ITEM 1. BUSINESS
GENERAL
F.Y.I. Incorporated ("F.Y.I." or the "Company") was founded in September 1994 to create a national, single source provider of document management services to three primary client segments: healthcare institutions, professional services firms and financial institutions. The Company's primary strategy is to consolidate the highly fragmented document management services industry through acquisitions. In January 1996, F.Y.I. acquired, simultaneously with the closing of its initial public offering (the "IPO"), seven document management services businesses (the "Founding Companies"). Since the IPO, and through December 31, 1996, the Company acquired 18 additional companies (the "Subsequent Acquisitions"). Since December 31, 1996, the Company has acquired three additional companies, for a total of 28 acquisitions since the Company's inception. In December 1996, the Company completed a public offering of 2,783,000 shares of Common Stock (including 420,000 shares of Common Stock sold by selling stockholders) (the "December Offering"). The proceeds from the December Offering were used to repay the outstanding balance on its line of credit, to pay a portion of consideration for acquisitions and to retire indebtedness assumed in acquisitions. The remaining proceeds are to be used for general corporate purposes, which are expected to include additional acquisitions. The Company intends to continue to aggressively pursue strategic acquisitions in existing and new markets, cross-sell its full range of services to its current customer base and expand the marketing of its services to new customers.
An estimated four trillion documents are generated annually in the United States. A significant portion of the storage, processing and management of these documents is outsourced to small document management services businesses. Further, the Company believes that the document management services market is growing due to several factors, including: (i) government regulations that require lengthy document retention periods and rapid accessibility for many types of records; (ii) increased customer expectations of low cost access to records on short notice and, in many instances, at disparate locations; (iii) the increasing litigiousness of society, necessitating access to relevant documents and records for extended periods; and (iv) continuing advancements in computer, networking, facsimile, printing and other technologies which have greatly facilitated the production and wide distribution of documents.
The Company's three targeted client segments generate large volumes of documents and require specialized processing, distribution, storage and retrieval of these documents and the information they contain. The Company believes that these client segments will continue to increase their outsourcing of document management services in order to maintain their focus on core operating competencies and revenue generating activities; reduce fixed costs, including labor and equipment costs; and gain access to new technologies without incurring the expense and risk of near-term obsolescence of such technologies.
The document management services business is highly fragmented. The Company believes that many small document management services businesses: (i) have insufficient capital for expansion; (ii) cannot keep abreast of rapidly changing technologies; (iii) lack effective marketing programs; and (iv) are unable to meet the needs of large, geographically dispersed clients. In addition, there are a limited number of options for owners of such businesses to obtain liquidity by selling their businesses. As a result, the Company believes that many owners of such businesses will continue to be receptive to its acquisition program.
BUSINESS STRATEGY
The Company's goal is to become a national, single source provider of document management services for its three primary target client segments: healthcare institutions, professional services firms and financial institutions, as well as governmental entities and Fortune 500 companies. In order to achieve this goal, the Company is implementing its focused business strategy based on the following key principles:
Establish Full Service Operations in Multiple Metropolitan Areas. The Company intends to establish a full range of document management operations to meet the diverse needs of targeted metropolitan areas by
implementing its "fill-in-the-grid" strategy through selected acquisitions and expansion of existing businesses. Ultimately, the Company will seek to achieve a national scope of coverage so that it can implement a national sales and service policy.
Capitalize on Cross-Selling Opportunities. The Company intends to continue to cross-sell in two primary ways. First, the Company intends to leverage its existing client relationships by selling such clients additional document management services provided by the Company's other businesses. Second, the Company intends to leverage its existing knowledge with respect to industry transferable services by marketing such services across client segment lines.
Achieve Cost Savings Through Economies of Scale. The Company believes that it will be able to achieve significant economies of scale by combining a number of general and administrative functions at the corporate level and by reducing or eliminating redundant functions and facilities. For example, the Company has implemented a Company-wide insurance plan, employee benefits programs and purchasing certain items, such as paper, microfilm and storage racks, on a combined basis. To the extent that the Company is able to expand through the acquisition of additional document management businesses, the Company believes that such cost savings will continue to accrue.
Operate With a Decentralized Management Strategy. The Company believes that the experienced local management teams of its acquired businesses have a valuable understanding of their respective markets and businesses and have existing client relationships upon which they may capitalize. Accordingly, the Company is operating and expects to continue to operate with a decentralized management strategy. Local management will remain empowered to make most of the day-to-day operating decisions at each location and will be primarily responsible for the profitability and growth of that location. Although the Company intends to have local management operate with a high degree of autonomy, the Company believes that regular communication between the individual businesses and the Company's executive management team will be integral to realizing the benefits afforded by the consolidation of these businesses into a single company.
ACQUISITION STRATEGY
Since the IPO, the Company has acquired 21 additional companies. The Company believes that there are significant opportunities to consolidate the capabilities and resources of a number of existing document management services businesses with the intent of providing customers with a single source document management solution. Accordingly, the Company is pursuing a "fill-in-the-grid" strategy aimed at providing comprehensive document management services based on the demands of the given geographical market. The Company has implemented an aggressive, three-tiered acquisition program consisting of "beachhead acquisitions" to enter additional targeted markets, "service expansion acquisitions" to acquire additional service capabilities within such markets and "tuck-in" acquisitions to gain market share.
In order to enter a targeted geographic market, the Company makes "beachhead" acquisitions of leading document management services companies with strong market positions. In analyzing beachhead acquisition candidates, the Company focuses on acquiring businesses that have one or more of the following characteristics: (i) experienced and high quality management; (ii) multiple locations, preferably with operations in two to three contiguous markets; (iii) a strong customer franchise; and (iv) a history of profitability.
The second tier of the Company's acquisition program involves the acquisition of related document management services companies that will either increase the Company's offered services in a particular region or increase its share of the market for those services it already offers in that region. In making such "service expansion" acquisitions, the Company assesses the services required by the specific market's customer base and then seeks to acquire leading providers of such services within that geographic area.
Finally, in order to increase its market share and realize economies of scale, the third tier of the Company's acquisition program is the acquisition of smaller "tuck-in" businesses that can be easily assimilated into the operations of the Company's existing businesses. Such tuck-in businesses are intended to enable the Company to benefit from the operating leverage of its existing businesses by acquiring additional market share and revenue while eliminating or reducing certain general, administrative and operating costs
previously associated with such revenue. Accordingly, the Company targets tuck-in businesses with strong customer relationships.
The Company believes that it will continue to be an attractive acquiror of other document management services companies due to its strategy of retaining selected owners and management of acquired companies, its access to growth capital and its ability to offer sellers cash for their business as well as an ongoing equity stake in the Company. Nevertheless, there are numerous risks associated with the Company's intended acquisition program. See "-- Risk Factors-Acquisition Strategy," "-- Reliance on Key Personnel" and "-- Need for Additional Financing to Continue Acquisition Strategy."
SERVICES OFFERED
The Company provides a wide variety of document management services and draws upon its available services to develop document management solutions for its clients based on their specific needs. The current document management services that are provided in certain geographic locations include:
Transferable Services
Document and Data Conversion Services. Document and data conversion services include micrographics services and electronic imaging services. Micrographics services involve: (i) the conversion of paper documents into microfilm images; (ii) film processing; and (iii) computer-based indexing and formatting. Typically, micrographic services are selected: (i) as a cost-competitive technology to reduce the physical size of stored records; (ii) for their long-term (over 100 years) archival capabilities; and (iii) as an intermediate step in certain imaging or reprographic applications.
Electronic imaging services involve the conversion of paper or microfilm documents into digitized information through optical scanners. Digitized information can be either stored as an image or converted to code through optical character recognition (OCR) or digital imaging storage and retrieval technologies. Conversion to code provides additional processing capabilities such as manipulation of data. In both cases, the digitized information can be stored on either a magnetic medium, such as a computer diskette, or on optical laser disks, such as compact disks. Electronic imaging is generally used because of the storage media's high speed of retrieval, its multiple indexing and text search formatting capabilities, and its ability to be used to distribute output to multiple locations. Electronic imaging services are typically billed on a job-by-job basis, based on the number of images and complexity of the retrieval applications.
Records Management Services. Records management services consist of active or open shelf storage and archival storage of inactive documents. Active or open shelf storage services involve the storage, processing (i.e., indexing and formatting), retrieval, delivery and return to storage of documents on a rapid time frame. Many of such services are provided electronically. Representative uses for open shelf storage include active medical and legal case files. In many instances, open shelf storage is offered as an outsourced file room service, where documents are requested and retrieved frequently and, in many cases, transmitted via facsimile or electronically due to the urgency of the request. Service fees generally include a monthly fee based on activity levels and volumes stored, with extra billing for specialized requests.
The archiving of inactive documents involves storage for extended periods of time with a lesser emphasis on service or accessibility to stored documents. Typical uses for archival storage of inactive documents include storage of closed files for professional services firms and documents that may be required by law to be maintained by hospitals, other healthcare institutions and financial institutions for extended periods. Service fees generally include billing for storage space, plus activity charges for each retrieval, delivery and return to storage, and ultimately for document destruction.
Database Management and Related Services. Database management and related services include database management, data entry, direct mail and fulfillment services. Database management services involve data capture (manually or through scanning or other electronic media), data consolidation and elimination, storage, maintenance, formatting and report creation. Data entry includes the conversion of text and handwritten paper media into digital files. An advantage of digital files is the ability to manipulate large
amounts of data quickly and efficiently. In some cases, database services include statistical analysis of data. Direct mail and fulfillment services provide customers with rapid, reliable and cost-effective methods for making large-scale distributions of statements, reports and letters to consumers and other target audiences.
Industry Specific Services
The Company has developed industry specific services in order to address the document management needs of its particular clients. These industry specific services include:
Medical Records Release Services. Medical records release services involve processing a request for a patient's medical records from a physician, insurance company, attorney, healthcare institution or individual. The medical records release service provider initially verifies that the release is properly authorized, coordinates the retrieval of the record, determines the relevant parts of the record to be copied and delivers the copied records (or portions thereof) to the requesting party. Medical records release services are provided on-site and off-site pursuant to contracts with hospitals and other large healthcare institutions. The medical records release service provider bills the recipient directly and sometimes pays a fee to the hospital.
Litigation Support. Litigation often involves the production (i.e., delivery to opposing counsel) and management of thousands of pages of documents, extracted in their current working form from the offices and files of litigating parties and their experts, advisors and legal counsel. Litigation support services include managing the logistics of high volume document production, microfilming and/or electronic imaging, document coding, computer indexing, automated document retrieval and high speed, multiple-set reproduction of documents. Additional litigation support services include subpoena of business documents and service of process, discovery assistance, document coding, forensic analysis and other trial support services to law firms, corporations and regulated entities. These clients typically look to litigation support companies to augment their internal operations and capabilities on an as-needed, job-by-job basis. Clients are generally billed on a per unit basis.
Business Imaging Products Sales
The Company has a five-year agreement with the Eastman Kodak Company that expires on December 31, 1999 and grants the Company the right to act as a distributor of a wide range of Kodak microfilm and business imaging supplies in Delaware, Maryland, Pennsylvania, Virginia, West Virginia and Washington, D.C.
SALES AND MARKETING
The Company has a broad customer base, and none of the Company's customers accounted for more than 5.0% of revenue for the year ended December 31, 1996. Historically, the Company's sales efforts have been implemented on a location-by-location basis and typically have been coordinated either through separate sales personnel or as part of the local management's responsibilities. The Company's existing local sales efforts are supplemented through local sales representatives. The Company strives to increase its client base by attracting customers away from small, single business operators as a result of its ability to offer a broader range of solutions for its clients' document management needs. In addition, the Company intends to continue to focus on increasing revenue from its existing clients by cross-selling its services and broadening its product offerings. Once the Company gains critical mass in a number of metropolitan areas, it will seek to augment local sales and marketing efforts through the implementation of a national sales/account program.
COMPETITION
The document management services businesses in which the Company competes and expects to compete are highly competitive. A significant source of competition is the in-house document handling capability of the Company's target client base. There can be no assurance that these businesses will outsource more of their document management needs or that such businesses will not bring in-house services that they currently outsource. In addition, certain of the Company's competitors are larger businesses and have greater financial resources than the Company. Certain of these competitors operate in broader geographic areas than the
Company, and others may choose to enter the Company's areas of operation in the future. In addition, the Company intends to continue to enter new geographic areas through internal growth and by acquiring existing companies and expects to encounter significant competition from established competitors in each of such new areas. As a result of this highly competitive environment, the Company may lose customers or have difficulty in acquiring new customers and new companies and its results of operations may be adversely affected.
The Company believes that the principal competitive factors in document management services include accuracy, reliability and security of service and client segment specific knowledge and price. The Company competes primarily on the basis of quality of service and client segment specific knowledge, and believes that it competes favorably with respect to these factors.
EMPLOYEES
As of December 31, 1996, the Company had approximately 1,830 full-time and 275 part-time employees. As of such date, the Company had approximately 100 employees represented by labor unions. The Company considers its relations with its employees to be good.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning each of the executive officers of the Company:
Thomas C. Walker has been Chairman of the Board of F.Y.I. since its inception in September 1994 and has been Chief Development Officer of F.Y.I. since November 1995. From September 1994 until November 1995, Mr. Walker held the positions of President and Chief Executive Officer. From August 1991 to December 1994, Mr. Walker was Vice President, Corporate Development, of Laidlaw Waste Systems, Inc., a subsidiary of Laidlaw, Inc., a waste management company, where he was responsible for its acquisition and divestiture program in the United States and Mexico. From May 1989 until he joined Laidlaw Waste Systems, Inc., Mr. Walker was President of Thomas C. Walker Associates, Inc., a company providing merger, acquisition and financial consulting services focusing on the waste management industry. During his career, Mr. Walker has been responsible for the acquisition or divestiture of over 150 businesses over a 30-year period. Mr. Walker holds a B.S. in Industrial Engineering from Lafayette College.
In May 1989, Mr. Walker resigned from a senior executive position with a former employer and received a severance payment under the terms of his employment agreement. In July 1989, such employer commenced a proceeding in bankruptcy, and, after emerging from such proceeding and in connection with its liquidation, sought to recover Mr. Walker's severance payment as a preference claim. Mr. Walker litigated this claim but ultimately entered into a judgment requiring him to make significant payments to his former employer. In April 1993, Mr. Walker filed a voluntary petition in bankruptcy in order to discharge such judgment and two mortgage notes relating to two condominiums in Dallas, the holders of which were unwilling to renegotiate the terms of the mortgages. Mr. Walker did not seek any other relief from creditors, and the bankruptcy was discharged in February 1994.
Ed H. Bowman, Jr. has been President and Chief Executive Officer and a Director of F.Y.I. since November 1995. From May 1993 to June 1995, Mr. Bowman was Executive Vice President and Chief
Operating Officer of the Health Systems Group of First Data Corporation, a financial services company. Mr. Bowman was responsible for the day-to-day operations of research and development, marketing and customer service. From 1983 to 1993, Mr. Bowman served in a number of executive positions with HBO & Co. ("HBO"), including VP -- International, VP -- Marketing, Senior VP -- Customer Services, Group Senior VP -- Research and Development, and last serving as Executive Vice President and Chief Operating Officer of the Star Business Unit with responsibility for domestic operations. Prior to joining HBO, Mr. Bowman was with Andersen Consulting for 10 years, where he was elected a Partner. Mr. Bowman became a C.P.A. in 1973 and holds an M.S. from Georgia Institute of Technology and a B.B.A. from Georgia State University. Mr. Bowman is an investor and former board member of several early-stage, high-technology companies.
David Lowenstein reassumed the responsibility of Chief Financial Officer of F.Y.I. in July 1996, the position he held prior to the IPO, and has been Executive Vice President -- Corporate Development and Acquisitions and a Director of F.Y.I. since February 1995. Prior to joining the Company, Mr. Lowenstein served, since February 1994, as Vice President, Business Development of Laidlaw Waste Systems, Inc., with overall responsibility for Laidlaw Waste System's acquisition and divestiture program in North America. From April 1990 until February 1994, Mr. Lowenstein served in a variety of capacities, including Director -- Corporate Development, for Laidlaw, Inc. From November 1988 to March 1990, he served as a business analyst for Tricil, Ltd., a solid and hazardous waste company that was acquired by Laidlaw, Inc. in 1990. Mr. Lowenstein has been responsible for the acquisition or divestiture of over 75 businesses in North America and Europe. Mr. Lowenstein holds a B.A. in Economics from Sir Wilfred Laurier University and an M.S. in Public and Business Administration from Carnegie Mellon University. Mr. Lowenstein is a citizen of the Dominion of Canada residing in the United States.
