<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 June 30, 1999, 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 (I.R.S. Employer Identification No.)
of 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 July 30, 1999, 14,399,102 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 JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets - December 31, 1998 and June 30, 1999
(unaudited)
Consolidated Statements of Operations - Three months and
six months ended June 30, 1998 and 1999 (unaudited)
Consolidated Statements of Cash Flows - Six months ended
June 30, 1998 and 1999 (unaudited)
Notes to Consolidated Financial Statements - June 30, 1999
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 2 Changes in Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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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, JUNE 30,
1998 1999
---------------- ----------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,592 12,213
Accounts receivable and notes receivable, less allowance of $4,705
and $7,128, respectively 51,683 63,511
Notes receivable, shareholders - short term 479 285
Prepaid expenses and other current assets 5,487 10,938
---------------- ----------------
Total current assets 72,241 86,947
PROPERTY, PLANT AND EQUIPMENT, NET 29,372 36,666
GOODWILL AND OTHER INTANGIBLES, NET 96,652 138,948
OTHER NONCURRENT ASSETS 8,705 3,285
---------------- ----------------
Total assets $ 206,970 $ 265,846
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 30,095 $ 39,818
Current maturities of long-term obligations 1,258 1,265
Income taxes payable 2,881 539
Current portion of deferred income tax 214 214
---------------- ----------------
Total current liabilities 34,448 41,836
LONG-TERM OBLIGATIONS, net of current maturities 31,498 52,934
DEFERRED INCOME TAXES, net of current portion 1,479 1,479
OTHER LONG-TERM OBLIGATIONS 810 15,122
---------------- ----------------
Total liabilities 68,235 111,371
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,
14,046,725 and 14,230,671 shares issued and outstanding at
December 31, 1998 and June 30, 1999, respectively 140 142
Additional paid-in-capital 107,912 112,641
Retained earnings 31,184 42,193
---------------- ----------------
139,236 154,976
Less - Treasury stock, $.01 par value, 36,670 shares
at December 31, 1998 and June 30, 1999, respectively (501) (501)
Other comprehensive income -- --
---------------- ----------------
Total stockholders' equity 138,735 154,475
---------------- ----------------
Total liabilities and stockholders' equity $ 206,970 $ 265,846
================ ================
</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 ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE $ 61,055 $ 81,587 $ 117,558 $ 153,199
COST OF SERVICES 38,012 49,958 73,716 94,106
DEPRECIATION 1,366 1,922 2,626 3,786
------------- ------------- ------------- -------------
Gross profit 21,677 29,707 41,216 55,307
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 13,169 18,644 25,380 34,199
AMORTIZATION 787 1,038 1,495 1,947
------------- ------------- ------------- -------------
Operating income 7,721 10,025 14,341 19,161
OTHER (INCOME) EXPENSE:
Interest expense 365 759 563 1,256
Interest income (61) (109) (126) (214)
Other (income) expense, net (48) (186) (48) (231)
------------- ------------- ------------- -------------
Income before income taxes 7,465 9,561 13,952 18,350
PROVISION FOR INCOME TAXES 2,597 3,824 4,989 7,340
------------- ------------- ------------- -------------
NET INCOME $ 4,868 $ 5,737 $ 8,963 $ 11,010
============= ============= ============= =============
PRO FORMA DATA:
Historical net income $ 4,868 $ 5,737 $ 8,963 $ 11,010
Pro forma provision for income taxes 390 -- 591 --
------------- ------------- ------------- -------------
PRO FORMA NET INCOME $ 4,478 $ 5,737 $ 8,372 $ 11,010
============= ============= ============= =============
NET INCOME PER COMMON SHARE
Basic $ 0.36 $ 0.41 $ 0.67 $ 0.79
============= ============= ============= =============
Diluted $ 0.35 $ 0.39 $ 0.66 $ 0.75
============= ============= ============= =============
PRO FORMA NET INCOME
PER COMMON SHARE
Basic $ 0.33 $ 0.41 $ 0.63 $ 0.79
============= ============= ============= =============
Diluted $ 0.33 $ 0.39 $ 0.62 $ 0.75
============= ============= ============= =============
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING
Basic 13,385 14,028 13,287 13,984
============= ============= ============= =============
Diluted 13,717 14,710 13,597 14,644
============= ============= ============= =============
</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 CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,963 $ 11,010
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,121 5,733
Change in operating assets and liabilities:
Accounts receivable (5,194) (7,063)
Prepaid expenses and other assets (1,499) 4,735
Accounts payable and other liabilities (392) (3,743)
------------- -----------
Net cash provided by operating activities 5,999 10,672
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (7,174) (10,194)
Cash paid for acquisitions, net of cash acquired (17,426) (22,127)
------------- -----------
Net cash used in investing activities (24,600) (32,321)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance, net 756 2,483
Distribution to shareholders of pooled companies (1,340) --
Proceeds from long-term obligations 22,000 29,250
Principal payments on long-term obligations (6,287) (12,463)
------------- -----------
Net cash provided by financing activities 15,129 19,270
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,472) (2,379)
CASH AND CASH EQUIVALENTS, beginning of period 10,982 14,592
------------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 7,510 $ 12,213
============= ===========
</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) F.Y.I.
