed H. Bowman, Jr.
-------------------------
Ed H. Bowman, Jr.
President and
Chief Executive Officer
Date: November 16, 1998 By: /s/ Timothy J. Barker
-------------------------
Timothy J. Barker
Senior Vice President and Chief
Financial Officer (Principal
Accounting Officer)
II-3
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
21 List of Subsidiaries of F.Y.I. Incorporated
27.1 Financial Data Schedule
27.2 1998 Restated Financial Data Schedule
27.3 1997 Restated Financial Data Schedule
27.4 1996 Restated Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
Acadian Consultants Corp.
ACT Medical Record Services, Inc.
APS Services Acquisition Corp.
Associate Record Technician Services Acquisition Corp.
B&B (Baltimore-Washington) Acquisition Corp.
California Medical Record Service Acquisition Corp.
CH Acquisition Corp.
Computer Central Corporation
Copyright Acquisition Corp.
Creative Mailings, Inc.
DeBari Associates Acquisition Corp.
Delaware Major Acquisition Corp.
Deliverex Acquisition Corp.
Deliverex Sacramento Acquisition Corp.
DISC Acquisition Corp.
Doctex Acquisition Corp.
DPAS Acquisition Corp.
Eagle Legal Services Acquisition Corp.
Economic Research Services, Inc.
F.Y.I. Corporate Acquisition Corp.
F.Y.I. Direct Inc.
F.Y.I. Image Inc.
F.Y.I. Input Inc.
F.Y.I. Integration Solutions, Inc.
F.Y.I. Print Inc.
F.Y.I. Records Inc.
F.Y.I. Storage Inc.
Imagent Acquisition Corp.
Information Management Acquisition Corp.
Input of Texas, Inc.
Leonard Archives Acquisition Corp.
Lifo Systems, Inc.
MAVRICC Management Systems, Inc.
Medicopy Acquisition Corp.
Microfilm Distribution Services, Inc.
Micro Publication Systems, Inc.
Minnesota Medical Record Service Acquisition Corp.
MMS Escrow and Transfer Agency, Inc.
Permanent Records Acquisition Corp.
Premier Acquisition Corp.
QCS Inet Acquisition Corp.
Quality Copy Acquisition Corp.
RAC (California) Acquisition Corp.
Recordex Acquisition Corp.
Researchers Acquisition Corp.
Robert A. Cook Acquisition Corp.
Texas Medical Record Service Acquisition Corp.
The Rust Consulting Group, Inc.
ZIA Information Analysis Group, Inc.
Zip Shred Canada Acquisition Corp.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,608
<SECURITIES> 0
<RECEIVABLES> 46,713
<ALLOWANCES> (3,716)
<INVENTORY> 1,370
<CURRENT-ASSETS> 59,921
<PP&E> 50,761
<DEPRECIATION> (22,733)
<TOTAL-ASSETS> 183,355
<CURRENT-LIABILITIES> 29,530
<BONDS> 25,375
0
0
<COMMON> 127
<OTHER-SE> 127,285
<TOTAL-LIABILITY-AND-EQUITY> 183,355
<SALES> 5,470
<TOTAL-REVENUES> 172,469
<CGS> 4,128
<TOTAL-COSTS> 146,050
<OTHER-EXPENSES> (241)
<LOSS-PROVISION> 819
<INTEREST-EXPENSE> 969
<INCOME-PRETAX> 19,434
<INCOME-TAX> 7,772
<INCOME-CONTINUING> 11,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,662
<EPS-PRIMARY> .93
<EPS-DILUTED> .91
</TABLE>
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<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 MAR-31-1998
<CASH> 5,612 9,468
<SECURITIES> 0 0
<RECEIVABLES> 41,505 39,155
<ALLOWANCES> (3,694) (3,388)
<INVENTORY> 1,363 1,399
<CURRENT-ASSETS> 51,219 53,056
<PP&E> 48,464 44,377
<DEPRECIATION> (21,320) (20,413)
<TOTAL-ASSETS> 171,655 167,366
<CURRENT-LIABILITIES> 25,843 30,766
<BONDS> 23,095 19,204
0 0
0 0
<COMMON> 126 125
<OTHER-SE> 121,589 115,602
<TOTAL-LIABILITY-AND-EQUITY> 171,655 167,366
<SALES> 3,550 1,766
<TOTAL-REVENUES> 113,167 54,788
<CGS> 2,657 1,341
<TOTAL-COSTS> 96,264 46,743
<OTHER-EXPENSES> (136) (47)
<LOSS-PROVISION> 439 186
<INTEREST-EXPENSE> 552 192
<INCOME-PRETAX> 12,476 5,986
<INCOME-TAX> 4,989 2,392
<INCOME-CONTINUING> 7,487 3,594
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,487 3,594
<EPS-PRIMARY> 0.60 0.29
<EPS-DILUTED> 0.59 0.28
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 15,820 10,556 9,575 9,261
<SECURITIES> 0 0 0 0
<RECEIVABLES> 25,035 27,822 31,575 32,349
<ALLOWANCES> (1,755) (1,602) (2,370) (3,219)
<INVENTORY> 1,190 1,473 1,493 1,675
<CURRENT-ASSETS> 43,488 41,418 45,125 45,777
<PP&E> 29,181 31,390 36,946 38,880
<DEPRECIATION> (13,634) (15,012) (18,040) (17,829)
<TOTAL-ASSETS> 110,057 112,183 121,353 132,742
<CURRENT-LIABILITIES> 22,426 18,787 21,094 23,065
<BONDS> 5,368 4,558 4,660 6,548
0 0 0 0
0 0 0 0
<COMMON> 109 111 113 117
<OTHER-SE> 82,131 88,106 94,839 102,247
<TOTAL-LIABILITY-AND-EQUITY> 110,057 112,183 121,353 132,742
<SALES> 1,765 3,590 5,878 7,845
<TOTAL-REVENUES> 37,078 75,712 119,979 168,158
<CGS> 1,351 2,774 4,527 5,949
<TOTAL-COSTS> 31,973 65,072 104,161 145,373
<OTHER-EXPENSES> (219) (381) (467) (594)
<LOSS-PROVISION> 3 100 387 560
<INTEREST-EXPENSE> 204 404 566 1,890
<INCOME-PRETAX> 3,967 8,230 12,015 16,148
<INCOME-TAX> 1,570 3,355 4,869 6,506
<INCOME-CONTINUING> 2,397 4,875 7,146 9,642
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,397 4,875 7,146 9,642
<EPS-PRIMARY> .22 0.45 0.65 0.86
<EPS-DILUTED> .22 0.44 0.64 0.85
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 23,402
<SECURITIES> 0
<RECEIVABLES> 21,202
<ALLOWANCES> (1,436)
<INVENTORY> 551
<CURRENT-ASSETS> 46,112
<PP&E> 26,484
<DEPRECIATION> (12,422)
<TOTAL-ASSETS> 106,566
<CURRENT-LIABILITIES> 23,759
<BONDS> 5,247
0
0
<COMMON> 104
<OTHER-SE> 77,650
<TOTAL-LIABILITY-AND-EQUITY> 106,566
<SALES> 6,345
<TOTAL-REVENUES> 98,685
<CGS> 4,898
<TOTAL-COSTS> 88,941
<OTHER-EXPENSES> (454)
<LOSS-PROVISION> 297
<INTEREST-EXPENSE> 1,172
<INCOME-PRETAX> 6,448
<INCOME-TAX> 2,980
<INCOME-CONTINUING> 3,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,468
<EPS-PRIMARY> .45
<EPS-DILUTED> .44
</TABLE>