Timothy J. Barker has been Vice President and Chief Accounting Officer of F.Y.I. since July 1996. From November 1995 to July 1996, Mr. Barker held the position of Controller of F.Y.I. Prior to joining F.Y.I. as a full-time consultant in June 1995, Mr. Barker was a manager with Arthur Andersen LLP, where he served in various capacities over a nine-year period. Mr. Barker served as Vice President of Financial Planning and Analysis for Sunbelt National Mortgage Corporation from June 1993 to October 1994. Mr. Barker holds a B.A. in Accounting from Texas Tech University and has been a C.P.A. since 1985.
Margot T. Lebenberg has been Vice President, General Counsel and Secretary of F.Y.I. since May 1996. From 1992 until joining the Company, Ms. Lebenberg was with Morgan, Lewis & Bockius LLP in New York, where she practiced law primarily in the areas of securities and mergers and acquisitions, specializing in consolidation transactions. Ms. Lebenberg holds a B.A. in Economics and History from the State University of New York at Binghamton and a J.D. from Fordham University School of Law.
RISK FACTORS
LIMITED OPERATING HISTORY; RISKS OF INTEGRATION; ABILITY TO MANAGE GROWTH
F.Y.I. was founded in September 1994 and conducted no operations prior to the consummation of the IPO. F.Y.I. acquired the Founding Companies simultaneously with the closing of the IPO and has acquired 21 additional companies since that time (together with the Founding Companies, the "Operating Companies"). Prior to their acquisition, these companies operated as separate independent entities. Currently, the Company has a decentralized financial reporting system and relies on the existing reporting systems of the Operating Companies. The success of the Company will depend, in part, on the Company's ability to integrate the operations of the Operating Companies, including centralizing certain functions to achieve cost savings and developing programs and processes that will promote cooperation and the sharing of opportunities and resources. F.Y.I.'s management group has been assembled recently and had no previous experience in the document management services industry. There can be no assurance that the management group will effectively be able to oversee the combined entity and implement the Company's operating or growth strategies. Further, to the extent that the Company is able to implement fully its acquisition strategy, the resulting growth of the Company will place significant demands on management and on the Company's internal systems and controls. There can be no assurance that the recently assembled management group will effectively be able to direct the Company through a period of significant growth. In addition, no assurance can be given that the Company's current systems will be adequate for its future needs or that the Company will be successful in implementing new systems.
A number of the Operating Companies offer different services, utilize different capabilities and technologies and target different geographic markets and client segments. While the Company believes that there are substantial opportunities in integrating these businesses, these differences increase the risk inherent in successfully completing such integration. Further, there can be no assurance that the Company's strategy to establish a single source provider for document management services will be successful, or that the Company's target client segments will accept the Company as a provider of such services. In addition, there can be no assurance that the operating results of the Company will match or exceed the combined individual operating results achieved by the Operating Companies prior to their acquisition.
ACQUISITION STRATEGY
The Company's primary growth strategy is the acquisition of additional document management services businesses that will complement its existing businesses. There can be no assurance that the Company will be able to identify or reach mutually agreeable terms with acquisition candidates and their owners, or that the Company will be able to profitably manage additional businesses or successfully integrate such additional businesses into the Company without substantial costs, delays or other problems. Acquisitions may involve a number of special risks including: (i) adverse short-term effects on the Company's reported operating results; (ii) diversion of management's attention; (iii) dependence on retention, hiring and training of key personnel; (iv) risks associated with unanticipated problems or legal liabilities; and (v) amortization of acquired intangible assets. Some or all of these risks could have a material adverse effect on the Company's operations and financial performance. In addition, to the extent that consolidation becomes more prevalent in the industry, the prices for attractive acquisition candidates may be bid up to higher levels. In any event, there can be no assurance that businesses acquired in the future will achieve sales and profitability that justify the investment therein.
The Company is regularly in discussions with additional acquisition candidates and may from time to time enter into letters of intent with respect to the acquisition of such businesses. No assurance can be given, however, that the Company will acquire any additional businesses.
NEED FOR ADDITIONAL FINANCING TO CONTINUE ACQUISITION STRATEGY
The Company currently intends to finance future acquisitions by using cash and its Common Stock for all or a portion of the consideration to be paid. The Company's Registration Statement on Form S-1
(Registration No. 333-1084) (the "Acquisition Shelf") relates to the offering of 2,000,000 shares of Common Stock to be used as consideration for acquisitions by the Company, of which approximately 918,701 shares remained available as of March 7, 1997. In the event that the Company's Common Stock does not maintain sufficient value, or potential acquisition candidates are unwilling to accept the Company's Common Stock as consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, in order to continue its acquisition program. If the Company does not have sufficient cash resources, its growth could be limited unless it is able to obtain capital through additional debt or equity financings. In December 1996, the Company completed the December Offering. The proceeds from the December Offering were used to repay the outstanding balance under the Credit Agreement, as amended (the "Line of Credit"), among the Company and its subsidiaries, Banque Paribas, as agent, and the lenders named therein, and for general corporate purposes, which have included and are expected to include additional acquisitions. Under the Line of Credit, the Company and its subsidiaries initially could borrow, on a revolving credit basis, loans in an aggregate outstanding principal amount of $5.0 million for working capital and general corporate purposes and term loans in an aggregate principal amount of $30.0 million for acquisitions, subject to certain restrictions in the Line of Credit. As of March 7, 1997, the availability under the Line of Credit was $5.0 million for working capital and $8.8 million for acquisitions. There can be no assurance, however, that funds available under the Line of Credit will be sufficient for the Company's needs.
EFFECT OF POTENTIAL FLUCTUATIONS IN OPERATING RESULTS ON PRICE OF COMMON STOCK; VOLATILITY OF STOCK PRICE
Results for any quarter are not necessarily indicative of the results that the Company may achieve for any subsequent quarter or a full fiscal year. Quarterly results may vary materially as a result of the timing and structure of acquisitions, the timing and magnitude of costs related to such acquisitions, the gain or loss of material client relationships and variations in the prices charged by the Company for the services it provides. In addition, since a significant portion of the Company's revenue is generated on a project-by-project basis, the timing or completion of material projects could result in fluctuations in the Company's results of operations for particular quarterly periods. Such fluctuations in operating results may adversely affect the market price of the Company's Common Stock. The market price for the Company's shares may also fluctuate in response to material announcements by the Company or significant clients or competitors of the Company, changes in the economic or other conditions impacting the Company's targeted client segments or changes in general economic conditions. Further, the securities markets have experienced significant price and volume fluctuations from time to time that have often been unrelated or disproportionate to the operating performance of particular companies. These broad fluctuations may adversely affect the market price of the Common Stock.
DEPENDENCE ON CERTAIN CLIENT SEGMENTS AND TECHNOLOGY
The Company derives its revenue primarily from its three targeted client segments: healthcare institutions, professional services firms and financial institutions. Fundamental changes in the business practices of any of these client segments, whether due to regulatory, technological or other developments, could cause a material reduction in demand by such clients for the services offered by the Company. Any such reduction in demand would have a material adverse effect on the results of operations of the Company. The document management services industry is characterized by technological change, evolving customer needs and emerging technical standards. Although the Company believes that it will be able to continue to offer services based on the newest technologies, there can be no assurance that the Company will be able to obtain the rights to use any such technologies, that it will be able to effectively implement such technologies on a cost-effective or timely basis or that such technologies will not render obsolete the Company's role as a third party provider of document management services.
COMPETITION
The document management services businesses in which the Company competes and expects to compete are highly competitive. A significant source of competition is the in-house document handling capability of the Company's targeted client base. There can be no assurance that these businesses will outsource more of their document management needs or that such businesses will not bring in-house services that they currently
outsource. In addition, certain of the Company's competitors are larger businesses and have greater financial resources than the Company. Certain of these competitors operate in broader geographic areas than the Company, and others may choose to enter the Company's areas of operation in the future. In addition, the Company intends to enter new geographic areas through internal growth and acquisitions and expects to encounter significant competition from established competitors in each of such new areas. As a result of this highly competitive environment, the Company may lose customers or have difficulty in acquiring new customers and new companies, and its results of operations may be adversely affected.
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of its executive officers and on senior management of the Operating Companies. Furthermore, the Company will likely depend on the senior management of businesses acquired in the future. If any of these people is unable or unwilling to continue in his or her present role, or if the Company is unable to attract and retain other skilled employees, the Company's business could be adversely affected. The Company does not currently have key person life insurance covering any of its executive officers or other members of senior management.
POTENTIAL LIABILITY FOR BREACH OF CONFIDENTIALITY
A substantial portion of the Company's business involves the handling of documents containing confidential and other sensitive information. Although the Company has established procedures intended to prevent any unauthorized disclosure of confidential information and, in some cases, has contractually limited its potential liability for unauthorized disclosure of such information, there can be no assurance that unauthorized disclosures will not result in material liability to the Company.
INCREASE IN MINIMUM WAGE
As of October 1, 1996, the federal minimum wage increased to $4.75 an hour. The second phase of the increase will be implemented on September 1, 1997, bringing the federal minimum wage to $5.15 an hour. In addition, California and other states have increased or may increase their minimum wage above the federal minimum. A significant number of the Company's employees earn slightly above the minimum wage and, therefore, the Company may have to increase salaries to remain competitive. Accordingly, the Company's results of operations may be adversely affected.
CONTROL BY MANAGEMENT
As of March 7, 1997, the directors and executive officers of the Company beneficially owned approximately 19.0% of the outstanding shares of Common Stock and exercise substantial control over the Company's affairs. These stockholders acting together would likely be able to elect a sufficient number of directors to control the Board of Directors and to approve or disapprove any matter submitted to a vote of stockholders.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
The market price of the Common Stock of the Company could be adversely affected by the sale of substantial amounts of Common Stock of the Company in the public market. As of March 7, 1997, there were 8,779,434 shares of Common Stock outstanding. The 2,783,000 shares sold by the Company and certain selling stockholders in the December Offering, and the 2,185,000 shares sold in the IPO, are freely tradable without restriction unless acquired by affiliates of the Company. Of such 8,779,434 shares, 2,664,615 shares, together with 165,000 shares of Common Stock currently issuable upon exercise of outstanding warrants, have not been registered under the Securities Act, which means that they may be resold publicly only upon registration under the Securities Act or in compliance with an exemption from the registration requirements of the Securities Act, including the exemption provided by Rule 144 under the Securities Act. Holders of all of such unregistered shares, however, have certain registration rights with respect to such shares.
The Company has agreed not to sell or otherwise dispose of any shares of Common Stock for a period of 90 days from the date of the December Offering without the prior written consent of Montgomery Securities, except that the Company may issue Common Stock in connection with acquisitions or upon the exercise of options. In addition, the former owners of the Founding Companies and the initial stockholders of the Company have agreed with the Company that they will not sell any of their shares for a period of two years after January 26, 1996 (other than certain sales registered under the Securities Act and a limited ability to pledge such shares as collateral). The Company has agreed not to waive such restriction for a period of 90 days from the date of the December Offering without the prior written consent of Montgomery Securities. Directors of the Company who are not subject to these contractual restrictions have agreed not to contract to sell or otherwise sell or dispose of any of their Common Stock for a period of 90 days after December 12, 1996 without the prior written consent of Montgomery Securities.
The Company issued 1,081,299 shares of Common Stock as partial consideration for acquisitions completed since the IPO. Of these, 1,081,299 shares were registered under the Company's Acquisition Shelf and are freely tradable (except for 36,670 shares held by a wholly-owned subsidiary of the Company) unless acquired by parties to the acquisition or affiliates of such parties, other than the issuer, in which case they may be sold pursuant to Rule 145 under the Securities Act. In addition, these shares are subject to contractual restrictions on resale which generally expire two years from the date of issuance.
The Company has an aggressive acquisition program under which it recently completed, and expects to continue to pursue, acquisitions that are accounted for under the pooling-of-interests method of accounting. Under the pooling-of-interests method of accounting, the affiliates of the acquired companies, which are generally all of the stockholders of the companies acquired by the Company, must be free to sell or otherwise transfer shares of the Common Stock received in the acquisition, subject to their compliance with federal securities laws, as soon as the Company releases results of operations that reflect the combined operations of the Company and the acquired company for a minimum of 30 days. In addition, the Company expects to complete additional acquisitions in the future that will be accounted for under the pooling-of-interests method. If a significant number of shares of Common Stock are issued in acquisitions that are consummated in close proximity to each other, such shares will become freely tradable at the same time. If a large number of shares are sold by stockholders in the market as soon as their shares became freely transferable, the price of the Common Stock could be adversely affected.
The Company has reserved for issuance under the Company's 1995 Stock Option Plan (the "Plan") an aggregate of 650,000 shares of Common Stock, or 12% of the aggregate number of shares of the Common Stock outstanding, whichever is greater. The Company has registered the shares issuable upon exercise of options granted under the Plan, and such shares will be eligible for resale in the public market. As of March 7, 1997, the Company had options to purchase 682,590 shares of Common Stock outstanding under the Plan.
EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is empowered to issue preferred stock without stockholder action. The existence of this "blank-check" preferred could render more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements such as the Company's or management's intentions, hopes, beliefs, expectations, strategies, predictions or any other variation thereof or comparable phraseology of the Company's future activities or other future events or conditions within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the sufficiency of the Company's working capital and the ability of the Company to realize benefits from consolidating certain general and administrative functions, to continue its aggressive acquisition program, to retain management, to implement its focused business strategy to expand its document management services geographically, to
attract customers from other businesses, to increase revenue by cross-selling services and to successfully defend itself in ongoing and future litigation. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company operated approximately 74 document management service facilities in 12 states. Except for the two facilities owned by the Company, these facilities are leased and are principally used for operations and general administrative functions. See Note 9 of Notes to Consolidated Financial Statements of F.Y.I. Incorporated and Subsidiaries for further information relating to these leases. In March 1996, the Company moved into its current corporate headquarters in Dallas, Texas.
As of December 31, 1996, the Company also operated on-site at approximately 245 client locations on a contractual basis and from time to time at many other client locations for specific projects.
In order to secure its obligations under its Line of Credit, the Company granted to Banque Paribas, as agent for the Company's lenders, a lien on substantially all of the Company's properties and other assets. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
The Company believes that its properties are generally well maintained, in good condition and adequate for its present needs. Furthermore, the Company believes that suitable additional or replacement space will be available when required.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation arising in the normal course of its business. Management believes that none of these actions will have a material adverse effect on the financial condition or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1996, no matters were submitted to a vote of the security holders.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock trades on the Nasdaq National Market under the symbol "FYII." The Company completed its IPO in January 1996 at a price of $13.00 per share. The following table sets forth, for the Company's fiscal periods indicated, the range of high and low last reported sale prices for the Common Stock.
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(1) Represents the initial public offering price.
HOLDERS
On March 7, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $23.25 per share. At March 7, 1997, there were 60 holders of record of the Company's Common Stock, although the Company believes the number of beneficial holders is substantially greater.
DIVIDENDS
The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future and intends to retain its earnings, if any, to finance the expansion of its business and for general corporate purposes. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions and other factors that the Company's Board of Directors deems relevant. In addition, the Line of Credit prohibits the payment of dividends by the Company without the lender's consent.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
F.Y.I. acquired, simultaneously with and as a condition to the closing of the IPO, the following seven Founding Companies (the "Acquisitions"): Imagent Corporation (together with Mobile Information Services Corporation, "Imagent"); Melanson & Associates, Inc. d/b/a Researchers (together with Bay Area Micrographics, "Researchers"); Recordex Services, Inc. ("Recordex"); C.&T. Management Services, Inc. d/b/a DPAS (together with Qualidata, Inc., "DPAS"); Leonard Archives, Inc. ("Leonard"); Deliverex, Incorporated (together with ASK Record Management, "Deliverex"); and Permanent Records, Inc. ("Permanent Records"). The Acquisitions have been accounted for in accordance with generally accepted accounting principles ("GAAP") as a combination of the Founding Companies at historical cost. Accordingly, historical financial statements of these Founding Companies have been combined throughout all relevant periods herein as if the Founding Companies had always been members of the same operating group. However, since the Founding Companies were not under common control or management, historical combined results may not be comparable to, or indicative of, future performance.