Incorporated; (ii) the companies acquired in business combinations accounted for
under the purchase method of accounting from their respective acquisition dates;
and (iii) 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 June 30, 1999,
its results of operations for the three and six months ended June 30, 1998 and
1999, and its cash flows for the six months ended June 30, 1998 and 1999. 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 17,
1999 and the Company's Current Report on Form 8-K filed with the Commission on
March 2, 1999. The results of operations for the three and six month periods
ended June 30, 1998 and 1999 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 Economic Research Services, Inc. in October 1998 in a
transaction that was accounted for as a pooling-of-interests. This company was
managed through its acquisition date as an independent S Corporation. Therefore,
the pro forma data present the incremental provision for income taxes as if this
entity had been subject to federal and state income taxes.
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):
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1999
---------------- ---------------
<S> <C> <C>
Basic weighted average common shares 13,287 13,984
Weighted average options, warrants and other
contingent consideration 310 660
---------------- ---------------
Diluted weighted average common shares 13,597 14,644
================ ===============
</TABLE>
4. BUSINESS COMBINATIONS
During the first six months of 1999, the Company acquired six additional
document management businesses, which were accounted for as purchases (the
"Purchased Companies"). These acquisitions were Northern Minnesota Medical
Records Services, Inc., PMI Imaging Systems, Inc., Quality Data Conversions,
Inc., MSI Imaging Solutions, Inc., Information Management Services, Inc., and
Managed Care Professionals, Inc. The aggregate consideration paid for the
Purchased Companies consisted of $24.0 million in cash and 57,815 shares of
Common Stock. The preliminary allocation of the purchase price is set forth
below (in thousands):
<TABLE>
<S> <C>
Consideration Paid $ 25,438
Estimated Fair Value of Tangible Assets 10,820
Estimated Fair Value of Liabilities 8,859
Goodwill 23,477
</TABLE>
The weighted average fair market values of the shares of Common Stock used
in calculating the consideration paid was $24.70, 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. Certain acquisitions are subject to additional consideration
based upon the achievement of specified earning targets over one to three year
periods. Based upon the evaluation of cumulative earnings through June 30, 1999
against the specified earnings targets, the Company has accrued aggregate
contingent consideration of approximately $15.0 million. The periods applicable
for the earnout targets have not been completed, and the amounts paid at the
conclusion are likely to be different from amounts presently accrued.
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 periods not to exceed 30
years. Management continually evaluates whether events and circumstances
indicate that the remaining estimated useful life of intangible assets might
warrant revisions or that the remaining balance of intangibles or other
long-lived assets
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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 certain acquisitions is not
deductible for income tax purposes.
5. SEGMENT REPORTING
The Company and its subsidiaries are principally engaged in document and
information outsourcing services. The Company identifies segments based on
management responsibility.
(i) Healthcare Services. Healthcare services include: (i) processing a
request for release of a patient's medical records; (ii) archival records
storage and management; (iii) document and data conversion; (iv) archiving
and imaging services to hospital radiology departments; (v) providing
attending physician statements for life and health insurance underwriting;
and (vi) image processing services for handling state government disability
and workers' compensation claims.
(ii) Commercial Services. This group offers electronic imaging,
micrographics services, data capture, document and media to media
conversion, database management, direct mail and fulfillment services,
statement processing, and full service commercial printing, as well as
integrated solutions to customers in a wide range of industries, including
financial services, retail, insurance and government entities.
(iii) Legal Services. Legal 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, as well as high level consulting
services ranging from labor discrimination, mortgage discrimination and
forensic analysis to trial support for law firms, corporations and utility
companies.
Investor services is an emerging business initiative, presented as part of
Legal services, which offers administration, record keeping and information
processing services for employee and/or investor records.
The Company measures segment profit as earnings before taxes. Information on
segments follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1999
----------------------------------------------------
Healthcare Commercial Legal
Services Services Services (1) Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue 26,804 32,586 22,197 81,587
Earnings before taxes 3,427 3,122 3,012 9,561
</TABLE>
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1998
----------------------------------------------------
Healthcare Commercial Legal
Services Services Services (1) Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue 21,541 18,628 20,886 61,055
Earnings before taxes 2,654 2,668 2,143 7,465
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
----------------------------------------------------
Healthcare Commercial Legal
Services Services Services (1) Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue 52,662 57,703 42,834 153,199
Earnings before taxes 7,019 6,262 5,069 18,350
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
----------------------------------------------------
Healthcare Commercial Legal
Services Services Services (1) Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue 41,211 36,423 39,924 117,558
Earnings before taxes 4,683 4,415 4,854 13,952
</TABLE>
(1) Includes Investor Services.
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 forward-looking statements is
contained under "Item 5. Other Information."
INTRODUCTION
The Company's revenue is segregated into the following segments: (i)
Healthcare Services; (ii) Commercial Services; and (iii) Legal Services, which
includes Investor Services, an emerging business initiative. Services provided
to customers are described by segment as follows:
Healthcare Services: includes (i) processing a request for release of a
patient's medical records from a physician, insurance company, attorney,
healthcare institution or individual; (ii) off-site active storage of a
healthcare institution's medical records; (iii) online delivery of images of
selected medical records for healthcare institutions; (iv) document and data
conversion services for healthcare institutions; (v) image processing for
state government disability and workers compensation claims; (vi) medical
staffing services; and (vii) providing attending physicians statements for
life and health insurance underwriting.
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Commercial Services: includes (i) electronic imaging services involving the
conversion of paper or microfilm documents into digitized information,
database management and indexing; (ii) micrographics services involving the
conversion of paper documents into microfilm images, film processing and
computer based indexing and formatting; (iii) data capture, document and
media-to-media conversion and database management services involving data
capture, data consolidation and elimination, storage, maintenance,
formatting and report creation; (iv) direct mail, which includes direct mail
and fulfillment services to customers who need rapid, reliable and
cost-effective methods for making large scale distributions of advertising,
literature and other information; (v) full service commercial printing,
including printing and related services such as electronic prepress
services, full-color report production of annual reports, flyers and
catalogs and statement processing; and (vi) integrated solutions, that
deliver technical services with a focus on document imaging, work flow, COLD
and document information management systems.