The Selected Financial Data for the year ended December 31, 1996 have been derived from the Consolidated Financial Statements of F.Y.I. Incorporated and Subsidiaries that have been audited by Arthur Andersen LLP and that appear elsewhere in this Report. The Selected Financial Data for the years ended December 31, 1993, 1994, 1995 and for the one month ended January 31, 1996 have been derived from the Combined Financial Statements of the Founding Companies that have been audited by Arthur Andersen LLP and that appear elsewhere in this Report. In their report, Arthur Andersen LLP states that with respect to Recordex, as of and for the two years in the period ended December 31, 1994, its opinion is based on the report of other independent public accountants, namely Elko, Fischer, McCabe & Rudman, Ltd. The Selected Financial Data for the year ended December 31, 1992 have been derived from financial statements not included elsewhere in this Report. The Selected Financial Data are based on available information and certain assumptions described in the footnotes set forth below, all of which the Company believes are reasonable. The data relating to the combined Founding Companies, Supplemental Data and pro forma information are provided for informational purposes only and do not purport to present the results of operations of the Company had the transactions assumed therein occurred on or as of the dates indicated, nor are they necessarily indicative of the results of operations which may be achieved in the future.
The Selected Individual Founding Company Financial Data for the years ended December 31, 1993, 1994 and 1995 have been derived from the audited financial statements of the Founding Companies that appear elsewhere in this Report. The Selected Individual Founding Company Financial Data for the year ended December 31, 1992 have been derived from audited financial statements not included elsewhere in this Report.
The Selected Financial Data provided below should be read in conjunction with the historical financial statements of F.Y.I., the Combined Financial Statements of the Founding Companies and the financial statements of each of the Founding Companies, including the related notes thereto, and "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial statements of the Company and the related notes thereto and "Item 6. Selected Financial Data" appearing elsewhere in this Report. Additional information concerning factors that could cause results to differ materially from those in the forward-looking statements is contained under "Item 1. Business -- Risk Factors."
INTRODUCTION
F.Y.I. was founded in September 1994 to create a national, single source provider of document management services. In January 1996, F.Y.I. acquired, simultaneously with the closing of the IPO, the Founding Companies. The Acquisitions have been accounted for in accordance with GAAP as a combination of the Founding Companies at historical cost, and January 31, 1996 has been used as the effective date of the Acquisitions. Between September 1994 and the consummation of the IPO, F.Y.I. did not conduct any operations. Accordingly, the actual operating results of the Company included in the Statement of Operations for the year ended December 31, 1996 represent the 11 months of operations subsequent to the consummation of the Acquisitions and the IPO. During the period prior to the IPO, F.Y.I. incurred various legal, accounting, marketing, travel and other costs in connection with the Acquisitions and the IPO which were funded by the issuance of equity securities. Additional costs associated with the Acquisitions and the IPO were paid with proceeds of the IPO.
Subsequent to the IPO and through December 31, 1996, the Company acquired 18 additional document management businesses. Of these Subsequent Acquisitions, 17 have been accounted for as purchases and one was accounted for as a pooling-of-interests. The Company's results of operations include the Subsequent Acquisitions from the date of their respective acquisition and the pooled company from January 1996.
Supplemental Statement of Operations Data represents the combined results of: (i) the Founding Companies for the one month of operations prior to the consummation of the Acquisitions and the IPO; and (ii) F.Y.I. Incorporated and Subsidiaries for the 11 months of operations subsequent to the consummation of the Acquisitions and the IPO. Such data are presented and discussed herein in order to present the results of the Company since the consummation of the IPO compared to the results of the combined Founding Companies for periods prior to the IPO. The Supplemental Data are provided for information purposes only and do not purport to present the results of operations of the Company had the transactions assumed therein occurred on or as of the dates indicated. The Founding Companies were not under common control or management. Accordingly, such historical combined results may not be comparable to, or indicative of, future performance.
The Company's revenue is classified as service revenue, product revenue and other revenue. Service revenue relates to: (i) document and data conversion services; (ii) records management services; (iii) database management and related services; (iv) medical records release of information services; and (v) litigation support services. Product revenue represents sales of micrographic and business imaging supplies and equipment, primarily in conjunction with film processing and other micrographic services. Other revenue consists of commissions on the sales of imaging systems and equipment and franchising fees.
Cost of services consists primarily of compensation and benefits to non-administrative employees, occupancy costs, equipment costs and supplies, and also includes the costs associated with other revenue discussed above. Cost of products sold relates to micrographics and business imaging supplies and equipment.
Selling, general and administrative expenses ("SG&A") consist primarily of compensation and related benefits to the sales and marketing, executive management, accounting, human resources and other administrative employees of the Company, other sales and marketing costs, communications costs, insurance costs and legal and accounting professional fees. SG&A subsequent to the IPO include the costs of being a public company and the Company's executive management team.
THE COMPANY
The Company conducted no significant operations from its inception through the IPO and the Acquisitions. For accounting purposes and the presentation of the actual financial results herein, January 31, 1996 has been used as the effective date of the Acquisitions.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, revenue was $75.7 million, gross profit was $26.0 million, operating income was $7.7 million and net income was $4.0 million. As previously mentioned, F.Y.I. had no operations until February 1996. For further discussion of supplemental operations for the years ended December 31, 1996 and 1995, see "-- Supplemental."
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had $22.8 million of working capital and $21.0 million of cash. Cash flows provided by operating activities for the year ended December 31, 1996 were $4.9 million. Cash used for investing activities was $40.5 million, as the Company paid $37.2 million for acquisitions, net of cash acquired. Cash provided by financing activities was $56.5 million. The Company raised $68.2 million in the IPO and the December Offering, net of underwriting discounts and other costs associated with the offerings. The Company assumed $8.5 million of debt in the Acquisitions and subsequently retired such debt with the proceeds of the IPO, with the exception of approximately $0.4 million of debt with favorable interest rates and capital lease obligations of approximately $0.4 million. In April 1996, the Company entered into a $35.0 million Line of Credit (see Note 8 of the Notes to Consolidated Financial Statements of F.Y.I. Incorporated and Subsidiaries). The Company paid $1.6 million in costs to secure this financing. During the year ended December 31, 1996, the Company borrowed $22.8 million under the Line of Credit to help fund the acquisition program, all of which was subsequently repaid with cash from operations and the proceeds of the December Offering. The Company assumed $4.0 million of debt in the Subsequent Acquisitions and retired $1.0 million, leaving $0.3 million of capital lease obligations assumed and $2.7 million of debt with interest rates more favorable than the Line of Credit.
In the year ended December 31, 1995, the Company raised $0.1 million through the sale of preferred stock. During this period, the Company spent $0.7 million in activities related to the IPO and the Acquisitions and ended the period with $0.1 million in cash. The Company had no operations during this period.
The Company anticipates that cash on hand, cash from operations, additional bank financing available under the Line of Credit, and shares of Common Stock available under the Acquisition Shelf will provide sufficient liquidity to execute the Company's acquisition and internal growth plans for approximately the next 12 months. The availability under the Line of Credit as of December 31, 1996 was $5.0 million for working capital and general corporate purposes, and approximately $8.8 million for acquisitions. Should the Company accelerate its acquisition program, the Company may need to seek additional financing through the public or private sale of equity or debt securities. There can be no assurance that the Company could secure such financing if and when it is needed or on terms the Company deems acceptable. The Company has registered pursuant to the Acquisition Shelf 2,000,000 shares of Common Stock for issuance in its acquisition program, of which 1,033,265 shares were available at December 31, 1996.
SUPPLEMENTAL
The Statement of Operations Data for the year ended December 31, 1995 represents the audited combined statement of operations of the Founding Companies for the period adjusted to give effect to: (i) the Compensation Differential; and (ii) provision for income taxes as if all entities had been subject to federal and state income taxes for the period. The Supplemental Statement of Operations Data for the year ended December 31, 1996 represents a combination of: (i) the audited results of the combined Founding Companies for the one month of operations prior to the consummation of the IPO and the Acquisitions adjusted for the compensation and tax adjustments discussed above; and (ii) the audited results of F.Y.I. Incorporated and Subsidiaries for the 11 months subsequent to the consummation of the IPO and the Acquisitions (which
include the Subsequent Acquisitions from the date of their respective acquisition and The Rust Consulting Group, Inc. ("Rust") from January 1, 1996) adjusted to give effect to the Compensation Differential for Rust. The Supplemental Data are provided for informational purposes only and do not purport to present the results of operations of the Company had the transactions assumed therein occurred on or as of the dates indicated, nor are they necessarily indicative of the results of operations which may be achieved in the future.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue
Total revenue. Total revenue increased 67.2%, from $47.6 million for the year ended December 31, 1995 to $79.6 million for the year ended December 31, 1996. This increase was comprised of a 77.7% increase in service revenue and a 6.6% increase in product and other revenue.
Service revenue. Service revenue increased $31.6 million, from $40.6 million for the year ended December 31, 1995 to $72.2 million for the year ended December 31, 1996. This increase was largely due to: (i) the Subsequent Acquisitions; and (ii) internal growth in service revenue at the Founding Companies of 9.6%. This internal growth was primarily attributable to: (i) an increase in medical records release revenue at Recordex and Permanent of $1.7 million, primarily attributable to the expansion into 29 additional healthcare institutions in the Eastern United States and Texas during 1996 and due to increased production volumes at facilities contracted during 1995; (ii) an increase in litigation support revenue at Researchers of $1.3 million primarily due to increased overnight document production and increased medical records subpoena and service of process requests; and (iii) an increase in micrographics and electronic imaging revenue at Imagent of $447,000 attributable to an overall increase in imaging, coding and indexing projects, offset by a reduction in microfilm processing revenue due to the reduced volumes of duplicate film processing for one customer and the loss of a customer in early 1996.
Product and other revenue. Product and other revenue increased approximately $461,000, from $7.0 million for the year ended December 31, 1995 to $7.5 million for the year ended December 31, 1996. The increase in product revenue primarily resulted from increased product revenue associated with the purchase of B&B in May 1996 and Rust in December 1996. This increase in product revenue was offset by a decline in Imagent's sales to governmental and related entities associated with the federal government shutdown in late 1995. The decrease in other revenue was attributable to decreased commissions on the sales of micrographics equipment in 1996.
Gross profit
Gross profit increased 76.6%, from $15.5 million for the year ended December 31, 1995 to $27.3 million for the year ended December 31, 1996, largely due to the increases in revenue discussed above. Gross profit as a percentage of revenue increased from 32.5% for the year ended December 31, 1995 to 34.3% for the year ended December 31, 1996, primarily due to the higher margin mix of revenue associated with the Subsequent Acquisitions.
Selling, general and administrative expenses
SG&A increased 75.2%, from $10.5 million for the year ended December 31, 1995 to $18.3 million for the year ended December 31, 1996, primarily due to: (i) the establishment of corporate overhead required to execute the acquisition program and to manage the consolidated group of companies; and (ii) the SG&A associated with the Subsequent Acquisitions. SG&A as a percentage of revenue (excluding corporate overhead) decreased from 21.9% for the year ended December 31, 1995 to 20.8% for the year ended December 31, 1996. This decrease was a result of: (i) a decrease in SG&A as a percentage of revenue at the Founding Companies from 22.1% for the year ended December 31, 1995 to 21.1% for the year ended December 31, 1996, primarily due to spreading the Company's fixed costs over a larger revenue base; and (ii) lower average SG&A as a percentage of revenue associated with the Subsequent Acquisitions relative to the Founding Companies.
Income before income taxes and net income.
Income before income taxes increased 57.8% from $4.8 million for the year ended December 31, 1995 to $7.6 million for the year ended December 31, 1996, and net income increased 48.3% from $3.0 million for the year ended December 31, 1995 to $4.5 million for the year ended December 31, 1996, largely attributable to the factors discussed above. Net income for the year ended December 31, 1996 was impacted by a higher effective tax rate attributable to the elimination of graduated tax rates as the Founding Companies are now taxed on a consolidated basis and due to the impact of nondeductible goodwill associated with certain of the Subsequent Acquisitions.
FOUNDING COMPANIES COMBINED
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue
Total revenue. Total revenue increased 10.7%, from $43.0 million for the year ended December 31, 1994 to $47.6 million for the year ended December 31, 1995. This increase was comprised of a 12.6% increase in service revenue, a 3.6% increase in product revenue and a 15.1% decrease in other revenue.
Service revenue. Service revenue increased $4.5 million, from $36.1 million for the year ended December 31, 1994 to $40.6 million for the year ended December 31, 1995. This increase was largely due to: (i) an increase in Imagent's revenue of $1.4 million, primarily attributable to opening a microfilm processing laboratory in Philadelphia in December 1994, the revenue of which represented approximately 56% of the increase in Imagent's revenue, and to an overall increase in scanning and microfilming projects; (ii) an increase in Leonard's revenue of $851,000 attributable to the addition of two new storage contracts in 1994, to the opening of new records storage and retrieval facilities in Toledo, Ohio in April 1994 and in Ann Arbor, Michigan in January 1995, which new facilities had revenue constituting 25.3% of the increase, and to increased paper prices received in the first half of 1995 for sales of scrap paper in the data disintegration area; and (iii) an increase in Recordex's revenue of $1.7 million and in Permanent's revenue of $414,000 primarily attributable to the expansion of medical records release services into 38 additional healthcare institutions in the Eastern U.S. and Texas during 1995.
Product revenue. Product revenue increased approximately $215,000, from $5.9 million for the year ended December 31, 1994 to $6.1 million for the year ended December 31, 1995. This resulted from obtaining a large contract to supply micrographics products in March 1994 and an increase in film sales associated with an overall increase in film processing due to the opening of two new processing labs.
Other revenue. Other revenue decreased approximately $155,000, from $1.0 million for the year ended December 31, 1994 to $873,000 for the year ended December 31, 1995. This decrease was primarily attributable to Imagent selling lower volumes of imaging systems and equipment.
Costs and expenses
Cost of services. Cost of services increased 9.7%, from $23.7 million for the year ended December 31, 1994 to $25.9 million for the year ended December 31, 1995. Cost of services as a percentage of service and other revenue was 63.7% for the year ended December 31, 1994 and 62.5% for the year ended December 31, 1995. Combined cost of services as a percentage of revenue decreased 1.2% as a result of fluctuations in several service areas: (i) Researchers' cost of services increased $631,000, and as a percentage of revenue increased from 63.3% to 70.3%, as it benefited from several large litigation projects in the first half of 1994 and was negatively impacted in the year ended December 1995 by expenses incurred in connection with the expansion of its imaging business and the addition of personnel and increased rental expense associated with the expansion of its San Francisco facility; (ii) Leonard's cost of services increased $1,000, but as a percentage of revenue decreased from 62.6% to 53.5%, primarily as a result of increased revenue and operating leverage in 1995 associated with the addition of two storage contacts in 1994 and expenses incurred in 1994 in connection with the opening of new document storage and retrieval facilities in Toledo, Ohio and Farmington Hills, Michigan; (iii) Deliverex's cost of services decreased $41,000, and as a percentage of revenue decreased from
64.6% to 57.3%, as a result of price increases and certain cost reduction programs; and (iv) DPAS' cost of services decreased $414,000, and as a percentage of revenue decreased from 74.5% to 66.3%, primarily as a result of a cost reduction program implemented in April 1995.
Cost of products sold. Cost of products sold increased 1.6%, from $4.9 million for the year ended December 31, 1994 to $5.0 million for the year ended December 31, 1995. Cost of products sold as a percentage of product revenue decreased from 82.6% to 81.0% for the years ended December 31, 1994 and 1995, respectively. This decrease was a result of additional value added rebates on selected products from Eastman Kodak.
Depreciation
Depreciation increased 17.3%, from $1.1 million for the year ended December 31, 1994 to $1.2 million for the year ended December 31, 1995. This increase was primarily associated with machinery and equipment purchased for the expansions at Leonard and Recordex discussed above.
Gross profit
As a result of the foregoing, gross profit increased 15.2%, from $13.4 million, or 31.2% of total revenue, for the year ended December 31, 1994 to $15.5 million, or 32.5% of total revenue, for the year ended December 31, 1995.
Selling, general and administrative expenses
SG&A increased 5.5%, from $11.8 million, or 27.5% of revenue, for the year ended December 31, 1994 to $12.5 million, or 26.2% of revenue, for the year ended December 31, 1995. After giving effect to the Compensation Differential in each year, SG&A increased from $10.0 million, or 23.2% of revenue, for the year ended December 31, 1994 to $10.5 million, or 22.1% of revenue, for the year ended December 31, 1995. Although combined SG&A adjusted for the Compensation Differential as a percentage of total revenue decreased 1.1%, there were fluctuations in several service areas: (i) Leonard's adjusted SG&A as a percentage of revenue decreased from 30.3% to 25.3%, primarily as a result of the two storage contracts described above which provided revenue without proportional increases in overhead; (ii) DPAS' adjusted SG&A as a percentage of revenue decreased from 24.9% to 23.2%, primarily as a result of a cost reduction program implemented in April 1995; and (iii) Recordex's SG&A as a percentage of revenue decreased from 33.1% to 31.8%, primarily as a result of increased revenue related to its expansion of medical records release services into additional healthcare institutions without a commensurate increase in overhead.