Legal Services: includes (i) automated litigation support, including
document conversion, computer indexing and automated document retrieval;
(ii) consulting services such as discovery assistance, labor discrimination,
forensic analysis and other trial support services; (iii) high-speed,
multiple-set reproduction of documents; and (iv) records acquisition in the
form of subpoena of business documents and service of process.
Investor Services: includes administration, record keeping and information
processing services to (i) general partners to service their investors in
limited partnerships, REITs and master limited partnerships; (ii)
corporations to provide turn-key outsourced administration of employee stock
purchase plans and employee stock option plans; and (iii) banks and
broker/dealers to provide complete record keeping and administration
services for additional brokerage and IRA accounts.
Cost of services consists primarily of compensation and benefits to
employees providing goods and services to the Company's customers, 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.
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THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUE
Revenue increased 33.6% from $61.1 million for the three months ended June
30, 1998 to $81.6 million for the three months ended June 30, 1999. This
increase was largely due to: (i) revenue from the acquisitions completed
subsequent to June 30, 1998; and (ii) internal growth of 12.1% in revenue at the
companies owned for longer than one year, based on the acquisition anniversary
date. This internal growth was primarily attributable to an increase in
government services revenue relating to the State of New York document imaging
contract, an increase in the volumes of other imaging and microfilming
contracts, and an increase in healthcare records release services revenue due to
expansion into additional healthcare institutions throughout the markets the
Company serves.
GROSS PROFIT
Gross profit increased 37.0% from $21.7 million for the three months ended
June 30, 1998 to $29.7 million for the three months ended June 30, 1999, largely
due to acquisitions completed subsequent to June 30, 1998. Gross profit as a
percentage of revenue increased from 35.5% for the three months ended June 30,
1998 to 36.4% for the three months ended June 30, 1999, primarily due to higher
profit margins associated with increased legal services consulting revenue, and
higher volumes in image processing for workers' compensation claims and mortgage
loan files. These higher margins were partially offset by a decline in automated
litigation support margins due to a downward fluctuation in project revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased 41.6% from $13.2 million, or 21.6% of revenue, for the three
months ended June 30, 1998 to $18.6 million, or 22.9% of revenue, for the three
months ended June 30, 1999. This increase in SG&A was a result of: (i) SG&A
incurred at companies acquired subsequent to June 30, 1998; and (ii) increased
corporate overhead required to manage the consolidated group.
OPERATING INCOME
Operating income increased 29.8% from $7.7 million, or 12.6% of revenue, for
the three months ended June 30, 1998 to $10.0 million, or 12.3% of revenue, for
the three months ended June 30, 1999, largely attributable to the factors
discussed above.
INCOME BEFORE INCOME TAXES AND PRO FORMA NET INCOME
Income before income taxes increased 28.1% from $7.5 million for the three
months ended June 30, 1998 to $9.6 million for the three months ended June 30,
1999, and pro forma net income adjusted for the pro forma provision for taxes
increased 28.1% from $4.5 million for the three months ended June 30, 1998 to
$5.7 million for the three months ended June 30, 1999, largely attributable to
the factors discussed above.
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SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUE
Revenue increased 30.3% from $117.6 million for the six months ended June
30, 1998 to $153.2 million for the six months ended June 30, 1999. This increase
was largely due to: (i) revenue from the acquisitions completed subsequent to
June 30, 1998; and (ii) internal growth of 11.8% in revenue at the companies
owned for longer than one year, based on the acquisition anniversary date. This
internal growth was primarily attributable to an increase in government services
revenue relating to the State of New York document imaging contract and an
increase in healthcare records release services revenue due to expansion into
additional healthcare institutions throughout the markets the Company serves.
GROSS PROFIT
Gross profit increased 34.2% from $41.2 million for the six months ended
June 30, 1998 to $55.3 million for the six months ended June 30, 1999, largely
due to acquisitions completed subsequent to June 30, 1998. Gross profit as a
percentage of revenue increased from 35.1% for the six months ended June 30,
1998 to 36.1% for the six months ended June 30, 1999, primarily due to higher
profit margins associated with increased legal services consulting revenue and
higher volumes in image processing for workers' compensation claims and mortgage
loan files. These higher margins were partially offset by a decline in automated
litigation support margins due to a downward fluctuation in project revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A increased 34.7% from $25.4 million, or 21.6% of revenue, for the six
months ended June 30, 1998 to $34.2 million, or 22.3% of revenue, for the six
months ended June 30, 1999. This increase in SG&A was a result of: (i) SG&A
incurred at companies acquired subsequent to June 30, 1998; and (ii) increased
corporate overhead required to manage the consolidated group.
OPERATING INCOME
Operating income increased 33.6% from $14.3 million, or 12.2% of revenue,
for the six months ended June 30, 1998 to $19.2 million, or 12.5% of revenue,
for the six months ended June 30, 1999, largely attributable to the factors
discussed above.
INCOME BEFORE INCOME TAXES AND PRO FORMA NET INCOME
Income before income taxes increased 31.5% from $14.0 million for the six
months ended June 30, 1998 to $18.4 million for the six months ended June 30,
1999, and pro forma net income adjusted for the pro forma provision for taxes
increased 31.5% from $8.4 million for the six months ended June 30, 1998 to
$11.0 million for the six months ended June 30, 1999, largely attributable to
the factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had $45.1 million of working capital and $12.2
million of cash. Cash flows provided by operating activities for the six months
ended June 30, 1999 were $10.7 million. Net cash provided by operating
activities approximated net income for the six months ended June 30, 1999. Net
cash used in investing activities was $32.3 million, as the Company paid $22.1
million for acquisitions, net of cash acquired. Net cash provided by financing
activities was $19.3 million, primarily due to borrowings of $29.3 million on
the Company's line of credit, net of principle payments on assumed debt of $12.5
million.
During the six months ended June 30, 1998, net cash flows provided by
operating activities were $6.0 million. Net cash used in investing activities
was $24.6 million, as the Company paid $17.4 million for acquisitions, net of
cash acquired. Net cash provided by financing activities was $15.1 million.
In February 1998, the Company entered into a new credit agreement (the "1998
Credit Agreement") with Banque Paribas and Bank of America Texas, N.A., as
co-agents and 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 $65.0 million, subject to certain
customary borrowing capacity requirements. In April 1999, the 1998 Credit
Agreement was amended to increase the aggregate outstanding principal limit to
$100.0 million. The availability under the 1998 Credit Agreement as of June 30,
1999 was $43.2 million. The Company may need to seek additional financing
through the public or private sale of equity or debt securities should it
accelerate its acquisition strategy. 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 its acquisition program (the "Acquisition
Shelf"), of which 1,210,028 shares were available at June 30, 1999.
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, 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 each 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)
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contingency planning. The work plan includes assessing the Year 2000 compliance
of customers and vendors and related interfaces. The Company is progressing
favorably 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 $3.6 million to $3.9 million, of which about $2.6 million to $2.9
million represent purchases of hardware, off-the-shelf software and customized
software and approximately $1.0 million represent internal salaries and external
consultant fees. As of June 30, 1999, the Company had incurred approximately
$2.3 million 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 general contingency plans is currently in process and are
scheduled to be completed by the end of 1999. Contingency plans include risk
management assessments, disaster recovery plans and staffing for necessary
support personnel. 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 June 30, 1999 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.
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 do not require additional disclosure by 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 registered
during the second quarter of 1999 that were initially not registered under the
Securities Act of 1933, as amended (the "Securities Act"):
On May 26, 1999, the Company filed a Registration Statement on Form S-3
registering 49% of the shares issued in the Economic Research Services, Inc.,
TCH Mailhouse, Inc. and G&W Enterprises, Inc., and Advanced Digital Graphics,
Inc. acquisitions for resale by the holders thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 12, 1999, the Company held its annual meeting of stockholders.
The stockholders elected nine (9) directors. The shares voting on the director
nominees were cast as follows:
<TABLE>
<CAPTION>
Number of Votes
----------------------------------
Nominee For Against/Withheld Abstentions Broker Non-Votes
------- --- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
G. Michael Bellenghi 11,756,890 82,369 - -
Ed. H. Bowman, Jr. 11,756,890 82,369 - -
Michael J. Bradley 11,756,890 82,369 - -
David Lowenstein 11,756,890 82,369 - -
Gregory R. Melanson 11,756,890 82,369 - -
Donald F. Moorehead, Jr. 11,756,890 82,369 - -
Hon. Edward M. Rowell 11,756,890 82,369 - -
Jonathan B. Shaw 11,756,890 82,369 - -
Thomas C. Walker 11,756,890 82,369 - -
</TABLE>
II-1
<PAGE> 17
ITEM 5. OTHER INFORMATION
RECENT DEVELOPMENTS
Acquisition Activity
Since March 31, 1999, the Company has acquired the following document and
information outsourcing solutions businesses: (i) Information Management
Services, Inc., a statement processing business located in Arizona; (ii) Managed
Care Professionals, Inc., a managed care payment compliance review business
located in Missouri; (iii) American Economics Group, Inc., a litigation support
business specializing in economic analysis located in Washington, D.C.; (iv)
Data Entry and Informational Services, Inc., a data processing business
headquartered in Colorado; (v) Rust Consulting, Inc., a claims process
administration business located in Minnesota; (vi) Copy Right, Inc., a medical
records release of information business headquartered in New Jersey; and (vii)
Newport Beach Data Entry, LLC, a data processing business headquartered in
Mexico and California.
Officers
In August 1999, Joe A. Rose was promoted to Executive Vice President.
He is responsible for Commercial Services and Legal Services.
In August 1999, Phillip B. Guy resigned from his position as Senior Vice
President - Legal Services.
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, or 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 acquisition program, to retain management, to
implement its focused business strategy to expand its document and information
management services geographically, to retain or to attract customers from other
businesses, to increase revenue by cross-selling services, to successfully
defend itself in ongoing and future litigation, and the uncertainty surrounding
the Year 2000 issue. 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
II-2
<PAGE> 18
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
Exhibits
10.50 Employment agreement between F.Y.I. Incorporated and Joe A. Rose
27.1 Financial Data Schedule
27.2 1998 Restated Financial Data Schedule
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 1999.
II-3
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
F.Y.I. Incorporated
Date: August 12, 1999 By: /s/ Ed H. Bowman, Jr.
--------------------------------
Ed H. Bowman, Jr.