Pro forma operating income
Pro forma operating income giving effect to the Compensation Differential increased 43.8%, from $3.5 million, or 8.0% of total revenue, for the year ended December 31, 1994 to $5.0 million, or 10.4% of total revenue, for the year ended December 31, 1995.
Interest expense, net
Interest expense, net of interest income increased 16.1%, from $304,000 for the year ended December 31, 1994 to $353,000 for the same period in 1995. This was primarily due to increased borrowings in April through December for the purchase of equipment associated with Leonard's opening of new document storage facilities.
Provision for income taxes
The combined provision for income taxes and pro forma provision for income taxes increased 42.8%, from $1.3 million, or an effective tax rate of 36.7%, for the year ended December 31, 1994 to $1.8 million, or an effective tax rate of 37.2%, for the year ended December 31, 1995. The Founding Companies were operated as separate entities for tax purposes for all periods presented.
Pro forma net income
Pro forma net income giving effect to the Compensation Differential and pro forma provision for income taxes increased 39.8%, from $2.2 million, or 5.0% of total revenue, for the year ended December 31, 1994 to $3.0 million, or 6.4% of total revenue, for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4.1 million, $2.0 million and $2.3 million, respectively, for the years ended December 31, 1995, 1994 and 1993. Net cash provided by operating activities for the year ended December 31, 1995 was primarily impacted by: (i) an increase in net income; (ii) an increase in revenue without a corresponding increase in accounts receivable; (iii) the settlement of a significant portion of Researchers' stockholder receivable; and (iv) a decrease in accounts payable and accrued liabilities. Net cash provided by operating activities for the year ended December 31, 1994 was impacted by increased revenue and increases in accounts receivable and accounts payable and accrued liabilities associated with facility expansions and was also impacted by an increase in Researchers' stockholder receivable. Cash used in investing activities was $1.3 million, $2.0 million and $1.1 million, respectively, for the years ended December 31, 1995, 1994 and 1993. Cash used in investing activities for the year ended December 31, 1995 and for the year ended December 31, 1994 was primarily used for purchases of property, plant and equipment associated with facility expansions, and was also impacted in 1994 by the purchase by Imagent of a microfilm processing business and the associated intangible assets. Cash used in investing activities for 1993 was primarily used for purchases of property, plant and equipment associated with facility expansions. Cash used for financing activities was $2.1 million, $124,000 and $1.2 million, respectively, for the years ended December 31, 1995, 1994 and 1993. Cash used for financing activities for the year ended December 31, 1995 consisted primarily of net payments on debt and payments of dividends. Cash used for financing activities for the year ended December 31, 1994 consisted primarily of payments of dividends offset by net proceeds from debt associated with facility expansions. Cash used for financing activities for 1993 included net payments on debt, advances to Recordex's parent company and payments of dividends. As a result of the foregoing, cash and cash equivalents increased by $686,000 for the year ended December 31, 1995, decreased by $86,000 in 1994 and decreased by $79,000 in 1993.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
Revenue from the Company's services shows no significant seasonal variations. However, service revenue can vary from period to period due to the impact of specific projects, primarily in the litigation support area. Quarterly results may also vary as a result of the timing of acquisitions and the timing and magnitude of costs related to such acquisitions. In addition, because the anticipated financial benefits of the combination of the Operating Companies may not be generated immediately, the Company's initial results as a combined company may reflect corporate overhead that exceeds the realized benefits.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRO FORMA FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To F.Y.I. Incorporated:
We have audited the accompanying consolidated balance sheets of F.Y.I. Incorporated (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of F.Y.I. Incorporated and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas, February 14, 1997
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
The accompanying notes are an integral part of these financial statements.
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these financial statements.
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these financial statements.
F.Y.I. INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
F.Y.I. Incorporated (the "Company" or "F.Y.I.") was founded in September 1994 to create a national, single source provider of document management services to three primary client segments: healthcare institutions, professional services firms and financial institutions. In January 1996, F.Y.I. acquired (the "Acquisitions") simultaneously with the closing of its initial public offering (the "IPO") on January 26, 1996, seven document management services businesses (the "Founding Companies"). The Founding Companies are headquartered in San Francisco (2), San Jose, Fort Worth, Detroit, Malvern (Philadelphia) and Baltimore, and operate in over 23 states. The consideration for the Founding Companies consisted of a combination of cash and common stock (the "Common Stock") of F.Y.I.
Between September 1994 and the consummation of the IPO and the Acquisitions, F.Y.I. did not conduct any operations. For accounting purposes and for the purposes of the presentation of the financial statements herein, January 31, 1996 has been used as the effective date of the Acquisitions. Accordingly, the actual operating results of the Company included in the Statement of Operations for the twelve months ended December 31, 1996 represent the eleven months of operations subsequent to the consummation of the Acquisitions. Supplemental Statement of Operations Data for the twelve months ended December 31, 1996 is presented in Note 15 herein.
The consolidated financial statements of F.Y.I. include the accounts of F.Y.I. Incorporated and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND THE ACQUISITIONS:
Initial Public Offering
On January 26, 1996, the Company completed the IPO of 2,185,000 shares of Common Stock (including the exercise of the underwriters' over-allotment option) at $13.00 per share. Proceeds from the IPO, net of underwriting commissions and offering costs, were approximately $22.9 million. Of these net proceeds, approximately $7.1 million was used to pay a portion of the consideration for the Acquisitions, approximately $7.7 million was used to retire certain indebtedness of the Founding Companies, approximately $8.0 million was used for acquisitions subsequent to the IPO, and $0.1 million was used as working capital.
Upon the closing of the IPO, the Company converted the 9,000 shares of Series A Preferred Stock then outstanding into 542,557 shares of Common Stock.
Acquisitions of the Founding Companies
Simultaneously with the closing of the IPO, the Company acquired the Founding Companies. The aggregate consideration paid by F.Y.I. to acquire the Founding Companies was approximately $35 million, consisting of: (i) $7,059,000 in cash; (ii) 1,878,933 shares of Common Stock; (iii) the assumption and repayment of approximately $191,000 of indebtedness owed by a Founding Company stockholder; and (iv) the distribution of cash and certain receivables to certain Founding Company stockholders of S corporations in the amount of $3,450,000, representing the undistributed retained earnings of S corporations, upon which taxes have been paid by the stockholders.
The Acquisitions have been accounted for in accordance with generally accepted accounting principles ("GAAP") as a combination of F.Y.I. and the Founding Companies at historical cost, because: (i) the Founding Companies' stockholders transferred assets to F.Y.I. in exchange for Common Stock and cash simultaneously, with the IPO; (ii) the nature of future operations of the Company will be substantially identical to the combined operations of the Founding Companies; and (iii) no former stockholder group of any of the Founding Companies obtained a majority of the outstanding voting shares of the Company.
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.
Inventory
Inventory is stated at the lower of cost or market with cost determined on a first-in, first-out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the useful life or the term of the lease.
Intangible Assets
Intangible assets consist primarily of excess purchase price over net assets, which are amortized over 30 years. In conformance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company's management continually evaluates whether events and circumstances indicate the remaining estimated useful life of intangible assets may warrant revisions or that the remaining balance of intangibles or other long-lived assets may not be recoverable. To make this evaluation, management uses an estimate of undiscounted net income over the remaining life of the intangibles or other long-lived assets.
Revenue Recognition
Revenue is recognized when the services are rendered, or products are shipped, to the Company's customers. Microfilm processing revenue is recognized on a percentage-of-completion basis. Unearned revenue represents customer storage and certain services which are billed in advance.
Income Taxes
Income taxes are provided based upon the provisions of SFAS No. 109, "Accounting for Income Taxes," which requires recognition of deferred income taxes under the asset and liability method.
Deferred income taxes are provided for temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes. Temporary differences result primarily from accelerated depreciation and amortization for tax purposes, deferred contract revenues being taxed when billed, and various accruals and reserves being deductible for tax purposes in different periods.
Net Income Per Share
Net income per common share has been computed by dividing income by the weighted average number of common shares and equivalent shares outstanding for the period. For purposes of computing income per common share for the year period ended December 31, 1996, the common stock equivalent impact of stock options outstanding during the period, are not included as their effect is not material.
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Pro Forma Net Income (Unaudited)
The Company acquired The Rust Consulting Group, Inc. ("Rust") in December 1996 in a transaction that was accounted for as a pooling-of-interests. Rust has previously been managed as an independent closely owned company and therefore, selling, general and administrative expenses for the historical periods reflect compensation and related benefits that the owner had received from the business during those periods. In connection with the acquisition, the owner has entered into a three year employment agreement that provides for compensation and benefits at levels lower than the historical amounts (the "Compensation Differential"). The unaudited pro forma data presents compensation at the level the owner has agreed to receive subsequent to the acquisition and the related income tax impact of the Compensation Differential discussed above.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
The activity in the allowance for doubtful accounts and notes receivable is as follows:
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
7. BUSINESS COMBINATIONS:
Since the IPO and through December 31, 1996, the Company has acquired 18 additional businesses (the "Subsequent Acquisitions") that provide document management services, of which 17 were accounted for as purchases and one was accounted for as a pooling-of-interests. The Subsequent Acquisitions consist of:
Sacramento Valley Records Management, Inc. ("Sacramento"); Microfilm Associates, Ltd. ("Microfilm"); B&B Information and Image Management, Inc. ("B&B"); Premier Document Management, Inc. and PDM Services, Inc. ("Premier"); Robert A. Cook and Staff, Inc. and RAC Services, Inc. ("Cook"); Octo, Inc. ("Octo"); Domor Data Processing ("Domor"); Index Record Management ("Index"); Rushmore Legal Support ("Rushmore"); C.M.R.S. Incorporated ("CMRS"), Minnesota Medical Record Service, Inc. ("Minnesota Medical Record"), and Texas Medical Record Service, Inc. ("Texas Medical Record") (collectively "Medical Record"); ZIA Information Analysis Group ("ZIA"); Carton Hodgson, Inc. and CH Direct, Inc. (collectively "Carton"); Data Input Services Corporation ("DISC"); Deliverex of Seattle ("Deliverex Seattle"); Researchers Litigation Support, L.L.C. ("Researchers LLC"); and Rust. The aggregate consideration paid for the 17 acquisitions accounted for as purchases consisted of $32.3 million in cash, 820,065 shares of Common Stock net of stock repurchased by the Company, and future contingent payment estimates of $2,664,000 to be paid in cash and stock. The preliminary allocation of the purchase price is set forth below:
The estimated fair market values reflected above are based on preliminary estimates and assumptions and are subject to revision. In management's opinion, the preliminary allocation is not expected to be materially different than the final allocation.
The fair market value of the shares of Common Stock used in calculating the consideration paid ranged from $13.65 to $14.25, which is based on approximately a 35% discount from the average trading price of the Common Stock based on the length and type of stock resale restrictions outlined in the purchase agreements.
All intangibles are considered enterprise goodwill. Based on the historical profitability of the purchased companies and trends in the legal, healthcare and other industries to outsource document management functions in the foreseeable future, the enterprise goodwill is being amortized over a period of 30 years. Management continually evaluates whether events and circumstances indicate that the remaining estimated
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
useful life of intangible assets may warrant revisions or that the remaining balance of intangibles or other long-lived assets may not be recoverable. To make this evaluation, management uses an estimate of undiscounted net income over the remaining life of the intangibles or other long-lived assets. The goodwill associated with the B&B, Premier, Medical Record, ZIA, Carton and DISC acquisitions is not deductible for income tax purposes.
The acquisition of Rust in December 1996 for 110,000 shares of Common Stock was accounted for as a pooling-of-interests. The consolidated financial statements of the Company were not restated for periods prior to January 1, 1996 due to the financial immateriality of Rust. The December 31, 1995 retained earnings of Rust have been presented as a restatement of the Company's beginning retained earnings. The interim results of the Company for the period from January 1, 1996 through September 30, 1996 have been restated for the Rust acquisition. Restated total revenue, net income, pro forma net income and weighted average shares outstanding after giving effect to the pooling-of-interests with Rust are summarized below. Pro forma net income reflects adjustments for the Compensation Differential and the related income tax effect.
Set forth below are unaudited pro forma financial data for the years ended December 31, 1995 and December 31, 1996. The unaudited pro forma data give effect to: (i) the acquisitions of B&B, Premier, Cook, Medical Record, ZIA, Carton and DISC; (ii) the acquisitions of the Founding Companies; and (iii) compensation and tax adjustments for all transactions as if the transactions had occurred on January 1, 1995. The acquisitions of Sacramento, Microfilm, Octo, Domor, Rushmore, Index, Deliverex Seattle and Researchers LLC have not been included in the pro forma financial statements for periods prior to their acquisition date as the effect is immaterial.
Subsequent to December 31, 1996, the Company acquired three document services businesses in transactions accounted for as purchases.
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CREDIT FACILITIES:
Long-term Obligations
Long-term obligations consist of the following:
In April 1996, the Company and its subsidiaries entered into a credit agreement, as amended (the "Line of Credit"), with Banque Paribas, as agent, and the lenders named therein. Under the Line of Credit, the Company and its subsidiaries initially could borrow on a revolving credit basis loans in an aggregate outstanding principal amount up to $35.0 million from time to time under the secured revolving credit and acquisition facility, subject to certain customary borrowing capacity requirements. The Line of Credit is secured by the receivables and equipment of F.Y.I. and its subsidiaries and by the stock of the subsidiaries. As of December 31, 1996, the availability under the Line of Credit was $13.8 million.
The Company and its subsidiaries may borrow revolving credit loans up to an aggregate $5.0 million under the Line of Credit for working capital and general corporate purposes. The commitment to fund revolving credit loans expires April 14, 2001. The commitment to fund term loans expires October 15, 1997. The annual interest rate applicable to borrowings under this facility is, at the option of the Company, (i) 1.50% plus the prime rate or (ii) 3.00% plus the Eurodollar rate.
The Company also has outstanding an irrevocable letter of credit in the amount of approximately $2.4 million to serve as guarantee for periodic principal and interest payments related to the Industrial Revenue Bonds.
The Line of Credit requires mandatory prepayments in certain circumstances. The outstanding principal balance of term loans as of October 15, 1997 is thereafter due and payable in 14 equal quarterly payments beginning January 15, 1998, and ending April 15, 2001. The outstanding principal balance of revolving credit loans is due and payable on April 15, 2001.
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average interest rate on short and long-term obligations at December 31, 1996 was 5.27%. The Line of Credit contains certain reporting requirements and financial covenants, including requirements that the Company maintain minimum levels of net worth and other financial ratios. As of December 31, 1996, the Company has complied with all loan covenants.
Maturities of Long-Term Obligations
As of December 31, 1996, maturities of long-term obligations are as follows (in thousands):
9. LEASE COMMITMENTS:
The operating companies lease various office buildings, machinery, equipment, and vehicles. Future minimum lease payments under capital leases and noncancelable operating leases are as follows:
Rent expense for all operating leases for the year ended December 31, 1996 was approximately $3,854,000.
Certain operating companies sublease a portion of their office facilities under noncancelable lease agreements which expire at various dates to three unrelated businesses. Future minimum sublease rental
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income as of December 31, 1996 for the remainder of the term and in the aggregate are as follows (in thousands):
10. INCOME TAXES:
The provision for federal and state income taxes consists of the following (in thousands):
The differences in income taxes provided and the amounts determined by applying the federal statutory tax rate to income before income taxes result from the following (in thousands):
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of deferred income tax liabilities and assets are as follows (in thousands):
11. STOCKHOLDERS' EQUITY:
December Public Stock Offering:
On December 17, 1996, the Company completed a follow-on public offering (the "December Offering") of 2,363,000 shares of Common Stock (including the exercise of the underwriters' over-allotment option) at $20.00 per share. Proceeds from the December Offering, net of underwriting commissions and offering costs, were approximately $43.6 million. Of these net proceeds, approximately $22.4 million was used to retire indebtedness, approximately $3.5 million was used to pay a portion of consideration for acquisitions in December, $0.6 million was used to retire indebtedness assumed in acquisitions, and the remaining $17.1 million is being used as working capital and for additional acquisitions.
Stock Options and Warrants:
At December 31, 1996, the Company had one stock-based compensation plan, the 1995 Stock Option Plan ("the Plan"), which is described below. The Company applies APB Opinion 25 and related Interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized for the Plan. Had compensation cost for the Plan been determined based upon the fair value at grant dates for awards under the Plan consistent with the method of SFAS No. 123, "Accounting for Stock Based Compensation", the Company's net income and earnings per share would have been $3,444,000 and $0.59, respectively. As reported net income and earnings per share were $4,031,000 and $0.69, respectively.
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions for 1996: risk free interest rate ranging from 5.4% to 6.9%, no dividend yield, expected life of 3 years, and volatility of 36%.