Chief Executive Officer and
President
Date: August 12, 1999 By: /s/ Timothy J. Barker
--------------------------------
Timothy J. Barker
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
II-4
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.50 Employment agreement between F.Y.I. Incorporated and Joe A. Rose
27.1 Financial Data Schedule
27.2 1998 Restated Financial Data Schedule
</TABLE>
II-5
<PAGE> 1
EXHIBIT 10.50
EMPLOYMENT AGREEMENT
(JOE A. ROSE)
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
the 17th day of June 1999 by and between Joe A. Rose ("Employee") and F.Y.I.
Incorporated, a Delaware corporation (the "Company"). This Agreement hereby
supersedes any other employment agreements or understandings, written or oral,
between the Company and Employee.
R E C I T A L S
The following statements are true and correct:
As of the date of this Agreement, the Company is engaged primarily in
the document management services business (the "Business").
Employee is employed hereunder by the Company in a confidential
relationship wherein Employee, in the course of his employment with the Company,
has and will continue to become familiar with and aware of information as to the
Company's customers, specific manner of doing business, including the processes,
techniques and trade secrets utilized by the Company, and future plans with
respect thereto, all of which has been and will be established and maintained at
great expense to the Company; this information is a trade secret and constitutes
the valuable goodwill of the Company.
Therefore, in consideration of the mutual promises, terms, covenants
and conditions set forth herein and the performance of each, it is hereby agreed
as follows:
A G R E E M E N T S
1. Employment and Duties.
(a) The Company hereby employs Employee as a Senior Vice
President-Business Unit Executive. As such, Employee shall have
responsibilities, duties and authority reasonably accorded to and expected of a
Senior Vice President-Business Unit Executive. Employee hereby accepts this
employment upon the terms and conditions herein contained and, subject to
paragraph 1(b), agrees to devote his working time, attention and efforts to
promote and further the business of the Company.
(b) Employee shall not, during the term of his employment hereunder, be
engaged in any other business activity pursued for gain, profit or other
pecuniary advantage except to the extent that such activity does not interfere
with Employee's duties and responsibilities hereunder.
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<PAGE> 2
The foregoing limitations shall not be construed as prohibiting Employee from
making personal investments in such form or manner as will neither require his
services in the operation or affairs of the companies or enterprises in which
such investments are made.
2. Compensation. For all services rendered by Employee, the Company
shall compensate Employee as follows:
(a) Base Salary; Annual Bonus. The base salary payable to Employee
shall be $225,000 per year, payable on a regular basis in accordance with the
Company's standard payroll procedures but not less than monthly (pro-rated for
any year in which Employee is employed for less than the full year). On at least
an annual basis the Board (as defined below) will review Employee's performance
and make increases to such base salary if, in its discretionary, any such
increase is warranted. For 1999 and subsequent years, it is the Company's intent
to develop a written Incentive Bonus Plan setting forth the criteria under which
Employee and other officers and key employees will be eligible to receive
year-end bonus awards. Employee shall be eligible for a bonus opportunity of up
to 50% of Employee's annual base salary payable in cash and or equity at the
Company's discretion beginning January 1, 2000 in accordance with this Incentive
Bonus Plan. Such recommended increase would, in all likelihood, require approval
by the Board of Directors (the "Board") or a duly constituted committee thereof.
The award of any bonus shall be based on the Company's overall performance and
the total performance of the business unit managed and shall be payable in
various increments based on the performance. The incremental payments and the
Company's targeted performance shall be determined by the Board or the
compensation committee thereof.
(b) Other Compensation. Employee shall be entitled to receive
additional benefits and compensation from the Company in such form and to such
extent as specified below:
(i) Payment of all premiums for coverage for Employee and
Employee's dependent family members under health, hospitalization,
disability, dental and other insurance plans that the Company may have
in effect from time to time.
(ii) Reimbursement for all business travel and other
out-of-pocket expenses reasonably incurred by Employee in the
performance of his services pursuant to this Agreement and a $500 per
month car allowance (determined on a pre-tax basis). All reimbursable
expenses shall be appropriately documented in reasonable detail by
Employee upon submission of any request for reimbursement, and in a
format and manner consistent with the Company's expense reporting
policy.
(iii) Four (4) weeks paid vacation for each year during the
period of employment or such greater amount as may be afforded officers
and key employees generally under the Company's policies in effect from
time to time (pro-rated for any year in which Employee is employed for
less than the full year).
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<PAGE> 3
(iv) The Company shall provide Employee with other executive
perquisites as may be available to or deemed appropriate for Employee
by the Board and participation in all other Company-wide employee
benefits as available from time to time.
3. [INTENTIONALLY LEFT BLANK]
4. Term; Termination; Rights on Termination. The term of this Agreement
shall begin on the date hereof and continue for two years (the "Term"). On the
annual anniversary, the agreement shall automatically renew for a two-year
period, unless written notice is given that it will not be renewed. This
Agreement and Employee's employment may be terminated in any one of the
following ways:
(a) Death. The death of Employee shall immediately terminate the
Agreement with no severance compensation due to Employee's estate.
(b) Disability. The Company will make efforts to reasonably accommodate
Employee as required by applicable state or federal disability laws. However,
the parties irrebutably presume that, given Employee's position, it would be an
undue hardship to the Company if Employee is absent for more than three (3)
consecutive months. Therefore, if as a result of incapacity due to physical or
mental illness or injury, Employee shall have been absent from his full-time
duties hereunder for three (3) consecutive months, then thirty (30) days after
receiving written notice (which notice may occur before or after the end of such
three (3) month period, but which shall not be effective earlier than the last
day of such three (3) month period), the Company may terminate Employee's
employment hereunder provided Employee is unable to resume his full-time duties
at the conclusion of such notice period. Also, Employee may terminate his
employment hereunder if his health should become impaired to an extent that
makes the continued performance of his duties hereunder hazardous to his
physical or mental health or his life, provided that Employee shall have
furnished the Company with a written statement from a qualified doctor to such
effect and provided, further, that at the Company's request made within thirty
(30) days of the date of such written statement, Employee shall submit to an
examination by a doctor selected by the Company who is reasonably acceptable to
Employee or Employee's doctor and such doctor shall have concurred in the
conclusion of Employee's doctor. In the event this Agreement is terminated as a
result of Employee's disability, Employee shall receive from the Company, in a
lump-sum payment due within ten (10) days of the effective date of termination,
the base salary at the rate then in effect for whatever time period is remaining
under the Term of this Agreement.