In October 1995, the Board of Directors and F.Y.I.'s stockholders approved the Plan, which became effective on the date of the IPO. The Plan provides awards of options to purchase Common Stock and may include incentive stock options ("ISOs") and/or non-qualified stock options.
The Plan also provides for automatic option grants to directors who are not otherwise employed by the Company or its subsidiaries. Upon commencement of service (or upon agreeing to serve in the case of the initial non-employee directors), a non-employee director will receive a non-qualified option to purchase 10,000
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of Common Stock, and continuing non-employee directors will receive annual options to purchase 5,000 shares of Common Stock. Options granted to non-employee directors become exercisable one-third on the date of grant and one-third on each of the next two anniversaries of the date of grant. Non-employee directors' options have a term of five years from the date of grant.
The maximum number of shares of Common Stock that may be subject to outstanding options, determined immediately after the grant of any option, is the greater of 650,000 shares or 12% of the aggregate number of shares of the Company's Common Stock outstanding, provided, however, that options to purchase no more than 650,000 shares of Common Stock may be granted as ISOs. At December 31, 1996 and December 31, 1995, approximately 1,037,000 and 650,000 shares, respectively, were subject to outstanding options.
The Company had options to purchase 690,370 shares outstanding at December 31, 1996. These options, other than those granted to employee directors, are generally exercisable within 180 days from the date of grant as to 20% of the underlying shares, and as to an additional 20% on each of the next four anniversaries of the date of grant. Options are granted at the market price of the Common Stock on the date of grant.
The following table summarizes information about stock options granted under the Plan that were outstanding at December 31, 1996:
Warrants to Purchase Common Stock
In November 1995, the Company granted to the Chief Executive Officer and the Chief Accounting Officer warrants to purchase 100,000 and 15,000 shares of common stock, respectively, each with an exercise price of $10.00 per share. The warrants are exercisable as to 50% on January 26, 1998, and as to the remaining 50% on January 26, 1999. In May 1996, the Company granted to the Chief Executive Officer an additional warrant to purchase 50,000 shares of Common Stock at an exercise price of $20.00 per share. The additional warrant is exercisable as to 50% on May 21, 1998 and as to the remaining 50% on May 21, 1999.
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS:
Certain of the operating companies have qualified defined contribution employee benefit plans (the "Plans"), the majority of which allow for voluntary pre-tax contributions by employees. The operating companies pay all general and administrative expenses of the Plans and, in some cases, the operating companies make matching and discretionary contributions to the Plans. The operating companies offer no post-employment or post-retirement benefits. The expense incurred related to the Plans by the Company was approximately $91,000 for the year ended December 31, 1996.
13. RELATED-PARTY TRANSACTIONS:
Leasing Transactions
Certain of the Operating Companies lease their operating facilities, along with certain equipment, from selling parties who remained employees or directors of the Company. These leases are for various lengths and annual amounts. The rental expense for these operating leases for the year ended December 31, 1996 was approximately $487,100.
Notes Receivable
In the Acquisitions, the Company acquired $613,000 of notes receivable from two Founding Company shareholders. At the time of the Merger, the shareholders entered into new notes receivable with a stated interest rate (5%) and principal payment schedules. Interest is payable on a semi-annual basis, and principal is due as follows: 1998 -- $321,000; and 1999 -- $322,000.
Other Transactions
An operating company purchases digital coding services from an entity in which an F.Y.I. stockholder had a controlling interest. Effective December 1, 1996, the Company purchased this entity from the shareholder for $2,700,000. The expense incurred to the entity for the 11 months ended November 30, 1996 was $32,000 and billings to the entity were $49,000. Additionally, the Company charged the entity a management fee for accounting services. Management fees were $25,000 for the eleven months ended November 30, 1996.
14. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the normal course of its business. Management believes that none of these actions will have a material adverse effect on the financial position or results of operations of the Company.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and trade receivables. The Company maintains cash and cash equivalents and certain other financial instruments at various major financial institutions across many geographic areas. Credit risk on trade receivables is minimized as a result of the large number of entities comprising the Company's customer base and their dispersion across many industries and geographic areas.
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SUPPLEMENTAL DATA (UNAUDITED):
Statement of Operations -- Supplemental Data
The Statement of Operations Data for the year ended December 31, 1995 represents the unaudited combined statement of operations of the Founding Companies for the period adjusted to give effect to: (i) compensation levels the officers and owners have agreed to receive subsequent to the IPO; and (ii) provision for income taxes as if all entities had been subject to federal and state income taxes for the period. The Statement of Operations Data for the year ended December 31, 1996 represents a combination of: (i) the audited results of the combined Founding Companies for the one month of operations prior to the consummation of the Acquisitions adjusted for the compensation and tax adjustments discussed above; and (ii) the audited results of F.Y.I. Incorporated and Subsidiaries for the eleven months subsequent to the consummation of the Acquisitions (which includes acquisitions subsequent to the IPO from the date of their respective acquisition and Rust from January 1, 1996) adjusted to give effect to the Compensation Differential for Rust. The Supplemental Data are provided for information purposes only and do not purport to present the results of operations of the Company had the transactions assumed therein occurred on or as of the dates indicated, nor are they necessarily indicative of the results of operations which may be achieved in the future.
- ---------------
(a) Adjusted for pro forma Compensation Differential of $1,976 for 1995 and $918 for 1996.
(b) Adjusted for pro forma provision for taxes of $1,631 for 1995 and $446 for 1996.
F.Y.I. INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. QUARTERLY INFORMATION (UNAUDITED):
Amounts reported differ from amounts previously reported due to the pooling-of-interests discussed in Note 7.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To F.Y.I. Incorporated:
We have audited the accompanying combined balance sheets of the Founding Companies (Note 1) as of December 31, 1994 and 1995 and January 31, 1996, and the related combined statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995 and the one month ended January 31, 1996. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We did not audit the financial statements of Recordex Services, Inc., as of and for the two years in the period ended December 31, 1994 which statements reflect total assets of 14% of the combined totals as of December 31, 1994, and total revenue of 14% and 16% of the combined totals for each of the two years in the period ended December 31, 1994. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Founding Companies as of December 31, 1994 and 1995 and January 31, 1996, and the results of their combined operations and their combined cash flows for each of the three years in the period ended December 31, 1995 and the one month ended January 31, 1996, in accordance with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Dallas, Texas, November 4, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors Recordex Services, Inc. Malvern, Pennsylvania
We have audited the accompanying balance sheet of Recordex Services, Inc. (a wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1994, and the related statements of operations, changes in stockholder's equity, and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Recordex Services, Inc. (a wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1994, and the results of its operations and its cash flows for the two years then ended in conformity with generally accepted accounting principles.
ELKO, FISCHER, McCABE & RUDMAN, LTD. Certified Public Accountants
Media, Pennsylvania September 15, 1995
FOUNDING COMPANIES
COMBINED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these combined financial statements.
FOUNDING COMPANIES
COMBINED STATEMENTS OF OPERATIONS (NOTE 1) (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these combined financial statements.
FOUNDING COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 1) (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these combined financial statements.
FOUNDING COMPANIES
COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these combined financial statements.
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Concurrently with the initial public offering of its common stock (the "IPO"), F.Y.I. Incorporated ("F.Y.I.") merged with the following seven companies (the "Founding Companies"): Imagent Corporation and Mobile Information Services ("Imagent"); Melanson and Associates, Inc. ("Melanson") dba Researchers and Bay Area Micrographics ("Researchers"); Recordex Services, Inc. (a wholly owned subsidiary of Paragon Management Group, Inc.) ("Recordex"); C.&T. Management Services, Inc. dba DPAS, and Qualidata, Inc. dba The Mail House ("DPAS"); Leonard Archives, Inc. ("Leonard"); Deliverex, Incorporated ("DLX") and Peninsula Records Management, a wholly owned subsidiary of DLX ("PRM"), and an affiliate, ASK Record Management, Inc. ("ASK") (collectively "Deliverex"); and Permanent Records, Inc. ("Permanent"). The merger will be effected by FYI through issuance of its common stock and cash.
The Founding Companies are providers of document management services to three primary client groups: healthcare institutions, professional services firms, and financial institutions.
2. BASIS OF PRESENTATION:
Simultaneously with the closing of the IPO, F.Y.I. and separate wholly owned subsidiaries of F.Y.I. merged with the Founding Companies (the "Acquisitions"). The accompanying combined financial statements and related notes represent the combined financial position, results of operations and cash flows of the Founding Companies excluding FYI without giving effect to the Mergers and the Offering. The assets and liabilities of the Founding Companies are reflected at their historical amounts. The Founding Companies were not under common control or management during any of the periods presented.
Melanson has previously reported on a fiscal year ending July 31. As such, the accounts of Melanson for its 1993 fiscal year has been combined with the accounts of the other Founding Companies for the year ended December 31, 1993. The fiscal 1994 and 1995 accounts of Melanson have been recast to a December 31 year-end and have been combined with the accounts of the other Founding Companies for the years ended December 31, 1994 and 1995. The exclusion of Melanson's net income for the period from August 1 through December 31, 1993 of $229,000 is reflected as an adjustment to retained earnings in the December 31, 1994 combined statement of stockholders' equity. The results of operations related to the adjustment to retained earnings for Melanson included revenues of $3,820,000 and costs and expenses of $3,591,000 from August 1, through December 31, 1993.
Deliverex's affiliate, ASK, has previously reported on a fiscal year ending December 31. DLX and PRM have previously reported on a fiscal year ending September 30. The 1995 accounts of DLX and PRM have been recast to a December 31 year-end and have been combined with the accounts of the other Founding Companies for the year ended December 31, 1995. The exclusion of DLX and PRM's net income for the period from October 1 through December 31, 1994 of $44,000 is reflected as an adjustment to retained earnings in the December 31, 1995 combined statement of stockholders' equity. The results of operations related to the adjustment to retained earnings for DLX and PRM included revenue of $553,000 and costs and expenses of $509,000 from October 1 through December 31, 1994.
The affiliate of Imagent Corporation, Mobile Information Services, had previously reported on a fiscal year ending June 30 through fiscal 1992. As such, the accounts of the affiliate for its 1992 fiscal year have been combined with the accounts of the other Founding Companies for the years ended December 31, 1992. The exclusion of the affiliate's net income for the period from July 1 through December 31, 1992 of $29,000 is reflected as an adjustment to retained earnings in the December 31, 1992 combined statement of stockholders' equity. The results of operations related to the adjustment to retained earnings for the affiliate of Imagent Corporation included revenue of $656,000 and costs and expenses of $627,000 from July 1 through December 31, 1992.
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Founding Companies consider highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.
Inventory
Inventory is stated at the lower of cost or market with cost determined on a first-in, first-out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the useful life or the term of the lease.
Intangible Assets
Intangible assets consist primarily of customer lists, acquired by a founding company in October of 1994, which are amortized over 15 years. The Founding Companies continually evaluate whether events and circumstances indicate the remaining estimated useful life of intangible assets may warrant revisions or that the remaining balance of intangibles or other long-lived assets may not be recoverable. To make this evaluation, the Founding Companies use an estimate of undiscounted net income over the remaining life of the intangibles or other long-lived assets. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. FYI and the Founding Companies do not expect the adoption of SFAS 121 to have any material effect on the combined financial statements. FYI and the Founding Companies will adopt SFAS 121 in 1996.
Revenue Recognition
Revenue is recognized when the services are rendered, or products are shipped, to the Founding Companies' customers. Unearned revenue represents customer storage and certain services which are billed in advance.
Income Taxes
Income taxes are provided based upon the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," for the Founding Companies that are C corporations for income tax purposes, which requires recognition of deferred income taxes under the asset and liability method.
Certain of the Founding Companies are S corporations or a sole proprietorship for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the respective owners. The historical combined net income of the Founding Companies includes no provision for income taxes of the S corporations or sole proprietorship.
Deferred income taxes are provided for temporary differences in the recognition of revenue and expenses for tax and financial reporting purposes. Temporary differences result primarily from accelerated depreciation and amortization for tax purposes, deferred contract revenue being taxed when billed, cash basis of accounting
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
for tax purposes versus accrual basis accounting for financial reporting purposes, and various accruals and reserves being deductible for tax purposes in different periods.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to make their presentation consistent with the current year.
Pro Forma Net Income (Unaudited)
The Founding Companies have been managed throughout the periods presented as independent private companies and represent a variety of tax structures (S corporation, C corporation, and sole proprietorship). Therefore, selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received from their respective businesses during these periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Mergers. Each stockholder (other than one Paragon Management Group stockholder) has entered into a three year employment agreement with FYI which contains a set base salary, participation in any future FYI incentive plans, four weeks vacation, car allowance, health benefits, and a two-year covenant-not-to-compete following termination of such person's employment. The employment agreements provide for the following compensation levels by company:
The unaudited pro forma data present compensation at the level the officers and owners of the Founding Companies have agreed to receive subsequent to the Offering. In addition, the pro forma data present the provision for income taxes as if all entities had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above.
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
The activity in the allowance for doubtful accounts and notes receivable is as follows:
5. PROPERTY, PLANT AND EQUIPMENT:
Property and equipment consist of the following:
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. CREDIT FACILITIES:
Short-Term Obligations
Short-term obligations consist of the following:
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average interest rate on borrowings under the lines of credit were approximately 7.50%, 9.75%, and 10.21% for the years ended December 31, 1993, 1994, 1995, respectively. The prime rate was 6%, 8.5%, and 8.5% at December 31, 1993, 1994, and 1995.
Officers payable -- Short-term
Officers payable -- short term consist of the following:
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Obligations
Long-term obligations consist of the following:
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Certain short-term and long-term obligations contain warranties and covenants and require maintenance of certain financial ratios of certain Founding Companies.
As of December 31, 1995, all Founding Companies have complied with their loan covenants.
Long-Term Obligations -- Affiliates
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Obligations -- Officer
DPAS has a 12% interest-bearing stockholder note payable totaling $51,000 and $38,000 at December 31, 1994 and 1995, respectively. Current maturities of this note totaling $16,000 and $18,000 at December 31, 1994 and 1995, respectively, have been included as Officers payable -- short-term.
Maturities of Long-Term Obligations
Maturities of long-term obligations are as follows (In Thousands):
8. LEASE COMMITMENTS:
The Founding Companies lease various office buildings, machinery, equipment, and vehicles. Future minimum lease payments under capital leases and noncancelable operating leases are as follows:
Rent expense for all operating leases for the years ended December 31, 1993, 1994, and 1995 was $1,972,000, $2,227,000, and $2,219,000, respectively.
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY:
The common stock authorized, issued, and outstanding of the Founding Companies consists of the following at December 31, 1994 and 1995:
In December 1994, ASK approved the reissuance of 10,000 shares of treasury stock to its minority stockholder. Compensation expense of $1,000 was recorded at the date of approval in 1994, equivalent to the estimated value of the shares at the approval date. The shares were reissued on January 1, 1995.
10. EMPLOYEE BENEFIT PLANS:
Certain of the Founding Companies have qualified defined contribution employee benefit plans (the "Plans"), the majority of which allow for voluntary pre-tax contributions by employees. The Founding Companies pay all general and administrative expenses of the Plans and, in some cases, the Founding Companies make matching and discretionary contributions to the Plans. The Founding Companies offer no post-employment or post-retirement benefits. The expenses incurred related to the Plans by the Founding Companies were $36,000, $63,000, and $82,000 for the years ending December 31, 1993, 1994, and 1995, respectively.
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES:
The provision for federal and state income taxes consists of the following (In Thousands):
The differences in income taxes provided and the amounts determined by applying the federal statutory tax rate to income before income taxes result from the following (In Thousands):
The components of deferred income tax liabilities and assets are as follows (In Thousands):
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED-PARTY TRANSACTIONS:
Leasing Transactions
Leonard leases its operating facilities from Leonard Investments and a former stockholder. These leases are for various lengths and annual amounts. The rental expense for these operating leases for the years ended December 31, 1993, 1994, and 1995 was approximately $189,000, $188,000, and $189,000, respectively. Leonard also has obligations to Leonard Investments. Leonard Investments is a partnership owned by the stockholder and former stockholder of Leonard.
Researchers leases office facilities in Sacramento and San Francisco, California, along with certain equipment from Researcher's principal shareholder. The leases provide for lease terms on a month-to-month basis as well as over five to ten-year periods commencing on August 1, 1991, through July 31, 2001, with monthly lease payments of $2,000 to $9,000. The total lease payments to Researcher's principal shareholder for these operating leases for the years ended July 31, 1993, and December 31, 1994 and 1995 was approximately $187,000, $177,000, and $242,000, respectively. The lease agreements provide that the Researchers pay all related taxes and insurance.
Permanent entered into an agreement to lease a building, beginning on July 1, 1995, from Permanent's stockholders. Lease expense per year will be approximately $90,000.
Other Transactions
Researchers purchases digital coding services from an affiliated entity, Researchers LLC. Researchers' principal shareholder has a controlling interest in Researchers LLC. During the years ended December 31, 1994 and 1995, Researchers incurred expenses of $28,000 and $11,000, and had billings to Researchers LLC of approximately $4,000 and $40,000.
Receivables and Advances
Leonard has guaranteed a promissory note in the principal amount of approximately $636,000 as of December 31, 1995, with interest at 10%, payable in monthly installments in varying amounts through December 1, 2004. The promissory note is from the stockholder to the former joint owner in Leonard.
FOUNDING COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Leonard's guarantee and security interest are subordinate to all other notes payable to the bank and the Detroit Economic Growth Council.
13. COMMITMENTS AND CONTINGENCIES:
Litigation
The Founding Companies are, from time to time, parties to litigation arising in the normal course of their business, most of which involve claims for workers' compensation, unemployment and property damage incurred in connection with their operations. Management of the Founding Companies believes that none of this litigation will have a material adverse effect on the combined financial position or combined results of operations of the Founding Companies.
Employment Agreements
Researchers has employment agreements with certain personnel to pay specific amounts annually. The employment agreements provide for a total annual compensation amount of $595,000 to be disbursed to certain personnel of Researchers in accordance with the terms of each employee's employment agreement.
Concentration of Credit Risk
Financial instruments that potentially subject the Founding Companies to concentration of credit risk consist primarily of cash and cash equivalents and trade receivables. The Founding Companies maintain cash and cash equivalents and certain other financial instruments at various major financial institutions across many geographic areas. Credit risk on trade receivables is minimized as a result of the large number of entities comprising the Founding Companies' customer base and their dispersion across many industries and geographic areas.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Imagent Corporation:
We have audited the accompanying combined balance sheets of Imagent Corporation (a Maryland corporation) and Related Company as of December 31, 1994 and 1995, and the related combined statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Imagent Corporation and Related Company as of December 31, 1994 and 1995, and the results of their combined operations and their combined cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996
IMAGENT CORPORATION AND RELATED COMPANY
COMBINED BALANCE SHEETS
The accompanying notes are an integral part of these combined financial statements.
IMAGENT CORPORATION AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these combined financial statements.
IMAGENT CORPORATION AND RELATED COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these combined financial statements.
IMAGENT CORPORATION AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these combined financial statements.
IMAGENT CORPORATION AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined financial statements include the accounts of Imagent Corporation (formerly Mobile Microfilming Corporation) and Mobile Information Services (collectively the "Company"). The Company is a microfilm processing laboratory and Kodak distributor of microfilm/microfilming supplies and a broker of imaging equipment and systems and provides data and document acquisition services for public and private industry customers. The Company's customers are primarily located in the Mid-Atlantic region.
The Company and its stockholders entered into a definitive agreement with F.Y.I. Incorporated ("FYI") in October 1995, pursuant to which the Company will merge with FYI (the "Merger"). All outstanding shares of the Company's common stock will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The Company is under common control of two stockholders. All significant intercompany transactions have been eliminated in combination.
Mobile Information Services (MIS) reported on a June 30, 1992 year-end prior to 1993; as such its accounts for the year ended June 30, 1992 have been combined with the accounts of Mobile Microfilming Corporation as of December 31, 1992. The results of MIS's operations for the six months ended December 31, 1992 have been reflected as an adjustment to retained earnings. Unaudited revenue and net income were approximately $656,000 and $29,000, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the asset's useful life or lease term.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Intangible and Other Long-Lived Assets
The customer list is being amortized over a 15-year period, and the covenant not to compete is being amortized over the term of the agreement.
The Company continually evaluates whether events and circumstances indicate the remaining estimated useful life of intangibles and long-lived assets may warrant revisions or that the remaining balance of intangibles or other long-lived assets may not be recoverable. To make this evaluation, the Company uses an estimate of undiscounted net income over the remaining life of the intangibles or other long-lived assets. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121: Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121) which establishes accounting standards for the impairment of long-lived assets, certain
IMAGENT CORPORATION AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 to have any material effect on the combined financial statements. The Company will adopt SFAS 121 in 1996.
Revenue Recognition
Revenue is recognized when services are rendered, or products are shipped, to the Company's customers.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by Statement of Financial Accounting Standards No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in the mid-Atlantic states and the primary customers are governmental and financial institutions. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
An agency of the federal government accounted for 14% and 17% of its revenues for the years ended December 31, 1994 and 1995, respectively. The Company did not have sales to this customer prior to 1994.
Income Taxes
The Company is an S corporation for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the stockholders. The Company's S corporation status will terminate with the effective date of the Merger discussed in Note 1.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
4. INTANGIBLE ASSETS:
Other noncurrent assets consist of the following at December 31, 1994 and 1995:
IMAGENT CORPORATION AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into an agreement on October 5, 1994 with Micrographic Sciences, Inc. The Company purchased Micrographic Sciences Inc.'s customer list and received a three-year covenant not to compete.
The purchase price was 100% of the processing sales plus 50% of the microfilm sales between April 1, 1994, and March 31, 1995. The ultimate purchase price of the customer list and the covenant not to compete was established as $852,433.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
6. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following at December 31, 1994 and 1995:
The Company has established a line of credit facility with a financial institution. The line of credit is secured by the Company's accounts receivable and inventory. This line of credit allows the Company to borrow up to $500,000 at an interest rate equal to prime. At December 31, 1995, $500,000 of borrowing capacity was available.
7. OPERATING LEASES:
The Company leases its office buildings. Lease payments for the years ended December 31, 1993, 1994 and 1995, totaled $235,435, $246,816 and $230,369, respectively. Minimum future lease payments under operating leases as of December 31, 1995, for each of the next five years and in the aggregate are as follows:
IMAGENT CORPORATION AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLAN:
Effective January 1, 1991, the Company adopted a profit sharing plan to provide for contributions made under salary deferral agreements pursuant to the Internal Revenue Code. All employees shall be eligible to enter the plan if they are at least 21 years of age and have at least one year of service.
All deferred compensation and company contributions are placed in a trust to be held and invested by the trustee. The profit sharing expense was $16,195, $19,325, and $20,875 for the years ended December 31, 1993, 1994, and 1995, respectively.
9. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involves claims for workers' compensation and unemployment incurred in connection with its operations. Management believes none of these actions will have a material adverse effect on the combined financial positions or combined results of operations of the Company.
10. COMMON STOCK:
Common stock at December 31, 1994 and 1995 consists of the following:
11. PRO FORMA NET INCOME (UNAUDITED):
Selling, general and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during the periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger.
In connection with the merger, each stockholder has entered into a three-year employment agreement with FYI which provides for set base salary, participation in any FYI incentive bonus plans, four weeks paid vacation, a car allowance, health benefits, and a two year covenant-not-to-compete following termination of such person's employment. The stockholders' employment agreements provide for an aggregate base salary of $250,000.
The unaudited pro forma data present compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Offering. In addition, the following pro forma data present the provision for income taxes as if the Company had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above.
IMAGENT CORPORATION AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS:
On January 26, 1996, the Company was acquired by FYI. In conjunction with the Merger, the Company will dividend cash and accounts receivable to its stockholders in the amount of $2,750,000, which represents the AAA accounts of the Company's stockholders. In addition, the Company could make an additional distribution corresponding to the increase in net stockholders' equity from June 30, 1995 to November 30, 1995, not to exceed $400,000. The $400,000 available for the additional distribution was distributed prior to December 31, 1995. Had the $2,750,000 transaction been recorded at December 31, 1995, the effect on the accompanying balance sheet would be a decrease in total assets and stockholders' equity of $2,750,000.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Melanson and Associates, Inc.:
We have audited the accompanying combined balance sheets of Melanson and Associates, Inc. (a California corporation) and Related Company as of December 31, 1994 and 1995, and the related combined statements of operations, stockholders' equity, and cash flows for each of the years ended July 31, 1993, and December 31, 1994 and 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Melanson and Associates, Inc. and Related Company as of December 31, 1994 and 1995, and the combined results of their operations and their combined cash flows for each of the years ended July 31, 1993, and December 31, 1994 and 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
COMBINED BALANCE SHEETS
The accompanying notes are an integral part of these combined financial statements.
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these combined financial statements.
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these combined financial statements.
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these combined financial statements.
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined financial statements include the accounts of Melanson and Associates, Inc. (dba Researchers) and Bay Area Micrographics ("BAM" -- or the "Related Company") (a sole proprietorship) (collectively the "Company"). The Company provides photocopying, microfilming, and electronic imaging of document services to its customers from its offices in California.
In October 1995, the Company and its stockholders entered into a definitive agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will merge with FYI (the "Merger"). All outstanding shares of the Company's common stock and the ownership of the sole proprietorship will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The Company is under common control. All significant intercompany transactions have been eliminated in combination.
Fiscal Year-Ends
BAM has a December 31 year-end. Researchers has a July 31 year-end. The accounts and results of BAM, using a December 31 year-end, have been combined with the July 31 year-end accounts and results of Researchers in the accompanying combined financial statements for 1993. Researcher's accounts and results for 1994 and 1995 have been recast to a December 31 year-end. Researcher's net income for the five-month period August 1, 1993 to December 31, 1993 was $229,428.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the accelerated and straight-line methods over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the asset's useful life or the lease term.
Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 to have any material effect on the combined financial statements. The Company will adopt SFAS 121 in 1996.
Income Taxes
Researchers is a C corporation. BAM is a sole proprietorship for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the owner. For purposes of these combined financial
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
statements, no federal and state income taxes have been provided for BAM. BAM's sole proprietorship status will terminate with the effective date of the Merger discussed in Note 1.
Deferred income taxes for Researchers are provided for timing differences in the recognition of revenues and expenses for tax and financial reporting purposes. Temporary differences result primarily from accelerated depreciation and amortization for tax purposes, deferred contract revenues being taxed when billed and various accruals and reserves being deductible for tax purposes in different periods.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards (SFAS) No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in the Western states and the primary customers are legal institutions. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
5. SHORT-TERM OBLIGATIONS:
The Company has a $425,000 line of credit with interest payable at prime plus 1.5% (7.5% and 10% at December 31, 1994 and 1995) on the outstanding principal balance. The line of credit, which expires in
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
October 1996, is guaranteed by the principal stockholder. The Company had draws outstanding of $395,000 and $213,000 at December 31, 1994 and 1995.
6. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
As of December 31, 1994 and 1995, the Company has complied with all loan covenants.
As of December 31, 1995, the aggregate amounts of annual principal maturities of long-term debt are as follows:
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASE COMMITMENTS AND RELATED-PARTY TRANSACTIONS:
The Company leases office facilities in Sacramento and San Francisco, California, and certain equipment from the Company's principal shareholder. The Company also leases office facilities in Los Angeles and San Jose, California from third parties. The leases provide for lease terms on a month to month basis as well as over five to ten year periods commencing on August 1, 1991 through July 31, 2001, with monthly lease payments of $1,950 to $8,500. The lease agreements provide that the Company pay all related taxes and insurance. The total lease expense for the years ended July 31, 1993 and December 31, 1994 and 1995 totaled approximately $373,000, $429,000 and $520,000, respectively, including total lease payments to the Company's principal shareholder of approximately $187,000, $177,000 and $242,000, respectively. Minimum future lease payments under operating leases as of December 31, 1995 for each of the next five years and in the aggregate are as follows:
8. EMPLOYEE BENEFIT PLAN:
On January 1, 1993, the Company adopted a qualified 401(k) plan covering substantially all eligible employees who meet certain age and length of service requirements. The plan allows for employee and employer contributions. The plan also requires an employer matching contribution unless changed in writing by the employer. Employer contributions charged to operations for the years ended July 31, 1993 and December 31, 1994 and 1995 were approximately $0, $15,000, and $17,172, respectively.
The Company offers no post-retirement or post-employment benefits.
9. INCOME TAXES:
The following income tax information for Researchers is presented in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109). This statement provides for a liability approach to accounting for income taxes.
Federal and state income taxes are as follows:
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The differences in income taxes provided and the amounts determined by applying the federal statutory tax rate to income before income taxes result from the following:
The components of deferred income tax liabilities and assets are as follows:
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involves claims for workers' compensation incurred in connection with its operations. Management believes that none of these actions will have a material adverse effect on the financial position or results of operations of the Company.
Employment Agreements
The Company has employment agreements with certain personnel to pay specific amounts annually. The employment agreements provide for a total annual compensation amount of $595,500 to be disbursed to certain personnel of the Company in accordance with the terms of each employee's employment agreement.
11. RELATED-PARTY TRANSACTION:
The Company purchases digital coding services from Researchers LLC, an affiliated entity. The Company's principal shareholder has a controlling interest in Researchers LLC. During the years ended December 31, 1994 and 1995, the Company incurred expenses related to purchases and services of approximately $28,000 and $10,642 and had billings of approximately $3,500 and $40,377 to Researchers, LLC.
MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Stockholder receivable results from advances to the stockholder in excess of his earned salary and estimated bonus. Amounts are settled at year-end.
12. SIGNIFICANT CUSTOMER:
For the year ended July 31, 1993, the Company had one customer which accounted for approximately 11% of combined revenue. For the year ended December 31, 1994, the Company had two customers which accounted for approximately 13% and 11% of combined revenue. For the year ended December 31, 1995, the Company had two customers which each accounted for approximately 12% of combined revenue.
13. PRO FORMA NET INCOME (UNAUDITED):
Selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during the periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger.
In connection with this merger, each stockholder has entered into a three year employment agreement with FYI which provides for set base salary, participation in any future FYI incentive bonus plans, four weeks paid vacation, a car allowance, health benefits and a two year covenant-not-to-compete following termination of such person's employment. The stockholders' employment agreements provide for an aggregate base salary of $250,000.
The unaudited pro forma data present compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Offering. In addition, the following pro forma data present the provision for income taxes as if the sole proprietorship had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above.
14. SUBSEQUENT EVENTS:
On January 26, 1996, the Company was acquired by FYI. In connection with the Merger, the Company will dividend land, building, and related improvements of $1,488,327 and the related mortgage payable of $1,300,224 to the principal stockholder. In addition, the Company will make a cash distribution of $250,000 prior to the closing of the Merger. Had these transactions been recorded at December 31, 1995, the effect on the accompanying balance sheet would be a decrease in assets of $1,738,327, liabilities of $1,300,224 and stockholders' equity of $438,103.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Recordex Services, Inc.:
We have audited the accompanying balance sheet of Recordex Services, Inc. (a wholly owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1995, and the related statements of operations, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Recordex Services, Inc. for the years ended December 31, 1994 and 1993, were audited by other auditors whose report dated September 15, 1995, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Recordex Services, Inc. (a wholly owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1995, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors Recordex Services, Inc. Malvern, Pennsylvania
We have audited the accompanying balance sheet of Recordex Services, Inc. (a wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1994, and the related statements of operations, changes in stockholder's equity, and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Recordex Services, Inc. (a wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1994, and the results of its operations and its cash flows for the two years then ended in conformity with generally accepted accounting principles.
ELKO, FISCHER, McCABE & RUDMAN, LTD. Certified Public Accountants
Media, Pennsylvania September 15, 1995
RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
The accompanying notes are an integral part of these statements.
RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
On October 16, 1991, Paragon Management Group, Inc. (the "Parent"), acquired all of the issued and outstanding shares of common stock of Recordex Services, Inc. (the "Company"). Established in 1987, the Company is a supplier of computerized correspondence management systems to hospital medical records departments. The Company provides services to over 100 hospitals in 11 states.
In October 1995, the Company, its Parent, and the shareholders of its Parent entered into a definitive agreement with F.Y.I. Incorporated (FYI), pursuant to which the Company will be acquired by FYI (the "Merger"). All outstanding shares of the Company will be exchanged for cash and shares of FYI Common Stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI. (See Note 11.)
Accounts Receivable
The Company follows the reserve method of providing for doubtful accounts receivable.
Transactions with Parent
The Company pays management fees to its Parent for management, consulting, and other services. These costs are presented in selling, general, and administrative costs on the statement of operations.
The Company pays certain expenses on behalf of its Parent including salaries, occupancy costs, and benefits. These payments are recorded as advances to Parent on the Company's books until the Company is reimbursed by the Parent. These advances are noninterest bearing obligations. (See Note 11.)
Equipment
Capital additions including assets acquired under capital leases are stated at cost. Maintenance, repairs, and minor renewals are charged to operations as incurred. Depreciation is provided over the estimated useful lives of the assets using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. The estimated useful lives used for depreciation vary for financial reporting and tax purposes. The range of lives for equipment is three to five years for financial reporting purposes.