(c) Good Cause. The Company may terminate the Agreement five (5) days
after written notice to Employee for good cause, which shall be: (i) Employee's
breach of this Agreement; (ii) Employee's negligence in the performance or
nonperformance (continuing for five (5) days after receipt of the written
notice) of any of Employee's material duties and responsibilities hereunder;
(iii) Employee's dishonesty, fraud or misconduct with respect to the business or
affairs of the Company that adversely affects the operations or reputation of
the
3
<PAGE> 4
Company; (iv) Employee's conviction of a felony crime; or (v) chronic alcohol
abuse or illegal drug abuse by Employee. In the event of a termination for good
cause, as enumerated above, Employee shall have no right to any severance
compensation.
(d) Without Cause. At any time after the commencement of employment,
the Company may, without cause, terminate this Agreement and Employee's
employment, effective ten (10) days after written notice is provided to
Employee. Employee may only be terminated without cause by the Company during
the Term hereof if such termination is approved by the Board of Directors of the
Company. Should Employee be terminated by the Company without cause, Employee
shall receive from the Company, in a lump-sum payment due on the effective date
of termination, the base salary at the rate then in effect for whatever time
period is remaining under the Term of this Agreement.
(e) Termination by Employee for Good Reason. Employee may terminate his
employment hereunder for "Good Reason." As used herein, "Good Reason" shall mean
the continuance of any of the following after fifteen (15) days' prior written
notice by Employee to the Company, specifying the basis for such Employee's
having Good Reason to terminate this Agreement:
(i) Employee's removal from, or failure to be reappointed or
reelected to, Employee's position under this Agreement, except as
contemplated by paragraphs 4(a), (b) and (c); or
(ii) Any other material breach of this Agreement by the
Company, including the failure to pay Employee on a timely basis the
amounts to which he is entitled under this Agreement.
In the event of any dispute with respect to the termination by the Employee for
Good Reason, such dispute shall be resolved pursuant to the provisions of
paragraph 16 below. In the event that it is determined that Good Reason did
exist, the Company shall pay all amounts and damages to which Employee may be
entitled as a result of such breach, including interest thereon and all
reasonable legal fees and expenses and other costs incurred by Employee to
enforce his rights hereunder. Should Employee terminate his employment for Good
Reason, Employee shall receive from the Company, in a lump-sum payment due on
the effective date of termination, the base salary at the rate then in effect
for whatever time period is remaining under the Term of this Agreement.
(f) Termination by Employee Without Cause. If Employee resigns or
otherwise terminates his employment without Good Reason pursuant to paragraph
4(e), Employee shall receive no severance compensation.
Upon termination of this Agreement for any reason provided in clauses (a)
through (f) above, Employee shall be entitled to receive all compensation earned
and all benefits and reimbursements vested or due through the effective date of
termination. Additional compensation subsequent to
4
<PAGE> 5
termination, if any, will be due and payable to Employee only to the extent and
in the manner expressly provided above or in paragraph 16. All other rights and
obligations of the Company and Employee under this Agreement shall cease as of
the effective date of termination, except that the Company's obligations under
paragraph 10 herein and Employee's obligations under paragraphs 5, 6, 7, 10 and
11 herein shall survive such termination in accordance with their terms.
5. Return of Company Property. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Employee by or on behalf of the Company or their
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, as the case may be, and
be subject at all times to their discretion and control. Likewise, all
correspondence, reports, records, charts, advertising materials and other
similar data pertaining to the business, activities or future plans of the
Company that is collected by Employee shall be delivered promptly to the Company
without request by it upon termination of Employee's employment.
6. Inventions. Employee shall disclose promptly to the Company any and
all significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by Employee,
solely or jointly with another, during the period of employment or within one
(1) year thereafter, and which are directly related to the business or
activities of the Company and that Employee conceives as a result of his
employment by the Company. Employee hereby assigns and agrees to assign all his
interests therein to the Company or its nominee. Whenever requested to do so by
the Company, Employee shall execute any and all applications, assignments or
other instruments that the Company shall deem necessary to apply for and obtain
letters patent of the United States or any foreign country or to otherwise
protect the Company's interest therein.
7. Trade Secrets. Employee agrees that he will not, during or after the
term of this Agreement with the Company, disclose the specific terms of the
Company's relationships or agreements with their respective significant vendors
or customers or any other significant and material trade secret of the Company,
whether in existence or proposed, to any person, firm, partnership, corporation
or business for any reason or purpose whatsoever.