Intangible and Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121) which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 to have any effect on the financial statements. The Company will adopt SFAS 121 in 1996.
Supplemental Cash Flow Information
The Company purchased an investment for $30,000 in 1993. As of December 31, 1994, the Company had accepted an offer to have the investee buy back the investment for $13,333 and a $16,667 loss was recorded in the 1994 statement of operations. The Company did not receive the proceeds of the sale until January 1995, and a $13,333 receivable was presented as part of other current assets on the 1994 balance sheet.
RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company and its Parent file a consolidated return for federal income tax purposes. The Company prospectively adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," on January 1, 1993 and 1993 statement of operations includes a cumulative effect adjustment of $17,500 to record a deferred tax liability.
The Company provides for income taxes based on its share of the consolidated income tax expense in accordance with SFAS No. 109. The allocation is performed by treating the Company as if it were a separate taxpayer.
Income taxes, after adopting SFAS No. 109, are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets, contractual allowances, and provision for uncollectible accounts and retrieval fees and accrued expenses for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
Retrieval Fees Payable
The Company pays retrieval fees to various healthcare organizations with which it has contracts. Those fees represent charges to the Company by the healthcare organization for each medical record retrieved from the organization's records department. Those fees are payable upon receipt of cash for the billing of the Company's services or upon the billing of its services, according to specific contract terms.
Revenue Recognition
Revenue is recognized when the service is rendered. Net service revenues is comprised of the following:
2. LINE OF CREDIT:
The Company has a line of credit agreement with a bank for $300,000. The interest rate on the line is the lending bank's prime rate plus 0.75% (10.5% and 10.25% at December 31, 1995 and 1994, respectively), payable monthly on outstanding borrowings. The line is secured by all assets of the Company and guarantees of the Parent and certain stockholders of the Parent. Payment of principal is due on demand and the line is reviewed annually by the bank.
The outstanding borrowings on the line were $250,000 and $142,527 at December 31, 1995 and 1994, respectively. Interest expense on the line was $30,121, $26,829, and $15,387 for the years ended December 31, 1995, 1994, and 1993, respectively.
3. TERM LOANS:
In October 1993, the Company entered into an agreement with a bank whereby the outstanding balance on its line of credit of $150,000 was converted to a term loan. The term loan is payable in monthly installments
RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of $4,167 plus interest at prime plus 1% (10.75% and 10.5% at December 31, 1995 and 1994, respectively) with the full balance due December 22, 1996. The balances at December 31, 1995 and 1994, were $41,658 and $95,829, respectively.
In April 1994, the Company entered into a $50,000 term loan agreement with a bank. The loan is payable in monthly installments of $1,400 plus interest at the bank's prime rate plus 1% (10.75% and 10.5% at December 31, 1995 and 1994, respectively), maturing April 1, 1997. The balance at December 31, 1995 and 1994 were $22,000 and $38,800, respectively.
On July 26, 1995, the Company converted $140,000 of the balance on its line of credit to a term loan. The term loan is payable in monthly installments of $3,889, plus interest of prime plus 1% (10.75% at December 31, 1995) with the full balance due June 30, 1998. Accordingly, the line of credit and notes payable balances have been adjusted at December 31, 1995, to reflect this transaction. The balance at December 31, 1995, was $128,334.
The term loans are secured by all assets of the Company, its Parent, and guarantees of certain stockholders of the Parent.
Aggregate annual maturities of the term loans at December 31, 1995, as adjusted for the conversion described above are as follows:
Interest expense on the term loans was $14,660, $14,395 and $37,500 for the years ended December 31, 1995, 1994 and 1993, respectively.
4. CAPITALIZED LEASE OBLIGATIONS:
The Company leases certain of its equipment under noncancelable leases which meet the capital lease criteria as defined by the Financial Accounting Standards Board in Statement No. 13. Accordingly, the present value of future minimum lease payments has been recorded as leased property under capital lease, net of depreciation, and obligations under capital lease. At December 31, 1995, the future minimum lease payments are as follows:
RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Equipment purchased under capital leases included in the balance sheets is as follows at December 31:
Total interest expense on capital lease obligations for the years ended December 31, 1995, 1994, and 1993, was $40,307, $16,353, and $10,970, respectively.
5. INTANGIBLES:
A covenant not to compete was incorporated in the stock purchase agreement for the Company dated October 16, 1991. The covenant provided for noncompetition by the seller and its affiliates directly or indirectly in the business conducted by the Company for a three-year period. Amortization was provided over the three-year period commencing October 16, 1991.
The Company contracts with various healthcare organizations to provide services over a given time period. The value of these contracts was determined as of October 16, 1991, by an appraisal performed in conjunction with the stock purchase agreement. The contracts were amortized over their remaining lives commencing October 16, 1991.
Both the covenant not to compete and the contracts are fully amortized at December 31, 1995.
6. INCOME TAXES:
The provision for taxes on income consists of the following:
Deferred taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes and relate primarily to depreciation and contractual allowances and provision for uncollectible accounts. Deferred income taxes are recognized for tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years, to differences between the financial reporting and the tax basis of existing assets and liabilities.
RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred income tax liabilities and assets are as follows:
The Company prospectively adopted Financial Accounting Standards No. 109, "Accounting for Income Taxes," on January 1, 1993, and the 1993 statement of income includes a cumulative effect adjustment of $17,500 to record a deferred tax liability.
The provision for income taxes differs from the tax at the statutory rate due to the following:
For purposes of the consolidated federal tax return, the Parent has a net operating loss carryforward available to offset taxable income of the Company in 1994. The net operating loss carryforward will be fully utilized for the tax year 1994.
7. 401(k) PLAN:
The Company has adopted a contributory 401(k) plan (the "Plan") as of September 1, 1993. The Plan allows employees to make elective contributions through salary reduction. The Plan allows for discretionary employer matching. Participation in the Plan is limited based on certain age and service requirements. The Company made no contribution to the Plan for the years ended December 31, 1995 and 1994.
8. OPERATING LEASES:
The Company leases office space under an operating lease which expires in 1998. The future minimum annual rental payments required under this operating lease as of December 31, 1995 are as follows:
RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense charged against operations for the years ended December 31, 1995, 1994 and 1993 was $77,172, $55,173, and $47,175, respectively.
9. COMMITMENTS AND CONTINGENCIES:
The Company is from time to time, a party to litigation arising in the normal course of business, most which involves claims for workers' compensation incurred in connection with its operations. Management believes that none of these actions will have a material adverse effect on the financial position or results of the operations of the Company.
10. PRO FORMA NET INCOME (UNAUDITED):
Selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during the periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger.
In connection with the Merger, two of the Parent's stockholders have entered into a three year employment agreement with FYI which provides for set base salary, participation in any future FYI incentive bonus plans, four weeks, paid vacation, a car allowance, health benefits, and a two year covenant-not-to- compete following termination of such person's employment. The stockholders' employment agreements provide for an aggregate base salary of $300,000.
The unaudited pro forma data presents compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Offering. In addition, the pro forma data presents the incremental provision for income taxes for the impact of the compensation differential discussed above.
11. SUBSEQUENT EVENTS:
On January 26, 1996, the Company was acquired by FYI. In connection with the Merger, the Company assumed a note payable to the Parent's stockholders in the amount of $190,590 and distributed advances receivable from the Parent of $816,335. Had these transactions been recorded at December 31, 1995, the effect on the accompanying balance sheet would be an increase in liabilities of $190,590, a decrease in assets of $816,335 and a decrease in stockholders' equity of $1,006,925. (See Note 1.)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Leonard Archives, Inc.:
We have audited the accompanying balance sheets of Leonard Archives, Inc. (a Michigan corporation) as of December 31, 1994 and 1995, and the related statements of operations, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Leonard Archives, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996
LEONARD ARCHIVES, INC.
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
LEONARD ARCHIVES, INC.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
LEONARD ARCHIVES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
LEONARD ARCHIVES, INC.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Leonard Archives, Inc. (the "Company") stores records, computer media and microfilm for all industries. The Company also provides document destruction as a complement to complete records management. The Company operates out of two Detroit facilities and three other facilities, in Ann Arbor and Farmington Hills, Michigan, and in Toledo, Ohio.
In October 1995, the Company and its stockholder entered into a definitive agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will merge with FYI (the "Merger"). All outstanding shares of the Company's common stock will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Building improvements are depreciated over the lesser of the asset's useful life or the lease-term.
Unearned Income
Unearned income represents customer storage services which are billed in advance.
Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121), which is establishing accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 to have any effect on the financial statements. The Company will adopt SFAS 121 in 1996.
Revenue Recognition
Revenue is recognized when the services are rendered.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards (SFAS) No. 105, consist primarily of trade receivables.
Trade receivables are primarily short-term receivables from clients located in Michigan and Ohio. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company is an S corporation for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the stockholder. The Company's S corporation status will terminate with the effective date of the Merger discussed in Note 1.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
Accumulated depreciation of equipment under capital leases amounted to $72,587 and $125,137 at December 31, 1994 and 1995, respectively.
4. SHORT-TERM OBLIGATIONS:
Short-term obligations consist of the following:
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Short-term obligations to affiliates consist of the following:
5. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
Long-term obligations to affiliates consist of the following:
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The stockholder of the Company also has a personal note obligation which has as collateral substantially all of the assets of the Company. The security interests in these assets is subordinate to the security interest of the bank. Maturities for December 31, 1996, 1997, 1998, 1999, 2000, and thereafter are $707,241, $110,255, $115,257, $79,699, $437,718, and $0, respectively.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
7. LEASE OBLIGATIONS:
The Company leases its buildings, transportation equipment, and office equipment under noncancelable lease agreements which expire at various dates. Minimum future lease payments under capital and operating leases as of December 31, 1995, are as follows:
Rental expense for all operating leases was approximately $354,894, $569,762, and $531,735 for the years ended December 31, 1993, 1994 and 1995, respectively.
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLAN:
In 1994, the Company adopted a discretionary retirement plan covering substantially all of its employees. Retirement expenses are funded through annual contributions to the plan. Expenses related to the plan were $15,982 and $24,227 for the years ended December 31, 1994 and 1995, respectively.
9. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involves claims for workers' compensation, unemployment, and property damage incurred in connection with its operations. Management believes none of these actions will have a material adverse effect on the financial position or results of operations of the Company.
10. RELATED-PARTY TRANSACTIONS:
The Company leases its operating facilities in Toledo and Trumbull (Detroit) from Leonard Investments. These leases are for various lengths and annual amounts. The rental expense for these operating leases for the years ended December 31, 1993, 1994 and 1995, were $127,000, $126,000, and $127,000, respectively. The Company is also borrowing funds from Leonard Investments as described in Note 5. Leonard Investments is a partnership owned by the stockholder and a former stockholder of the Company. The Ann Arbor facility is leased from a former stockholder. Rental expense for the Ann Arbor facility was $62,064 for the years ended December 31, 1993, 1994, and 1995.
Accounts receivable -- affiliate represents amounts due from Accumed Billing, Inc. and Pathfinders, Inc. The sole stockholder of the Company and his relatives own a 78% interest in Accumed Billing, Inc. and a 33% interest in Pathfinders, Inc. The receivables relate primarily to employee services provided to Accumed Billing, Inc. and Pathfinders, Inc.
Leonard has guaranteed a promissory note in the principal amount of approximately $636,000 as of December 31, 1995, with interest at 10%, payable in monthly installments in varying amounts through December 1, 2004. The promissory note is from the stockholder to the former joint owner in Leonard. Leonard's guarantee and security interest are subordinate to all other notes payable to the bank and the Detroit Economic Growth Council.
11. PRO FORMA NET INCOME (UNAUDITED):
Selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during these periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger.
In connection with this merger, the stockholder has entered into a three year employment agreement with FYI which provides for set base salary, participation in any future FYI incentive bonus plans, four week paid vacation, a car allowance, health benefits, and a two year covenant-not-to-compete following termination of such person's employment. The stockholder's employment agreement provides for a $100,000 base salary.
The unaudited pro forma data presents compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Offering. In addition, the pro forma data presents the provision for income taxes as if the Company had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above.
LEONARD ARCHIVES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS:
In October 1995, the Company and its stockholder entered into a definitive agreement to be acquired by FYI. This transaction was subsequently closed on January 26, 1996. In conjunction with this merger, prior to year-end, the Company distributed cash to its stockholder in the amount of $700,000 which represented the AAA account of the Company. In addition, the Company can make an additional distribution corresponding to the increase in net stockholders' equity from June 30, 1995 to November 30, 1995, not to exceed $75,000. The amount available for the additional distribution at December 31, 1995, is $75,000. Had these transactions been recorded at December 31, 1995, the effect on the accompanying balance sheet would be a decrease in total assets and a decrease in stockholder's equity of $75,000.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To C.&T. Management Services, Inc.:
We have audited the accompanying combined balance sheets of C.&T. Management Services, Inc. (a California corporation) and Related Company as of December 31, 1994 and 1995, and the related combined statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of C.&T. Management Services, Inc. and Related Company as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
COMBINED BALANCE SHEETS
The accompanying notes are an integral part of these combined financial statements.
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these combined financial statements.
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
The accompanying notes are an integral part of these combined financial statements.
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these combined financial statements.
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined financial statements include the accounts of C.&T. Management Services, Inc. (dba DPAS) and Qualidata, Inc. (dba The Mail House -- the "Related Company") (collectively the "Company"). The Company's principal business is providing data processing, information management, and bulk mailing services for its customers who are located primarily on the West Coast.
The Company and its stockholders entered into a definitive agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will merge with FYI (the "Merger"). All outstanding shares of the Company's common stock will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The companies discussed in Note 1 are all under common control of two stockholders. All significant intercompany transactions have been eliminated in combination.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
Intangible and Other Long-Lived Assets
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121: Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121) which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 to have any effect on the combined financial statements. The Company will adopt SFAS 121 in 1996.
Revenue Recognition
Revenue is recognized when services are rendered.
Income Taxes
The companies are S corporations for income tax purposes and, accordingly, any federal income tax liabilities are the responsibility of the stockholders. The Company's S corporation status will terminate with the effective date of the Merger discussed in Note 1.
Reclassifications
Certain prior year amounts have been reclassified to make their presentation consistent with the current year.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards (SFAS) No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in the Western United States and the primary
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
customers are state and public institutions. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
3. NOTES RECEIVABLE:
Notes receivable consist of the following:
The Company sold a commercial building to Sunrise Mushroom on February 1, 1993, for $625,000, including $75,000 of cash and a note receivable of $550,000. The gain of $40,000 was deferred in 1993 and subsequently recognized in 1994 upon fulfillment of the requirements for gain recognition under SFAS No. 66, "Accounting for Sales of Real Estate."
The Sunrise Mushroom note receivable was refinanced in January 1995 and is due in full on January 16, 1996 (see Note 15).
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHORT-TERM OBLIGATION:
7. LONG-TERM OBLIGATIONS:
Long-term obligations consist of the following:
As of December 31, 1994 and 1995, the Company has complied with all loan covenants.
8. OPERATING LEASES:
The Company leases its office buildings, office equipment, and computer software under noncancelable lease agreements which expire at various dates. Lease payments for the years ended December 31, 1993, 1994,
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and 1995, totaled approximately, $460,000, $455,000, and $293,000. Future minimum lease payments under operating leases as of December 31, 1995, for each of the next five years and in the aggregate are as follows:
9. EMPLOYEE BENEFIT PLAN:
The Company sponsors a profit sharing plan. Employees become eligible after one year of service to the Company. The employees are not allowed to make contributions to the plan; Company contributions are determined by the Board of Directors. The profit sharing plan expense was $19,392, $12,422, and $19,866 for 1993, 1994 and 1995, respectively.
The Company offers no postretirement or postemployment benefits.
10. INCOME TAXES:
The Company has elected S corporation status under the Internal Revenue Code. In lieu of federal income taxes, the shareholder is taxed on the Company's taxable income. Therefore, no provision or liability for federal income tax has been included in the financial statements for the years ended December 31, 1993, 1994, and 1995. Due to the losses recorded in 1992 and 1994, only the California minimum corporate tax of $800 has been due. A deferred state tax liability exists primarily due to the cash basis method of reporting for income tax purposes. The deferred tax liability of $15,857 at December 31, 1994 and 1995, represents the 2.5% State of California corporate tax on the net temporary differences.
State income taxes are as follows:
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involve workers' compensation and unemployment claims incurred in connection with its operations. Management believes that none of these actions will have a material adverse effect on the financial position or results of operations of the Company.