8. Disclosure of Information. Employee agrees that for a period of
three (3) years after the date hereof or during the term of this Agreement and
for a period of three (3) years thereafter, whichever is longer, without the
prior written consent of the Company, Employee shall not, directly or
indirectly, through any form of ownership, in any individual or representative
or affiliated capacity whatsoever, except as may be required by law, reveal,
divulge, disclose or communicate to any person, firm, association, corporation
or other entity in any manner whatsoever information of any kind, nature or
description concerning: (i) the names of any prior or present suppliers or
customers with respect to the Business, (ii) the prices for products or services
with respect to the Business, (iii) the names of personnel with respect to the
Business, (iv) the manner of operation with respect to the Business, (v) the
plans, trade secrets, or other data of
5
<PAGE> 6
any kind, nature or description, whether tangible or intangible, with respect to
the Business, or (vi) any other financial, statistical or other information
regarding the business acquired by the Company that the Company designates or
treats as confidential or proprietary. The agreements set forth herein shall not
apply to any information that at the time of disclosure or thereafter is
generally available to and known by the public (other than as a result of a
disclosure directly or indirectly by Employee in violation of this Agreement).
Without regard to whether any or all of the foregoing matters would be deemed
confidential, material or important, the parties hereto stipulate that as
between them, the same are important, material and confidential and gravely
affect the effective and successful conduct of the Business and its goodwill.
9. Noncompetition. (a) Employee agrees that during the term of
this Agreement and, upon termination of Employee's employment by the Company for
a period of three (3) years thereafter, he shall not:
(i) Call upon, solicit, divert, take away or attempt to call
upon, solicit, divert or take away any existing customers, suppliers,
businesses, or accounts of the Business in connection with any business
substantially similar to the Business in the territory defined as 100 miles in
and around the Company's and its affiliates operations (the "Territory");
(ii) Hire, attempt to hire, contact or solicit with respect to
hiring for himself or on behalf of any other person any present employee of the
Company in the Business;
(iii) Lend credit, money or reputation for the purpose of
establishing or operating a business substantially similar to the Business in
the Territory;
(iv) Do any act that Employee knew or reasonably should have
known might directly injure the Company in any material respect or that might
divert customers, suppliers or employees from the Business; and
(v) Without limiting the generality of the foregoing
provisions, conduct a business substantially similar to the Business under the
name "F.Y.I. Incorporated" or any other trade names, trademarks or service marks
heretofore used by the Company or its affiliates.
The covenants in subsections (i) through (v) are intended to restrict
Employee from competing in any manner with the Company or the Business in the
activities that have heretofore been carried on by the Company or its
affiliates. The obligations set forth in subsections (i) through (v) above shall
apply to actions by Employee, through any form of ownership, and whether as
principal, officer, director, agent, employee, employer, consultant, stockholder
or holder of any equity security (beneficially or as trustee of any trust),
lender, partner, joint venturer or in any other individual or representative or
affiliated capacity whatsoever. However, none of the foregoing shall prevent
Employee from being the holder of up to 5.0% in the aggregate of any class of
securities of any corporation engaged in the activities described in subsection
(i) through
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<PAGE> 7
(v) above, provided that such securities are listed on a national securities
exchange or reported on the Nasdaq National Market.
10. Indemnification. In the event Employee is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Employee), by reason of the fact that he is or was performing services
under this Agreement, then the Company shall indemnify Employee against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, as actually and reasonably incurred by Employee in connection
therewith. In the event that both Employee and the Company are made a party to
the same third-party action, complaint, suit or proceeding, the Company agrees
to engage competent legal representation, and Employee agrees to use the same
representation, provided that if counsel selected by the Company shall have a
conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and the Company shall pay all attorneys'
fees of such separate counsel. Further, while Employee is expected at all times
to use his best efforts to faithfully discharge his duties under this Agreement,
Employee shall not be held liable to the Company for errors or omissions made in
good faith where Employee has not exhibited negligence or performed criminal and
fraudulent acts which damage the business of the Company.
11. No Prior Agreements. Employee hereby represents and warrants to the
Company that the execution of this Agreement by Employee and his employment by
the Company and the performance of his duties hereunder will not violate or be a
breach of any agreement with a former employer, client or any other person or
entity. Further, Employee agrees to indemnify the Company for any claim,
including, but not limited to, attorneys' fees and expenses of investigation, by
any such third party that such third party may now have or may hereafter come to
have against the Company based upon or arising out of any non-competition
agreement, invention or secrecy agreement between Employee and such third party
which was in existence as of the date of this Agreement.
12. Assignment; Binding Effect. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Employee agrees, therefore, he cannot
assign all or any portion of his performance under this Agreement. Subject to
the preceding, this Agreement shall be binding upon, inure to the benefit of and
be enforceable by the parties hereto and their respective heirs, legal
representatives, successors and assigns.
13. Complete Agreement. This Agreement is not a promise of future
employment. Employee has no oral representations, understandings or agreements
with the Company or any of its officers, directors or representatives covering
the same subject matter as this Agreement. This written Agreement is the final,
complete and exclusive statement and expression of the agreement between the
Company and Employee and of all the terms of this Agreement, and it cannot be
varied, contradicted or supplemented by evidence of any prior or contemporaneous
oral or written agreements. This Agreement may not be later modified except by a
further writing signed by a
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<PAGE> 8
duly authorized officer of the Company and Employee, and no term of this
Agreement may be waived except by writing signed by the party waiving the
benefit of such term.
14. Notice. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: F.Y.I. Incorporated
3232 McKinney Avenue
Suite 900
Dallas, Texas 75204
Attn: Margot T. Lebenberg, Esq.
To Employee: Joe A. Rose
4236 Purdue Boulevard
Dallas, Texas 75225
Notice shall be deemed given and effective three (3) days after the deposit in
the United States mail of a writing addressed as above and sent first class
mail, certified, return receipt requested, or when actually received. Either
party may change the address for notice by notifying the other party of such
change in accordance with this paragraph 14.
15. Severability; Headings. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of the
Agreement or of any part hereof.
16. Arbitration. Any unresolved dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three (3) arbitrators in Dallas, Texas, in
accordance with the rules of the American Arbitration Association then in
effect. The arbitrators shall not have the authority to add to, detract from, or
modify any provision hereof nor to award punitive damages to any injured party.
The arbitrators shall have the authority to order back-pay, severance
compensation, vesting of options (or cash compensation in lieu of vesting of
options), reimbursement of costs, including those incurred to enforce this
Agreement, and interest thereon in the event the arbitrators determine that
Employee was terminated without disability or good cause, as defined in
paragraphs 4(b) and 4(c), respectively, or that the Company has otherwise
materially breached this Agreement. A decision by a majority of the arbitration
panel shall be final and binding. Judgment may be entered on the arbitrators'
award in any court having jurisdiction. The direct expense of any arbitration
proceeding shall be borne by the Company.
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<PAGE> 9
17. Governing Law. This Agreement shall in all respects be construed
according to the laws of the State of Texas.
18. Counterparts. This Agreement may be executed simultaneously in two
(2) or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
19. Attorneys' Fees. In the event of any litigation or arbitration
arising under or in connection with this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees as determined by the court or
arbitration panel, as the case may be. Each party to this Agreement represents
and warrants that it has been represented by counsel in the negotiation and
execution of this Agreement, including without limitation the provisions set
forth in this paragraph 19.
20. Change in Control.
(a) Employee understands and acknowledges that the Company may be
merged or consolidated with or into another entity.
(b) In the event of a transaction giving rise to the Change in Control
from the successor to all or a substantial portion of the Company's business
and/or assets that such successor "is" willing as of the closing to assume and
agree to perform the Company's obligations under this Agreement in the same
manner and to the same extent that the Company is hereby required to perform,
then such Change in Control shall cause a lump-sum payment due to Employee
equivalent of Employee's salary for one year.
(c) In any Change in Control situation in which Employee has received
written notice prior to the closing date from the successor that such successor
is not willing to assume the Company's obligations hereunder Employee shall
receive a lump-sum severance payment equivalent to one and a half years salary.
(d) For purposes of applying paragraph 20 under the circumstances
described in (b) and (c) above, the effective date will be the closing date of
the transaction giving rise to the Change in Control and all compensation,
reimbursements and lump-sum payments due Employee must be paid in full by the
Company at or prior to such closing. Further, Employee will be given an
opportunity to elect whether to exercise all or any of his vested options to
purchase Common Stock of the Company, including any options with accelerated
vesting under the provisions of the Company's 1995 Stock Option Plan, such that
he may convert the options to shares of Common Stock of the Company at or prior
to the closing of the transaction giving rise to the Change in Control, if he so
desires.
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<PAGE> 10
(e) A "Change in Control" shall be deemed to have occurred if:
(i) any person, other than the Company or an employee benefit
plan of the Company, acquires directly or indirectly the Beneficial
Ownership (as defined in Section 13(d) of the Securities Exchange Act
of 1934, as amended) of any voting security of the Company and
immediately after such acquisition such Person is, directly or
indirectly, the Beneficial Owner of voting securities representing 50%
or more of the total voting power of all of the then-outstanding voting
securities of the Company;
(ii) the individuals (A) who, as of the effective date of the
Company's registration statement with respect to its initial public
offering, constitute the Board of Directors of the Company (the
"Original Directors") or (B) who thereafter are elected to the Board of
Directors of the Company and whose election, or nomination for
election, to the Board of Directors of the Company was approved by a
vote of at least two-thirds (2/3) of the Original Directors then still
in office (such directors becoming "Additional Original Directors"
immediately following their election) or (C) who are elected to the
Board of Directors of the Company and whose election, or nomination for
election, to the Board of Directors of the Company was approved by a
vote of at least two-thirds (2/3) of the Original Directors and
Additional Original Directors then still in office (such directors also
becoming "Additional Original Directors" immediately following their
election), cease for any reason to constitute a majority of the members
of the Board of Directors of the Company;
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a
reverse stock split of outstanding voting securities, or consummation
of any such transaction if stockholder approval is not sought or
obtained, other than any such transaction which would result in at
least 75% of the total voting power represented by the voting
securities of the surviving entity outstanding immediately after such
transaction being Beneficially Owned by at least 75% of the holders of
outstanding voting securities of the Company immediately prior to the
transaction, with the voting power of each such continuing holder
relative to other such continuing holders not substantially altered in
the transaction; or
(iv) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a substantial portion of the
Company's assets (i.e., 50% or more of the total assets of the
Company).
(f) Employee must be notified in writing by the Company at any time
that the Company or any member of its Board anticipates that a Change in Control
may take place.
(g) Employee shall be reimbursed by the Company or its successor for
any excise taxes and/or interest or penalties with respect to such excise taxes
that Employee incurs under Section
10
<PAGE> 11
4999 of the Internal Revenue Code of 1986, as amended (or any similar tax that
may hereafter be imposed), as a result of any Change in Control. Such amount
will be due and payable by the Company or its successor within ten (10) days
after Employee delivers a written request for reimbursement accompanied by a
copy of his tax return(s) showing the excise tax actually incurred by Employee.
11
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
F.Y.I. INCORPORATED
By: /s/ Ed H. Bowman, Jr.
-----------------------
Title: President and CEO
EMPLOYEE:
/s/ Joe A. Rose
--------------------------
JOE A. ROSE
12
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