C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMON STOCK:
Common stock at December 31, 1994 and 1995, consists of the following:
13. RELATED-PARTY TRANSACTIONS:
A stockholder has advanced funds to the Company of $503,502 and $545,502 as of December 31, 1994 and 1995, respectively. The amounts advanced bear interest at a rate of 9% and are payable on demand.
The Company has a 12% interest-bearing stockholder note payable totaling $51,432 and $37,981 at December 31, 1994 and 1995, that has monthly principal and interest payments of $1,800 and a maturity date of October 1997.
The maturity for this obligation is as follows:
14. PRO FORMA NET INCOME (UNAUDITED):
Selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that the owner and certain key employees received during the periods. The owner and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger.
In connection with the Merger, each stockholder has entered into a three-year employment agreement with FYI which provides for set base salary, participation in any future FYI incentive bonus plans, four week paid vacation, a car allowance, health benefits and a two year covenant-not-to-compete following termination of such person's employment. The stockholders' employment agreements provide for an aggregate base salary of $220,000.
The unaudited pro forma data presents compensation at the level the officers and owner of the Company have agreed to receive subsequent to the Offering. In addition, the following pro forma data presents the provision for income taxes as if the Company had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above.
15. SUBSEQUENT EVENTS:
In October 1995, the Company and its stockholders entered into a definitive agreement to be acquired by FYI. This transaction was subsequently closed on January 26, 1996.
In conjunction with the Merger, the Company will dividend to the stockholders, a note receivable totaling $424,649 and related mortgage note payable of $144,085. In addition, the Company will make a cash distribution of $250,000 prior to the closing of the merger of which $20,000 was distributed prior to year-end. Had these transactions been recorded at December 31, 1995, the effect on the accompanying balance sheet would be a decrease in total assets of $654,649, total liabilities of $144,085, and stockholders' equity of $510,564.
In addition certain cash proceeds of the Offering will be used to repay the stockholder notes payable of $583,483.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Deliverex, Incorporated:
We have audited the accompanying combined balance sheets of Deliverex, Incorporated (a California corporation) and Subsidiary and Related Company as of September 30, 1994, and December 31, 1995, and the related combined statements of operations, stockholders' equity, and cash flows for each of the years ended September 30, 1993 and 1994, and December 31, 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Deliverex, Incorporated and Subsidiary and Related Company as of September 30, 1994 and December 31, 1995, and the combined results of their operations and their combined cash flows for each of the years ended September 30, 1993 and 1994, and December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
COMBINED BALANCE SHEETS
The accompanying notes are an integral part of these combined financial statements.
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these combined financial statements.
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these combined financial statements.
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these combined financial statements.
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying combined financial statements include the accounts of Deliverex, Incorporated (DLX), its wholly owned subsidiary Peninsula Records Management, Inc. (PRM) and ASK Record Management, Inc. (ASK -- the "Related Company") (collectively the "Company"). The Company specializes in storing and managing active and inactive files for hospitals throughout the United States but has customers primarily located on the West Coast. The Company also has franchises that are located in San Francisco, Sacramento, Seattle, and Denver.
In October 1995, the Company's stockholders entered into a definitive agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will be acquired by FYI (the "Merger"). All outstanding shares of the Company's common stock will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The companies referred to in Note 1 are all under common control. All significant intercompany transactions have been eliminated in combination.
Fiscal Year-Ends
ASK has a December 31 year-end. The accompanying combined financial statements reflect the accounts and results of ASK combined with the September 30 year-end accounts and results of DLX and PRM. DLX and PRM's net income for the period from October 1 through December 31, 1994, of $44,177 is reflected as an adjustment to retained earnings on the combined statement of stockholders' equity.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.
Receivable from Shareholder
Receivable from shareholder represents advances made to the shareholder which are payable on demand and will be repaid as a result of the transaction discussed in Note 14.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the asset's useful life or the lease term.
Franchise and License Agreements
DLX has four franchise agreements and three licensee agreements. Initial franchise fees are recognized as DLX's initial services and material obligations are performed. Franchise and license agreements are for periods of up to twenty years and contain options to renew.
Revenue Recognition
Revenue is recognized by PRM and ASK when the services are rendered to the Company's customers. DLX's revenue is derived from monthly royalties under its franchise and licensee agreements and is
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
recognized in the month earned. Royalties earned are shown in other revenue on the combined statements of operations.
Income Taxes
ASK is an S corporation for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the stockholders. For purposes of these combined financial statements, no federal and state income taxes have been provided for ASK. ASK's corporation status will terminate with the effective date of the Merger discussed in Note 1.
Deferred income taxes are provided for temporary differences in the recognition of revenues and expenses for income tax and financial reporting purposes for DLX and PRM. Temporary differences result primarily from various accruals and reserves being deductible for tax purposes in different periods.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards (SFAS) No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in the Western-Pacific states and the primary customers are healthcare institutions. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
Leasehold improvements are depreciated over the lesser of the asset's useful life or the lease term.
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
5. SHORT-TERM OBLIGATIONS:
The Company has a $50,000 bank line of credit at prime plus a premium, as defined, on the outstanding principal balance. The line of credit has no defined expiration date. The Company had draws outstanding of $47,270 and $39,258 at September 30, 1994, and December 31, 1995, respectively. At September 30, 1994, and December 31, 1995, the total interest rate was 14% and 12.25%.
6. LONG-TERM OBLIGATIONS:
Long-term debt consists of the following:
The Small Business Administration note payable is secured by machinery and equipment, furniture and fixtures, and leasehold improvements of PRM as well as by personal guarantees of DLX's stockholder. DLX's stockholder has also guaranteed certain of the bank notes payable.
As of September 30, 1994, and through December 31, 1995, the Company has complied with all loan covenants.
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, the aggregate amounts of annual principal maturities of long-term debt are as follows:
7. OPERATING LEASES:
The Company leases its office buildings and certain of its automobiles. Lease payments for the years ended September 30, 1993 and 1994, and December 31, 1995, totaled approximately $547,300, $545,000, and $446,000. Minimum future lease payments under operating leases as of December 31, 1995, for each of the next five years and in the aggregate are as follows:
8. EMPLOYEE BENEFIT COSTS:
The Company pays health and dental insurance premiums for the majority of its employees. Premiums paid in the years ended September 30, 1993, 1994, and December 31, 1995, were approximately $72,500, $79,600, and $84,000, respectively.
The Company offers no postretirement or postemployment benefits.
9. INCOME TAXES:
The following income tax information for DLX and PRM is presented in accordance with Statement of Financial Accounting Standards No. 109. This statement provides for a liability approach to accounting for income taxes.
Federal and state income taxes are as follows:
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The differences in income taxes provided and the amounts determined by applying the federal statutory tax rate to income before income taxes result from the following:
The components of deferred income tax liabilities and assets are as follows:
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involves claims for workers' compensation and unemployment incurred in connection with its operations. Management believes that none of these actions will have a material adverse effect on the financial position or results of operations of the Company.
11. CAPITAL STOCK:
Common stock at December 31, 1995, consists of the following:
ASK's common stock is 65% owned by the 100% stockholder of DLX. PRM has 10,000 shares of no par value common stock authorized, issued, and outstanding. PRM's common stock is owned by DLX.
In December 1994, ASK approved the reissuance of 10,000 shares of treasury stock to its minority stockholder. Compensation expense was recorded in 1994, equivalent to the repurchase cost in 1992. The shares were reissued on January 1, 1995.
DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. SIGNIFICANT CUSTOMER:
In 1994 and 1995, the Company had one customer that accounted for 15% and 16%, respectively, of combined revenues.
13. PRO FORMA NET INCOME (UNAUDITED):
Selling, general and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during the periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger.
In connection with this merger, each stockholder has entered into a three-year employment agreement with FYI which provides for set base salary, participation in any future FYI incentive bonus plans, four-week paid vacations, a car allowance, health benefits, and a two-year covenant-not-to-compete following termination of such person's employment. The stockholders' employment agreements provide for an aggregate base salary of $247,000.
The unaudited pro forma data presents compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Offering. In addition, the following pro forma data presents the provision for income taxes as if the S corporation had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above.
14. SUBSEQUENT EVENTS:
On January 26, 1996 the Company was acquired by FYI. In conjunction with the Merger, the Company can make an additional distribution corresponding to the increase in net stockholders' equity from June 30, 1995 to November 30, 1995, not to exceed $200,000. The amount available for the additional distribution at December 31, 1995, is $80,000. Had this transaction been recorded at December 31, 1995, the effect on the accompanying balance sheet would be a decrease in total assets and stockholders' equity of $80,000, respectively.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Permanent Records, Inc.:
We have audited the accompanying balance sheets of Permanent Records, Inc. (a Texas corporation) as of December 31, 1994 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Permanent Records, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996
PERMANENT RECORDS, INC.
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
PERMANENT RECORDS, INC.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
PERMANENT RECORDS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these statements.
PERMANENT RECORDS, INC.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
PERMANENT RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying financial statements include the accounts of Permanent Records, Inc. (the "Company"). The Company provides offsite active and inactive storage and retrieval services, microfilming, and medical records release services to its customers from its office in Fort Worth, Texas.
The Company and its stockholders entered into a definitive agreement with F.Y.I. Incorporated ("FYI") in October 1995, pursuant to which the Company will merge with FYI (the "Merger"). All outstanding shares of the Company's common stock will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering of the common stock of FYI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
Revenue Recognition
Revenue is recognized when services are rendered.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards (SFAS) No. 105, consist primarily of trade receivables.
Trade receivables are primarily short-term receivables from healthcare institutions in Northern Central Texas. The Company's management reviews receivables for collectibility.
Income Taxes
The Company is a C corporation. Deferred income taxes are provided for timing differences in the recognition of revenues and expenses for tax and financial reporting purposes. Temporary differences result primarily from accelerated depreciation for tax purposes, deferred contract revenues being taxed when billed and various accruals and reserves being deductible for tax purposes in different periods.
F.Y.I. INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
These pro forma combined financial statements should be read in conjunction with the historical financial statements of the Founding Companies, F.Y.I. Incorporated and Subsidiaries and the individual Founding Companies. See "Index to Financial Statements."
F.Y.I. acquired, simultaneously with and as a condition to the closing of the IPO in January 1996, Imagent, Researchers, Recordex, DPAS, Leonard, Deliverex and Permanent Records (the "Acquisitions"). The Acquisitions have been accounted for in accordance with GAAP as a combination of the Founding Companies at historical cost and January 31, 1996 has been used as the effective date of the Acquisitions. Accordingly, historical financial statements of these Founding Companies have been combined throughout all periods prior to February 1, 1996 as if the Founding Companies had always been members of the same operating group. However, since the Founding Companies were not under common control or management, historical combined results may not be comparable to, or indicative of, future performance.
In May 1996, the Company acquired B&B and Premier. In June 1996, the Company acquired all of the non-cash assets of Cook. In August 1996, the Company acquired Medical Record. CMRS and Texas Medical Record have previously reported on a fiscal year ending February 29 and Minnesota Medical Record has previously reported on a fiscal year ending September 30. As such, the accounts of CMRS, Texas Medical Record and Minnesota Medical Record for their last fiscal year have been combined with the results of F.Y.I. for the year ended December 31, 1995. The results of CMRS, Texas Medical Record and Minnesota Medical Record for the interim period from January 1, 1996 through the date of acquisition have been recast and combined with the results of F.Y.I. for the year ended December 31, 1996. Also, as of August 1996, the Company acquired ZIA. In October 1996, the Company acquired Carton, and in November 1996, the Company acquired DISC. All of these acquisitions are accounted for under the purchase method of accounting.
The unaudited pro forma financial statements of F.Y.I. for the year ended December 31, 1995 give effect to: (i) the acquisitions of B&B, Premier, Cook, Medical Record, ZIA, Carton and DISC (collectively, the "Significant Acquisitions") as if the transactions were consummated as of January 1, 1995 and (ii) the acquisition of the Founding Companies as if the transactions were consummated as of January 1, 1995.
The unaudited pro forma financial statements of F.Y.I. for the year ended December 31, 1996 are based upon:
(i) the audited statement of operations of F.Y.I. for the period from February 1, 1996 to December 31, 1996 combined with the audited statement of operations for the Founding Companies for the one month ended January 31, 1996;
(ii) the unaudited statements of operations for B&B, Premier, Cook, ZIA, Medical Record, Carton and DISC from January 1, 1996 to the respective effective date of the acquisition.
The pro forma financial statements have been prepared based upon certain assumptions and include all adjustments as detailed in the Notes to Pro Forma Financial Statements.
The Company has preliminarily analyzed the savings that it expects to be realized by consolidating certain general and administrative functions, including reductions in accounting, audit, insurance and benefit plan expenses. In addition, the Company has realized benefits from: (i) the reduction in interest payments related to the prepayment of outstanding Founding Company debt; (ii) its ability to borrow at lower interest rates than the Founding Companies; and (iii) the interest earned on the net proceeds of the IPO remaining after payment of the expenses of the IPO and the cash portion of the consideration for the Founding Companies. These savings are offset by the costs of being a public company and the incremental increase in costs related to the Company's new management. Neither the savings nor the costs have been included in the
pro forma financial information of F.Y.I. Incorporated and Subsidiaries for the periods prior to the Acquisitions.
The pro forma financial data do not purport to represent what the Company's financial position or results of operations would actually have been if such transaction in fact had occurred on those dates or to project the Company's financial position or results of operations for any future period.
F.Y.I. INCORPORATED AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR DECEMBER 31, 1995 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
F.Y.I. INCORPORATED AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
THE PRO FORMA ADJUSTMENTS TO THE ACCOMPANYING STATEMENTS OF OPERATIONS ARE SUMMARIZED BELOW:
A. Adjustment to depreciation and amortization expense related to the preliminary purchase price allocations.
B. To record the difference between the compensation paid to the stockholders of B&B, Premier, ZIA and Medical Record for the historical periods presented and the F.Y.I. employment contract compensation to the stockholders.
C. Adjustment of the federal and state income tax provisions based on the pro forma combined operations.
D. To adjust the weighted average shares outstanding to reflect the pro forma effect of the shares issued for the purchase of B&B, Premier, ZIA, Medical Record, Carton and DISC.
E. To record the difference between the compensation paid to the stockholders of the Founding Companies and Rust and the F.Y.I. employment contract compensation for the one month ended January 31, 1996 and the year ended December 31, 1995.
F. Adjustment of the federal and state income tax provisions based on the pro forma combined operations of F.Y.I. and the Founding Companies.
G. To record interest expense on the $17,106,000 term debt issued for the purchase of Cook, ZIA, Medical Record, Carton and DISC. Proceeds remaining from the IPO were used for the purchase of B&B and Premier, and a portion of Cook.
H. To eliminate intercompany revenue between the acquired companies and the Founding Companies.
I. To eliminate net management fees due to the different fiscal year ends of Medical Record.
Statements throughout this Report that state the Company's or management's intentions, hopes, beliefs, anticipations, expectations or predictions of the future are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in "Item 1. Business -- Risk Factors" in this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 will be set forth under the caption "Election of Directors" in the Company's 1997 Proxy Statement, which will be filed not later than 120 days after the end of the Company's fiscal year end December 31, 1996 and which is incorporated herein by this reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 will be set forth under the caption "Executive Compensation" in the Company's 1997 Proxy Statement, which will be filed not later than 120 days after the end of the Company's fiscal year end December 31, 1996 and which is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 will be set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's 1997 Proxy Statement, which will be filed not later than 120 days after the end of the Company's fiscal year end December 31, 1996 and which is incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 will be set forth under the caption "Certain Relationships and Related Transactions" in the Company's 1997 Proxy Statement, which will be filed not later than 120 days after the end of the Company's fiscal year end December 31, 1996 and which is incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are being filed as part of this Report:
(a)(1) The following financial statements are included in Part II, Item 8 of this Report:
(a)(2) Financial Statement Schedules
PRO FORMA FINANCIAL STATEMENTS
All other schedules are omitted because they are not applicable, not required or the required information is in the Financial Statements or the Notes thereto.
(a)(3) The following Exhibits are filed as part of this Report as required by Item 601 of Regulation S-K. The Exhibits designated by an asterisk are management contracts and compensatory plans and arrangements required to be filed as Exhibits to this Report.
(b) Reports on Form 8-K:
The Company did not file any Form 8-K Current Reports during the last quarter of the fiscal year ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
F.Y.I. INCORPORATED
By: /s/ ED H. BOWMAN, JR. ---------------------------------- Ed H. Bowman, Jr., Chief Executive Officer and President
Date: March 11, 1997
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and constitutes Ed H. Bowman, Jr. and Margot T. Lebenberg, and each of them singly, his true and lawful attorneys-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign and file any and all amendments to this report with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and he hereby ratifies and confirms all that said attorneys-in-fact or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX