-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R9IL9BZqc34U/98Q9F2Vg0ougahjXbPYxpF/GlhcNw+EGtIO9vaLt3zf4R7rohp2 VtG0hnokyfisgk30NxM+OQ== 0000950134-96-004858.txt : 19960916 0000950134-96-004858.hdr.sgml : 19960916 ACCESSION NUMBER: 0000950134-96-004858 CONFORMED SUBMISSION TYPE: 424B2 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960913 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FYI INC CENTRAL INDEX KEY: 0000936931 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 752560895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-01084 FILM NUMBER: 96629998 BUSINESS ADDRESS: STREET 1: 3232 MCKINNEY AVE STREET 2: STE 900 CITY: DALLAS STATE: TX ZIP: 75204 BUSINESS PHONE: 2149537555 MAIL ADDRESS: STREET 1: 3232 MCKINNEY AVE STREET 2: STE 900 CITY: DALLAS STATE: TX ZIP: 75204 424B2 1 FINAL PROSPECTUS 1 Filed pursuant to Rule 424(b)(2) Registration No. 333-1084 2,000,000 SHARES [FYI LOGO] COMMON STOCK --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- This Prospectus covers 2,000,000 shares of common stock, $.01 par value (the "Common Stock"), which may be offered and issued by F.Y.I. Incorporated (the "Company" or "F.Y.I.") from time to time in connection with the merger with or acquisition by the Company of other businesses or assets, and which may be reserved for issuance pursuant to, or offered and issued upon exercise or conversion of, warrants, options, convertible notes or other similar instruments issued by the Company from time to time in connection with any such merger or acquisition. It is expected that the terms of acquisitions involving the issuance of securities covered by this Prospectus will be determined by direct negotiations with the owners or controlling persons of the businesses or assets to be merged with or acquired by the Company, and that the shares of Common Stock issued will be valued at prices reasonably related to market prices current either at the time the terms of a merger or acquisition are agreed upon or at or about the time of delivery of shares. No underwriting discounts or commissions will be paid, although finder's fees may be paid from time to time with respect to specific mergers or acquisitions. Any person receiving any such fees may be deemed to be an underwriter within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). The Company has previously issued 467,973 shares of Common Stock pursuant to this Registration Statement. Of such issued shares, 36,670 shares of Common Stock are held by a wholly-owned subsidiary of the Company. After giving effect to the Company's pending acquisition (see "Recent Developments"), the Company will have issued an additional 154,286 shares of Common Stock pursuant to this Registration Statement. The Common Stock of the Company is included for quotation on the Nasdaq National Market. On September 11, 1996, the closing price of the Common Stock on the Nasdaq National Market was $17.50 per share as published in The Wall Street Journal on September 12, 1996. All expenses of this offering will be paid by the Company. The Company is a Delaware corporation and all references herein to the Company refer to the Company and its subsidiaries. The executive offices of the Company are located at 3232 McKinney Avenue -- Suite 900, Dallas, Texas 75204 and its telephone number is (214) 953-7555. The Common Stock offered hereby invokes a high degree of risk. See "Risk Factors" commencing on page 6 hereof. The date of this Prospectus is September 13, 1996. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Statements throughout this Prospectus that state the Company's or management's intentions, hopes, beliefs, anticipations, expectations or predictions of the future are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained under "Risk Factors." THE COMPANY F.Y.I. Incorporated (the "Company" or "F.Y.I.") was founded in September 1994 to create a national, single-source provider of document management services to three primary client segments: healthcare institutions, professional services firms and financial institutions. In January 1996, F.Y.I. acquired (the "Acquisitions"), simultaneously with the closing of its initial public offering (the "Offering"), seven document management services businesses (the "Founding Companies"). The Founding Companies, which have been in business an average of 22 years, are headquartered in San Francisco (2), San Jose, Fort Worth, Detroit, Malvern (Philadelphia) and Baltimore. Since the Offering, the Company has acquired 10 additional companies (together with the Founding Companies, the "Operating Companies") which provide document management services in Baltimore, Houston, Los Angeles, Minneapolis, Sacramento, San Jose, Seattle and Washington, D.C. The Operating Companies operate in over 25 states. The Company had pro forma fiscal 1995 annual revenues of approximately $78 million and pro forma fiscal 1995 net income of $5.1 million after giving effect to the New Acquisitions as defined below. The Company operates with a decentralized management strategy rather than a standardized national model in order to provide superior customer service and retain the historical customers of acquired businesses while achieving the operating efficiencies of a large organization. This strategy also emphasizes the retention of local management, which the Company believes makes it an attractive acquiror of other document management services companies. See "The Company." The Company's three primary client segments are highly document-intensive. For a variety of regulatory, client service and other reasons, the documents of the Company's clients must be maintained, accessed and managed for extensive periods of time, often under strict guidelines and specifications. While the document management requirements of each target client segment are relatively unique and require a specialized understanding of that segment, the Company offers certain common document management services that are transferable across its targeted client segments. These services, which are offered by one or more of the Operating Companies, include: (i) micrographic services, including microfilm and microfiche production and processing; (ii) electronic imaging services, including the conversion of documents into digitized media using sophisticated computer technology; (iii) active storage and maintenance of documents and files; (iv) archival storage of inactive documents; and (v) information and database management services. In addition, in order to better fulfill the document management needs of targeted client segments, certain Operating Companies also offer industry specific services such as litigation support, including subpoena, authorization, photocopying and service of process services, medical records release services and remittance processing. The Company also derives revenue from the sale of certain micrographic and business imaging products. Historically, the document management services industry has been highly fragmented, consisting primarily of small local or regional businesses that limit their operations to a narrow range of offered services or provide services only to selected client segments. The Company believes that significant opportunities are available to a business that can consolidate the capabilities and resources of a number of existing document management services businesses. In order to effect such a consolidation, the Company has implemented an aggressive acquisition program designed to expand its range of offered services and acquire additional market share in each of its targeted geographic markets. 2 3 The Company believes that each of its targeted geographic markets can support the following range of services: [CHART] The Company believes that the consolidation of document management services businesses will provide it with a significant competitive advantage over existing smaller businesses. In addition to economies of scale, the Company expects to benefit from enhanced operating efficiencies and significant cross-selling opportunities. As the Company gains critical mass in certain geographic markets, it expects to be able to capitalize on its existing client relationships and technical expertise to: (i) vertically integrate by expanding the services offered to each of its client segments; and (ii) horizontally integrate by offering certain transferable services to a larger overall customer base. 3 4 SUMMARY COMBINED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) F.Y.I. was founded in September 1994 and effectively began its operations on February 1, 1996, following the completion of the Offering. The Summary Combined Financial Data set forth below for the periods prior to February 1, 1996, are derived from the Founding Companies Combined Statements contained elsewhere in this Prospectus.
SIX MONTHS SIX MONTHS ENDED JUNE 30, 1996 ENDED JUNE (UNAUDITED)(5) FISCAL YEARS ENDED DECEMBER 31, 30,(4) ------------------------------------- ----------------------------------------------- ------------ FOUNDING F.Y.I. 1991 1992 1993 1994 1995 1995 COMPANIES INCORPORATED SUPPLEMENTAL ----------- ------- ------- ------- ------- ------------ --------- ------------ ------------ (UNAUDITED) (UNAUDITED) Statement of Operations Data: Total revenue........... $29,525 $35,696 $38,396 $43,032 $47,626 $ 23,829 $ 3,916 $ 24,651 $ 28,567 Operating income(1)..... 1,444 2,708 3,401 3,454 4,966 2,827 503 2,173 2,676 Interest and other expense (income), net................... 132 272 248 29 139 99 (45) (123) (168) Income before income taxes(1).............. 1,312 2,436 3,153 3,425 4,827 2,728 548 2,296 2,844 Provision for income taxes(2).............. 474 895 1,261 1,256 1,794 1,024 221 923 1,144 Net income(1)(2)........ 838 1,541 1,892 2,169 3,033 1,704 327 1,373 1,700 Net income per share(1)(2)(3)........ $0.23 $0.42 $0.52 $0.60 $0.83 $0.06 $0.26 $0.32 ------ ---- ---- ---- ---- ----- ------ ------ ------ ---- ---- ---- ---- ----- ------ ------ Weighted average shares outstanding(3)........ 3,644 3,644 3,644 3,644 3,644 5,335 5,335 5,335 ======= ======= ======= ======= ======= ====== ====== =======
DECEMBER 31, 1995 JUNE 30, JUNE 30, 1996 ------------ 1996 -------------- ACTUAL ----------- PRO FORMA ------------ ACTUAL AS ADJUSTED(6) ----------- -------------- (UNAUDITED) (UNAUDITED) Balance Sheet Data: Working capital.................................................... $ 1,663 $ 4,260 $ 5,155 Total assets....................................................... 19,681 45,695 56,628 Long-term debt less current portion................................ 2,777 11,071 15,678 Stockholders' equity............................................... 7,111 22,916 27,453
- --------------- SUMMARY PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA AS ADJUSTED FOR NEW ACQUISITIONS(6) --------------------------- YEAR ENDED SIX MONTHS DECEMBER ENDED JUNE 31, 1995 30, 1996 ----------- ----------- (UNAUDITED) (UNAUDITED) Statement of Operations Data: Total revenue........................................................................ $78,001 $42,675 Operating income..................................................................... 9,724 5,682 Interest and other expense, net...................................................... 1,454 431 Income before income taxes........................................................... 8,270 5,251 Provision for income taxes........................................................... 3,172 2,107 Net income........................................................................... 5,098 3,144 Pro forma net income per share....................................................... $0.87 $0.54 ======= ======= Pro forma weighted average shares outstanding(3)..................................... 5,872 5,872
4 5 (1) Gives effect to certain reductions in salaries and benefits of the former owners and key employees of the Founding Companies which were agreed to in connection with the organization of the Company and the Offering (the "Compensation Differential"). See Note 3 of Notes to Combined Financial Statements of the Founding Companies. (2) Gives effect to certain tax adjustments related to the taxation of certain Founding Companies as S corporations or sole proprietorships prior to the consummation of the acquisition of each of the Founding Companies (the "Acquisitions") and the tax impact of the Compensation Differential in each period. See Note 3 of Notes to Combined Financial Statements of the Founding Companies. (3) Weighted average shares for all periods prior to the Offering include: (i) 1,205,682 shares issued by F.Y.I. prior to the consummation of the Acquisitions and the Offering; (ii) 1,878,933 shares issued to the stockholders of the Founding Companies in connection with the Acquisitions; (iii) 543,000 shares sold in the Offering to cover the cash consideration for the Acquisitions; and (iv) 15,923 shares of Common Stock determined pursuant to the treasury stock method relating to warrants to purchase 115,000 shares of Common Stock at $10.00 per share. Periods subsequent to the Offering and the pro forma data include the additional 1,642,000 shares (2,185,000 -- 543,000) issued in the Offering beyond shares sold to cover cash consideration for the Acquisitions and the additional 253,252 shares of Common Stock issued in acquisitions consummated in May 1996. Pro forma weighted average shares also include an additional 332,337 shares issued or to be issued in connection with the acquisition of Medical Record and the pending acquisition of ZIA. Does not include (i) an additional 650,000 shares of Common Stock or 12% of the aggregate number of shares of Common Stock outstanding reserved for issuance under the Company's 1995 Stock Option Plan, of which options to purchase 588,670 shares of Common Stock are currently outstanding; and (ii) warrants outstanding to purchase 50,000 shares of Common Stock. (4) The Statement of Operations Data for the six months ended June 30, 1995, represent the unaudited results of the combined Founding Companies for the period. (5) The Statement of Operations Data for the six months ended June 30, 1996, for the Founding Companies represent the one month of operations prior to the consummation of the Acquisitions. The Statement of Operations Data for the six months ended June 30, 1996, for F.Y.I. Incorporated and Subsidiaries represent the results of operations subsequent to the consummation of the Acquisitions. The Supplemental Data represent the combined operations of the Founding Companies and F.Y.I. during the six months ended June 30, 1996. 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. (6) Gives effect to: (i) the acquisition of Robert A. Cook and Staff, Inc. and RAC Services, Inc. ("Cook"), B&B Information and Management, Inc. ("B&B"), Premier Document Management, Inc. and PDM Services, Inc. ("Premier"), C.M.R.S. Incorporated. ("CMRS"), Minnesota Medical Record Service, Inc. ("Minnesota Medical Record") and Texas Medical Record Service, Inc. ("Texas Medical Record") and the pending acquisition of ZIA Information Analysis Group (collectively the "New Acquisitions") as if the transactions were consummated for the balance sheet data based upon the earlier of June 30, 1996 or the respective acquisition date and for statement of operations data as of January 1, 1995; and (ii) the Acquisitions of the Founding Companies for Statement of Operations Data for periods prior to February 1, 1996. See the separate unaudited pro forma financial statements and notes thereto located elsewhere within this Prospectus. 5 6 RISK FACTORS Prospective purchasers of the Common Stock offered hereby should consider carefully the specific factors set forth below as well as the other information set forth in this Prospectus in evaluating an investment in the Company. ABSENCE OF COMBINED OPERATING HISTORY; RISKS OF INTEGRATION F.Y.I. was founded in September 1994 and conducted no operations prior to the consummation of the Offering. F.Y.I. acquired the Founding Companies simultaneously with the closing of the Offering. The Company effected 10 additional acquisitions since the Offering. Prior to their acquisition, the Operating Companies operated as separate independent entities. Currently, the Company has a decentralized financial reporting system and initially relies on the existing reporting systems of the Operating Companies. The success of the Company will depend, in part, on the Company's ability to integrate the operations of the Operating Companies, including centralizing certain functions to achieve cost savings and developing programs and processes that will promote cooperation and the sharing of opportunities and resources among the Operating Companies. F.Y.I.'s management group has been assembled only recently and has no previous experience in the document management services industry. There can be no assurance that the management group will effectively be able to oversee the combined entity and implement the Company's operating or growth strategies. Further, to the extent that the Company is able to implement its acquisition strategy, the resulting growth of the Company will place significant demands on management and on the Company's internal systems and controls. There can be no assurance that the newly assembled management group will effectively be able to direct the Company through a period of significant growth. See "Business -- Acquisition Program," "Business -- Organization" and "Management." A number of the Operating Companies offer different services, utilize different capabilities and technologies and target different geographic markets and client segments. While the Company believes that there are substantial opportunities in integrating the businesses of the Operating Companies, these differences increase the risk inherent in successfully completing such integration. Further, there can be no assurance that the Company's strategy to establish a single-source provider for document management services will be successful, or that the Company's target client segments will accept the Company as a provider of such services. In addition, there can be no assurance that the operating results of the Company will match or exceed the combined individual operating results achieved by the Operating Companies prior to their acquisition. ACQUISITION STRATEGY The Company's primary growth strategy is the acquisition of additional document management services businesses which will complement its existing businesses. There can be no assurance that the Company will be able to identify or reach mutually agreeable terms with acquisition candidates and their owners, or that the Company will be able to profitably manage additional businesses or successfully integrate such additional businesses into the Company without substantial costs, delays or other problems. Acquisitions may involve a number of special risks including: adverse short-term effects on the Company's reported operating results; diversion of management's attention; dependence on retention, hiring and training of key personnel; risks associated with unanticipated problems or legal liabilities; and amortization of acquired intangible assets. Some or all of these risks could have a material adverse effect on the Company's operations and financial performance. In addition, to the extent that consolidation becomes more prevalent in the industry, the prices for attractive acquisition candidates may be bid up to higher levels and, in any event, there can be no assurance that businesses acquired in the future will achieve sales and profitability that justify the investment therein. See "Business -- Acquisition Program." NEED FOR ADDITIONAL FINANCING TO IMPLEMENT ACQUISITION STRATEGY The Company currently intends to finance future acquisitions by using its Common Stock, including the Common Stock offered by this Prospectus, for all or a portion of the consideration to be paid. In the event that the Company's Common Stock does not maintain sufficient value, or potential acquisition candidates are 6 7 unwilling to accept the Company's Common Stock as consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, in order to continue its acquisition program. If the Company does not have sufficient cash resources, its growth could be limited unless it is able to obtain capital through additional debt or equity financings. In April 1996, the Company and its subsidiaries entered into a credit agreement, as amended (the "Line of Credit"), with Banque Paribas, as agent, and the lenders named therein. Under the Line of Credit, the Company and its subsidiaries may borrow, on a revolving credit basis, loans in an aggregate outstanding principal amount of $5.0 million for working capital and general corporate purposes and term loans in an aggregate principal amount of $30.0 million for acquisitions, subject to certain restrictions in the Line of Credit. The commitments to fund revolving credit loans and term loans expire April 14, 2001 and October 15, 1997, respectively. Loans under the Line of Credit will bear interest, at the option of the Company, at a rate per annum of (i) Banque Paribas' prime rate plus 1.50% or (ii) an adjusted London inter-bank offered rate plus 3.00%. As of September 3, 1996, the availability under the Line of Credit was approximately $2.0 million for working capital and approximately $16.7 million for acquisitions. There can be no assurance, however, that funds available under such Line of Credit will be sufficient for the Company's needs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Acquisition Program." DEPENDENCE ON CERTAIN CLIENT SEGMENTS AND TECHNOLOGY The Company derives its revenues primarily from its three targeted client segments: healthcare institutions, professional services firms and financial institutions. Fundamental changes in the business practices of any of these client segments, whether due to regulatory, technological or other developments, could cause a material reduction in demand by such clients for the services offered by the Company. Any such reduction in demand would have a material adverse effect on the results of operations of the Company. Although the Company believes that it will be able to continue to offer services based on the newest technologies, there can be no assurance that the Company will be able to obtain the rights to use any such technologies, that it will be able to effectively implement such technologies on a cost-effective basis or that such technologies will not render obsolete the Company's role as a third party provider of document management services. See "Business -- Services Offered by the Operating Companies." COMPETITION The document management services businesses in which the Company competes and expects to compete are highly competitive. A significant source of competition is the in-house document handling capability of the Company's target client base. There can be no assurance that these businesses will outsource more of their document management needs or that such businesses will not bring in-house services that they currently outsource. In addition, certain of the Company's competitors are larger businesses, many of which have greater financial resources than the Company. Certain of these competitors operate in broader geographic areas than the Company, and others may choose to enter the Company's areas of operation in the future. In addition, the Company intends to enter new geographic areas through internal growth and acquisitions and expects to encounter significant competition from established competitors in each of such new areas. As a result of this highly competitive environment, the Company may lose customers or have difficulty in acquiring new customers, and its revenues and margins may be adversely affected. See "Business -- Competition." EFFECT OF POTENTIAL FLUCTUATIONS IN OPERATING RESULTS ON PRICE OF COMMON STOCK; VOLATILITY OF STOCK PRICE Results for any quarter are not necessarily indicative of the results that the Company may achieve for any subsequent quarter or a full fiscal year. Quarterly results may vary materially as a result of the timing and structure of acquisitions, the timing and magnitude of costs related to such acquisitions, the gain or loss of material client relationships and variations in the prices charged by the Company for the services it provides. In addition, since a significant portion of the Company's revenues are generated on a project-by-project basis, the timing or completion of material projects could result in fluctuations in the Company's results of operations for particular quarterly periods. Further, because the anticipated financial benefits of the combination of the Operating Companies may not be generated immediately, the Company's initial results as a combined company may reflect corporate overhead that exceeds the realized benefits. Such fluctuations in operating results may adversely affect the market price of the Company's Common Stock. The market price 7 8 for the Company's shares may also fluctuate in response to material announcements by the Company or significant clients of the Company, changes in the economic or other conditions impacting the Company's targeted client segments and general economic conditions outside of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Fluctuations in Quarterly Results of Operations." RELIANCE ON KEY PERSONNEL The Company's operations are dependent on the continued efforts of Thomas C. Walker, Ed H. Bowman, Jr., David Lowenstein, Timothy J. Barker, Margot T. Lebenberg, its other executive officers and on senior management of the Operating Companies. Furthermore, the Company will also be dependent on the senior management of businesses acquired in the future. If any of these people is unable or unwilling to continue in his or her present role, or if the Company is unable to attract and retain other skilled employees, the Company's business could be adversely affected. The Company does not intend to obtain key man life insurance covering any of its executive officers or other members of senior management. See "Management." POTENTIAL LIABILITY FOR BREACH OF CONFIDENTIALITY A substantial portion of the Company's business involves the handling of documents containing confidential and other sensitive information. Although the Operating Companies have established procedures intended to eliminate any unauthorized disclosure of confidential information and, in some cases, have contractually limited their potential liability for unauthorized disclosure of such information, there can be no assurance that unauthorized disclosures will not result in liability to the Company. It is possible that such liabilities could have a material adverse effect on the Company. CONTROL BY MANAGEMENT The former stockholders of the Operating Companies and the directors and other executive officers of the Company, and entities affiliated with them, beneficially own approximately 52.9% of the outstanding shares of Common Stock and exercise substantial control over the Company's affairs. These stockholders acting together would likely be able to elect a sufficient number of directors to control the Board and to approve or disapprove any matter submitted to a vote of stockholders. See "Principal Stockholders." POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK The market price of the Common Stock of the Company could be adversely affected by the sale of substantial amounts of Common Stock of the Company in the public market. The Company issued 2,185,000 shares of Common Stock in the Offering, all of which may be sold in the public market. In addition, simultaneously with the closing of the Offering, the former owners of the Founding Companies received, in the aggregate, 1,878,933 shares of Common Stock as a portion of the consideration for their businesses. Such shares are not being offered by this Prospectus and have not been registered under the Securities Act, and therefore may not be resold except in transactions registered under the Securities Act or pursuant to an exemption from registration. Certain other stockholders of F.Y.I. hold, in the aggregate, an additional 1,205,682 shares of Common Stock. See "Business -- Organization." None of these 1,205,682 shares of Common Stock were acquired in transactions registered under the Securities Act, and, accordingly, such shares may not be sold except in transactions registered under the Securities Act or pursuant to an exemption from registration. However, the holders of all such 3,084,615 unregistered shares have certain registration rights with respect to such shares. The Company issued 467,973 shares of Common Stock in connection with the acquisitions which closed in May 1996 and in August 1996. Of such issued shares, 36,670 shares are held by a wholly-owned subsidiary of the Company. These 467,973 shares of Common Stock were registered under this Registration Statement, but are subject to certain contractual transfer restrictions. After giving effect to the Company's pending acquisition (see "Recent Developments"), the Company will have issued an additional 154,286 shares of Common Stock pursuant to this Registration Statement. 8 9 The Company has reserved for issuance under its 1995 Stock Option Plan (the "Plan") an aggregate of 650,000 shares of Common Stock or 12% of the aggregate number of shares of the Common Stock outstanding, whichever is greater. The Company has registered the shares issuable upon exercise of options granted under the Plan, and such shares will be eligible for resale in the public market. The Company also has warrants outstanding for the purchase of 165,000 shares of Common Stock. The former owners of the Founding Companies and the initial stockholders of the Company are contractually prohibited by the Company from selling such shares until at least January 26, 1998 (other than certain sales registered under the Securities Act). EFFECT OF CERTAIN CHARTER PROVISIONS The Board of Directors of the Company is empowered to issue preferred stock without stockholder action. The existence of this "blank-check" preferred could render more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise. See "Description of Capital Stock." 9 10 THE COMPANY F.Y.I. Incorporated was founded in September 1994 under the laws of the State of Delaware to create a national, single-source provider of document management services. Prior to the Offering, F.Y.I. did not conduct any operations. F.Y.I. acquired simultaneously with the consummation of the Offering, the following seven well-established businesses. For a description of the transactions pursuant to which these businesses were acquired, see "Business -- Organization" and "Certain Transactions." Imagent. Imagent Corporation (together with Mobile Information Services Corporation, an affiliate acquired by F.Y.I., "Imagent") provides document management services to clients in the northeastern and mid-Atlantic United States. Founded in 1969, Imagent's three primary lines of business include: (i) the distribution of Kodak(C) microfilm and business imaging supplies; (ii) microfilm processing; and (iii) business services, including microfilming, database creation and management, electronic imaging, data entry and microfilm storage and research services. A large number of Imagent's microfilm processing clients are banks, including Bank of New York, Bankers Trust, Chase Manhattan, Citibank, First Union and NationsBank. Imagent's business services segment, which is its fastest growing business segment, provides services to financial, administrative and legal departments of a wide variety of companies. Imagent is headquartered in Baltimore and had 1995 revenues of $13.5 million. Researchers. Melanson & Associates, Inc. (d/b/a Researchers) (together with Bay Area Micrographics ("BAM"), an affiliate acquired by F.Y.I., "Researchers") provides litigation support services to law firms, corporate legal departments and insurance companies in the San Francisco, Los Angeles, San Jose and Sacramento metropolitan areas. These services include customized solutions for a variety of its clients' document needs, including on-site microfilming and electronic imaging, overnight document reproduction and document indexing. In addition, Researchers has particular expertise in retrieving and processing medical records for use in medical malpractice and personal injury litigation. Founded in 1975, Researchers is a significant provider of outsourced litigation support in California and has provided services to many of the largest law firms in the State. Although Researchers' business is primarily project driven, a majority of its 1995 revenues have been generated by clients who were clients in 1994. Researchers is headquartered in San Francisco and had 1995 revenues of $9.9 million. Recordex. Recordex Services, Inc. ("Recordex") provides medical records release services to over 140 hospitals and other healthcare institutions in 14 eastern states, including Johns Hopkins Hospital, University of Massachusetts Medical Center and Duke University Medical Center, as well as to physician groups, clinics and HMOs. Recordex's services, which are performed on-site, include: (i) tracking of the request for information from its receipt until its fulfillment; (ii) ensuring that a request for information is complete and authorized; (iii) coordinating the retrieval of the record; (iv) reproducing relevant pages for release; (v) reassembling and refiling the record; and (vi) billing. Based in Malvern, Pennsylvania, Recordex was founded in 1986. Recordex had 1995 net service revenues of $8.5 million. DPAS. C. & T. Management Services, Inc. (d/b/a DPAS) (together with Qualidata, Inc., an affiliate acquired by F.Y.I., "DPAS") provides database and processing services primarily to financial institutions, including Bank of America, as well as to a number of other corporate clients nationwide. Database services include: document conversion; customized data capture (manually or through scanning or other electronic means); database creation, management and analysis; and certain direct mail services. DPAS also provides remittance processing services as an outsourcing option for the receivables function of its corporate clients. Such services include receiving and processing credit card payments, encoding checks and depositing payments, and certain other mailing-related activities. Headquartered in San Francisco, DPAS was founded in 1961. DPAS had 1995 revenues of $5.4 million. Leonard. Leonard Archives, Inc. ("Leonard") provides records storage, retrieval and processing services to over 30 hospitals and medical facilities, as well as to a wide variety of corporate clients in southern Michigan and northern Ohio. Founded in 1888 as a moving and storage company, Leonard entered the records storage business in 1968. Leonard's services include: (i) active medical, financial and legal records storage; (ii) archival storage of semi-active and inactive documents; (iii) environmental vault storage of magnetic and micrographic media; (iv) disaster recovery services; and (v) document destruction. Leonard provides 10 11 document management services to a wide variety of corporate clients, including Ford Motor Company, Chrysler Corporation and Ameritech. Headquartered in Detroit, Leonard had 1995 revenues of $5.9 million. Deliverex. Deliverex, Incorporated (together with ASK Record Management, an affiliate acquired by F.Y.I., "Deliverex") provides active medical records storage, retrieval and processing services to 27 hospitals and medical facilities in the San Jose and greater San Francisco Bay areas, including Stanford University Hospital, Good Samaritan Health Systems, Summit Medical Center and Santa Clara Valley Medical Center. Founded in 1973, Deliverex offers off-site management of medical records, including: filling of records requests; extracting key pages within minutes for transmission to hospitals via facsimile for emergency cases; computerized tracking of medical records to their destinations; file system conversion; storage; and purging of files on a regular basis. In addition, Deliverex is currently developing a system in which it electronically images the most frequently used pages of a medical file so that it can provide its clients with immediate access to such records at multiple locations through linked computer terminals. Deliverex is a franchisor or licensor to five other medical records businesses operating in San Francisco, Seattle, Denver, Baltimore and Ft. Lauderdale. Deliverex had 1995 revenues of $2.9 million. Permanent Records. Permanent Records, Inc. ("Permanent Records") provides a complete document management outsourcing service for its hospital, clinic and physician clients, including: on-site handling of medical records; off-site active and inactive storage and retrieval services; microfilming; and medical records release services. These services are provided to over 50 hospitals in the Dallas/Fort Worth area, including Columbia/HCA Healthcare Systems and the Harris and Irving healthcare systems. Founded in 1977, Permanent Records had 1995 revenues of $1.6 million. The aggregate consideration paid by F.Y.I. to acquire the Founding Companies was approximately $35 million, consisting of: (i) $7,059,000 in cash; (ii) 1,878,933 shares of Common Stock; (iii) the assumption and repayment of approximately $191,000 of indebtedness owed by a Founding Company stockholder; and (iv) the distribution of cash and certain receivables to stockholders of Imagent and Leonard, which are S corporations, in the amount of $2,750,000 and $700,000, respectively, representing the Accumulated Adjustment Accounts ("AAA accounts"). AAA accounts generally represent undistributed retained earnings of an S corporation, upon which taxes have been paid by the shareholders. In addition, prior to the closing of the Acquisitions, certain Founding Companies made distributions to their stockholders of certain assets and related liabilities, including the increase in net equity subsequent to June 30, 1995 of each of the Founding Companies, other than Recordex. Based on the relevant account balances as of December 31, 1995, the amount of these distributions was $2,340,000. As such, total transfers of selected assets to and assumption of selected liabilities of certain stockholders of the Founding Companies was in the net amount of approximately $5,981,000 (of which $1,120,000 was distributed prior to December 31, 1995). The aggregate consideration paid for each Founding Company was: (i) Imagent -- $1,500,000 and 331,497 shares of Common Stock; (ii) Researchers -- $2,750,000 and 681,400 shares of Common Stock; (iii) Recordex -- $309,000 and 198,589 shares of Common Stock; (iv) DPAS -- $400,000 and 117,068 shares of Common Stock; (v) Leonard -- $1,250,000 and 253,274 shares of Common Stock; (vi) Deliverex -- $700,000 and 186,147 shares of Common Stock; and (vii) Permanent Records -- $150,000 and 110,958 shares of Common Stock. In addition, upon consummation of the acquisitions, the Company repaid approximately $3,349,000 of third party indebtedness assumed by the Company in the Acquisitions, virtually all of which was guaranteed by respective stockholders of the Founding Companies, and $584,000 of indebtedness to such stockholders. Combined with the $191,000 of assumed indebtedness referred to in the immediately preceding paragraph, the total indebtedness repaid from the proceeds of the Offering was approximately $4,124,000. The consideration paid by F.Y.I. for each Founding Company was determined by arm's-length negotiations between F.Y.I. and representatives of such Founding Company. See "Business -- Organization" and "Certain Transactions." The Company's executive offices are located at 3232 McKinney Avenue, Suite 900, Dallas, Texas 75204, and its telephone number is (214) 953-7555. 11 12 RECENT DEVELOPMENTS Since the closing of the Offering in January 1996, the Company has acquired 10 additional document management services businesses. See "Risk Factors." Cook. Robert A. Cook and Staff, Inc. and RAC Services, Inc. ("Cook"). Substantially all of the non-cash assets of Cook were acquired by Robert A. Cook Acquisition Corp. ("Cook Acquisition") and RAC (California) Acquisition Corp. ("RAC Acquisition"), respectively two wholly-owned subsidiaries of the Company in June 1996. Cook provides litigation support services to hundreds of law firms and insurance companies throughout the State of California. Founded in 1966, Cook is headquartered in San Jose, California and had 1995 revenues of $12 million. B&B. B&B Information and Image Management, Inc. ("B&B"). B&B was acquired by B&B (Baltimore-Washington) Acquisition Corp. ("B&B Acquisition Corp."), a wholly-owned subsidiary of the Company in May 1996 and provides document management services to clients in the Washington, D.C. area. Founded in 1980, B&B's primary lines of business include micrographic, electronic imaging and database services. B&B's primary client relationships include financial institutions, insurance companies, hospitals, and medical facilities. B&B is headquartered in Upper Marlboro, Maryland and had 1995 revenues of $8 million. Premier. Premier Document Management, Inc. and PDM Services, Inc. ("Premier"). Premier was acquired by Premier Acquisition Corp. ("Premier Acquisition Corp."), a wholly-owned subsidiary of the Company in May 1996 and provides medical records release services to over 195 clients throughout the State of Washington and northern California. Based in Seattle, Washington, Premier was founded in 1984. Premier had 1995 revenues of $3 million. Medical Record. C.M.R.S. Incorporated ("CMRS"), Texas Medical Record Service, Inc. ("Texas Medical Record") and Minnesota Medical Record Service, Inc. ("Minnesota Medical Record") (CMRS, Texas Medical Record and Minnesota Medical Record, are referred to herein collectively, as "Medical Record"). CMRS was acquired by California Medical Record Service Acquisition Corp. ("California Acquisition Corp."), a wholly-owned subsidiary of the Company. Texas Medical Record was acquired by Texas Medical Record Service Acquisition Corp. ("Texas Acquisition Corp."), a wholly-owned subsidiary of the Company. Minnesota Medical Record was acquired by Minnesota Medical Service Acquisition Corp. ("Minnesota Acquisition Corp."), a wholly-owned subsidiary of the Company. CMRS, Texas Medical Record and Minnesota Medical Record were affiliated corporations. CMRS, Texas Medical Record and Minnesota Medical Record were acquired in August 1996 and provide medical records release services. CMRS, Texas Medical Record and Minnesota Medical Record are based in Los Angeles, California, Houston, Texas and Minneapolis, Minnesota, respectively, and were founded in 1985, 1986, and 1987, respectively. Medical Record had 1995 combined revenues of $5.5 million. ZIA. ZIA Information Analysis Group ("ZIA"). The Company and ZIA Acquisition Corp. ("ZIA Acquisition Corp."), a wholly-owned subsidiary of the Company entered into a definitive agreement with ZIA and its shareholders, dated as of August 1996, to acquire ZIA. ZIA was founded in 1994, is based in San Francisco, California and provides litigation consulting services, including discovery assistance, document coding, forensic analysis and trial support services to law firms, corporations and regulated entities in California. ZIA had 1995 revenues of $2.3 million. The acquisition of ZIA is subject to customary closing conditions, and there can be no assurance that such acquisition will be consummated. See "Business -- Subsequent Acquisitions and Pending Acquisition." In addition, substantially all of the assets of Sacramento Valley Records Management Co. ("Sacramento"), a medical records storage and delivery franchise company, were acquired by Deliverex Sacramento Acquisition Corp. ("Deliverex Sacramento"), a wholly-owned subsidiary of the Company, in March 1996. The former employees of Sacramento report to Deliverex. In February 1996, certain of the assets of Microfilm Associates, Ltd. ("Microfilm"), also an imaging company, were acquired by Imagent and in June 1996, certain of the assets of Octo, Incorporated ("Octo"), an imaging company, were acquired by Imagent. Both Mircrofilm and Octo have been physically integrated into Imagent. In July 1996, substantially all of the assets of (i) Domor Data Processing ("Domor"), a data processing business, were acquired by DPAS; 12 13 (ii) Rushmore Legal Support ("Rushmore"), a litigation support business, were acquired by Researchers; and (iii) Index Records Management ("Index"), a medical records release business, were acquired by Deliverex. Since the Offering, the Company has strengthened its management team. The Company has hired Margot T. Lebenberg as Vice President, Secretary and General Counsel to oversee its legal matters. Ms. Lebenberg was formerly an associate at Morgan, Lewis & Bockius LLP, New York, New York. Effective July 22, 1996, David Lowenstein, co-founder of the Company, Executive Vice President and a Director of the Company reassumed the responsibility of Chief Financial Officer, the position he held prior to the Offering. Additionally, Timothy J. Barker was promoted to the position of Vice President and Chief Accounting Officer. See "Management -- Stock Option Plan." PRICE RANGE OF COMMON STOCK The Company's Common Stock has traded on the Nasdaq National Market since January 23, 1996. On September 11, 1996, the last sale price of the Common Stock was $17.50 per share, as published in The Wall Street Journal on September 12, 1996. At August 30, 1996, there were 42 shareholders of record of the Company's Common Stock. The following table sets forth the range of high and low sale prices for the Common Stock for the period from January 23, 1996, the date of the Company's initial public offering, through September 11, 1996.
HIGH LOW ------ ------ FISCAL YEAR 1996 January 23, 1996 through March 31, 1996...................... $20.00 $13.00(1) April 1, 1996 through June 30, 1996....................... $22.50 $16.00 July 1, 1996 through September 11, 1996.................. $23.00 $17.00
- --------------- (1) Represents the initial public offering price DIVIDEND POLICY The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future because it intends to retain its earnings, if any, to finance the expansion of its business and for general corporate purposes. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Company's Board of Directors deems relevant. In addition, the Line of Credit prohibits the payment of dividends without the lender's consent. 13 14 CAPITALIZATION The following table sets forth the short-term debt and capitalization at June 30, 1996 of F.Y.I. and pro forma to reflect: (i) the term debt issued and the stock issued or to be issued in connection with the acquisition of Medical Record and the pending acquisition of ZIA; and (ii) the debt assumed with the acquisition of Medical Record. This table should be read in conjunction with the unaudited pro forma financial statements of F.Y.I. Incorporated and the related notes thereto included elsewhere in this Prospectus.
JUNE 30, 1996 --------------------- ACTUAL PRO FORMA ------- --------- Short-term debt (including current portion of long-term debt)... $ 1,331 $ 1,339 ======= ======= Long-term debt, excluding current portion....................... $11,071 $15,678 Stockholders' equity Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued and outstanding................................ -- -- Common Stock, $0.01 par value, 26,000,000 shares authorized, 5,522,867 issued and outstanding, 5,891,874 issued and 5,855,204 outstanding pro forma(1)(2)...................... 55 58 Additional paid-in-capital.................................... 21,488 26,022 Retained earnings............................................. 1,373 1,373 ------- ------- Total Stockholders' equity............................ 22,916 27,453 ------- ------- Total Capitalization............................................ $35,318 $44,470 ======= =======
- --------------- (1) Does not include an additional 650,000 shares of Common Stock or 12% of the aggregate number of shares of Common Stock outstanding reserved for issuance under the Company's 1995 Stock Option Plan and warrants outstanding for the purchase of 165,000 shares of Common Stock. (2) A total of 36,670 shares of Common Stock, resulting from the acquisition of Medical Record, are held by a wholly-owned subsidiary of the Company. 14 15 SELECTED FINANCIAL DATA F.Y.I. acquired, simultaneously with and as a condition to the closing of the Offering, Imagent, Researchers, Recordex, DPAS, Leonard, Deliverex and Permanent Records. The Acquisitions have been accounted for in accordance with generally accepted accounting principles ("GAAP") as a combination of the Founding Companies at historical cost, because the Founding Companies' stockholders transferred assets to F.Y.I. in exchange for Common Stock and cash simultaneously with the Offering, the nature of future operations of the Company will be substantially identical to the combined operations of the Founding Companies, and no former stockholder group of any of the Founding Companies obtained a majority of the outstanding voting shares of the Company. Accordingly, historical financial statements of these Founding Companies have been combined throughout all relevant periods herein as if the Founding Companies had always been members of the same operating group. However, since the Founding Companies were not under common control or management, historical combined results may not be comparable to, or indicative of, future performance. The Selected Financial Data for the years ended December 31, 1993, 1994 and 1995 have been derived from the Combined Financial Statements of the Founding Companies that have been audited by Arthur Andersen LLP and that appear elsewhere in this Prospectus. In their report, Arthur Andersen LLP states that with respect to Recordex Services, Inc., as of and for the two years in the period ended December 31, 1994, its opinion is based on the report of other independent public accountants, namely Elko, Fischer, McCabe & Rudman, Ltd. The Selected Financial Data for the years ended December 31, 1991 (unaudited) and 1992 (audited) have been derived from financial statements not included elsewhere in this Prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments and reclassifications necessary for a fair presentation of the financial position and results of operations for the periods presented. The pro forma balance sheet data as of June 30, 1996 give effect to the New Acquisitions as if they had occurred on the earlier of June 30, 1996 or the respective acquisition date. The pro forma statement of operations data give effect to the Acquisitions of the Founding Companies for periods prior to February 1, 1996, and give effect to the New Acquisitions as if the transactions were consummated as of January 1, 1995. See the unaudited pro forma financial statements and the related notes thereto included elsewhere in this Prospectus. The Founding Company statement of operations data give effect to certain compensation adjustments for key executives who entered into employment agreements with the Company and certain tax adjustments related to the taxation of certain Founding Companies as S corporations or sole proprietorships prior to the consummation of the Acquisitions and the tax impact of the compensation adjustments. See Note 3 of Notes to Combined Financial Statements of the Founding Companies. In addition, the Selected Financial Data is based on available information and certain assumptions described in the footnotes set forth below, all of which the Company believes are reasonable. The Founding Company, Supplemental Data and pro forma information is provided for informational purposes only and does not purport to present the results of operations of the Company had the transactions assumed therein occurred on or as of the dates indicated, nor is it necessarily indicative of the results of operations which may be achieved in the future. The Selected Individual Founding Company Financial Data for the years ended December 31, 1993, 1994 and 1995 have been derived from the audited financial statements of the Founding Companies that appear elsewhere in this Prospectus. The Selected Individual Founding Company Financial Data for the year ended December 31, 1992 have been derived from audited financial statements not included elsewhere in this Prospectus. The Selected Financial Data provided below should be read in conjunction with the historical financial statements of F.Y.I., the Combined Financial Statements of the Founding Companies and the financial statements of each Founding Company, including the related notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" that appear elsewhere in this Prospectus. 15 16 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) F.Y.I. was founded in September 1994 and effectively began its operations on February 1, 1996, following the completion of the Offering. The Selected Financial Data set forth below for the periods prior to December 31, 1995, are derived from the Founding Companies Combined Financial Statements contained elsewhere in this Prospectus.
SIX MONTHS SIX MONTHS ENDED JUNE 30, 1996 ENDED (UNAUDITED)(5) FISCAL YEAR ENDED DECEMBER 31, JUNE 30(4) --------------------------------------- --------------------------------------------------- ------------ FOUNDING F.Y.I. 1991 1992 1993 1994 1995 1995 COMPANIES INCORPORATED SUPPLEMENTAL ----------- ------- ------- ------- ------- ------------ --------- ------------ ------------ (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Service revenue........ $22,958 $29,442 $32,067 $36,081 $40,615 $ 20,207 $ 3,487 $ 21,714 $ 25,201 Product revenue........ 5,899 5,378 5,123 5,923 6,138 3,187 395 2,640 3,035 Other revenue.... 668 876 1,206 1,028 873 435 34 297 331 ------- ------- ------- ------- ------- ------- ------- ------ ------ Total revenue... 29,525 35,696 38,396 43,032 47,626 23,829 3,916 24,651 28,567 Cost of services....... 14,742 18,348 20,318 23,650 25,937 12,729 2,196 13,630 15,826 Cost of products sold........... 5,050 4,628 4,464 4,892 4,972 2,604 307 1,974 2,281 Depreciation..... 771 873 883 1,055 1,238 584 90 633 723 ------- ------- ------- ------- ------- ------- ------- ------ ------ Gross profit... 8,962 11,847 12,731 13,435 15,479 7,912 1,323 8,414 9,737 Selling, general and administrative expenses(1).... 7,457 8,940 9,218 9,921 10,449 5,053 814 6,169 6,983 Amortization..... 61 199 112 60 64 32 6 72 78 ------- ------- ------- ------- ------- ------- ------- ------ ------ Operating income(1).. 1,444 2,708 3,401 3,454 4,966 2,827 503 2,173 2,676 Interest and other expense (income), net............ 132 272 248 29 139 99 (45) (123) (168) ------- ------- ------- ------- ------- ------- ------- ------ ------ Income before income taxes(1)....... 1,312 2,436 3,153 3,425 4,827 2,728 548 2,296 2,844 Provision for income taxes(2)....... 474 895 1,261 1,256 1,794 1,024 221 923 1,144 ------- ------- ------- ------- ------- ------- ------- ------ ------ Net income(1)(2)... $ 838 $ 1,541 $ 1,892 $ 2,169 $ 3,033 $ 1,704 $ 327 $ 1,373 $ 1,700 ======= ======= ======= ======= ======= ======= ======= ====== ====== Net income per share(1)(2)(3)... $0.23 $0.42 $0.52 $0.60 $0.83 $0.06 $0.26 $ 0.32 ======= ======= ======= ======= ======= ======= ====== ====== Weighted average shares outstanding(3)... 3,644 3,644 3,644 3,644 3,644 5,335 5,335 5,335
DECEMBER 31, JUNE 30, 1996 DECEMBER 31, 1995 ---------------------------- ----------------------------------------- ------------ AS ADJUSTED 1991 1992 1993 1994 ACTUAL ACTUAL PRO FORMA(6) ----------- ------- ------- ------- ------------ ----------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) BALANCE SHEET DATA: Working capital....................... $ 1,341 $ 1,223 $ 2,081 $ 1,404 $ 1,663 $ 4,260 $ 5,155 Total assets.......................... 13,989 14,124 15,143 19,130 19,681 45,695 56,628 Long-term debt less current portion... 2,809 2,713 3,077 3,185 2,777 11,071 15,678 Stockholders' equity.................. 4,315 4,797 5,223 6,410 7,111 22,916 27,453
16 17 SUMMARY PRO FORMA FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA AS ADJUSTED FOR NEW ACQUISITIONS(6) ------------------------------ YEAR ENDED SIX MONTHS DECEMBER ENDED JUNE 30, 31, 1995 1996 ----------- -------------- (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Service revenue.............................................................................. $69,405 $ 38,936 Product revenue.............................................................................. 7,688 3,397 Other revenue................................................................................ 908 342 ------- ------- Total revenue.......................................................................... 78,001 42,675 Cost of services............................................................................. 42,027 23,096 Cost of products sold........................................................................ 6,222 2,594 Depreciation................................................................................. 1,632 888 ------- ------- Gross profit........................................................................... 28,120 16,097 Selling, general and administrative expenses................................................. 17,500 9,990 Amortization of intangibles.................................................................. 896 425 ------- ------- Operating income....................................................................... 9,724 5,682 Interest and other expense (income), net..................................................... 1,454 431 ------- ------- Income before income taxes................................................................... 8,270 5,251 Provision for income taxes................................................................... 3,172 2,107 ------- ------- Net income................................................................................... $ 5,098 $ 3,144 ======= ======= Pro forma net income per share............................................................... $ 0.87 $ 0.54 Pro forma weighted average shares outstanding(3)............................................. 5,872 5,872
- --------------- (1) Gives effect to the Compensation Differential. See Note 3 of Notes to Combined Financial Statements of the Founding Companies. (2) Gives effect to certain tax adjustments related to the taxation of certain Founding Companies as S corporations or sole proprietorships prior to the consummation of the Acquisitions and the tax impact of the Compensation Differential in each period. See Note 3 of Notes to Combined Financial Statements of the Founding Companies. (3) Weighted average shares for all periods prior to the Offering include: (i) 1,205,682 shares issued by F.Y.I. prior to the consummation of the Acquisitions and the Offering; (ii) 1,878,933 shares issued to the stockholders of the Founding Companies in connection with the Acquisitions; (iii) 543,000 shares sold in the Offering to cover the cash consideration for the Acquisitions; and (iv) 15,923 shares of Common Stock determined pursuant to the treasury stock method relating to warrants to purchase 115,000 shares of Common Stock at $10.00 per share. Periods subsequent to the Offering and the pro forma data include an additional 1,642,000 shares (2,185,000 -- 543,000) issued in the Offering beyond shares sold to cover cash consideration for the Acquisitions and the additional 253,252 shares of Common Stock issued in acquisitions consummated in May 1996. Pro forma weighted average shares also include an additional 332,337 shares issued or to be issued in connection with the acquisition of Medical Record and the pending acquisition of ZIA. Does not include (i) an additional 650,000 shares of Common Stock or 12% of the aggregate number of shares of Common Stock outstanding reserved for issuance under the Company's 1995 Stock Option Plan, of which options to purchase 588,670 shares of Common Stock are currently outstanding; and (ii) warrants outstanding to purchase 50,000 shares of Common Stock. (4) The Statement of Operations Data for the six months ended June 30, 1995, represent the unaudited results of the combined Founding Companies for the period. (5) The Statement of Operations Data for the six months ended June 30, 1996, for the Founding Companies represent the one month of operations prior to the consummation of the Acquisitions. The Statement of Operations Data for the six months ended June 30, 1996, for F.Y.I. Incorporated and Subsidiaries represent the results of operations subsequent to the consummation of the Acquisitions. The Supplemental Data represent the combined operations of the Founding Companies and F.Y.I. during the six months ended June 30, 1996. 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. (6) Gives effect to: (i) the New Acquisitions as if the transactions were consummated for the balance sheet data based upon the earlier of June 30, 1996 or the respective acquisition date and for the Statement of Operations data as of January 1, 1995; and (ii) the Acquisitions of the Founding Companies for statement of operations data for periods prior to February 1, 1996. See the separate unaudited pro forma financial statements and the notes thereto located elsewhere in this Prospectus. 17 18 SELECTED INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA (IN THOUSANDS)
FISCAL YEARS ENDED DECEMBER 31,(1) ------------------------------------------- 1992 1993 1994 1995 ------- ------- ------- ------- Revenue: Imagent................................................................. $10,258 $10,252 $12,135 $13,544 Researchers............................................................. 7,231 8,738 9,973 9,874 Recordex................................................................ 4,655 5,465 6,826 8,550 Leonard................................................................. 4,041 4,372 5,007 5,858 Other................................................................... 9,511 9,569 9,091 9,800 ------ ------ ------ ------ Total............................................................. $35,696 $38,396 $43,032 $47,626 ====== ====== ====== ====== Gross profit: Imagent................................................................. $ 2,562 $ 2,713 $ 3,293 $ 3,829 Researchers............................................................. 2,708 2,841 3,384 2,611 Recordex................................................................ 1,942 2,258 2,494 3,092 Leonard................................................................. 1,787 1,843 1,640 2,415 Other................................................................... 2,848 3,076 2,624 3,532 ------ ------ ------ ------ Total............................................................. $11,847 $12,731 $13,435 $15,479 ====== ====== ====== ====== Selling, general and administrative expenses:(2) Imagent................................................................. $ 1,775 $ 2,036 $ 2,264 $ 2,471 Researchers............................................................. 1,425 1,458 1,590 1,458 Recordex................................................................ 1,729 1,978 2,216 2,715 Leonard................................................................. 1,359 1,385 1,517 1,482 Other................................................................... 2,652 2,361 2,334 2,323 ------ ------ ------ ------ Total............................................................. $ 8,940 $ 9,218 $ 9,921 $10,449 ====== ====== ====== ====== Operating income:(2) Imagent................................................................. $ 787 $ 677 $ 1,012 $ 1,294 Researchers............................................................. 1,283 1,383 1,794 1,153 Recordex................................................................ 35 168 235 376 Leonard................................................................. 429 459 123 933 Other................................................................... 174 714 290 1,210 ------ ------ ------ ------ Total............................................................. $ 2,708 $ 3,401 $ 3,454 $ 4,966 ====== ====== ====== ====== Net income:(2)(3) Imagent................................................................. $ 499 $ 429 $ 632 $ 860 Researchers............................................................. 712 731 1,118 684 Recordex................................................................ 8 66 118 183 Leonard................................................................. 231 264 35 527 Other................................................................... 91 402 266 779 ------ ------ ------ ------ Total............................................................. $ 1,541 $ 1,892 $ 2,169 $ 3,033 ====== ====== ====== ======
- --------------- (1) Researchers' amounts for 1992 and 1993 are reported for fiscal years ended July 31. See Note 2 of Notes to Combined Financial Statements of the Founding Companies. (2) Gives effect to the Compensation Differential. See Note 3 of Notes to Combined Financial Statements of the Founding Companies. (3) Gives effect to certain tax adjustments related to the taxation of certain Founding Companies as S corporations or sole proprietorships prior to the consummation of the Acquisitions and the tax impact of the Compensation Differential in each period. See Note 3 of Notes to Combined Financial Statements of the Founding Companies. 18 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Combined Financial Statements of the Company and related notes thereto and "Selected Financial Data" appearing elsewhere in this Prospectus. 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 results to differ materially from those in the forward-looking statements is contained under the "Risk Factors." Overview The Company effected the Acquisitions of the Founding Companies simultaneously with the Offering on January 23, 1996. Prior to the consummation of the Offering, the Company had not conducted any operations and all activities related to completing the Offering and the Acquisitions. The Company incurred various legal, accounting, marketing and travel costs in connection with the Offering and the Acquisitions, which were funded by issuance of shares of Common Stock and Preferred Stock. Additional costs associated with the Offering and the Acquisitions were paid with proceeds of the Offering. The Acquisitions have been accounted for in accordance with generally accepted accounting principles as a combination of the Founding Companies at historical cost. For accounting purposes, January 31, 1996 has been used as the effective date of the Acquisitions. Accordingly, the actual operating results of the Company included in the Statement of Operations for the six months ended June 30, 1996 represents the five months of operations subsequent to the consummation of the Acquisitions. Since the Offering and the Acquisitions, the Company acquired: (i) six additional document management businesses through June 30, 1996; (ii) an additional four document management businesses subsequent to June 30, 1996; and (iii) signed a definitive agreement to acquire another document management business, subject to satisfactory completion of customary closing conditions. All of these acquisitions have been or will be accounted for using the purchase method of accounting. The results of operations for these acquisitions are reflected in the Company's financial statements based upon their individual acquisition date. Supplemental statement of operations data are presented in the footnotes to the financial statements and discussed herein in order to present the results of the Company since the consummation of the Acquisitions compared to the results of the combined Founding Companies for periods prior to the Acquisitions. The Supplemental Data are provided for information purposes only and do not purport to present the results of operations of the Company had the transactions assumed therein occurred on or as of the dates indicated. The Founding Companies were not under common control or management. Accordingly, such historical combined results may not be comparable to, or indicative of, future performance. The Company's revenue is classified as service revenue, product revenue and other revenue. Service revenue relates to: (i) micrographics; (ii) electronic imaging; (iii) active document storage; (iv) archival storage of inactive documents; (v) information and data base management; (vi) litigation support services; (vii) medical records release services; and (viii) remittance processing. Product revenue represents sales of micrographic and business imaging supplies and equipment, primarily in conjunction with film processing and other micrographic services. Other revenue consists of commissions on the sales of imaging systems and equipment and franchising fees. Cost of services consists primarily of salaries and benefits, equipment costs, supplies and occupancy costs and also includes the costs associated with other revenue discussed above. Cost of products sold relates to micrographics and business imaging supplies and equipment. Selling, general and administrative expenses ("SG&A") includes the SG&A cost at all of the individual Operating Companies and the corporate overhead cost required to: (i) execute the acquisition program; (ii) manage the operations; and (iii) comply with regulatory, legal and accounting issues of a public company. The Company expects to realize benefits from consolidating certain general and administrative functions, 19 20 including reductions in accounting, audit, insurance and benefit plan expenses. The Company is in the process of evaluating the consolidation of certain of these functions. No significant savings have been realized in the results of operations as of June 30, 1996. RESULTS OF OPERATIONS Except as otherwise noted, the following table sets forth various items as a percentage of revenue for the three years ended December 31, 1995 on a historical basis, as well as adjusted for the Compensation Differential. The results prior to February 1, 1996 of the combined companies presented in this table and the results discussed below occurred when the Operating Companies were not under common control or management and may not be comparable to, or indicative of, future performance. See "Risk Factors -- Absence of Combined Operating History; Risks of Integration."
SUPPLEMENTAL DATA FISCAL YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30,(3) -------------------------- ----------------------- 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------------ (UNAUDITED) Service revenue..................... 83.5% 83.8% 85.3% 84.8% 88.2% Product revenue..................... 13.4 13.8 12.9 13.4 10.6 Other revenue....................... 3.1 2.4 1.8 1.8 1.2 ------ ------ ------ ------ ------ Total revenues............ 100.0 100.0 100.0 100.0 100.0 Cost of services(1)................. 61.1 63.7 62.5 61.7 62.0 Cost of products sold(2)............ 87.1 82.6 81.0 81.7 75.2 Depreciation........................ 2.3 2.5 2.6 2.5 2.5 ------ ------ ------ ------ ------ Gross profit.............. 33.2 31.2 32.5 33.2 34.1 Selling, general and administrative expenses.......................... 28.5 27.4 26.1 25.0 26.8 Amortization........................ 0.3% 0.1% 0.1% 0.1% 0.3% ------ ------ ------ ------ ------ Operating income.......... 4.4 3.7 6.3 8.1 7.0 Compensation differential........... 4.5 4.3 4.1 3.8 2.4 ------ ------ ------ ------ ------ Adjusted operating income.................. 8.9% 8.0% 10.4% 11.9% 9.4% ====== ====== ====== ====== ======
- --------------- (1) Shown as a percentage of Service revenue and Other revenue. (2) Shown as a percentage of Product revenue. (3) The Statement of Operations Data for the six months ended June 30, 1995, represent the unaudited results of the combined Founding Companies for the period. The Statement of Operations Data for the six months ended June 30, 1996, represent a combination of: (i) Statement of Operations Data for the combined operations of the Founding Companies for the one month of operations prior to the consummation of the Acquisitions; and (ii) Statement of Operations Data for F.Y.I. Incorporated and Subsidiaries for the results of operations subsequent to the consummation of the Acquisitions. The Supplemental Data are provided for information purposes only and do not purport to present the results of operations of the Company had the transaction assumed therein occurred on or as of the dates indicated, nor are they necessarily indicative of the results of operations which may be achieved in the future. Results of Operations -- The Company The Company had conducted no significant operations from its inception through the Offering and the Acquisitions. For accounting purposes and the presentation of the actual financial results herein, January 31, 1996, has been used as the effective date of the Acquisitions. THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995 -- F.Y.I. INCORPORATED For the three months ended June 30, 1996, revenue was $16.2 million, gross profit was $5.6 million, operating income was $1.6 million, and net income was $1.0 million. As previously mentioned, F.Y.I. had no operations until February 1996. 20 21 SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 -- F.Y.I. INCORPORATED For the six months ended June 30, 1996, revenue was $24.7 million, gross profit was $8.4 million, operating income was $2.2 million, and net income was $1.4 million. As previously mentioned, F.Y.I. had no operations until February 1996. For further discussion of supplemental operations for the six months ended June 30, 1996 and 1995, see "Results of Operations -- Supplemental Data." Results of Operations -- Supplemental Data The Statement of Operations Data for the six months ended June 30, 1995, represent the audited combined statement of operations of the Founding Companies for the period adjusted to give effect to: (i) compensation levels the officers and owners of the Operating Companies have agreed to receive subsequent to the Offering; and (ii) provision for income taxes as if all entities had been subject to federal and state income taxes for the period. The Supplemental Statement of Operations Data for the six months ended June 30, 1996, represent a combination of: (i) the unaudited results of the combined Founding Companies for the one month of operations prior to the consummation of the Acquisitions; and (ii) the unaudited results of F.Y.I. Incorporated and Subsidiaries for the five months subsequent to the consummation of the Acquisitions (which includes acquisitions subsequent to the Offering from the date of their respective acquisition). The Supplemental Data are provided for information purposes only and do not purport to present the results of operations of the Company had the transactions assumed therein occurred on or as of the dates indicated, nor are they necessarily indicative of the results of operations which may be achieved in the future.
SUPPLEMENTAL DATA ------------------------- SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 1995 1996 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Service revenue............................................ $ 20,207 $ 25,201 Product revenue............................................ 3,187 3,035 Other revenue.............................................. 435 331 ------- ------- Total revenue...................................... 23,829 28,567 Cost of services........................................... 12,729 15,826 Cost of products sold...................................... 2,604 2,281 Depreciation............................................... 584 723 ------- ------- Gross profit....................................... 7,912 9,737 Selling, general and administrative expenses(a)............ 5,053 6,983 Amortization............................................... 32 78 ------- ------- Operating income................................... 2,827 2,676 Interest and other expenses (income),net................... 99 (168) ------- ------- Income before income taxes................................. 2,728 2,844 Provision for income taxes (b)............................. 1,024 1,144 ------- ------- Net income................................................. $ 1,704 $ 1,700 ======= ======= Net income per share....................................... $ 0.32 ======= Weighted average shares outstanding........................ 5,335
- --------------- (a) Adjusted for Founding Company pro forma Compensation Differential of $897 for 1995 and $683 for 1996. (b) Adjusted for pro forma provision for taxes of $887 for 1995 and $351 for 1996. 21 22 SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 -- F.Y.I. INCORPORATED COMBINED WITH FOUNDING COMPANIES The $4,738,000 or 20% increase in revenue was attributable to a 25% increase in service revenue of $4,994,000. The increase in service revenue was offset by a $256,000 or 7% decrease in product and other revenue. The increase in service revenue was largely due to: (i) an increase in scanning and microfilming revenue of approximately $1,751,000, primarily due to the purchase of B&B in May 1996, the purchase of Microfilm in February 1996 and an overall increase in microfilming projects; (ii) an increase in medical records release revenue of $1,758,000, primarily attributable to the expansion into additional healthcare institutions in the U.S. during 1995 and 1996 and the purchase of Premier in May 1996; (iii) an increase in litigation support revenue of $1,133,000, primarily due to the purchase of Cook in June 1996; and (iv) an increase in records storage and retrieval revenue of $537,000 attributable to the purchase of Sacramento in February 1996 and increases in volume in 1996. These increases were offset by a slight decline in data input and fulfillment revenue. The decrease in product revenue primarily resulted from a decline in one major customer's film purchases in the first quarter of 1996, caused by a business interruption at that customer. This decline is not expected to be permanent as the interruption was attributable to the federal government shutdown in late 1995. Film sales to this customer have resumed at levels greater than the prior year during the second quarter of 1996. This decline in product revenue was offset by increased product revenue associated with the purchase of B&B in May 1996. Gross profit increased $1,825,000 or 23% largely due to the increases in revenue discussed above. The gross profit margin increased from 33% for the six months ended June 30, 1995, to 34% for the six months ended June 30, 1996, primarily due to the change in the mix of revenue associated with acquisitions subsequent to the Offering in 1996. SG&A increased $1,930,000, or 38%, primarily due to the establishment of corporate overhead required to execute the acquisition program and to manage the consolidated group of companies and due to the SG&A associated with acquisitions subsequent to the Offering. Earnings before taxes increased $116,000 to $2,844,000 and net income remained constant at $1,700,000 largely attributable to the factors discussed above. Net income was impacted by (i) a higher effective tax rate attributable to the elimination of graduated tax rates as the Operating Companies are now taxed on a consolidated basis; and (ii) the impact of nondeductible goodwill associated with the B&B and Premier acquisitions. Results of Operations -- Founding Companies Combined YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenue Total revenue. Total revenue increased 10.7% from $43.0 million for the year ended December 31, 1994 to $47.6 million for the year ended December 31, 1995. This increase was comprised of a 12.6% increase in service revenue, a 3.6% increase in product revenue and a 15.1% decrease in other revenue. Service revenue. Service revenue increased $4.5 million from $36.1 million for the year ended December 31, 1994 to $40.6 million for the year ended December 31, 1995. This increase was largely due to: (i) an increase in Imagent's revenue of $1.4 million, primarily attributable to opening a microfilm processing laboratory in Philadelphia, Pennsylvania in December, 1994, the revenue of which represented approximately 56% of the increase in Imagent's revenue and to an overall increase in scanning and microfilming projects; (ii) an increase in Leonard's revenue of $851,000 attributable to the addition of two new storage contracts in 1994; to the opening of new records storage and retrieval facilities in Toledo, Ohio in April 1994 and in Ann Arbor, Michigan in January 1995, which new facilities had revenues constituting 25.3% of the increase and due to increased paper prices received in the first half of 1995 for sales of scrap paper in the data disintegration area; and (iii) an increase in Recordex's revenue of $1.7 million and in Permanent's revenue of $414,000 22 23 primarily attributable to the expansion of medical records release services into 38 additional healthcare institutions in the Eastern U.S. and Texas since December 1994. Product revenue. Product revenue increased approximately $215,000 from $5.9 million for the year ended December 31, 1994 to $6.1 million for the year ended December 31, 1995. This resulted from obtaining a large contract to supply micrographics products in March 1994 and an overall increase in film processing due to the opening of two new processing labs. Other revenue. Other revenue decreased approximately $155,000 from $1,028,000 for the year ended December 31, 1994 to $873,000 for the year ended December 31, 1995. This decrease was primarily attributable to Imagent selling lower volumes of imaging systems and equipment. Costs and Expenses Cost of services. Cost of services increased 9.7% from $23.6 million for the year ended December 31, 1994 to $25.9 million for the year ended December 31, 1995. Cost of services as a percentage of service and other revenue was 63.7% for the year ended December 31, 1994 and 62.5% for the year ended December 31, 1995. Combined cost of services as a percentage of revenue decreased 1.2%, as a result of fluctuations in several service areas: (i) Researchers' cost of services increased $631,000, and as a percentage of revenue increased from 63.3% to 70.3%, as it benefited from several large litigation projects in the first half of 1994 and was negatively impacted in the year ended December 1995 by expenses incurred in connection with the expansion of its imaging business and the addition of personnel and increased rental expense associated with the expansion of its San Francisco facility; (ii) Leonard's cost of services increased $1,000, but as a percentage of revenue decreased from 62.6% to 53.5% primarily as a result of increased revenue and operating leverage in 1995 associated with the addition of two storage contacts in 1994 and expenses incurred in 1994 in connection with the opening of new document storage and retrieval facilities in Toledo, Ohio and Farmington Hills, Michigan; (iii) Deliverex's cost of services decreased $41,000, and as a percentage of revenue decreased from 64.6% to 57.3% as a result of price increases and certain cost reduction programs; and (iv) DPAS's cost of services decreased $414,000, and as a percentage of revenue decreased from 74.5% to 66.3% primarily as a result of a cost reduction program implemented in April 1995. Cost of products sold. Cost of products sold increased 1.6% from $4.9 million for the year ended December 31, 1994 to $5.0 million for the year ended December 31, 1995. Cost of products sold as a percentage of product revenue decreased from 82.6% to 81.0% for the year ended December 31, 1994 and 1995, respectively. This decrease was a result of reduced cost of goods sold attributable to Eastman Kodak, the supplier implementing additional value added rebates on selected products. Depreciation Depreciation increased 17.3% from $1.1 million for the year ended December 31, 1994 to $1.2 million for the year ended December 31, 1995. This increase is primarily associated with machinery and equipment purchased for the expansions at Leonard and Recordex discussed above. Gross Profit As a result of the foregoing, gross profit increased 15.2% from $13.4 million, or 31.2% of total revenue, for the year ended December 31, 1994 to $15.5 million, or 32.5% of total revenue, for the year ended December 31, 1995. Selling, general and administrative expenses SG&A increased 5.5% from $11.8 million, or 27.5% of revenues, for the year ended December 31, 1994 to $12.5 million, or 26.2% of revenues, for the year ended December 31, 1995. After giving effect to the Compensation Differential in each year, SG&A increased from $10.0 million, or 23.2% of revenues, for the year ended December 31, 1994 to $10.5 million, or 22.1% of revenues, for the year ended December 31, 1995. Although combined SG&A expenses adjusted for the Compensation Differential as a percentage of total 23 24 revenue decreased 1.1% there were fluctuations in several service areas: (i) Leonard's adjusted SG&A as a percentage of revenues decreased from 30.3% to 25.3% primarily as a result of the two storage contracts described above which provided revenues without proportional increases in overhead; (ii) DPAS' adjusted SG&A as a percentage of revenues decreased from 24.9% to 23.2% primarily as a result of a cost reduction program implemented in April 1995; and (iii) Recordex's SG&A as a percentage of revenues decreased from 33.1% to 31.8% primarily as a result of increased revenues related to its expansion of medical records release services into additional healthcare institutions without a commensurate increase in overhead. Pro forma operating income Pro forma operating income adjusted for the Compensation Differential increased 43.8% from $3.5 million, or 8.0% of total revenue, for the year ended December 31, 1994 to $5.0 million, or 10.4% of total revenue, for the year ended December 31, 1995. Interest expense, net Interest expense, net of interest income increased 16.1% from $304,000 for the year ended December 31, 1994 to $353,000 for the same period in 1995. This is primarily due to increased borrowings in April through December, for the purchase of equipment associated with Leonard's opening of new document storage facilities. Provision for income taxes The combined provision for income taxes and pro forma provision for income taxes increased 42.8% from $1.3 million, or an effective tax rate of 36.7%, for the year ended December 31, 1994 to $1.8 million, or an effective tax rate of 37.2%, for the year ended December 31, 1995. The Founding Companies were operated as separate entities for tax purposes for all periods presented. Pro forma net income Pro forma net income adjusted for the Compensation Differential and pro forma provision for income taxes increased 39.8% from $2.2 million, or 5.0% of total revenue, for the year ended December 31, 1994 to $3.0 million, or 6.4% of total revenue, for the year ended December 31, 1995. YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993 Revenue Total revenue. Total revenue increased 12.1% from $38.4 million in 1993 to $43.0 million in 1994. This increase was comprised of a 12.5% increase in service revenue, a 15.6% increase in product revenue and a 14.8% decrease in other revenue. Service revenue. Service revenue increased $4.0 million from $32.1 million in 1993 to $36.1 million in 1994. This increase was largely due to: (i) an increase in Imagent's revenue of $1.3 million primarily attributable to an overall increase in scanning and microfilming projects, the opening of microfilm processing laboratories in Roanoke, Virginia in April 1993 and in Philadelphia, Pennsylvania in December 1994, the revenue of which constituted approximately 16% of the increase in Imagent's revenue and the purchase of a microfilm processing business in October 1994, the revenue of which represented approximately 7% of the increase in Imagent's revenue; (ii) an increase in Researchers' revenue of $1.2 million primarily attributable to performing services related to several large litigation projects that commenced in 1993; (iii) an increase in Recordex's revenue of $1.4 million primarily attributable to the expansion of medical records release services into an additional 30 healthcare institutions in the eastern U.S. during 1994; and (iv) an increase in Leonard's revenue of $635,000 primarily attributable to opening of new document storage facilities in Farmington Hills, Michigan and Toledo, Ohio, the revenue of which represented approximately 35% of the increase in Leonard's revenue and securing two new document storage and retrieval contracts during 1994. This increase was partially offset by a decrease in DPAS' revenue of $468,000 primarily due to the loss of three inventory compilation projects in 1993 and 1994. 24 25 Product revenue. Product revenue increased approximately $800,000 from $5.1 million in 1993 to $5.9 million in 1994. This increase resulted primarily from Imagent's obtaining a large contract to supply micrographics products in March 1994 and an increase in film sales made in conjunction with increased film processing services at Imagent's new laboratory. Other revenue. Other revenue decreased approximately $178,000 from $1.2 million in 1993 to $1.0 million in 1994. This decrease was primarily related to a decrease in commissions on the sale of micrographics equipment by Imagent. Costs and expenses Cost of services. Cost of services increased 16.4% from $20.3 million in 1993 to $23.6 million in 1994. Cost of services as a percentage of service and other revenue was 61.1% in 1993 and 63.7% in 1994. This increase in cost of services as a percentage of service and other revenue was primarily attributable to: (i) an increase in Imagent's cost of services of $816,000, and as a percentage of revenue from 56.1% to 59.4%, due to costs related to the start-up of the microfilm processing laboratory in Philadelphia and increased price competition in one geographic area which began in late 1993; (ii) an increase in Leonard's cost of services of $740,000, and as a percentage of revenue from 54.8% to 62.6%, related to its expansion into additional storage facilities in late 1993 and 1994; (iii) an increase in DPAS' cost of services of $27,000, and as a percentage of revenue from 68.9% to 74.5% due to the loss of three inventory compilation projects in late 1993 and 1994; and (iv) an increase in Recordex's cost of services of $1.1 million, and as a percentage of revenue from 56.3% to 61.0%, related to its expansion into an additional 30 healthcare institutions in the eastern U.S. during 1994. These increases as a percentage of revenue were partially offset by a reduction in Researchers' cost of services, which increased $661,000, but decreased as a percentage of revenue from 64.7% to 63.3% primarily as a result of increased revenue and enhanced operating leverage associated with several large litigation projects in 1994. Cost of products sold. Cost of products sold increased 9.6% from $4.5 million in 1993 to $4.9 million in 1994. Cost of products sold as a percentage of product revenue decreased from 87.1% in 1993 to 82.6% in 1994. This decrease resulted from Imagent's receiving additional value added rebates and better pricing on selected products. Depreciation Depreciation increased 19.5% from $883,000 in 1993 to $1.1 million in 1994. This increase was primarily associated with machinery and equipment purchased for the expansions discussed above. Gross profit As a result of the foregoing, gross profit increased 5.5% from $12.7 million, or 33.2% of total revenue, for 1993 to $13.4 million, or 31.2% of total revenue, for 1994. Selling, general and administrative SG&A increased 7.2% from $11.0 million in 1993 to $11.8 million in 1994. After giving effect to the Compensation Differential in each year, SG&A increased from $9.3 million, or 24.3% of revenue, in 1993 to $10.0 million, or 23.2% of revenue, in 1994. This decrease in SG&A as a percentage of revenues is primarily related to an increase in Recordex's revenue related to its expansion of medical records release services into additional healthcare institutions without a commensurate increase in overhead. In addition, Researchers, Imagent and Leonard all experienced slightly enhanced operating efficiencies in 1994. Pro forma operating income Pro forma operating income adjusted for the Compensation Differential increased 1.6% from $3.4 million, or 8.9% of total revenue, for 1993 to $3.5 million, or 8.0% of total revenue, for 1994. Interest expense, net Interest expense, net of interest income, increased slightly from $299,000 for 1993 to $304,000 for 1994. 25 26 Provision for income taxes The combined provision for income taxes and pro forma provision for income taxes remained constant at $1.3 million, with an effective tax rate of 40.0% for 1993 and an effective tax rate of 36.7% for 1994. The Founding Companies were operated as separate entities for tax purposes for all periods presented. See Note 11 of Notes to Combined Financial Statements of the Founding Companies for a more detailed analysis of the provision for income taxes. Pro forma net income Pro forma net income adjusted for the Compensation Differential and pro forma provision for taxes increased 14.7% from $1.9 million, or 4.9% of total revenue, for 1993 to $2.2 million, or 5.0% of total revenue, for 1994. Certain balance sheet changes Accounts and notes receivable, less allowance for doubtful accounts and notes increased from December 31, 1993 to December 31, 1994 primarily as a result of an overall increase in revenues. Accounts receivable, officer and employee, increased primarily as a result of advances to Researchers' controlling stockholder. These advances were settled at Researchers fiscal year end of July 31. Intangible assets, net of accumulated amortization increased primarily due to the purchase by Imagent of a microfilm processing business. The intangible assets associated with this purchase represented a customer list and a covenant not to compete. Property and equipment, net, accounts payable and accrued liabilities and debt all increased primarily as a result of facility expansions. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1996, the Company had $4.3 million of working capital and $2.5 million of cash. Cash flows provided by operating activities for the six months ended June 30, 1996 were $1.7 million. Cash used for investing activities was $21.8 million, as the Company paid $20.7 million for acquisitions, net of cash acquired. Cash provided by financing activities was $22.6 million. The Company raised $23.1 million in the Offering, net of underwriting discounts and other costs associated with the Offering. The Company assumed $8.5 million of debt in the Acquisitions and subsequently retired all of this debt with the proceeds of the Offering, with the exception of approximately $0.4 million of debt with favorable interest rates and capital lease obligations of approximately $0.4 million. In April 1996, the Company entered into a $35.0 million line of credit ("Line of Credit"). See Note 4 in the Notes to Financial Statements. The Company paid $1.5 million in costs to secure this financing. In June, the Company borrowed $9.2 million through the Line of Credit to help fund the acquisition program. The Company assumed $2.8 million of debt in the acquisitions subsequent to the Offering and retired $0.4 million. The assumed debt remaining has interest rates more favorable than the Company's Line of Credit. Net cash provided by operating activities was $4.1 million, $2.0 million and $2.3 million, respectively, for the years ended December 31, 1995, 1994 and 1993. Net cash provided by operating activities for the year ended December 31, 1995 was primarily impacted by: (i) an increase in net income; (ii) an increase in revenue without a corresponding increase in accounts receivable; (iii) the settlement of a significant portion of Researchers' stockholder receivable; and (iv) a decrease in accounts payable and accrued liabilities. Net cash provided by operating activities for the year ended December 31, 1994 was impacted by increased revenue and increases in accounts receivable, accounts payable and accrued liabilities associated with facility expansions and was also impacted by an increase in Researchers' stockholder receivable. Cash used in investing activities was $1.3 million, $2.0 million and $1.1 million, respectively, for the years ended December 31, 1995, 1994 and 1993. Cash used in investing activities for the year ended December 31, 1995 and for the year ended December 31, 1994 was primarily used for purchases of property, plant and equipment associated with facility expansions, and was also impacted in 1994 by the purchase by Imagent of a microfilm processing business and the associated intangible assets. Cash used in investing activities for 1993 was primarily used for purchases of property, plant and equipment associated with facility expansions. Cash used for financing activities was $2.1 million, $124,000 and $1.2 million, respectively, for the years ended December 31, 1995, 1994 and 1993. Cash used for financing activities for the year ended December 31, 1995, consisted primarily of net payments 26 27 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. The Company anticipates that cash from operations, and additional bank financing available under the Line of Credit will be sufficient to meet the Company's liquidity requirements for its operations for the next twelve months. As of September 4, 1996, the availability under the Line of Credit was $2.0 million for working capital and general corporate purposes, and approximately $16.7 million for acquisitions. The Company expects that additional funds may be required in the future to successfully continue the acquisition program. See "Risk Factors -- Need for Additional Financing to Implement Acquisition Strategy." The consideration paid for the 10 businesses recently acquired by the Company consisted of cash or a combination of cash and shares of Common Stock. See "Business -- Subsequent Acquisitions." FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS Revenues from the Company's services show no significant seasonal variations. However, service revenue can vary from period to period due to the impact of specific projects, primarily in the litigation support area. Quarterly results may also vary as a result of the timing of acquisitions and the timing and magnitude of costs related to such acquisitions. In addition, because the anticipated financial benefits of the combination of the Operating Companies may not be generated immediately, the Company's initial results as a combined company may reflect corporate overhead that exceeds the realized benefits. 27 28 BUSINESS F.Y.I. Incorporated was founded in September 1994 to create a national, single-source provider of document management services to three primary client segments: healthcare institutions, professional services firms and financial institutions. Prior to the Offering, F.Y.I. did not conduct any operations. F.Y.I. has acquired, simultaneously with the consummation of the Offering, the seven Founding Companies. The Founding Companies, which have been in business an average of 22 years, are headquartered in San Francisco (2), San Jose, Fort Worth, Detroit, Malvern (Philadelphia) and Baltimore. Since the Offering, the Company has acquired 10 additional companies (together with the Founding Companies, the "Operating Companies") which provide document management services in Baltimore, Houston, Los Angeles, Minneapolis, Sacramento, San Jose, Seattle and Washington, D.C. The Operating Companies operate in over 25 states. The Company had pro forma fiscal 1995 annual revenues of approximately $78 million and pro forma fiscal 1995 net income of $5.1 million after giving effect to the New Acquisitions. The Company operates with a decentralized management strategy rather than a standardized national model in order to provide superior customer service and retain the historical customers of acquired businesses while achieving the operating efficiencies of a large organization. This strategy also emphasizes the retention of local management, which the Company believes makes it an attractive acquiror of other document management services companies. See "The Company." The Company's three primary client segments are highly document-intensive. For a variety of regulatory, client service and other reasons, the documents of the Company's clients must be maintained, accessed and managed for extensive periods of time, often under strict guidelines and specifications. While the document management requirements of each target client segment are relatively unique and require a specialized understanding of that segment, the Company offers certain common document management services that are transferable across its targeted client segments. These services, which are offered by one or more of the Operating Companies, include: (i) micrographic services, including microfilm and microfiche production and processing; (ii) electronic imaging services, including the conversion of documents into digitized media using sophisticated computer technology; (iii) active storage and maintenance of documents and files; (iv) archival storage of inactive documents; and (v) information and database management services. In addition, in order to better fulfill the document management needs of targeted client segments, certain Operating Companies also offer industry specific services such as litigation support, including subpoena, authorization, photocopying and service of process services, medical records release services and remittance processing. The Company also derives revenue from the sale of certain micrographic and business imaging products. Historically, the document management services industry has been highly fragmented, consisting primarily of small local or regional businesses that limit their operations to a narrow range of offered services or provide services only to selected client segments. The Company believes that significant opportunities are available to a business that can consolidate the capabilities and resources of a number of existing document management services businesses. In order to effect such a consolidation, the Company has implemented an aggressive acquisition program designed to expand its range of offered services and acquire additional market share in each of its targeted geographic markets. 28 29 The Company believes that each of its targeted geographic markets can support the following range of services: [CHART] The Company believes that the consolidation of document management services businesses will provide it with a significant competitive advantage over existing smaller businesses. In addition to economies of scale, the Company expects to benefit from enhanced operating efficiencies and significant cross-selling opportunities. As the Company gains critical mass in certain geographic markets, it expects to be able to capitalize on its existing client relationships and technical expertise to: (i) vertically integrate by expanding the services offered to each of its client segments; and (ii) horizontally integrate by offering certain transferable services to a larger overall customer base. OVERVIEW An estimated four trillion documents are generated annually in the United States. A significant portion of the storage, processing and management of these documents is outsourced to document management services businesses such as the Operating Companies. Further, the Company believes that the document management services market is growing due to several factors including: (i) government regulations that require lengthy document retention periods and rapid accessibility for many types of records; (ii) increased customer expectations of low cost access to records on short notice and, in many instances, at disparate locations; (iii) the increasing litigiousness of society, necessitating access to relevant documents and records for extended periods; and (iv) continuing advancements in computer, networking, facsimile, printing and other technologies which have greatly facilitated the production and wide distribution of documents. The Company's three targeted client segments, healthcare institutions, professional services firms and financial institutions, generate large volumes of documents and require efficient processing, distribution, storage and retrieval of these documents and the information they contain. The Company believes that these client segments have increased and will continue to increase their outsourcing of document management services in order to: (i) maintain a focus on core operating competencies and revenue generating activities; (ii) reduce fixed costs, including labor and equipment costs; and (iii) gain access to new technologies without incurring the expense and risk of near-term obsolescence of such technologies. The document management services business is highly fragmented. The Company believes that many small document management services businesses: (i) have insufficient capital for expansion; (ii) cannot keep abreast of rapidly changing technologies; (iii) lack effective marketing programs; and (iv) are unable to meet 29 30 the needs of large, geographically dispersed clients. In addition, there are a limited number of options for owners of such businesses to obtain liquidity or to sell their businesses. As result, the Company believes that many owners of such businesses will be receptive to a consolidation strategy. BUSINESS STRATEGY The Company's goal is to become a national, single-source provider of document management services for its three primary target client segments: healthcare institutions, professional services firms and financial institutions. In order to achieve this goal, the Company intends to implement a focused business strategy based on the following key principles: Establish Full Service Operations in Multiple Metropolitan Areas. The Company intends to establish full service document management operations in targeted metropolitan areas, including the areas serviced by the Operating Companies, through selected acquisitions and expansion of existing businesses. Ultimately, the Company will seek to achieve a national scope of coverage so that it can implement a national sales and service policy. Capitalize on Cross-Selling Opportunities. The Company intends to cross-sell in two primary ways. First, the Company intends to leverage its existing client relationships by selling such clients additional document management services provided by the Company's other businesses. Second, the Company intends to leverage its existing knowledge with respect to industry transferable services by marketing such services across client segment lines. Achieve Cost Savings Through Economies of Scale. The Company believes that it will be able to achieve significant economies of scale by combining a number of general and administrative functions at the corporate level and by reducing or eliminating redundant functions and facilities. For example, the Company has implemented a Company-wide insurance plan and intends to implement Company-wide employee benefits programs and to purchase certain items, such as paper, microfilm and storage racks, on a combined basis. To the extent that the Company is able to expand through the acquisition of additional document management businesses, the Company believes that such cost savings will continue to accrue. Operate With a Decentralized Management Strategy. The Company believes that the experienced local management teams that exist at the Operating Companies have a valuable understanding of their respective markets and businesses and have existing client relationships upon which they may capitalize. Accordingly, the Company intends to operate with a decentralized management strategy. Local management will remain empowered to make most of the day-to-day operating decisions at each location and will be primarily responsible for the profitability and growth of that location. Although the Company intends to have local management operate with a high degree of autonomy, the Company believes that regular communication between the individual businesses and the Company's executive management team will be integral to realizing the benefits afforded by the consolidation of these businesses into a single company. ACQUISITION PROGRAM The Company believes that there are significant opportunities to consolidate the capabilities and resources of a number of existing document management services businesses. In order to effect this consolidation, the Company has implemented an aggressive acquisition program in order to enter additional targeted markets, acquire additional service capabilities within such markets and gain market share. The Company intends to employ a three-tiered acquisition program. Initially, to enter a targeted geographic market, the Company intends to make "beachhead" acquisitions of leading document management services companies with strong market positions. In analyzing beachhead acquisition candidates, the Company will focus on acquiring businesses that have: (i) experienced and high quality management; (ii) multiple locations, preferably with operations in two to three contiguous markets; (iii) a strong customer franchise; and (iv) a history of profitability. The second tier of the Company's acquisition program involves the acquisition of related document management services companies that will increase the Company's offered services in a particular region. In 30 31 making such acquisitions, the Company will assess the services required by the specific market's customer base and then seek to acquire leading providers of such services within that geographic area. As with beachhead acquisitions, the Company will seek profitable businesses with strong management teams. Finally, in order to increase its market share and realize economies of scale, the third tier of the Company's acquisition program will be the acquisition of smaller "tuck-in" businesses which can be easily assimilated into the operations of the Company's existing businesses. Such tuck-in businesses are intended to enable the Company to benefit from the operating leverage of its existing businesses by acquiring additional market share and revenue while eliminating or reducing certain general, administrative and operating costs previously associated with such revenue. Accordingly, the main selection criteria for such tuck-in businesses will be strong customer relationships. The Company believes that it will be an attractive acquiror of other document management services companies due to: (i) the benefits afforded by an association with a full service national company, including an enhanced ability to compete in the local market through an expansion of offered products and services and increased access to new technologies; (ii) the potential for increased profitability as a result of the Company's centralization of certain administrative functions and certain economies of scale; (iii) the Company's financial strength and visibility as a public company; and (iv) the Company's decentralized management strategy which will, in many cases, enable existing local management to remain involved in the operations of acquired companies. Nevertheless, there are numerous risks associated with the Company's intended acquisition program. See "Risk Factors -- Acquisition Strategy" and "-- Need for Additional Financing to Implement Acquisition Strategy." Since its inception in September 1994, F.Y.I. has gathered and assembled data with respect to numerous document management services businesses and believes it is well positioned to commence and continue its acquisition program. The Company's acquisition program is led by Thomas C. Walker, Chairman of the Board and Chief Development Officer of the Company, and David Lowenstein, Executive Vice President -- Corporate Development and Acquisitions and Chief Financial Officer, each of whom has extensive experience in acquiring businesses. As consideration for acquisitions, the Company intends to use various combinations of Common Stock, cash and notes, including the shares of Common Stock being offered hereby. SERVICES OFFERED BY THE OPERATING COMPANIES The Company provides a wide variety of document management services and draws upon its available services to develop document management solutions for its clients based on their specific needs. The current document management services that are provided in certain geographic locations through one or more of the Operating Companies include: Transferable Services Micrographics. Micrographics services involve: (i) the conversion of paper documents into microfilm images; (ii) film processing; and (iii) computer-based indexing and formatting. Typically, micrographic services are selected: (i) as a cost-competitive technology to reduce the physical size of stored records; (ii) for their long term (over 100 years) archival capabilities; and (iii) as an intermediate step in certain imaging or reprographic applications. Imagent, B&B, Researchers, Permanent Records and Medical Record currently provide micrographics services. Electronic Imaging. Electronic imaging services involve the conversion of paper or microfilm documents into digitized information through optical scanners. Digitized information can be either stored as an image or converted to code through optical character recognition (OCR) or digital imaging storage and retrieval technologies. Conversion to code provides additional processing capabilities such as manipulation of data. In both cases, the digitized information can be stored on either a magnetic medium, such as a computer diskette, or on optical laser disks, such as compact disks. Electronic imaging is generally used because of the storage media's high speed of retrieval, its multiple indexing and text search formatting capabilities, and its ability to 31 32 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. Imagent, B&B, Researchers and DPAS currently provide electronic imaging services. Active or Open Shelf Storage. Active or open shelf storage services involve the storage, processing (i.e., indexing and formatting), retrieval, delivery and return to storage of documents on a rapid time frame. Representative uses for open shelf storage include active medical and legal case files. In many instances, open shelf storage is offered as an outsourced file room service, where documents are requested and retrieved frequently and, in many cases, transmitted via facsimile due to the urgency of the request. Service fees generally include a monthly fee based on activity levels and volumes stored, with extra billing for specialized requests. Deliverex, Deliverex Sacramento, Leonard and Permanent Records currently provide active or open shelf storage. Archival Storage of Inactive Documents. The archiving of inactive documents involves storage for extended periods of time with a lesser emphasis on service or accessibility to stored documents. Typical uses for archival storage of inactive documents include storage of closed files for professional services firms and documents that may be required by law to be maintained by hospitals, other healthcare institutions and financial institutions for extended periods. Service fees generally include billing for storage space, plus activity charges for each retrieval, delivery and return to storage, and ultimately for document destruction. Leonard and Permanent Records currently provide archival storage of inactive documents. Database Services. Database services involve data capture (manually or through scanning or other electronic media), data consolidation and elimination, storage, maintenance, formatting and report creation. In some cases, database services include statistical analysis of data. DPAS, Imagent and B&B currently provide database services. Industry Specific Services Certain of the Founding Companies have developed industry specific services in order to address the document management needs of their particular clients. These industry specific services include: Litigation Support. Litigation often involves the production (i.e., delivery to opposing counsel) and management of thousands of pages of documents, extracted in their current working form from the offices and files of litigating parties and their experts, advisors and legal counsel. Litigation support services include managing the logistics of high volume document production, microfilming and/or electronic imaging, document coding, computer indexing, automated document retrieval, and high speed, multiple-set reproduction of documents. Litigation support services are provided to law firms, corporate legal departments and insurance companies. These clients typically look to litigation support companies to augment their internal operations and capabilities on an as-needed, job-by-job basis. Additional litigation support services include subpoena, authorization, photocopying and service of process services. Clients are generally billed on a per unit basis. Researchers, Cook, Imagent and DPAS currently provide litigation support services. Medical Records Release Services. Medical records release services involve processing a request for a patient's medical records from a physician, insurance company, attorney or other healthcare institution. The medical records release service provider initially verifies that the release is properly authorized, coordinates the retrieval of the record, determines the relevant parts of the record to be copied, and delivers the copied records (or portions thereof) to the requesting party. Medical records release services are provided on-site pursuant to contracts with hospitals and other large healthcare institutions. The medical records release service provider bills the recipient directly and sometimes pays a fee to the hospital. Recordex, Premier, Permanent Records and Medical Record currently provide medical records release services. Remittance Processing. Remittance processing and order fulfillment services involve the outsourcing of a client's receivables function, including generating bills and statements, receiving and processing credit card payments, encoding checks and depositing payments, and other mailing related activities. DPAS and Imagent currently provide remittance processing services. 32 33 Business Imaging Products Sales Imagent has a five-year agreement with the Eastman Kodak Company which expires on December 31, 1999 and grants Imagent the right to act as a distributor of a wide range of Kodak microfilm and business imaging supplies in Delaware, Maryland, Pennsylvania, Virginia, West Virginia and Washington, D.C. B&B is also in the business imaging product sales business. SALES AND MARKETING The Company has a broad customer base, and none of the Company's customers accounted for more than 8.0% of revenue for either the year ended December 31, 1994 or December 31, 1995. Historically, the Company's sales efforts have been implemented on a location-by-location basis at each Operating Company. For most of the Operating Companies, sales efforts are typically not coordinated through separate sales personnel, but are part of the local management's responsibilities. The Company believes that the existing local sales efforts can be supplemented through the addition of local sales representatives. The Company will strive to increase its client base by attracting customers away from small, single business operators as a result of its ability to offer a broader range of solutions for its clients' document management needs. In addition, the Company will focus on increasing revenues from its existing clients by cross-selling its services and broadening its product offerings. Once the Company gains critical mass in a number of metropolitan areas, it hopes to augment local sales and marketing efforts through the implementation of a national sales/account program. The Company believes that its ability to attract and retain additional clients will depend on its ability to offer the broad range of services necessary to satisfy such clients' document management needs and maintain a high level of customer satisfaction. COMPETITION The document management services businesses in which the Company competes and expects to compete are highly competitive. A significant source of competition is the in-house document handling capability of the Company's target client base. There can be no assurance that these businesses will outsource more of their document management needs or that such businesses will not bring in-house services that they currently outsource. In addition, certain of the Company's competitors are larger businesses, many of which have greater financial resources than the Company. Certain of these competitors operate in broader geographic areas than the Company, and others may choose to enter the Company's areas of operation in the future. In addition, the Company intends to enter new geographic areas through internal growth and by acquiring existing companies and expects to encounter significant competition from established competitors in each of such new areas. As a result of this highly competitive environment, the Company may lose customers or have difficulty in acquiring new customers and its revenues and margins may be adversely affected. The Company believes that the principal competitive factors in document management services include accuracy, reliability and security of service, client segment specific knowledge and price. The Company competes primarily on the basis of quality of service and client segment specific knowledge, and believes that it competes favorably with respect to these factors. ORGANIZATION Simultaneously with the closing of the Offering, F.Y.I. acquired seven well-established document management services businesses. The aggregate consideration paid by F.Y.I. to acquire the Founding Companies was approximately $35 million, consisting of: (i) $7,059,000 in cash; (ii) 1,878,933 shares of Common Stock; (iii) the assumption and repayment of approximately $191,000 of indebtedness owed by a certain Founding Company stockholder; and (iv) the distribution of cash and certain receivables to stockholders of Imagent and Leonard, which are S corporations, in the amounts of $2,750,000 and $700,000, respectively, representing the AAA accounts of these companies. In addition, prior to the closing of the Acquisitions, certain Founding Companies made distributions to their stockholders of certain assets and related liabilities, including the increase in net equity subsequent to June 30, 1995 of each of the Founding Companies, other than Recordex. Based on the relevant account balances as of December 31, 1995, the amount of these distributions was $2,340,000. As such, total transfers of selected assets to and assumption of 33 34 selected liabilities of certain stockholders of the Founding Companies was a net amount of approximately $5,981,000 (of which $1,120,000 was distributed prior to December 31, 1995). In addition, upon consummation of the Acquisitions, the Company repaid approximately $3,349,000 of third party indebtedness assumed by the Company in the Acquisitions, virtually all of which was guaranteed by respective stockholders of the Founding Companies, and $584,000 of indebtedness to such stockholders. The consideration paid for the Founding Companies was determined through arm's-length negotiations among F.Y.I. and representatives of the Founding Companies. The factors considered by the parties in determining the consideration to be paid include, among others, the historical operating results, the levels of indebtedness and the future prospects of the Founding Companies. In connection with the Acquisitions, the stockholders of the Founding Companies agreed not to compete with the Company for a period of five years following the Acquisitions. In addition, each stockholder (other than Michael J. Bradley) entered into a three-year employment agreement with the Company which contains a two-year covenant-not-to-compete following termination of such person's employment. The period of the covenants-not-to-compete will be shortened to a period of one year following the termination of any such person without cause. See "Management." Imagent. Under an agreement with Imagent, Mr. John Shaw and Mr. Ted Montouri, F.Y.I. acquired by merger all of the issued and outstanding stock of Imagent. The consideration paid by F.Y.I. for Imagent was $1,500,000 in cash, 331,497 shares of Common Stock of the Company and an S Corporation dividend of cash and certain receivables in the amount of $2,750,000 representing the AAA account of Imagent. Researchers. Under an agreement with Researchers, Mr. Greg Melanson and Dr. Roger Mansfield, F.Y.I. acquired by merger all of the issued and outstanding stock of Researchers. The consideration paid by F.Y.I. for Researchers was $2,750,000 in cash and 681,400 shares of Common Stock of the Company. F.Y.I. also has an option to acquire an additional start-up document management business owned by Mr. Melanson, and Mr. Melanson has an option to require F.Y.I. to purchase such business at such time as its annual audited pre-tax profits exceed $550,000. In either event, the consideration payable to Mr. Melanson will consist of F.Y.I. Common Stock with a value equal to six times the amount of such audited pre-tax profits. Recordex. Under an agreement with Recordex, Paragon Management Group, Inc. ("Paragon"), the sole shareholder of Recordex, and Mr. G. Michael Bellenghi, Mr. Gerald E. Pierson and Mr. Michael J. Bradley, the shareholders of Paragon, F.Y.I. acquired by merger all of the issued and outstanding stock of Recordex. The consideration paid by F.Y.I. for Recordex was $309,000 in cash, 198,589 shares of Common Stock of the Company and the assumption and repayment of $191,000 of debt of Paragon to its stockholders upon consummation of the Acquisition. DPAS. Under an agreement with DPAS, Mr. Robert Tessler and Mr. John Brown, F.Y.I. acquired by merger all of the issued and outstanding stock of DPAS. The consideration paid by F.Y.I. for DPAS was $400,000 in cash and 117,068 shares of Common Stock of the Company. Leonard. Under an agreement with Leonard and Mr. Jerry Leonard, F.Y.I. acquired by merger all of the issued and outstanding stock of Leonard. The consideration paid by F.Y.I. for Leonard was $1,250,000 in cash, 253,274 shares of Common Stock of the Company and an S corporation dividend of cash and certain receivables in the amount of $700,000 representing the AAA account of Leonard. Deliverex. Under an agreement with Deliverex, Mr. Steven Rowen and Ms. Andrea Bushnell, F.Y.I. acquired by merger all of the issued and outstanding stock of Deliverex. The consideration paid by F.Y.I. for Deliverex was $700,000 in cash and 186,147 shares of Common Stock of the Company. Permanent Records. Under an agreement with Permanent Records, Mr. Kent Patterson and Mr. Neil Patterson, F.Y.I. acquired by merger all of the issued and outstanding stock of Permanent Records. The consideration paid by F.Y.I. for Permanent Records was $150,000 in cash and 110,958 shares of Common Stock of the Company. The businesses of each of the Founding Companies is conducted through separate subsidiaries of the Company. 34 35 SUBSEQUENT ACQUISITIONS AND PENDING ACQUISITION Since the closing of the Offering, the Company has acquired 10 additional document management services businesses, including B&B, Premier, Cook and Medical Record. The Company's significant subsequent acquisitions are described below: Cook. Under an agreement with Cook, Robert A. Cook and Anna M. Cook as Co-Trustees of the Cook 1993 Living Trust, Cook Acquisition and RAC Acquisition, both wholly-owned subsidiaries of the Company, acquired substantially all of the non-cash assets of Cook in June 1996. Cook has been operating a litigation support business for 30 years throughout the State of California. The aggregate consideration paid by the Company for Cook consisted of $11.3 million in cash. An amount equal to $1,000,000 in cash will be retained for a period of 90 days from the date of closing as security against any indemnification claim. B&B. Under an agreement with B&B and Charles J. Bauer, Jr., B&B (Baltimore-Washington) Acquisition Corp., acquired by merger all of the issued and outstanding stock of B&B in May 1996. B&B has been operating a document management services business for 15 years in the Baltimore-Washington, D.C. area. The aggregate consideration paid by the Company for B&B consisted of $3.1 million in cash and 183,333 shares of Common Stock. Of such 183,333 shares of Common Stock, a total of 13,889 shares of Common Stock will be held in escrow for a period of 120 days from the date of closing as security against any indemnification claim. Premier. Under an agreement with Premier and Brian E. Whiteside, Christopher S. Moore, Lynette C. Pomerville and Gary T. Siervert (the "Premier Stockholders"), Premier Acquisition Corp., acquired by merger all of the outstanding stock of Premier in May 1996. Premier has been operating as a document management services business for 11 years in the State of Washington and in Northern California. The aggregate consideration paid by the Company for Premier consisted of $1.2 million in cash and 69,919 shares of Common Stock. The Company will make an additional lump-sum, cash and stock earnout payment on March 1, 1997 to the Premier Stockholders, up to a maximum earnout of $6,000,000. An amount equal to $200,000 in cash will be retained by the Company for a period of 120 days from the date of closing as security against any indemnification claim. Medical Record. Under an agreement with CMRS and Alan Simon, California Acquisition Corp. acquired by merger all of the outstanding stock of CMRS in August 1996. CMRS has been operating as a medical records release business for 11 years in Los Angeles, California. Under an agreement with Texas Medical Record, Jill Simon and California Acquisition Corp., Texas Acquisition Corp. acquired by merger all of the outstanding stock of Texas Medical Record in August 1996. Texas Medical Record has been operating as a medical records release business for ten years in Houston, Texas. Under an agreement with Minnesota Medical Record and Alan Simon, Minnesota Acquisition Corp. acquired by merger all of the outstanding stock of Minnesota Medical Record. Minnesota Medical Record has been operating as a medical records release business for nine years in Minneapolis, Minnesota. CMRS, Texas Medical Record and Minnesota Medical Record were affiliated corporations. The aggregate consideration paid by the Company for Medical Record consisted of $2.3 million in cash and 214,721 shares of Common Stock (of which 36,670 shares of Common Stock were issued to California Acquisition Corp.). The Company may make an additional lump-sum, cash and stock earnout payment in September 1997 to Alan Simon, up to a maximum amount of $2,500,000. A total amount of $196,000 in cash and 11,657 shares of Common Stock will be retained by the Company for a period of 90 days from the date of closing as security against any indemnification claim. ZIA. The Company and ZIA Acquisition Corp. entered into a definitive agreement with ZIA and its shareholders, dated as of August 1996, to acquire ZIA through its wholly-owned subsidiary, ZIA Acquisition Corp. ZIA has been operating a litigation consulting business for 2 years in California. The aggregate consideration to be paid by the Company for ZIA consists of $2.3 million in cash, and 154,286 shares of Common Stock. A total amount of $183,998 in cash and 12,343 shares of Common Stock will be retained by the Company for a period of 120 days from the date of closing as security against an indemnification claim. The acquisition of ZIA is subject to customary closing conditions, and there can be no assurance that such acquisition will be consummated. 35 36 In addition, substantially all of the assets of Sacramento, a medical records storage and delivery franchise company, were acquired by Deliverex Sacramento in March 1996. Deliverex Sacramento reports to Deliverex. In February 1996, certain of the assets of Microfilm, an imaging company, were acquired by Imagent and, in June 1996, certain of the assets of Octo, an imaging company, were acquired by Imagent. In July 1996, substantially all of the assets of (i) Domor, a data processing company, were acquired by DPAS; (ii) Rushmore, a litigation support business, were acquired by Researchers; and (iii) Index, a medical records release business, were acquired by Deliverex. The aggregate consideration for Sacramento, Microfilm Associates, Octo, Domor, Rushmore and Index consisted of approximately $3.0 million in cash. EMPLOYEES As of August 15, 1996, the Company had approximately 1,302 full-time employees, 214 of whom were employed primarily in management and administration. In addition, the Company utilized the services of approximately 209 part-time and 103 temporary employees. As of such date, the Company had 128 employees represented by a labor union. The Company considers its relations with its employees to be good. PROPERTY AND EQUIPMENT The Company operates 54 document management service facilities. Except as noted, all of these facilities are leased and are principally used for operations and general administrative functions. The chart below summarizes the Company's facilities.
APPROXIMATE LOCATION OF FACILITY SQUARE FOOTAGE FUNCTION - ---------------------------- -------------- ---------------------------------------- Imagent Baltimore, MD 12,000 Film Processing Lab, Supplies Warehouse and Administrative Offices Baltimore, MD 18,000 Microfilming and Imaging Operation Baltimore, MD 3,000 Warehouse Philadelphia, PA 2,000 Film Processing Lab Claymont, DE 2,000 Film Processing Lab Falls Church, VA 2,000 Film Processing Lab Richmond, VA 2,000 Film Processing Lab Roanoke, VA 1,000 Film Processing Lab Researchers San Francisco, CA 11,000 Microfilming, Imaging and Administrative Offices San Francisco, CA 8,000 Copying Operation San Jose, CA 3,500 Records Retrieval Operation San Jose, CA 1,000 Equipment Repair Sacramento, CA 2,000 Records Retrieval Operation Los Angeles, CA 2,000 Copying, Microfilming and Imaging Operation Palo Alto, CA 1,734 Overnight Copy Center Century City, CA 1,200 Overnight Copy Center Recordex Malvern, PA 6,000 Administrative Offices DPAS San Francisco, CA 10,000 Database Services and Administrative Offices San Francisco, CA 15,000 Mail Services San Francisco, CA 1,400 Storage Tamal, CA 1,500 Data Entry and Assembly Services
36 37
APPROXIMATE LOCATION OF FACILITY SQUARE FOOTAGE FUNCTION - ---------------------------- -------------- ---------------------------------------- Leonard Detroit, MI(1) 80,000 Archive Storage and Administrative Offices Detroit, MI 120,000 Archive Storage Detroit, MI 20,000 Archive Storage Detroit, MI 20,000 Archive Storage Detroit, MI 500 Service Center Detroit, MI 15,000 Archive Storage Detroit, MI 67,500 Archive Storage Farmington Hills, MI 45,000 Archive Storage Ann Arbor, MI 30,000 Archive Storage Ann Arbor, MI 10,000 Archive Storage Toledo, OH 63,000 Archive Storage Toledo, OH 20,000 Archive Storage Deliverex San Jose, CA 27,000 Medical Records Storage and Administrative Offices San Jose, CA 18,000 Medical Records Storage San Jose, CA 12,500 Medical Records Storage Hayward, CA 40,000 Medical Records Storage Sacramento, CA 41,000 Off-Site Records Management Permanent Records Ft. Worth, TX 22,000 Medical Records Microfilming, Storage and Administrative Offices B&B Marlboro, MD(1) 30,000 Administrative Office, Warehouse and Production Upper Marlboro, MD 2,000 Warehouse Space Premier Seattle, WA 4,644 Administrative Office, Processing Center and Medical Records Reproduction Tacoma, WA 217 Warehouse and Production Hub Spokane, WA 400 Processing Center and Production Hub San Jose, CA 500 Production, Processing Center and Warehouse Cook San Jose, CA 17,388 Administrative Office and Legal Copy Operations Santa Rosa, CA 2,578 Copy Operations Sacramento, CA 2,650 Copy Operations Fresno, CA 2,534 Copy Operations Culver City, CA 3,372 Copy Operations Medical Record Bloomington, MN 3,200 Administrative Office, Invoicing and Mailing Canoga Park, CA 1,000 Administrative Office, Invoicing and Mailing Houston, TX 2,000 Administrative Office Houston, TX 2,400 Production
- --------------- (1) Owned facility. The Company also operates on-site at over 175 client locations on a contractual basis and from time to time at many other client locations for specific projects. 37 38 The aggregate lease or rental expense for the Company was approximately $2.2 million during 1995. See Note 8 of Notes to Combined Financial Statements of the Founding Companies for further information relating to these leases. In March 1996, the Company occupied its new premises for its corporate headquarters in Dallas, Texas, consisting of approximately 4,700 square feet. The Company believes that its properties are generally well maintained, in good condition and adequate for its present needs. Furthermore, the Company believes that suitable additional or replacement space will be available when required. The Company owns or leases under both financial and capital leases substantial computer, scanning and imaging equipment which it believes to be adequate for its current needs. Additionally, the Company owns or leases approximately 100 cars or trucks of various types. LITIGATION The Company is, from time to time, a party to litigation arising in the normal course of its business. Management believes that none of these actions will have a material adverse effect on the financial condition or results of operations of the Company. Recordex is one of several defendants in one federal and three state lawsuits contesting the reasonableness of the fees charged for medical records reproduction. The plaintiffs in these cases are seeking class certification. In November 1994, the plaintiff's motion for class certification and all other claims were denied in the federal lawsuit. The plaintiffs filed an appeal in January 1995. On April 4, 1996, the Court of Appeals affirmed the decision in favor of the Company on the substantive claims, but remanded the case to the District Court for a hearing on the individual plaintiff's request for injunctive relief. In February 1996, one of the remaining Pennsylvania lawsuits was concluded favorably to the Company. While the outcome of the remaining litigation is uncertain, the Company believes that Recordex has meritorious defenses to these claims, and that there will not be a material adverse effect on the Company's financial position or results of operations as a result thereof. ENVIRONMENTAL MATTERS The Company is subject to federal, state and local laws, regulations and ordinances that: (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water as well as handling and disposal practices for solid and hazardous wastes; or (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposal or other releases of solid wastes and hazardous substances. The Company is currently unaware of any environmental conditions relating to present or past waste generation at or from these facilities that would be likely to have a material adverse effect on the financial condition of results of operations of the Company. However, there can be no assurance that environmental liabilities in the future will not have a material adverse effect on the financial condition or results of operations of the Company. 38 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning each of the directors and executive officers of the Company:
NAME AGE POSITION - ---------------------------- --- ------------------------------------------------- Thomas C. Walker(3)(4)...... 63 Chairman of the Board and Chief Development Officer Ed H. Bowman, Jr.(3)(5)..... 50 President and Chief Executive Officer; Director David Lowenstein(3)......... 34 Executive Vice President -- Corporate Development and Acquisitions and Chief Financial Officer; Director Timothy J. Barker........... 34 Vice President and Chief Accounting Officer Margot T. Lebenberg......... 29 Vice President, Secretary and General Counsel G. Michael Bellenghi(3)..... 48 Chairman -- Recordex; Director Jerry F. Leonard, Jr.(4).... 56 President -- Leonard; Director Greg Melanson(5)............ 43 President -- Researchers; Director Jonathan B. Shaw(5)......... 41 President -- Imagent; Director Michael J. Bradley(1)(2).... 52 Director Donald F. Moorehead, Jr.(1)(2)................. 46 Director Hon. Edward M. Rowell(1)(2)(4)........... 64 Director
- --------------- (1) Member of Audit Committee. (2) Member of Compensation Committee. (3) Member of Executive Committee. (4) Member of Nominating Committee. (5) Member of Technology Committee. At the annual meeting of stockholders, directors will be elected by the holders of the Common Stock to succeed those directors whose terms are expiring. All officers serve at the discretion of the Board of Directors. See "-- Employment Agreements; Covenants-Not-to-Compete." Thomas C. Walker has been Chairman of the Board and Chief Development Officer of F.Y.I. since its inception in September 1994 and November 1995, respectively. From September 1994 until November 1995, Mr. Walker held the positions of President and Chief Executive Officer of F.Y.I. From August 1991 to December 1994, Mr. Walker was Vice President, Corporate Development, of Laidlaw Waste Systems, Inc., a subsidiary of Laidlaw, Inc., a waste management company, where he was responsible for its acquisition and divestiture program in the United States and Mexico. From May 1989 until he joined Laidlaw Waste Systems, Inc., Mr. Walker was President of Thomas C. Walker Associates, Inc., a company providing merger, acquisition and financial consulting services focusing on the waste management industry. During his career, Mr. Walker has been responsible for the acquisition or divestiture of over 100 businesses over a 29-year period. Mr. Walker holds a B.S. degree in Industrial Engineering from Lafayette College. In May 1989, Mr. Walker resigned from a senior executive position with a former employer and received a severance payment under the terms of his employment agreement. In July 1989, such employer commenced a proceeding in bankruptcy and after emerging from such proceeding and in connection with its liquidation, sought to recover Mr. Walker's severance payment as a preference claim. Mr. Walker litigated this claim but ultimately entered into a judgment requiring him to make significant payments to his former employer. In April 1993, Mr. Walker filed a voluntary petition in bankruptcy in order to discharge such judgment and two mortgage notes relating to two condominiums in Dallas, the holders of which were unwilling to renegotiate the terms of the mortgages. Mr. Walker did not seek any other relief from creditors, and the bankruptcy was discharged in February 1994. 39 40 Ed H. Bowman, Jr. has been President and Chief Executive Officer and a Director of F.Y.I. since November 1995. From May 1993 to June 1995, Mr. Bowman was Executive Vice President and Chief Operating Officer of the Health Systems Group of First Data Corporation, a financial services company. Mr. Bowman was responsible for day to day operations of research and development, marketing and customer services. From 1983 to 1993, Mr. Bowman served in a number of marketing, customer service and research and development executive positions for HBO & Company, last serving as Executive Vice President of the STAR Business Unit with responsibility for domestic operations. Prior to joining HBO & Company, Mr. Bowman was with Andersen Consulting for 10 years. Mr. Bowman holds an M.S. from Georgia Institute of Technology and a B.B.A. from Georgia State University. David Lowenstein has reassumed the responsibility of Chief Financial Officer of F.Y.I., the position he held prior to the Offering and has been Executive Vice President -- Corporate Development and Acquisitions and a Director of F.Y.I. since February 1995. Prior to joining the Company, Mr. Lowenstein served, since February 1994, as Vice President, Business Development of Laidlaw Waste Systems, Inc., with overall responsibility for Laidlaw Waste System's acquisition and divestiture program in North America. From April 1990 until February 1994, Mr. Lowenstein served in a variety of capacities, including Director -- Corporate Development, for Laidlaw, Inc. From November 1988 to March 1990, he served as a business analyst for Tricil, Ltd., a solid and hazardous waste company that was acquired by Laidlaw, Inc. in 1990. Mr. Lowenstein has been responsible for the acquisition or divestiture of over 30 businesses in North America and Europe. Mr. Lowenstein holds a B.A. degree in Economics from Sir Wilfred Laurier University and an M.S. degree in Public and Business Administration from Carnegie Mellon University. Mr. Lowenstein is a citizen of the Dominion of Canada residing in the United States. Timothy J. Barker has been Vice President and Chief Accounting Officer of F.Y.I. since July 1996. Prior to July 1996, Mr. Barker held the position of Controller of F.Y.I. His primary responsibilities have included: (i) the preparation of combined financial statements of the Founding Companies; and (ii) the financial analysis, due diligence, audit coordination and completion and SEC reporting compliance for the acquisitions of the Founding Companies and all acquisitions since the Offering. Prior to joining F.Y.I., Mr. Barker was a Manager with Arthur Andersen LLP, where he served in various capacities over a nine year period. Mr. Barker served as Vice President of Financial Planning and Analysis for Sunbelt National Mortgage Corporation from June 1993 to October 1994. Mr. Barker holds a B.A. degree in Accounting from Texas Tech University and has been a C.P.A. since 1985. Margot T. Lebenberg has been Vice President, Secretary and General Counsel of F.Y.I. since June 1996. From 1992 until joining the Company, Ms. Lebenberg was an associate at Morgan, Lewis & Bockius LLP in New York where she practiced law primarily in the areas of securities and mergers and acquisitions. Ms. Lebenberg holds a B.A. degree in Economics and History from the State University of New York at Binghamton and a J.D. degree from Fordham University School of Law. G. Michael Bellenghi has been a director since the closing of the Offering, is a principal of Paragon, a healthcare consulting firm, and has served as Chairman of the Board, Vice President and Secretary of Recordex since December 1990. Prior to joining Recordex, Mr. Bellenghi served as Partner-in-Charge and Director of Deloitte & Touche's Philadelphia office Healthcare Practice for 10 years. Mr. Bellenghi has also served as a graduate professor in Financial Management of Healthcare Institutions at LaSalle University. Mr. Bellenghi is a director of Home Health Corporation of America, Inc., a public company. Mr. Bellenghi is a certified public accountant and holds a B.A. degree in Accounting from LaSalle University. Jerry F. Leonard, Jr. has been a director since the closing of the Offering and has been the President and Chief Executive Officer of Leonard since 1968. Mr. Leonard has been active in the data storage business for over 27 years. Greg Melanson has been a director since the closing of the Offering and has been Chairman of the Board, President and Chief Executive Officer of Researchers since 1978. Mr. Melanson has been in the litigation support services business since 1975. Mr. Melanson holds a B.A. degree from the University of Southern California. 40 41 Jonathan B. Shaw has been a director since the closing of the Offering and has been Chairman of the Board, President and Chief Executive Officer of Imagent since 1990. Mr. Shaw has been active with Imagent for 16 years. Mr. Shaw attended the University of Vermont and George Washington University. Michael J. Bradley has been a director since the closing of the Offering. Since January 1991, Mr. Bradley has served as a principal of Paragon and as a member of the Board of Directors of Recordex. Mr. Bradley has also been Executive Vice President of Mercy Health Corporation of Southeast Pennsylvania since May 1994. Prior to joining Mercy Health Corporation, Mr. Bradley served as President and Chief Executive Officer of several healthcare organizations, including Thomas Jefferson University Hospital and North Philadelphia Health System, both of which are located in Philadelphia, and the Columbia Presbyterian Medical Center in New York City. Mr. Bradley is a certified public accountant and holds a B.S. degree in Business Administration from Drexel University. Donald F. Moorehead, Jr. has been a director of the Company since January 1995. Since June 1995, Mr. Moorehead has been Vice Chairman of the Board and Chief Development Officer of U.S.A. Waste Services, Inc., a national waste management company whose shares are listed on the New York Stock Exchange. From May 1994 until June 1995, he was Chairman of the Board and Chief Development Officer of U.S.A. Waste Services and from September 1990 to May 1994, served as its Chairman of the Board and Chief Executive Officer. Mr. Moorehead was Chairman of the Board and Chief Executive Officer of Mid-American Waste Systems, Inc., from its inception in December 1985 until August 1990 and continued as a director until February 1991. From 1977 until 1984, Mr. Moorehead served in various management positions with Waste Management, Inc. Mr. Moorehead holds a B.S. degree in Engineering from the University of Tulsa. Hon. Edward M. Rowell has been a director since the closing of the Offering. From April 1990 to August 1994, Mr. Rowell served as the United States Ambassador to Luxembourg. Mr. Rowell also served from January 1988 to April 1990 as the United States Ambassador to Portugal and from August 1985 to January 1988 as the Ambassador to Bolivia. Mr. Rowell is currently Vice President of the American Foreign Service Association, an organization dedicated to the protection and advancement of United States interests abroad. Mr. Rowell is also an associate of Global Business Access, Ltd., a private trade development firm in Washington, D.C. Mr. Rowell holds a B.A. degree in International Relations from Yale University and was a Sloan Executive Fellow at the Stanford University Graduate School of Business. DIRECTOR COMPENSATION Directors who are employees of the Company do not receive additional compensation for serving as directors. Each director who is not an employee of the Company will receive a fee of $1,500 for attendance at each Board of Director's meeting and $1,000 for each committee meeting (unless held on the same day as a Board of Director's meeting) and an initial grant of nonqualified options to purchase 10,000 shares of Common Stock. Non-employee directors will, beginning with the first annual meeting of the Company's stockholders, receive annual grants of nonqualified options to purchase 5,000 shares of Common Stock. See "-- Stock Option Plan." All directors of the Company are reimbursed for out-of-pocket expenses incurred in their capacity as directors of the Company. EXECUTIVE COMPENSATION F.Y.I. was incorporated in September 1994 and, prior to the Offering, did not conduct any operations. The Company anticipates that during fiscal 1996 its most highly compensated officers and their annualized base salaries will be: Mr. Bowman -- $200,000, Mr. Walker -- $150,000, Mr. Bellenghi -- $150,000, Mr. Melanson -- $150,000, Mr. Shaw -- $140,000, Mr. Lowenstein -- $120,000, Ms. Lebenberg -- $100,000, Mr. Barker -- $100,000 and Mr. Leonard -- $100,000 (collectively, the "named executive officers"). Each named executive officer has entered into an employment agreement with the Company or a subsidiary thereof commencing on completion of the Offering, except that Messrs. Bowman, Walker, Lowenstein, Lebenberg and Barker commenced employment with F.Y.I. in November 1995, December 1994, February 1995, May 1996 and November 1995 (from June 1995 to November 1995, Mr. Barker served as a full-time consultant for the Company), respectively. See "-- Employment Agreements; Covenants-Not-To- 41 42 Compete." Pursuant to such employment agreements, each such officer is eligible to earn additional year-end bonus compensation. From January 1 through December 31, 1995, Messrs. Walker and Lowenstein had been paid cash compensation from F.Y.I. of $150,000 and $130,000, respectively. EMPLOYMENT AGREEMENTS; COVENANTS-NOT-TO-COMPETE Mr. Bowman, Ms. Lebenberg and Mr. Barker entered into employment agreements with F.Y.I. dated as of November 1995, July 1996 and July 1996, respectively. Messrs. Walker and Lowenstein entered into employment agreements with F.Y.I. in December 1994 and February 1995, respectively. Messrs. Bellenghi, Melanson, Shaw and Leonard entered into employment agreements with the Company which commenced on the date of the Offering. Pursuant to such agreements, each of such persons receives an annual base salary and is eligible for additional year-end bonus compensation. Each employment agreement is for a term of three years and automatically renews at the end of its initial term (and each succeeding term) for an additional one year, unless terminated or not renewed by the Company or the employee. Each of the employment agreements provides that, in the event of a termination of employment by the Company without cause, such employee shall be entitled to receive from the Company such employee's then current salary for the greater of one year (two years in the case of Messrs. Bowman, Walker, Lowenstein and Ms. Lebenberg) or whatever period is remaining under the term of the agreement. In the event of a change in control of the Company, if the employee has not received notice 15 days prior to the event resulting in such change of control that such employee's employment will be continued by the successor to the Company, it shall be deemed a termination without cause, except that the amount of the lump-sum payment to be made to such employee shall be triple (150% in the case of Mr. Barker) the amount ordinarily due upon a termination without cause. In addition, in the event of a change in control of the Company, each employee may elect to terminate his employment agreement and receive 150% of the amount ordinarily due upon a termination without cause. Each employment agreement contains a covenant-not-to-compete with the Company for a period of two years following termination of employment, provided that: (i) in the event of a termination of employment by the Company without cause, the term of the covenant-not-to-compete contained in the employment agreement will be shortened to one year; and (ii) in the event of a change in control of the Company wherein the employee does not receive notice 15 days prior to the event resulting in such change of control of the continuation of such employee's employment, the covenant-not-to-compete shall not apply. If applicable law reduces the time period during which the employee is prohibited from competing with the Company, the covenant-not-to-compete shall be reduced to the maximum period permitted by law. STOCK OPTION PLAN In October 1995, the Board of Directors and F.Y.I.'s stockholders approved the Company's 1995 Stock Option Plan (the "Plan") which became effective on the date of the Offering. The purpose of the Plan is to provide directors, officers and key employees with additional incentives by increasing their ownership interests in the Company. Directors, officers and other key employees of the Company and its subsidiaries are eligible to participate in the Plan. Awards may also be granted to consultants providing valuable services to the Company. In addition, individuals who have agreed to become a key employee or consultant, and key employees and consultants of entities that are expected to become subsidiaries, are eligible for option grants, conditional in each case on actual employment, consultant or subsidiary status. Awards of options to purchase Common Stock may include incentive stock options ("ISOs") and/or non-qualified stock options ("NQSOs"). The Plan also provides for automatic option grants to directors who are not otherwise employed by the Company or its subsidiaries. Upon commencement of service (or upon agreeing to serve in the case of the initial non-employee directors), a non-employee director will receive a nonqualified option to purchase 10,000 shares of Common Stock, and continuing non-employee directors will receive annual options to purchase 5,000 shares of Common Stock. Options granted to non-employee directors become exercisable one-third on 42 43 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. The Company has outstanding nonqualified options to purchase a total of 403,670 shares of Common Stock granted in November 1995 at $13.00 per share (including options granted to non-employee directors of the Company). The outstanding options, other than those granted to non-employee directors, are generally exercisable after July 21, 1996 as to 20% of the underlying shares, and as to an additional 20% on each of the next four anniversaries of the date of option grant. In November 1995, the Company granted to Mr. Bowman and Mr. Barker warrants to purchase 100,000 and 15,000 shares of Common Stock, respectively, each at $10.00 per share. The warrants are exercisable as to 50% on January 26, 1998 and as to the remaining 50% on January 26, 1999. Since the Offering, the Company has granted additional options to purchase 76,000 shares of Common Stock to its key employees. In May 1996, the Company granted Mr. Bowman an additional warrant (the "Additional Warrant") to purchase 50,000 shares of Common Stock at $20.00 per share. The Additional Warrant is exercisable as to 50% on May 21, 1998 and as to the remaining 50% on May 21, 1999. Additional nonqualified options to purchase 70,000 shares of Common Stock were granted at fair market value at the date of grant in connection with the B&B and Premier acquisitions in May 1996, and nonqualified options to purchase 23,000 shares of Common Stock were granted at fair market value at the date of grant in connection with the Cook and Octo acquisitions in June 1996. In August 1996, additional nonqualified options to purchase 16,000 shares of Common Stock were granted at fair market value at the date of grant in connection with the Medical Record acquisition. No options were granted during fiscal year 1994. The following table sets forth certain information concerning the grant of options and warrants to purchase Common Stock of the Company to Mr. Bowman, Mr. Barker and Ms. Lebenberg. None of the other named executives has been granted options or warrants.
POTENTIAL REALIZABLE VALUE PERCENT OF AT ASSUMED ANNUAL RATES TOTAL OF STOCK PRICE APPRECIATION OPTIONS/ OPTIONS AND FOR OPTION/WARRANT TERM(1) WARRANT WARRANTS EXERCISE -------------------------------- NAME(5) GRANTED OUTSTANDING PRICE EXPIRATION DATE 0% 5% 10% - ----------------------------------------------- ----------- -------- --------------- -------- -------- ---------- Ed H. Bowman, Jr. (options)............ 80,000 10.6% $13.00 (2) $ -- $654,048 $1,657,496 Ed H. Bowman, Jr. (warrant)............ 100,000 13.3% $10.00 (3) $300,000 $874,960 $1,660,000 Ed H. Bowman, Jr. (warrant)............ 50,000 6.6% $20.00 (4) $ -- $407,100 $ 948,717 Timothy J. Barker (options)............ 15,000 2.0% $13.00 (2) $ -- $122,634 $ 310,780 Timothy J. Barker (warrant)............ 15,000 2.0% $10.00 (3) $ 45,000 $131,244 $ 249,000 Timothy J. Barker (options)............ 15,000 2.0% $17.00 (2) $ -- $160,368 $ 406,404 Margot T. Lebenberg (options).......... 45,000 6.0% $16.00 (2) $ -- $452,804 $1,147,495
- --------------- (1) These values have been determined based on assumed rates of appreciation and are not intended to forecast the possible future appreciation mandated by rules of the Commission, if any, of the price or value of the Company's Common Stock. (2) The options will expire 10 years from the date of grant. (3) Fifty percent of the warrants expire in 2003 and the remaining 50% of the warrants expire in 2004. (4) May 21, 2003. (5) Effective July 22, 1996, the Company's then Executive Vice President and Chief Financial Officer resigned. Under the terms of the separation agreement, the Company will pay the former Executive Vice President and Chief Financial Officer an aggregate of $195,000 payable as follows: $120,000 on August 19, 1996, $50,000 on January 30, 1997 and $25,000 on August 19, 1997. Furthermore, in addition to the options for 8,000 shares that vested, additional options for 22,000 shares were accelerated and vested. All of such options have been exercised. 43 44 OFFICER AND DIRECTOR LIABILITY Pursuant to the Company's Certificate of Incorporation and under Delaware law, directors of the Company are not liable to the Company or its stockholders for monetary damages for breach of fiduciary duty, except for liability in connection with a breach of duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases illegal under Delaware law or any transaction in which a director has derived an improper personal benefit. In accordance with Delaware law, the Company entered into indemnification agreements with its directors, pursuant to which it agreed to pay certain expenses, including attorneys' fees, judgments, fines and amounts paid in settlement incurred by such directors in connection with certain actions, suits or proceedings. These agreements require directors to repay the amount of any expenses advanced if it shall be determined that they shall not have been entitled to indemnification. The Company maintains liability insurance for the benefit of its directors and officers. 44 45 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to beneficial ownership of the Company's Common Stock by: (i) each person known to the Company to be the beneficial owner of 5% or more thereof; (ii) each director; (iii) each named executive officer; and (iv) all executive officers and directors as a group. The address of each person listed below is c/o F.Y.I. Incorporated, 3232 McKinney Avenue, Suite 900, Dallas, Texas 75204. All persons listed have sole voting and investment power with respect to their shares unless otherwise indicated.
COMMON STOCK BENEFICIALLY PERCENTAGE NAME OWNED OWNERSHIP --------------------------------------------------------- ------------ ---------- Greg Melanson............................................ 613,260 10.7% Thomas C. Walker......................................... 337,590 5.9 Jerral W. Jones Family Limited Partnership............... 301,420 5.3 David Lowenstein......................................... 265,250 4.6 Jonathan B. Shaw......................................... 265,198 4.6 Jerry F. Leonard, Jr..................................... 253,274 4.4 Michael J. Bradley(1).................................... 68,196 1.2 G. Michael Bellenghi..................................... 66,196 1.2 Donald F. Moorehead, Jr.(2).............................. 62,284 1.1 Ed H. Bowman, Jr.(3)..................................... 26,000 * Margot T. Lebenberg(4)................................... 9,200 * Timothy J. Barker(5)..................................... 7,000 * Hon. Edward M. Rowell(6)................................. 2,000 * All executive officers and directors as a group (12 persons)(7)............................................ 1,975,448 34.4%
- --------------- * Represents less than 1%. (1) Does not include 8,000 shares which may be acquired upon the exercise of options not exercisable within 60 days. (2) Does not include 8,000 shares which may be acquired upon the exercise of options not exercisable within 60 days. (3) Includes 10,000 shares which Mr. Bowman purchased directly from the Underwriters in the Offering and does not include 214,000 shares which may be acquired upon the exercise of options and warrants not exercisable within 60 days. (4) Includes 200 shares Ms. Lebenberg purchased directly from the Underwriters in the Offering and does not include 36,000 shares which may be acquired upon the exercise of options not exercisable within 60 days. (5) Includes 1,000 shares Mr. Barker purchased directly from the Underwriters in the Offering and does not include 39,000 shares which may be acquired upon the exercise of options and warrants not exercisable within 60 days. (6) Does not include 8,000 shares which may be acquired upon the exercise of options not exercisable within 60 days. (7) Includes 11,200 shares which Mr. Bowman, Ms. Lebenberg and Mr. Barker purchased directly from the Underwriters in the Offering and does not include 316,000 shares which may be acquired upon the exercise of options and warrants not exercisable within 60 days. 45 46 DESCRIPTION OF CAPITAL STOCK GENERAL The Company's authorized capital stock consists of 26,000,000 shares of Common Stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). As of August 30, 1996, the Company had outstanding 5,735,148 shares of Common Stock and no shares of Preferred Stock and had 42 record holders of Common Stock. After giving effect to the Company's pending acquisition (see "Recent Developments") the Company will have issued an additional 154,286 shares of Common Stock pursuant to this Registration Statement. COMMON STOCK The holders of Common Stock are entitled to one vote for each share on all matters voted upon by stockholders, including the election of directors. Subject to the rights of any then outstanding shares of Preferred Stock, the holders of the Common Stock are entitled to such dividends as may be declared in the discretion of the Board of Directors out of funds legally available therefore. See "Dividends." Holders of Common Stock are entitled to share ratably in the net assets of the Company upon liquidation after payment or provision for all liabilities and any preferential liquidation rights of any Preferred Stock then outstanding. The holders of Common Stock have no preemptive rights to purchase shares of stock of the Company. Shares of Common Stock are not subject to any redemption provisions and are not convertible into any other securities of the Company. All outstanding shares of Common Stock are, and the shares of Common Stock to be issued hereby will be upon payment therefor, fully paid and non-assessable. PREFERRED STOCK The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the Company's Certificate of Incorporation and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares and to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, in each case without any further action or vote by the stockholders. The Company has no current plans to issue any shares of Preferred Stock of any class or series. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. The issuance of shares of the Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Common Stock. STATUTORY BUSINESS COMBINATION PROVISION The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law ("Section 203"). Section 203 provides, with certain exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person or an affiliate, or associate of such person, who is an "interested stockholder" for a period of three years from the date that such person became an interested stockholder unless: (i) the transaction resulting in a person becoming an interested stockholder, or the 46 47 business combination, is approved by the Board of Directors of the corporation before the person becomes an interested stockholder; (ii) the interested stockholder acquired 85% or more of the outstanding voting stock of the corporation in the same transaction that makes such person an interested stockholder (excluding shares owned by persons who are both officers and directors of the corporation, and shares held by certain employee stock ownership plans); or (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation's board of directors and by the holders of at least 66 2/3% of the corporation's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. Under Section 203, an "interested stockholder" is defined as any person who is: (i) the owner of 15% or more of the outstanding voting stock of the corporation; or (ii) an affiliate or associate of the corporation and who was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder. A corporation may, at its option, exclude itself from the coverage of Section 203 by amending its certificate of incorporation or bylaws, by action of its stockholders, to exempt itself from coverage, provided that such bylaw or certificate of incorporation amendment shall not become effective until 12 months after the date it is adopted. The Company has not adopted such an amendment to its Certificate of Incorporation or By-laws. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is American Stock Transfer and Trust Company. 47 48 CERTAIN TRANSACTIONS ORGANIZATION OF THE COMPANY Between September 1994 and September 1995, F.Y.I. issued 1,205,682 shares of Common Stock at an aggregate purchase price of $1,225,000 to certain founding stockholders including Thomas C. Walker, David Lowenstein and Jerry Jones. In connection with the Acquisitions, and as consideration for their interests in the Founding Companies, certain officers, directors and holders of more than 5% of the outstanding shares of the Company received cash and shares of Common Stock of the Company as follows: Mr. Melanson -- $2,475,000 and 613,260 shares of Common Stock; Mr. Leonard -- $1,250,000 and 253,274 shares of Common Stock; Mr. Shaw -- $1,200,000 and 265,198 shares of Common Stock; Mr. Bellenghi -- $103,000 and 66,196 shares of Common Stock; and Mr. Bradley -- $103,000 and 66,196 shares of Common Stock. For a description of the transactions pursuant to which the Company was formed, see "Business -- Organization." The Company has repaid approximately $4,106,000 of indebtedness of the Founding Companies, of which approximately $2,212,000 directly or indirectly benefited officers, directors or greater than 5% stockholders of the Company as follows: Mr. Melanson -- approximately $417,000; Mr. Shaw -- approximately $155,000; Mr. Leonard -- approximately $1.2 million; Mr. Bellenghi -- $205,000; and Mr. Bradley -- $205,000. In each case, such person was previously either a direct obligor or a guarantor of such indebtedness. The Company has an option to acquire an additional start-up document management business owned by Mr. Melanson, and Mr. Melanson has an option to require the Company to purchase such business at such time as its annual pre-tax profits exceed $550,000. In either event, the consideration payable to Mr. Melanson will consist of the Company's Common Stock with a value equal to six times the amount of such pre-tax profits. For the six months ending June 30, 1996 the pre-tax earnings of such business was $267,000. WARRANT TO PURCHASE COMMON STOCK In November 1995, the Company granted to Mr. Bowman and Mr. Barker warrants to purchase 100,000 and 15,000 shares of Common Stock, respectively each at $10.00 per share. These warrants are exercisable as to 50% on January 26, 1998 and as to the remaining 50% on January 26, 1999. In May 1996, the Company granted to Mr. Bowman the Additional Warrant to purchase 50,000 shares of Common Stock at $20.00 per share. The Additional Warrant is exercisable as to 50% on May 21, 1998 and as to the remaining 50% on May 21, 1999. REAL ESTATE TRANSACTIONS Leonard leases two properties from Leonard Investments, a partnership consisting of Mr. Leonard and his father. The aggregate rental expenses for these properties were approximately $127,000, $126,000 and $127,000 for the three years ended December 31, 1993, 1994 and 1995, respectively. The Company also leases one other facility from Mr. Leonard's father. The rental expenses for this property were approximately $62,000 for each of the three years ended December 31, 1993, 1994 and 1995, respectively. The Company believes that the amounts paid for such properties do not exceed the fair market rental thereof. Researchers leases office facilities and certain equipment from Mr. Melanson. The total lease payments to Mr. Melanson were $187,000, $177,000 and $242,000 for the three years ended December 31, 1993, 1994 and 1995, respectively. Researchers is also required to pay the taxes and insurance on the properties. The Company believes that the amounts paid for such properties do not exceed the fair market rental thereof. CERTAIN LOANS At December 31, 1995, two companies in which Mr. Leonard and his relatives owned 78% and 33% of the outstanding shares, respectively, were obligated to Leonard in the amount of $259,000. COMPANY POLICY In the future, transactions with affiliates of the Company are anticipated to be minimal and will be approved by a majority of the Board of Directors, including a majority of the disinterested members of the 48 49 Board of Directors, and will be made on terms no less favorable to the Company than could be obtained from unaffiliated third parties. SHARES ELIGIBLE FOR FUTURE SALE The Company has outstanding 5,735,148 shares of Common Stock. The 2,185,000 shares sold in the Offering are freely tradeable without restriction unless purchased by affiliates of the Company. The 467,973 outstanding shares issued in connection with the B&B, Premier and Medical Record acquisitions are subject to contractual restrictions on the transfer therefor. Of such shares, 36,670 shares of Common Stock are held by a wholly-owned subsidiary of the Company. An additional 154,286 shares of Common Stock will be issued upon consummation of the pending acquisition of ZIA. These contractual restrictions generally expire two years from the date of issuance and may only be resold in compliance with Rule 145 under the Securities Act. None of the remaining 3,084,615 outstanding shares of Common Stock (collectively, the "Restricted Shares") has been registered under the Securities Act, which means that they may be resold publicly only upon registration under the Securities Act or in compliance with an exemption from the registration requirements of the Securities Act, including the exemption provided by Rule 144 thereunder. In general, under Rule 144 as currently in effect, if two years have elapsed since the later of the date of the acquisition of restricted shares of Common Stock from the Company or any affiliate of the Company, the acquiror or subsequent holder thereof may sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Common Stock, or the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the proposed sale is sent to the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If three years have elapsed since the later of the date of the acquisition of restricted shares of Common Stock from the Company or any affiliate of the Company, a person who is not deemed to have been an affiliate of the Company at any time for 90 days preceding a sale would be entitled to sell such shares under Rule 144 without regard to the volume limitations, manner of sale provisions or notice requirements. The former owners of the Founding Companies and the initial stockholders of the Company are contractually prohibited by the Company from selling such shares until at least January 26, 1998 (other than certain sales registered under the Securities Act). Sales of substantial amounts of the Common Stock in the public market could adversely affect prevailing market prices and the ability of the Company to raise equity capital in the future. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered by this Prospectus has been passed upon for the Company by Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, New York 10178. 49 50 EXPERTS The audited financial statements of F.Y.I.; Imagent Corporation and Related Company; Melanson and Associates, Inc. and Related Company; C. & T. Management Services, Inc. and Related Company; Leonard Archives, Inc.; Deliverex, Incorporated and Subsidiary and Related Company and Permanent Records, Inc. for the three years ended December 31, 1995, or the applicable fiscal year-ends included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports. The audited Combined Financial Statements of the Founding Companies for the three years ended December 31, 1995, included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report. In this report, Arthur Andersen LLP states that with respect to Recordex Services, Inc., as of and for the two years in the period ended December 31, 1994, its opinion is based on the report of other independent public accountants, namely Elko, Fischer, McCabe & Rudman, Ltd. The audited financial statements for Recordex Services, Inc. for the year ended December 31, 1995, included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report. The audited financial statements for Recordex Services, Inc. for the two years ended December 31, 1994, included in this Prospectus and elsewhere in the Registration Statement have been audited by Elko, Fischer, McCabe & Rudman, Ltd., independent public accountants, as indicated in their report with respect thereto. The financial statements are included herein in reliance upon the authority of said firms as experts in giving said reports. The financial statements of B & B Information and Image Management, Inc. as of December 31, 1994, and 1995, have been included herein in reliance on the report of C.W. Amos & Company, LLC, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in auditing and accounting. The financial statements of Premier Document Management, Inc. as of December 31, 1995, have been included herein in reliance on the report of Moss Adams LLP, independent public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in auditing and accounting. The financial statements of Robert A. Cook and Staff, Inc. for the three years ended December 31, 1995 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The financial statements of ZIA Information Analysis Group for the year ended December 31, 1995 included in this Prospectus and elsewhere in this Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The financial statements of C.M.R.S. Incorporated for the year ended February 29, 1996 included in this Prospectus and elsewhere in this Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The financial statements of Minnesota Medical Record Service, Inc. for the year ended September 30, 1995 included in this Prospectus and elsewhere in this Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The financial statements of Texas Medical Record Service, Inc. for the year ended February 29, 1996 included in this Prospectus and elsewhere in this Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included in reliance upon the authority of said firm as experts in giving said report. 50 51 ADDITIONAL INFORMATION The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained from the Commission at Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549, at prescribed rates. The Commission maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of that site is http://www.sec.gov. The Company has filed with the Commission, Washington, D.C., a Registration Statement under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to such Registration Statement and exhibits. A copy of the Registration Statement on file with the Commission may be obtained from the Commission's principal office in Washington, D.C. upon payment of the fees prescribed by the Commission. The Company's Common Stock is listed on the Nasdaq National Market. Proxy statements and other information concerning the Company can also be inspected at the offices of the Nasdaq National Market, 1735 K Street, Washington D.C. 20006. 51 52 INDEX TO FINANCIAL STATEMENTS
PAGE ----- F.Y.I. INCORPORATED Report of Independent Public Accountants........................................... F-4 Balance Sheet as of December 31, 1995 and Consolidated Balance Sheet as of June 30, 1996............................................................................ F-5 Consolidated Statements of Operations.............................................. F-6 Consolidated Statements of Cash Flows.............................................. F-7 Notes to Consolidated Financial Statements......................................... F-8 FOUNDING COMPANIES Report of Independent Public Accountants........................................... F-13 Report of Independent Public Accountants........................................... F-14 Combined Balance Sheets............................................................ F-15 Combined Statements of Operations.................................................. F-16 Combined Statements of Stockholders' Equity........................................ F-17 Combined Statements of Cash Flows.................................................. F-18 Notes to Combined Financial Statements............................................. F-19 IMAGENT CORPORATION AND RELATED COMPANY Report of Independent Public Accountants........................................... F-32 Combined Balance Sheets............................................................ F-33 Combined Statements of Operations.................................................. F-34 Combined Statements of Stockholders' Equity........................................ F-35 Combined Statements of Cash Flows.................................................. F-36 Notes to Combined Financial Statements............................................. F-37 MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY Report of Independent Public Accountants........................................... F-42 Combined Balance Sheets............................................................ F-43 Combined Statements of Operations.................................................. F-44 Combined Statements of Stockholders' Equity........................................ F-45 Combined Statements of Cash Flows.................................................. F-46 Notes to Combined Financial Statements............................................. F-47 RECORDEX SERVICES, INC. Report of Independent Public Accountants........................................... F-53 Report of Independent Public Accountants........................................... F-54 Balance Sheets..................................................................... F-55 Statements of Operations........................................................... F-56 Statements of Changes in Stockholder's Equity...................................... F-57 Statements of Cash Flows........................................................... F-58 Notes to Financial Statements...................................................... F-59 LEONARD ARCHIVES, INC. Report of Independent Public Accountants........................................... F-65 Balance Sheets..................................................................... F-66 Statements of Operations........................................................... F-67 Statements of Stockholders' Equity................................................. F-68 Statements of Cash Flows........................................................... F-69 Notes to Financial Statements...................................................... F-70
F-1 53
PAGE ----- C. & T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY Report of Independent Public Accountants........................................... F-76 Combined Balance Sheets............................................................ F-77 Combined Statements of Operations.................................................. F-78 Combined Statements of Stockholders' Equity........................................ F-79 Combined Statements of Cash Flows.................................................. F-80 Notes to Combined Financial Statements............................................. F-81 DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY Report of Independent Public Accountants........................................... F-86 Combined Balance Sheets............................................................ F-87 Combined Statements of Operations.................................................. F-88 Combined Statements of Stockholders' Equity........................................ F-89 Combined Statements of Cash Flows.................................................. F-90 Notes to Combined Financial Statements............................................. F-91 PERMANENT RECORDS, INC. Report of Independent Public Accountants........................................... F-97 Balance Sheets..................................................................... F-98 Statements of Operations........................................................... F-99 Statements of Stockholders' Equity................................................. F-100 Statements of Cash Flows........................................................... F-101 Notes to Financial Statements...................................................... F-102 NEW ACQUISITIONS COOK AND STAFF, INC. AND RELATED COMPANY Report of Independent Public Accountants........................................... F-105 Combined Balance Sheets............................................................ F-106 Combined Statements of Operations.................................................. F-107 Combined Statements of Stockholder's Equity........................................ F-108 Combined Statements of Cash Flows.................................................. F-109 Notes to Combined Financial Statements............................................. F-110 B&B INFORMATION AND IMAGE MANAGEMENT, INC. Report of Independent Public Accountants........................................... F-113 Balance Sheets..................................................................... F-114 Statements of Operations........................................................... F-115 Statements of Stockholder's Equity................................................. F-116 Statements of Cash Flows........................................................... F-117 Notes to Financial Statements...................................................... F-118 PREMIER DOCUMENT MANAGEMENT, INC. Report of Independent Public Accountants........................................... F-122 Combined Balance Sheets............................................................ F-123 Combined Statements of Operations.................................................. F-124 Combined Statements of Stockholders' Equity........................................ F-125 Combined Statements of Cash Flows.................................................. F-126 Notes to Combined Financial Statements............................................. F-127 C.M.R.S. INCORPORATED Report of Independent Public Accountants........................................... F-132 Balance Sheets..................................................................... F-133 Statements of Operations........................................................... F-134 Statements of Stockholder's Equity................................................. F-135 Statements of Cash Flows........................................................... F-136 Notes to Financial Statements...................................................... F-137
F-2 54
PAGE ----- MINNESOTA MEDICAL RECORD SERVICE, INC. Report of Independent Public Accountants........................................... F-141 Balance Sheets..................................................................... F-142 Statements of Operations........................................................... F-143 Statements of Stockholder's Equity................................................. F-144 Statements of Cash Flows........................................................... F-145 Notes to Financial Statements...................................................... F-146 TEXAS MEDICAL RECORD SERVICE, INC. Report of Independent Public Accountants........................................... F-149 Balance Sheets..................................................................... F-150 Statements of Operations........................................................... F-151 Statements of Stockholders' Equity................................................. F-152 Statements of Cash Flows........................................................... F-153 Notes to Financial Statements...................................................... F-154 ZIA INFORMATION ANALYSIS GROUP Report of Independent Public Accountants........................................... F-157 Balance Sheets..................................................................... F-158 Statements of Operations........................................................... F-159 Statements of Stockholders' Equity................................................. F-160 Statements of Cash Flows........................................................... F-161 Notes to Financial Statements...................................................... F-162 PRO FORMA FINANCIAL STATEMENTS F.Y.I. INCORPORATED AND SUBSIDIARIES Pro Forma Balance Sheet -- June 30, 1996 (unaudited)............................... F-168 Pro Forma Statement of Operations for the Year Ended December 31, 1995 (unaudited)..................................................................... F-169 Pro Forma Statement of Operations for the Six Months Ended June 30, 1996 (unaudited)..................................................................... F-170 Notes to Pro Forma Financial Statements (unaudited)................................ F-171
F-3 55 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To F.Y.I. Incorporated: We have audited the accompanying balance sheet of F.Y.I. Incorporated (a Delaware corporation) as of December 31, 1995. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of F.Y.I. Incorporated as of December 31, 1995, in accordance with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996 F-4 56 F.Y.I. INCORPORATED AND SUBSIDIARIES BALANCE SHEET AS OF DECEMBER 31, 1995 AND CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, JUNE 30, 1995 1996 ------------ ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents......................................... $ 52 $ 2,521 Accounts receivable and notes receivable, less allowance.......... -- 12,107 Accounts receivable, officers and employees....................... -- 12 Inventory......................................................... -- 536 Prepaid expenses and other current assets......................... 52 678 ------ ------- Total current assets...................................... 104 15,854 PROPERTY, PLANT AND EQUIPMENT, net.................................. 15 8,995 GOODWILL, DEFERRED OFFERING COSTS AND OTHER INTANGIBLES............. 2,190 18,516 ACCOUNTS RECEIVABLE, OFFICER-LONG TERM.............................. -- 570 OTHER NONCURRENT ASSETS............................................. 6 1,760 ------ ------- Total assets.............................................. $2,315 $45,695 ====== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities.......................... $1,101 $10,263 Short-term obligations............................................ -- 1,049 Current maturities of long-term obligations....................... -- 282 ------ ------- Total current liabilities................................. 1,101 11,594 LONG-TERM OBLIGATIONS, net of current maturities......................................... -- 11,071 DEFERRED INCOME TAXES, net of current portion............................................ -- 114 ------ ------- Total liabilities......................................... 1,101 22,779 ------ ------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, Series A, $.01 par value, 1,000,000 and 0 shares authorized, 9,000 and 0 shares issued and outstanding at December 31, 1995 and June 30, 1996, respectively.............. -- -- Preferred stock, $.01 par value, 1,000,000 shares authorized, 0 shares issued and outstanding.................................. -- -- Common stock, $.01 par value, 26,000,000 shares authorized, 663,125 and 5,522,867 shares issued and outstanding at December 31, 1995 and June 30, 1996, respectively....................... 7 55 Additional paid-in-capital........................................ 1,207 21,488 Retained earnings................................................. -- 1,373 ------ ------- Total stockholders' equity................................ 1,214 22,916 ------ ------- Total liabilities and stockholders' equity........... $2,315 $45,695 ====== =======
The accompanying notes are an integral part of these financial statements. F-5 57 F.Y.I. INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) (SEE NOTE 1)
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ----------------- ----------------- 1995 1996 1995 1996 ------ ------- ------ ------- REVENUE: Service revenue........................................ $ -- $14,307 $ -- $21,714 Product revenue........................................ -- 1,727 -- 2,640 Other revenue.......................................... -- 204 -- 297 ------ ------- ------ ------- Total revenue.................................. -- 16,238 -- 24,651 COST OF SERVICES......................................... -- 8,929 -- 13,630 COST OF PRODUCTS SOLD.................................... -- 1,255 -- 1,974 DEPRECIATION............................................. -- 421 -- 633 ------ ------- ------ ------- Gross profit................................... -- 5,633 -- 8,414 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............................................... -- 3,925 -- 6,169 AMORTIZATION............................................. -- 63 -- 72 ------ ------- ------ ------- Operating income............................... -- 1,645 -- 2,173 OTHER (INCOME) EXPENSE: Interest expense....................................... -- 104 -- 117 Interest income........................................ -- (74) -- (180) Other income, net...................................... -- (21) -- (60) ------ ------- ------ ------- Income before income taxes..................... -- 1,636 -- 2,296 PROVISION FOR INCOME TAXES............................... -- 661 -- 923 ------ ------- ------ ------- NET INCOME............................................... $ -- $ 975 $ -- $ 1,373 ====== ======= ====== ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............... -- 5,454 -- 5,335 ====== ======= ====== ======= NET INCOME PER COMMON SHARE.............................. $ -- $ 0.18 $ -- $ 0.26 ====== ======= ====== =======
The accompanying notes are an integral part of these financial statements. F-6 58 F.Y.I. INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) (SEE NOTE 1)
SIX MONTHS ENDED --------------------- JUNE 30, JUNE 30, 1995 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................. $ -- $ 1,373 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization............................ -- 705 Change in operating assets and liabilities: Accounts receivable............................................... -- 104 Inventory......................................................... -- (20) Prepaid expenses and other assets................................. -- 100 Accounts payable and accrued liabilities.......................... -- (578) -------- -------- Net cash provided by operating activities...................... -- 1,684 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment.............................. (1) (1,078) Cash paid for acquisitions, net of cash received....................... -- (20,749) -------- -------- Net cash used for investing activities......................... (1) (21,827) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock issuance, net of underwriting discounts and other costs......................................................... (280) 23,088 Proceeds from preferred stock issuance................................. 135 -- Proceeds from short-term obligations................................... -- 1,000 Proceeds from long-term obligations.................................... -- 8,150 Cash paid for debt issuance costs...................................... -- (1,487) Principal payments on short-term obligations........................... -- (1,857) Principal payments on long-term obligations............................ -- (6,282) -------- -------- Net cash (used in) provided by financing activities............ (145) 22,612 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..................... (146) 2,469 CASH AND CASH EQUIVALENTS, beginning of period........................... 669 52 -------- -------- CASH AND CASH EQUIVALENTS, end of period................................. $ 523 $ 2,521 ====== ========
The accompanying notes are an integral part of these financial statements. F-7 59 F.Y.I. INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION: F.Y.I. Incorporated (the "Company" or "F.Y.I.") was founded in September 1994 to create a national, single-source provider of document management services to three primary client segments: healthcare institutions, professional services firms and financial institutions. In January 1996, F.Y.I. acquired (the "Acquisitions"), simultaneously with the closing of its initial public offering (the "Offering") on January 23, 1996, seven document management services businesses (the "Founding Companies"). The Founding Companies are headquartered in San Francisco (2), San Jose, Fort Worth, Detroit, Malvern (Philadelphia) and Baltimore, and operate in over 23 states. The consideration for the Founding Companies consisted of a combination of cash and common stock (the "Common Stock") of F.Y.I. Between September 1994 and the consummation of the Offering and the Acquisitions, F.Y.I. did not conduct any significant operations. For accounting purposes and for the purposes of the presentation of the financial statements herein, January 31, 1996 has been used as the effective date of the Acquisitions. Accordingly, the actual operating results of the Company included in the Statement of Operations for the six months ended June 30, 1996, represent the five months of operations subsequent to the consummation of the Acquisitions. Supplemental Statement of Operations Data for the six months ended June 30, 1996 is presented in Note 2 herein. In the opinion of F.Y.I.'s management, the accompanying consolidated financial statements include the accounts of the Company and all adjustments necessary to present fairly the Company's financial position at June 30, 1996, its results of operations for the three and six months ended June 30, 1995 and 1996, and its cash flows for the six months ended June 30, 1995 and 1996. All significant intercompany accounts have been eliminated. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). These consolidated financial statements should be read in conjunction with the combined financial statements of the Founding Companies and the related notes thereto in F.Y.I.'s Annual Report on Form 10-K filed with the Commission on April 10, 1996, as amended by F.Y.I.'s Annual Report on Form 10-K/A filed with the Commission on April 29, 1996, and the Company's Current Report on Form 8-K filed June 14, 1996, as amended by the Current Report on Form 8-K/A filed July 5, 1996. The results of operations for the interim periods ended June 30, 1996 and 1995, may not be indicative of the results for the full year. 2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND THE ACQUISITIONS INITIAL PUBLIC OFFERING On January 26, 1996, the Company completed the Offering of 2,185,000 shares of Common Stock (including the exercise of the underwriters' over-allotment option) at $13.00 per share. Proceeds from the Offering, net of underwriting commissions and offering costs, were approximately $23.1 million. Of these net proceeds, approximately $7.1 million was used to pay a portion of the consideration for the Acquisitions, approximately $7.7 million was used to retire certain indebtedness of the Founding Companies, approximately $8.0 million was used for acquisitions subsequent to the Offering, and $0.3 million was used as working capital. Upon the closing of the Offering, the Company converted the 9,000 shares of Series A Preferred Stock then outstanding into 542,557 shares of Common Stock. ACQUISITIONS OF THE FOUNDING COMPANIES Simultaneously with the closing of the Offering, the Company acquired the Founding Companies. The aggregate consideration paid by F.Y.I. to acquire the Founding Companies was approximately $35 million, F-8 60 F.Y.I. INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) consisting of: (i) $7,059,000 in cash; (ii) 1,878,933 shares of Common Stock; (iii) the assumption and repayment of approximately $191,000 of indebtedness owed by a Founding Company stockholder; and (iv) the distribution of cash and certain receivables to certain Founding Company stockholders of S corporations in the amount of $3,450,000, representing the undistributed retained earnings of S corporations, upon which taxes have been paid by the stockholders. The Acquisitions have been accounted for in accordance with generally accepted accounting principles ("GAAP") as a combination of F.Y.I. and the Founding Companies at historical cost, because: (i) the Founding Companies' stockholders transferred assets to F.Y.I. in exchange for Common Stock and cash simultaneously, with the Offering; (ii) the nature of future operations of the Company will be substantially identical to the combined operations of the Founding Companies; and (iii) no former stockholder group of any of the Founding Companies obtained a majority of the outstanding voting shares of the Company. SUPPLEMENTAL DATA Statement of Operations -- Supplemental Data The Statement of Operations Data for the six months ended June 30, 1995 represent the audited combined statement of operations of the Founding Companies for the period adjusted to give effect to: (i) compensation levels the officers and owners have agreed to receive subsequent to the Offering; and (ii) provision for income taxes as if all entities had been subject to federal and state income taxes for the period. The Supplemental Statement of Operations Data for the six months ended June 30, 1996 represent a combination of: (i) the unaudited results of the combined Founding Companies for the one month of operations prior to the consummation of the Acquisitions; and (ii) the unaudited results of F.Y.I. Incorporated and Subsidiaries for the five months subsequent to the consummation of the Acquisitions (which includes acquisitions subsequent to the Offering from the date of their respective acquisition). The Supplemental Data are provided for information purposes only and do not purport to present the results of F-9 61 F.Y.I. INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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.
SUPPLEMENTAL DATA SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 1995 1996 ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Service revenue............................................. $ 20,207 $ 25,201 Product revenue............................................. 3,187 3,035 Other revenue............................................... 435 331 ------- ------- Total revenue....................................... 23,829 28,567 Cost of services............................................ 12,729 15,826 Cost of products sold....................................... 2,604 2,281 Depreciation................................................ 584 723 ------- ------- Gross profit........................................ 7,912 9,737 Selling, general and administrative expenses(a)............. 5,053 6,983 Amortization................................................ 32 78 ------- ------- Operating income.................................... 2,827 2,676 Interest and other expenses (income), net................... 99 (168) ------- ------- Income before income taxes.................................. 2,728 2,844 Provision for income taxes(b)............................... 1,024 1,144 ------- ------- Net income.................................................. $ 1,704 $ 1,700 ======= ======= Net income per share........................................ $ 0.32 ======= Weighted average shares outstanding......................... 5,335
- --------------- (a) Adjusted for Founding Company pro forma Compensation Differential of $897 for 1995 and $683 for 1996. (b) Adjusted for pro forma provision for taxes of $887 for 1995 and $351 for 1996. WEIGHTED AVERAGE SHARES OUTSTANDING The number of shares (in thousands) used in calculating net income per share was determined as follows:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 1996 1996 ------------ ---------- Outstanding F.Y.I. shares after the Offering and the acquisitions of the Operating Companies..................... 5,438 5,319 Warrants to purchase stock under the treasury stock method.... 16 16 ----- ----- Number of shares used in net income per share calculation....................................... 5,454 5,335 ===== =====
3. BUSINESS COMBINATIONS Since the Offering, the Company has acquired six additional businesses (together with the Founding Companies, the "Operating Companies") which provide document management services and are headquar- F-10 62 F.Y.I. INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) tered in Washington, D.C., Baltimore (2), San Jose, Sacramento, and Seattle. All of the acquisitions are accounted for under the purchase method of accounting. In May 1996, the Company acquired the stock of B&B Information and Image Management, Inc. ("B&B") and Premier Document Management, Inc. and PDM Services, Inc. ("Premier"). In June 1996, the Company acquired all of the non-cash assets of Robert A. Cook and Staff, Inc. and RAC Services, Inc. ("Cook"). B&B, Premier and Cook are considered significant subsidiaries of the Company. The aggregate consideration paid for B&B, Premier and Cook consisted of $15,522,000 in cash and 253,252 shares of Common Stock. The preliminary allocation of the purchase price is set forth below: Consideration Paid...................................................... $18,979,000 Estimated Fair Value of Tangible Assets................................. 8,133,000 Estimated Fair Value of Liabilities..................................... 5,739,000 Goodwill................................................................ 16,585,000
The fair market value of the shares of Common Stock used in calculating the consideration paid was $13.65, which represents a 35% discount from the average trading price of the Common Stock based on the length and type of restrictions in the purchase agreements. The Company acquired substantially all of the assets of Sacramento Valley Records Management Co. ("Sacramento") in February 1996; Microfilm Associated, Ltd. ("Microfilm") in February 1996 and Octo, Incorporated ("Octo") in June 1996. The aggregate consideration paid for Sacramento, Microfilm and Octo consisted of $1,567,000 in cash. The preliminary allocation of the purchase price is set forth below: Consideration Paid....................................................... $1,567,000 Estimated Fair Value of Tangible Assets.................................. 637,000 Estimated Fair Value of Liabilities...................................... 318,000 Goodwill................................................................. 1,248,000
The estimated fair market values reflected above are based on preliminary estimates and assumptions and are subject to revision. In management's opinion, the preliminary allocation is not expected to be materially different than the final allocation. All intangibles are considered enterprise goodwill. Based on the historical profitability of the purchased companies and trends in the legal, healthcare and other industries to outsource document management functions in the foreseeable future, the enterprise goodwill will be amortized over a period of 30 years. Management continually evaluates whether events and circumstances indicate that the remaining estimated useful life of intangible assets may warrant revisions or that the remaining balance of intangibles or other long-lived assets may not be recoverable. To make this evaluation, management uses an estimate of undiscounted net income over the remaining life of the intangibles or other long-lived assets. The goodwill associated with the B&B and Premier acquisitions is not deductible for income tax purposes. Set forth below is a pro forma income statement for the six months ended June 30, 1996 and for the year ended December 31, 1995. The unaudited pro forma data give effect to: (i) the acquisitions of B&B, Premier and Cook; (ii) the acquisitions of the Founding Companies; and (iii) compensation and tax adjustments for all transactions as if the transactions had occurred on January 1, 1995. The acquisitions of Sacramento, F-11 63 F.Y.I. INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Microfilm and Octo have not been included in the pro forma financial statements for periods prior to their acquisition date as the effect is immaterial.
PRO FORMA YEAR ENDED PRO FORMA DECEMBER 31, SIX MONTHS ENDED 1995 JUNE 30, 1996 ------------ ---------------- Revenue................................................ $ 70,681 $ 38,330 Income before income taxes............................. 7,667 4,514 Net income............................................. 4,737 2,702 Net income per common share............................ $ 0.86 $ 0.49 Average shares outstanding............................. 5,539 5,539 ======= =======
4. CREDIT FACILITY In April 1996, the Company and its subsidiaries entered into a credit agreement, as amended (the "Line of Credit"), with Banque Paribas, as agent, and the lenders named therein. Under the Line of Credit, the Company and its subsidiaries may borrow on a revolving credit basis, loans in an aggregate outstanding principal amount up to $35.0 million from time to time under the secured revolving credit and acquisition facility, subject to certain customary borrowing capacity requirements. The Company and its subsidiaries may borrow up to an aggregate $30.0 million of term loans under the Credit Agreement for acquisitions under prescribed conditions. The Company and its subsidiaries may borrow revolving credit loans up to an aggregate $5.0 million under the Credit Agreement for working capital and general corporate purposes. The commitment to fund revolving credit loans expires April 14, 2001. The commitment to fund term loans expires October 15, 1997. The annual interest rate applicable to borrowings under this facility is, at the option of the Company, (i) 1.50% plus the prime rate or (ii) 3.00% plus the Eurodollar rate. The Credit Agreement requires mandatory prepayments in certain circumstances. The outstanding principal balance of term loans as of October 15, 1997, shall thereafter be due and payable in 14 equal quarterly payments beginning January 15, 1998, and ending April 15, 2001. The outstanding principal balance of revolving credit loans shall be due and payable on April 15, 2001. As of September 4, 1996, the Company had $3.0 million in borrowings outstanding under this facility for working capital and corporate purposes, and $13.3 million in commitments outstanding under the term loans for acquisitions. F-12 64 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To F.Y.I. Incorporated: We have audited the accompanying combined balance sheets of the Founding Companies (Note 1) as of December 31, 1994 and 1995, and the related combined statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We did not audit the financial statements of Recordex Services, Inc., as of and for the two years in the period ended December 31, 1994 which statements reflect total assets of 14% of the combined totals as of December 31, 1994, and total revenues of 14% and 16% of the combined totals for each of the two years in the period ended December 31, 1994. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Founding Companies as of December 31, 1994 and 1995, and the results of their combined operations and their combined cash flows for each of the three years in the period ended December 31, 1995, in accordance with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996 F-13 65 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors Recordex Services, Inc. Malvern, Pennsylvania We have audited the accompanying balance sheet of Recordex Services, Inc. (a wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1994, and the related statements of operations, changes in stockholder's equity, and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Recordex Services, Inc. (a wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1994, and the results of its operations and its cash flows for the two years then ended in conformity with generally accepted accounting principles. ELKO, FISCHER, McCABE & RUDMAN, LTD. Certified Public Accountants Media, Pennsylvania September 15, 1995 F-14 66 FOUNDING COMPANIES COMBINED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------ 1994 1995 ------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................... $ 1,056 $ 1,742 Accounts and notes receivable, less allowance for doubtful accounts and notes of $677 and $562, respectively............................. 7,802 7,939 Accounts receivable, officer and employee............................... 971 692 Accounts receivable, affiliates......................................... 280 279 Inventory............................................................... 257 331 Current portion of deferred income taxes................................ 78 24 Prepaid and other current assets........................................ 216 320 ------- ------- Total current assets............................................ 10,660 11,327 ------- ------- PROPERTY AND EQUIPMENT, net............................................... 6,142 6,467 INTANGIBLE ASSETS, net of accumulated amortization of $17 and $82, respectively............................................ 836 770 ACCOUNTS RECEIVABLE, OFFICERS -- LONG-TERM................................ 795 890 OTHER NONCURRENT ASSETS................................................... 262 193 NOTES RECEIVABLE, LONG-TERM............................................... 435 34 ------- ------- Total assets.................................................... $19,130 $19,681 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities................................ $ 5,674 $ 5,587 Short-term obligations.................................................. 1,970 1,430 Current maturities of long-term obligations............................. 715 1,250 Officers payable -- short-term.......................................... 520 1,064 Unearned revenue........................................................ 377 333 Current portion of deferred income taxes................................ -- -- ------- ------- Total current liabilities....................................... 9,256 9,664 ------- ------- LONG-TERM OBLIGATIONS, net of current..................................... 3,107 2,738 LONG-TERM OBLIGATIONS -- AFFILIATES, net of current....................... 43 19 LONG-TERM OBLIGATIONS -- OFFICERS, net of current......................... 35 20 DEFERRED INCOME TAXES..................................................... 229 129 OTHER NONCURRENT LIABILITIES.............................................. 50 -- ------- ------- Total liabilities............................................... 12,720 12,570 ------- ------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock (Note 9)................................................... 173 173 Additional paid-in capital.............................................. 775 775 Retained earnings....................................................... 5,463 6,163 ------- ------- 6,411 7,111 Less -- Treasury stock, 10,000 shares in 1994, no par, $1,000 assigned value................................................ 1 -- ------- ------- Total stockholders' equity...................................... 6,410 7,111 ------- ------- Total liabilities and stockholders' equity...................... $19,130 $19,681 ======= =======
The accompanying notes are an integral part of these combined financial statements. F-15 67 FOUNDING COMPANIES COMBINED STATEMENTS OF OPERATIONS (NOTE 1) (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- REVENUES: Service revenue............................................. $32,067 $36,081 $40,615 Product revenue............................................. 5,123 5,923 6,138 Other revenue............................................... 1,206 1,028 873 ------- ------- ------- Total revenue....................................... 38,396 43,032 47,626 COST OF SERVICES.............................................. 20,318 23,650 25,937 COST OF PRODUCTS SOLD......................................... 4,464 4,892 4,972 DEPRECIATION.................................................. 883 1,055 1,238 ------- ------- ------- Gross profit........................................ 12,731 13,435 15,479 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES................. 11,045 11,836 12,489 ------- ------- ------- Operating income.................................... 1,686 1,599 2,990 OTHER (INCOME) EXPENSE: Interest expense............................................ 339 388 492 Interest income............................................. (40) (84) (139) Other....................................................... (51) (275) (214) ------- ------- ------- Income before income taxes.......................... 1,438 1,570 2,851 PROVISION FOR INCOME TAXES.................................... 218 211 163 ------- ------- ------- NET INCOME.................................................... $ 1,220 $ 1,359 $ 2,688 ======= ======= ======= PRO FORMA DATA (Unaudited -- See Note 3): HISTORICAL NET INCOME......................................... $ 1,220 $ 1,359 $ 2,688 PRO FORMA COMPENSATION DIFFERENTIAL........................... 1,715 1,855 1,976 PRO FORMA PROVISION FOR INCOME TAXES.......................... 1,043 1,045 1,631 ------- ------- ------- PRO FORMA NET INCOME.......................................... $ 1,892 $ 2,169 $ 3,033 ======= ======= ======= PRO FORMA NET INCOME PER COMMON SHARE......................... $ .52 $ .60 $ .83 ======= ======= ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................................................. 3,644 3,644 3,644 ======= ======= =======
The accompanying notes are an integral part of these combined financial statements. F-16 68 FOUNDING COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 1) (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK TREASURY STOCK TREASURY ---------------- PAID-IN RETAINED ---------------- STOCK TOTAL SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT SUBSCRIBED EQUITY ------- ------ ------- -------- ------- ------ ---------- ------- BALANCE, December 31, 1992....... 208,109 $173 $ 775 $ 3,850 10,000 $ (1) $ -- $ 4,797 Dividends declared............. -- -- -- (823) -- -- -- (823) Adjustment to conform fiscal year-ends of certain combined companies.................... -- -- -- 29 -- -- -- 29 Net income..................... -- -- -- 1,220 -- -- -- 1,220 ------- ---- ----- ------- ------- ---- ---- ------- BALANCE, December 31, 1993....... 208,109 173 775 4,276 10,000 (1) -- 5,223 Dividends declared............. -- -- -- (401) -- -- -- (401) Adjustment to conform fiscal year-ends of certain combined companies........... -- -- -- 229 -- -- -- 229 Net income..................... -- -- -- 1,359 -- -- -- 1,359 ------- ---- ----- ------- ------- ---- ---- ------- BALANCE, December 31, 1994....... 208,109 173 775 5,463 10,000 (1) -- 6,410 Reissuance of treasury stock... -- -- -- -- (10,000) 1 (1) -- Dividends declared............. -- -- -- (2,032) -- -- -- (2,032) Adjustment to conform fiscal year-ends of certain combined companies.................... -- -- -- 44 -- -- 1 45 Net income..................... -- -- -- 2,688 -- -- -- 2,688 ------- ---- ----- ------- ------- ---- ---- ------- BALANCE, December 31, 1995....... 208,109 $173 $ 775 $ 6,163 -- $ -- $ -- $ 7,111 ======= ==== ===== ======= ======= ==== ==== =======
The accompanying notes are an integral part of these combined financial statements. F-17 69 FOUNDING COMPANIES COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FISCAL YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 1,220 $ 1,359 $ 2,688 Adjustment to reconcile net income to net cash provided by operating activities- Amortization and depreciation.......................... 995 1,115 1,302 Loss (gain) on sale-retirement of assets............... -- (38) (3) Loss on investment..................................... -- 17 -- Deferred tax expense (benefit)......................... 39 (555) (60) Changes in operating assets and liabilities- Accounts receivable................................. (446) (1,058) 220 Prepaid expenses and other assets................... (54) (142) (53) Stockholder receivable.............................. -- (272) 331 Inventory........................................... (164) 171 (74) Accounts payable.................................... 557 1,366 (162) Unearned revenue.................................... 74 94 (44) Other.................................................. 77 (46) (62) ------- ------- ------- Net cash provided by operating activities...... 2,298 2,011 4,083 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment................... (1,119) (1,734) (1,423) Sale of property, plant and equipment....................... 40 203 76 Purchase of intangibles..................................... -- (438) -- Other, net.................................................. (70) (4) -- ------- ------- ------- Net cash used for investing activities......... (1,149) (1,973) (1,347) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on short-term obligations................ (425) (578) (2,063) Principal payments on long-term obligations................. (1,802) (443) (704) Proceeds from short-term borrowing.......................... 427 1,068 1,825 Proceeds from long-term borrowings.......................... 1,605 316 642 Borrowings (payments) on line of credit..................... 155 38 219 Payment of dividends........................................ (823) (401) (2,032) Advances to parent.......................................... (352) (98) -- Other, net.................................................. -- 78 55 Net change in cash due to conforming fiscal year-end........ (13) (104) 8 ------- ------- ------- Net cash used for financing activities......... (1,228) (124) (2,050) ------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (79) (86) 686 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................................................... 1,221 1,142 1,056 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 1,142 $ 1,056 $ 1,742 ======= ======= ======= SUPPLEMENTAL DATA: Interest paid............................................... $ 334 $ 379 $ 486 Income taxes paid........................................... 55 67 296 NONCASH TRANSACTIONS: Equipment acquired through capital lease obligations........ 117 310 $ 225 Sale of investment.......................................... -- 13 -- Acquisition of intangible assets with debt.................. -- 414 -- Note receivable received in connection with sale of building................................................. 550 -- --
The accompanying notes are an integral part of these combined financial statements. F-18 70 FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Concurrently with the initial public offering of its common stock (the "Offering"), F.Y.I. Incorporated ("FYI") will merge with the following seven companies (the "Founding Companies"): Imagent Corporation and Mobile Information Services ("Imagent"); Melanson and Associates, Inc. ("Melanson") dba Researchers and Bay Area Micrographics ("Researchers"); Recordex Services, Inc. (a wholly owned subsidiary of Paragon Management Group, Inc.) ("Recordex"); C.&T. Management Services, Inc. dba DPAS, and Qualidata, Inc. dba The Mail House ("DPAS"); Leonard Archives, Inc. ("Leonard"); Deliverex, Incorporated ("DLX") and Peninsula Records Management, a wholly owned subsidiary of DLX ("PRM"), and an affiliate, ASK Record Management, Inc. ("ASK") (collectively "Deliverex"); and Permanent Records, Inc. ("Permanent"). The merger will be effected by FYI through issuance of its common stock and cash. The Founding Companies are providers of document management services to three primary client groups: healthcare institutions, professional services firms, and financial institutions. 2. BASIS OF PRESENTATION: Simultaneously with the closing of the Offering, FYI and separate wholly owned subsidiaries of FYI will merge with the Founding Companies (the "Mergers"). The accompanying combined financial statements and related notes represent the combined financial position, results of operations, and cash flows of the Founding Companies excluding FYI without giving effect to the Mergers and the Offering. The assets and liabilities of the Founding Companies are reflected at their historical amounts. The Founding Companies were not under common control or management during any of the periods presented. Melanson has previously reported on a fiscal year ending July 31. As such, the accounts of Melanson for its 1993 fiscal year has been combined with the accounts of the other Founding Companies for the year ended December 31, 1993. The fiscal 1994 and 1995 accounts of Melanson have been recast to a December 31 year-end and have been combined with the accounts of the other Founding Companies for the years ended December 31, 1994 and 1995. The exclusion of Melanson's net income for the period from August 1 through December 31, 1993, of $229,000 is reflected as an adjustment to retained earnings in the December 31, 1994, combined statement of stockholders' equity. The results of operations related to the adjustment to retained earnings for Melanson included revenues of $3,820,000 and costs and expenses of $3,591,000 from August 1, through December 31, 1993. Deliverex's affiliate, ASK, has previously reported on a fiscal year ending December 31. DLX and PRM have previously reported on a fiscal year ending September 30. The 1995 accounts of DLX and PRM have been recast to a December 31 year-end and have been combined with the accounts of the other Founding Companies for the year ended December 31, 1995. The exclusion of DLX and PRM's net income for the period from October 1 through December 31, 1994, of $44,000 is reflected as an adjustment to retained earnings in the December 31, 1995 combined statement of stockholders' equity. The results of operations related to the adjustment to retained earnings for DLX and PRM included revenue of $553,000 and costs and expenses of $509,000 from October 1 through December 31, 1994. The affiliate of Imagent Corporation, Mobile Information Services, had previously reported on a fiscal year ending June 30 through fiscal 1992. As such, the accounts of the affiliate for its 1992 fiscal year have been combined with the accounts of the other Founding Companies for the years ended December 31, 1992. The exclusion of the affiliate's net income for the period from July 1 through December 31, 1992, of $29,000 is reflected as an adjustment to retained earnings in the December 31, 1992, combined statement of stockholders' equity. The results of operations related to the adjustment to retained earnings for the affiliate of Imagent Corporation included revenues of $656,000 and costs and expenses of $627,000 from July 1 through December 31, 1992. F-19 71 FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash and Cash Equivalents The Founding Companies consider highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. Inventory Inventory is stated at the lower of cost or market with cost determined on a first-in, first-out (FIFO) basis. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the useful life or the term of the lease. Intangible Assets Intangible assets consist primarily of customer lists, acquired by a founding company in October of 1994, which are amortized over 15 years. The Founding Companies continually evaluate whether events and circumstances indicate the remaining estimated useful life of intangible assets may warrant revisions or that the remaining balance of intangibles or other long-lived assets may not be recoverable. To make this evaluation, the Founding Companies use an estimate of undiscounted net income over the remaining life of the intangibles or other long-lived assets. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. FYI and the Founding Companies do not expect the adoption of SFAS 121 to have any material effect on the combined financial statements. FYI and the Founding Companies will adopt SFAS 121 in 1996. Revenue Recognition Revenues are recognized when the services are rendered, or products are shipped, to the Founding Companies' customers. Unearned revenue represents customer storage and certain services which are billed in advance. Income Taxes Income taxes are provided based upon the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," for the Founding Companies that are C corporations for income tax purposes, which requires recognition of deferred income taxes under the asset and liability method. Certain of the Founding Companies are S corporations or a sole proprietorship for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the respective owners. The historical combined net income of the Founding Companies includes no provision for income taxes of the S corporations or sole proprietorship. Deferred income taxes are provided for temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes. Temporary differences result primarily from accelerated depreciation and amortization for tax purposes, deferred contract revenues being taxed when billed, cash basis of F-20 72 FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) accounting for tax purposes versus accrual basis accounting for financial reporting purposes, and various accruals and reserves being deductible for tax purposes in different periods. Use of Estimates in Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to make their presentation consistent with the current year. Pro Forma Net Income (Unaudited) The Founding Companies have been managed throughout the periods presented as independent private companies and represent a variety of tax structures (S corporation, C corporation, and sole proprietorship). Therefore, selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received from their respective businesses during these periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Mergers. Each stockholder (other than one Paragon Management Group stockholder) has entered into a three year employment agreement with FYI which contains a set base salary, participation in any future FYI incentive plans, four weeks vacation, car allowance, health benefits, and a two-year covenant-not-to-compete following termination of such person's employment. The employment agreements provide for the following compensation levels by company:
COMPANY COMPENSATION ------- ------------ Imagent......................................................... $ 250,000 Researchers..................................................... 250,000 Recordex........................................................ 300,000 DPAS............................................................ 220,000 Leonard......................................................... 100,000 Deliverex....................................................... 247,000 Permanent....................................................... 120,000 ---------- $1,487,000 ==========
The unaudited pro forma data presents compensation at the level the officers and owners of the Founding Companies have agreed to receive subsequent to the Offering. In addition, the pro forma data presents the provision for income taxes as if all entities had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above. Pro Forma Net Income Per Share (Unaudited) The computation of pro forma net income per share is based upon 3,643,538 weighted average shares of common stock outstanding, which includes (i) 1,205,682 shares to be issued with the conversion of FYI preferred stock to common stock and the stock split of FYI common stock at the date of the registration statement filing, (ii) 1,878,933 shares to be issued to the stockholders of the Founding Companies in connection with the Mergers, (iii) 543,000 shares being sold in the Offering to cover the cash portion of the F-21 73 FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) purchase price (based upon the Offering price of $13 per share) and (iv) 15,923 shares of common stock determined pursuant to the treasury stock method relating to warrants to purchase 115,000 shares of common stock granted at $10.00 per share. Does not include (i) an additional 650,000 shares of common stock reserved for issuance under F.Y.I.'s 1995 Stock Option Plan, of which options to purchase 478,500 shares of common stock are currently outstanding, and (ii) a warrant outstanding to purchase 50,000 shares of common stock. 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE: The activity in the allowance for doubtful accounts and notes receivable is as follows:
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF OF PERIOD EXPENSES WRITE-OFFS PERIOD ---------- ---------- ---------- ---------- (IN THOUSANDS) Year Ended December 31, 1993 Allowance for doubtful accounts........ $599 $715 $ (572) $742 ==== ==== ====== ==== Year Ended December 31, 1994 Allowance for doubtful accounts........ $742 $835 $ (900) $677 ==== ==== ====== ==== Year Ended December 31, 1995 Allowance for doubtful accounts........ $677 $710 $ (825) $562 ==== ==== ====== ====
5. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
ESTIMATED DECEMBER 31, USEFUL LIVES ------------------- YEARS 1994 1995 ------------ ------- ------- (IN THOUSANDS) Land................................................ N/A $ 415 $ 415 Buildings and improvements.......................... 7-18 2,203 2,194 Leasehold improvements.............................. 5-10 452 477 Vehicles............................................ 5-7 1,114 1,163 Machinery and equipment............................. 5-15 8,223 9,589 Furniture and fixtures.............................. 5-15 382 500 ------- ------- 12,789 14,338 Less -- Accumulated depreciation and amortization... 6,647 7,871 ------- ------- $ 6,142 $ 6,467 ======= =======
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, ----------------- 1994 1995 ------ ------ (IN THOUSANDS) Accounts payable and accrued liabilities........................... $3,298 $3,255 Accrued compensation and benefits.................................. 731 827 Sales tax payable.................................................. 119 94 Income tax payable................................................. 907 818 Other accrued liabilities.......................................... 619 593 ------ ------ $5,674 $5,587 ====== ======
F-22 74 FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. CREDIT FACILITIES: Short-Term Obligations Short-term obligations consist of the following:
DECEMBER 31, ----------------- 1994 1995 ------ ------ (IN THOUSANDS) Researchers Bank line of credit -- expiring October 10, 1996, limited to $425,000, interest payable monthly at prime plus 1.5% (10% and 10.5% at December 31, 1994 and 1995, respectively), guaranteed by the shareholder...................................................... $ 395 $ 213 Recordex Bank line of credit, limited to $300,000, interest payable monthly at the bank's prime plus 0.75% (10.25% and 10.5% at December 31, 1994 and 1995, respectively), secured by all assets........................................................... 143 250 DPAS Bank line of credit, limited to $300,000, interest payable monthly at prime plus 1% (9.5% and 10.75% at December 31, 1994 and 1995, respectively).................................................... 300 253 Trust deed payable on demand; monthly payment of $6,000 including principal and interest at the bank's index rate plus 1.5% (11% and 11.25% at December 31, 1994 and 1995, respectively), maturing January 15, 1998; secured by first trust deed on commercial property......................................................... 197 144 Note payable -- bank payable on demand, monthly payment of $8,000 plus accrued interest at prime plus 2% (10.5% and 10.75% at December 31, 1994 and 1995, respectively), maturing December 1996, secured by non-real estate assets of DPAS.................. 200 100 Note payable -- bank, payable on demand, monthly payment of $5,000 plus accrued interest at prime plus 2% (10.5% and 11% at December 31, 1994 and 1995, respectively), maturing January 1996, secured by non-real estate assets of DPAS........................ 60 -- Leonard Bank demand note, expiring June 1999, interest at prime plus 0.75% (9.25% at December 31, 1994), secured by accounts receivable and machinery and equipment........................... 119 -- Bank master equipment line of credit, each borrowing payable on demand and is termed-out over 36 equal monthly payments, accrued interest at prime plus 0.75% (9.25% at December 31, 1994), payable monthly, secured by accounts receivable and machinery and equipment........................................................ 242 --
F-23 75 FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 1995 ------ ------ (IN THOUSANDS) Bank demand master equipment note, monthly payment of $5,000 plus accrued interest at prime plus 0.75% (9.25% at December 31, 1994), matures 1999, secured by accounts receivable and machinery and equipment.................................................... $ 265 $ -- Bank working capital line of credit, payable on demand, accrued interest at prime plus 1.25% (9.75% at December 31, 1995), secured by a first security interest in all accounts receivable, machinery, and equipment, and a personal guarantee by the stockholder...................................................... -- 316 Deliverex Bank line of credit, limited to $50,000, at prime plus a premium, as defined by the outstanding principal balance (14% and 12.25% at December 31, 1994 and 1995), no defined expiration date....... 46 39 Permanent Bank line of credit, expiring on January 6, 1996, limited to $175,000, interest at the bank's base rate, as defined, plus 1% (10.5% at December 31, 1995), secured by accounts receivable, inventory, equipment and fixtures, and life insurance policy..... 3 115 ------ ------ Total short-term obligations............................. $1,970 $1,430 ====== ======
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:
DECEMBER 31, ------------- 1994 1995 ---- ---- (IN THOUSANDS) Leonard Note payable -- stockholder, payable on demand, accrued interest at 8.75%, unsecured................................................. $ -- $500 DPAS Note payable -- stockholder, payable on demand, accrued interest at 9.0%, unsecured.................................................. $504 $546
F-24 76 FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Long-Term Obligations Long-term obligations consist of the following:
DECEMBER 31, ------------------- 1994 1995 ------ -------- (IN THOUSANDS) Imagent Noninterest-bearing note payable to Micrographics Services, $200,000 due May 1, 1995, remainder due on February 1, 1996.... $ 414 $ 194 Researchers Mortgage payable -- bank, monthly payment of $4,000 through July 1994, $5,000 from August 1994 through maturity date of July 2003; payment includes principal and interest at bank's reference index plus 4% (9.45% and 9.25% at December 31, 1994 and 1995, respectively), secured by deed of trust on real property....................................................... 565 561 Note payable -- bank, monthly payment of $2,000 plus accrued interest at prime plus 1.75% (9.25% and 10.5% at December 31, 1994 and 1995, respectively), maturity date of September 15, 1998, unsecured................................................ 74 54 Note payable -- bank, monthly payment of $2,000 plus accrued interest at prime plus 1.5% (9.25% and 10.25% at December 31, 1994 and 1995, respectively) maturing October 15, 1999, guaranteed by the stockholder.................................. 97 77 Note payable -- bank, monthly payment of $5,000 through maturity of November 2025; payment includes principal and interest at 8%, secured by deed of trust on real property...... 738 739 Note payable -- bank, monthly payment of $2,000 plus accrued interest at prime plus 1.75% (9.25% and 10.5% at December 31, 1994 and 1995, respectively); maturing September 15, 1997, guaranteed by the stockholder.................................. 55 35 Note payable -- Xerox, monthly payment of $1,000, including principal and interest at 15.5%, maturing November 1999, secured by Xerox equipment..................................... 45 33 Recordex Notes payable -- monthly payment of $4,000 plus accrued interest at prime plus 1% (10.5% and 10.75% at December 31, 1994 and 1995, respectively), maturing December 1996, secured by all assets.................................................. 96 42 Notes payable -- bank, monthly payment of $1,000 plus interest at prime plus 1% (10.5% and 10.75% at December 31, 1994 and 1995, respectively), maturing April 1, 1997, secured by all assets......................................................... 39 22 Note payable -- bank, monthly payment of $4,000 plus accrued interest at prime plus 1% (10.5% and 10.75% at December 31, 1994 and 1995, respectively), maturing June 30, 1998; secured by all assets.................................................. 140 128
F-25 77 FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1994 1995 ------ -------- (IN THOUSANDS) Leonard Mortgage payable, monthly payment of $9,000, including principal and interest at prime plus .75% (9% and 9.5% at December 31, 1994 and 1995, respectively), maturing October 1, 1996; secured by a first mortgage on the land, building and certain equipment, guaranteed by the stockholder and former stockholder.................................................... 562 504 Mortgage payable -- bank, monthly payment of $8,000, including principal and interest at prime plus 1.25% (9.75% at December 31, 1995), maturing December 1, 2000, secured by a second mortgage on the land, building, and certain equipment, and guaranteed by the stockholder.................................. -- 600 Deliverex Notes payable -- Small Business Administration, monthly payment of $3,000, including principal and interest at 4%, maturing November 17, 2014, secured by deed of trust on real estate and non-real estate assets of the Company, guaranteed by the stockholder and the stockholder's wife......................... 430 410 Capital lease obligations........................................ 351 424 All other obligations............................................ 120 85 ------ -------- Total.................................................. 3,726 3,908 Less -- Current maturities of long-term obligations.............. 619 1,170 ------ -------- Total long-term obligations............................ $3,107 $ 2,738 ====== ========
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
DECEMBER 31, ------------- 1994 1995 ---- ---- (IN THOUSANDS) Leonard Note payable, monthly payment of $1,185, including principal and interest at prime plus 1% (9.5% at December 31, 1994 and 1995, respectively), maturing in 1998, unsecured.......................... $ 38 $26 Note payable -- Affiliate, interest payable annually at prime plus 1% (9.5% at December 31, 1994 and 1995, respectively), maturing December 31, 1995, unsecured........................................ 69 59 Other................................................................. 32 14 ---- --- 139 99 Less -- Current maturities of long-term obligations................. 96 80 ---- --- Total long-term obligations to affiliates................... $ 43 $19 ==== ===
F-26 78 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):
YEARS ENDING DECEMBER 31 ------------ 1996............................................................ $1,268 1997............................................................ 370 1998............................................................ 250 1999............................................................ 139 2000............................................................ 471 2001 and thereafter............................................. 1,547 ------ Total................................................. $4,045 ======
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:
YEARS ENDING DECEMBER 31, --------------------- CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) 1996.............................................................. $ 221 $ 1,967 1997.............................................................. 148 2,061 1998.............................................................. 76 1,899 1999.............................................................. 29 1,663 2000.............................................................. 12 1,065 2001 and thereafter............................................... -- 4,673 ----- ------- Total minimum lease payments...................................... 486 $13,328 ======= Less -- Amounts representing interest............................. 62 ----- Net minimum lease payments........................................ 424 Less -- Current portion of obligations under capital leases....... 183 ----- Long-term portion of obligations under capital leases............. $ 241 =====
Rent expense for all operating leases for the years ended December 31, 1993, 1994, and 1995, was $1,972,000, $2,227,000, and $2,219,000, respectively. F-27 79 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:
DECEMBER 31, ------------- 1994 1995 ---- ---- (IN THOUSANDS) Imagent Common stock, class A and B, $10 par value, 7,500 shares authorized, 400 shares issued, and common stock, no par value, 100 shares authorized and issued............................................... $21 $ 21 Researchers Common stock, no par, 75,000 shares authorized, 556 shares issued and outstanding......................................................... 2 2 Recordex Common stock, $1 par value, 1,000 shares authorized, issued and outstanding......................................................... 1 1 DPAS Common stock, $1 par value and no par, 125,000 shares authorized, 3,100 shares issued and outstanding................................. 4 4 Leonard Common stock, $10 par value, 8,500 shares authorized, 4,293 shares outstanding......................................................... 43 43 Deliverex Common stock, no par value, 510,000 shares authorized, 107,000 shares issued at stated value....................................... 10 10 Permanent Common stock, $1 par value, 100,000 shares authorized, 91,660 shares issued and outstanding.............................................. 92 92 ---- ---- Total....................................................... $173 $173 ==== ====
In December 1994, ASK approved the reissuance of 10,000 shares of treasury stock to its minority stockholder. Compensation expense of $1,000 was recorded at the date of approval in 1994, equivalent to the estimated value of the shares at the approval date. The shares were reissued on January 1, 1995. 10. EMPLOYEE BENEFIT PLANS: Certain of the Founding Companies have qualified defined contribution employee benefit plans (the "Plans"), the majority of which allow for voluntary pretax contributions by employees. The Founding Companies pay all general and administrative expenses of the Plans and in some cases, the Founding Companies make matching and discretionary contributions to the Plans. The Founding Companies offer no postemployment or postretirement benefits. The expenses incurred related to the Plans by the Founding Companies were $36,000, $63,000, and $82,000 for the years ending December 31, 1993, 1994, and 1995, respectively. F-28 80 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):
FISCAL YEAR ENDED DECEMBER 31, ---------------------- 1993 1994 1995 ---- ---- ---- Federal -- Current..................................................... $120 $593 $172 Deferred.................................................... 39 (440) (40) State -- Current..................................................... 43 173 51 Deferred.................................................... 16 (115) (20) ---- ---- ---- $218 $211 $163 ==== ==== ====
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):
FISCAL YEAR ENDED DECEMBER 31, ---------------------- 1993 1994 1995 ---- ---- ---- Tax at statutory rate......................................... $489 $534 $969 Add (deduct) -- State income taxes.......................................... 35 37 23 Effect of graduated tax rates............................... (10) (26) (26) Income of S corporations.................................... (318) (339) (809) Other, net.................................................. 22 5 6 ---- ---- ---- $218 $211 $163 ==== ==== ====
The components of deferred income tax liabilities and assets are as follows (In Thousands):
FISCAL YEAR ENDED DECEMBER 31, -------------- 1994 1995 ---- ---- Deferred income tax liabilities- Tax over book depreciation and amortization........................ $116 $129 Accrual to cash differences, net................................... 690 381 Other, net......................................................... 7 -- ---- ---- Total deferred income tax liabilities...................... 813 510 Deferred income tax assets- Allowance for doubtful accounts.................................... 149 159 Other reserves, net................................................ 502 192 Other, net......................................................... 11 54 ---- ---- Total deferred income tax assets........................... 662 405 ---- ---- Total net deferred income tax liabilities............................ $151 $105 ==== ==== Current deferred tax asset........................................... $(78) $(24) Long-term deferred tax liabilities................................... 229 129 ---- ---- $151 $105 ==== ====
F-29 81 FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 12. RELATED-PARTY TRANSACTIONS: Leasing Transactions Leonard leases its operating facilities from Leonard Investments and a former stockholder. These leases are for various lengths and annual amounts. The rental expense for these operating leases for the years ended December 31, 1993, 1994, and 1995, was approximately $189,000, $188,000, and $189,000, respectively. Leonard also has obligations to Leonard Investments. Leonard Investments is a partnership owned by the stockholder and former stockholder of Leonard. Researchers leases office facilities in Sacramento and San Francisco, California, along with certain equipment from the Researcher's principal shareholder. The leases provide for lease terms on a month-to-month basis as well as over five to ten-year periods commencing on August 1, 1991, through July 31, 2001, with monthly lease payments of $2,000 to $9,000. The total lease payments to the Researcher's principal shareholder for these operating leases for the years ended July 31, 1993, and December 31, 1994 and 1995, was approximately $187,000, $177,000, and $242,000, respectively. The lease agreements provide that the Researchers pay all related taxes and insurance. Permanent entered into an agreement to lease a building, beginning on July 1, 1995, from Permanent's stockholders. Lease expense per year will be approximately $90,000. Other Transactions Researchers purchases digital coding services from an affiliated entity, Researchers LLC. Researchers' principal shareholder has a controlling interest in Researchers LLC. During the years ended December 31, 1994 and 1995, Researcher's incurred expenses of $28,000 and $11,000, and had billings to Researchers LLC of approximately $4,000 and $40,000. Receivables and Advances
DECEMBER 31, ----------------- 1994 1995 ------ ------ Accounts receivable, officer and employee -- Deliverex -- noninterest bearing................................. $ 315 $ 315 Leonard -- noninterest bearing................................... 14 67 Researchers -- noninterest bearing............................... 642 310 ------ ------ 971 692 Accounts receivable, affiliates -- Leonard -- noninterest bearing................................... 280 259 Researchers -- noninterest bearing............................... -- 20 ------ ------ 280 279 ------ ------ Accounts receivable, officers -- long-term -- Deliverex -- noninterest bearing................................. 74 74 Recordex -- noninterest bearing.................................. 721 816 ------ ------ 795 890 ------ ------ Total related-party receivables.......................... $2,046 $1,861 ====== ======
Leonard has guaranteed a promissory note in the principal amount of approximately $636,000 as of December 31, 1995, with interest at 10%, payable in monthly installments in varying amounts through December 1, 2004. The promissory note is from the stockholder to the former joint owner in Leonard. F-30 82 FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Leonard's guarantee and security interest are subordinate to all other notes payable to the bank and the Detroit Economic Growth Council. 13. COMMITMENTS AND CONTINGENCIES: Litigation The Founding Companies are, from time to time, a party to litigation arising in the normal course of their business, most of which involve claims for workers compensation, unemployment and property damage incurred in connection with its operations. Management of the Founding Companies believes that none of this litigation will have a material adverse effect on the combined financial position or combined results of operations of the Founding Companies. Recordex is one of several defendants in a federal and three state lawsuits contesting the reasonableness of the fees charged for medical records release services. The plaintiffs in these cases are seeking class certification. In November 1994, the plaintiff's motion for class certification and all other claims were denied in the federal lawsuit. The plaintiffs filed an appeal on January 3, 1995. On April 4, 1996, the Court of Appeals affirmed the decision in favor of the Company on the substantive claims, but remanded the case to the District Court for a hearing on the individual plaintiff's request for injunctive relief. In February 1996, one of the Pennsylvania lawsuits was concluded favorably to the Company. While the outcome of the remaining litigation is uncertain, management of Recordex believes that it has meritorious defenses, and there will not be a material effect on its financial position or results of operations. Employment Agreements Researchers has employment agreements with certain personnel to pay specific amounts annually. The employment agreements provide for a total annual compensation amount of $595,000 to be disbursed to certain personnel of Researchers in accordance with the terms of each employee's employment agreement. Concentration of Credit Risk Financial instruments that potentially subject the Founding Companies to concentration of credit risk consist primarily of cash and cash equivalents and trade receivables. The Founding Companies maintain cash and cash equivalents and certain other financial instruments at various major financial institutions across many geographic areas. Credit risk on trade receivables is minimized as a result of the large number of entities comprising the Founding Companies' customer base and their dispersion across many industries and geographic areas. 14. SUBSEQUENT EVENTS: In October 1995, FYI entered into definitive agreements to acquire the Founding Companies. On January 26, 1996, the Founding Companies were acquired by FYI and separate wholly owned subsidiaries, effective with the closing of the Offering of 2,185,000 shares of FYI common stock. F-31 83 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Imagent Corporation: We have audited the accompanying combined balance sheets of Imagent Corporation (a Maryland corporation) and Related Company as of December 31, 1994 and 1995, and the related combined statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Imagent Corporation and Related Company as of December 31, 1994 and 1995, and the results of their combined operations and their combined cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996 F-32 84 IMAGENT CORPORATION AND RELATED COMPANY COMBINED BALANCE SHEETS
DECEMBER 31, ------------------------- 1994 1995 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents......................................... $ 516,422 $1,073,616 Accounts receivable, less allowances for doubtful accounts of $40,000 for each period........................................ 1,742,526 1,412,351 Inventories....................................................... 252,742 306,441 Prepaid and other current assets.................................. 15,778 17,196 ---------- ---------- Total current assets...................................... 2,527,468 2,809,604 PROPERTY AND EQUIPMENT, net......................................... 1,035,816 968,163 INTANGIBLES, net of amortization of $17,935 and $82,481 at December 31, 1994 and 1995................................................. 834,498 769,952 OTHER NONCURRENT ASSETS............................................. 38,745 73,838 ---------- ---------- Total assets.............................................. $4,436,527 $4,621,557 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations....................... $ 220,000 $ 194,347 Accounts payable and accrued liabilities.......................... 1,098,467 1,097,855 ---------- ---------- Total current liabilities................................. 1,318,467 1,292,202 LONG-TERM OBLIGATIONS, net of current maturities.................... 194,347 -- ---------- ---------- Total liabilities......................................... 1,512,814 1,292,202 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock...................................................... 20,773 20,773 Retained earnings................................................. 2,902,940 3,308,582 ---------- ---------- Total stockholders' equity................................ 2,923,713 3,329,355 ---------- ---------- Total liabilities and stockholders' equity................ $4,436,527 $4,621,557 ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-33 85 IMAGENT CORPORATION AND RELATED COMPANY COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1993 1994 1995 ----------- ----------- ----------- REVENUES: Service revenue................................... $ 4,173,176 $ 5,451,372 $ 6,844,552 Product revenue................................... 5,123,101 5,922,622 6,138,127 Other revenue..................................... 955,345 760,789 561,350 ----------- ----------- ----------- 10,251,622 12,134,783 13,544,029 COST OF SERVICES.................................... 2,875,063 3,691,206 4,474,396 COST OF PRODUCT SOLD................................ 4,464,187 4,892,293 4,972,103 DEPRECIATION........................................ 199,389 257,847 268,183 ----------- ----------- ----------- Gross profit.............................. 2,712,983 3,293,437 3,829,347 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....... 2,196,798 2,571,162 2,838,360 ----------- ----------- ----------- Operating income.......................... 516,185 722,275 990,987 OTHER (INCOME) EXPENSE: Interest income................................... (11,954) (13,241) (27,728) Other............................................. (3,395) 4,669 (52,612) ----------- ----------- ----------- NET INCOME.......................................... $ 531,534 $ 730,847 $ 1,071,327 ----------- ----------- ----------- PRO FORMA DATA (Unaudited -- See Note 11): HISTORICAL NET INCOME............................... $ 531,534 $ 730,847 $ 1,071,327 PRO FORMA COMPENSATION DIFFERENTIAL................. 161,143 289,571 303,357 PRO FORMA PROVISION FOR INCOME TAXES................ 264,013 388,137 515,100 ----------- ----------- ----------- PRO FORMA NET INCOME................................ $ 428,664 $ 632,281 $ 859,584 =========== =========== ===========
The accompanying notes are an integral part of these combined financial statements. F-34 86 IMAGENT CORPORATION AND RELATED COMPANY COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL ------------------ PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------- ---------- ---------- ------------- BALANCE, December 31, 1992........... 500 $20,773 $ -- $2,139,804 $ 2,160,577 Dividends declared................. -- -- -- (467,204) (467,204) Net income......................... -- -- -- 531,534 531,534 -- --- ------- ---------- ----------- BALANCE, December 31, 1993........... 500 20,773 -- 2,204,134 2,224,907 Dividends declared................. -- -- -- (32,041) (32,041) Net income......................... -- -- -- 730,847 730,847 -- --- ------- ---------- ----------- BALANCE, December 31, 1994........... 500 20,773 -- 2,902,940 2,923,713 Dividends declared................. -- -- -- (665,685) (665,685) Net income......................... -- -- -- 1,071,327 1,071,327 -- --- ------- ---------- ----------- BALANCE, December 31, 1995........... 500 $20,773 $ -- $3,308,582 $ 3,329,355 === ======= ==== ========== ===========
The accompanying notes are an integral part of these combined financial statements. F-35 87 IMAGENT CORPORATION AND RELATED COMPANY COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------- 1993 1994 1995 --------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................ $ 531,534 $ 730,847 $1,071,327 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization...................... 199,389 275,782 332,729 Loss (gain) on disposal of assets.................. -- 20,693 (3,042) Changes in operating assets and liabilities -- (Increase) decrease in -- Accounts receivable, net...................... (186,962) (547,294) 330,175 Prepaid and other assets...................... 2,101 (5,218) (36,511) Inventories................................... (164,008) 171,363 (53,699) Increase (decrease) in -- Accounts payable and accrued liabilities...... 292,779 81,748 (612) --------- --------- ---------- Net cash provided by operating activities............................. 674,833 727,921 1,640,367 --------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment................... (419,577) (322,797) (230,033) Purchase of intangible assets......................... -- (438,086) -- Proceeds from sale of property and equipment.......... -- -- 32,545 --------- --------- ---------- Net cash used in investing activities.... (419,577) (760,883) (197,488) --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations........... -- -- (220,000) Capital distributions................................. (467,204) (32,041) (665,685) Net change in cash due to conforming fiscal year-end........................................... (12,840) -- -- --------- --------- ---------- Net cash used in financing activities.... (480,044) (32,041) (885,685) --------- --------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (224,788) (65,003) 557,194 CASH AND CASH EQUIVALENTS, at beginning of period....... 806,213 581,425 516,422 ========= ========= ========== CASH AND CASH EQUIVALENTS, at end of period............. $ 581,425 $ 516,422 $1,073,616 ========= ========= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Interest........................................... $ -- $ -- $ -- Income taxes....................................... -- -- -- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCIAL ACTIVITIES: Acquisition of intangible assets with debt............ -- 414,347 --
The accompanying notes are an integral part of these combined financial statements. F-36 88 IMAGENT CORPORATION AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: The accompanying combined financial statements include the accounts of Imagent Corporation (formerly Mobile Microfilming Corporation) and Mobile Information Services (collectively the "Company"). The Company is a microfilm processing laboratory and Kodak distributor of microfilm/microfilming supplies and a broker of imaging equipment and systems and provides data and document acquisition services for public and private industry customers. The Company's customers are primarily located in the Mid-Atlantic region. The Company and its stockholders entered into a definitive agreement with F.Y.I. Incorporated ("FYI") in October 1995, pursuant to which the Company will merge with FYI (the "Merger"). All outstanding shares of the Company's common stock will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation The Company is under common control of two stockholders. All significant intercompany transactions have been eliminated in combination. Mobile Information Services (MIS) reported on a June 30, 1992, year-end prior to 1993; as such its accounts for the year ended June 30, 1992, have been combined with the accounts of Mobile Microfilming Corporation as of December 31, 1992. The results of MIS's operations for the six months ended December 31, 1992, have been reflected as an adjustment to retained earnings. Unaudited revenues and net income were approximately $656,000 and $29,000, respectively. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the asset's useful life or lease term. Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. Intangible and Other Long-Lived Assets The customer list is being amortized over a 15-year period, and the covenant not to compete is being amortized over the term of the agreement. The Company continually evaluates whether events and circumstances indicate the remaining estimated useful life of intangibles and long-lived assets may warrant revisions or that the remaining balance of intangibles or other long-lived assets may not be recoverable. To make this evaluation, the Company uses an estimate of undiscounted net income over the remaining life of the intangibles or other long-lived assets. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121: Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121) which establishes accounting standards for the impairment of long-lived assets, certain F-37 89 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:
ESTIMATED DECEMBER 31, USEFUL LIVES --------------------------- (YEARS) 1994 1995 ------------ ----------- ----------- Vehicles..................................... 5 $ 249,165 $ 188,826 Leasehold improvements....................... 10 327,320 348,658 Machinery and equipment...................... 5-15 1,250,409 1,385,076 Furniture and fixtures....................... 5-15 21,589 49,288 Office equipment............................. 5-15 224,787 258,183 ---- ----------- ----------- 2,073,270 2,230,031 Less -- Accumulated depreciation and amortization............................... 1,037,454 1,261,868 ----------- ----------- $ 1,035,816 $ 968,163 =========== ===========
4. INTANGIBLE ASSETS: Other noncurrent assets consist of the following at December 31, 1994 and 1995:
1994 1995 -------- -------- Customer list................................................. $802,433 $802,433 Covenant not to compete....................................... 50,000 50,000 -------- -------- 852,433 852,433 Less -- Accumulated amortization.............................. 17,935 82,481 -------- -------- $834,498 $769,952 ======== ========
F-38 90 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:
YEAR ENDED DECEMBER 31, ------------------------- 1994 1995 ---------- ---------- Accounts payable............................................ $ 831,072 $ 871,345 Accrued payroll and related benefits........................ 143,510 176,825 Accrued expenses............................................ 123,885 49,685 ---------- ---------- $1,098,467 $1,097,855 ========== ==========
6. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following at December 31, 1994 and 1995:
1994 1995 -------- -------- Noninterest-bearing note payable to Micrographics Sciences, due on February 1, 1996.................................... $414,347 $194,347 Less -- Current maturities................................... 220,000 194,347 -------- -------- Long-term obligations, net of current maturities............. $194,347 $ -- ======== ========
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: 1996.............................................................. $223,152 1997.............................................................. 219,738 1998.............................................................. 120,342 1999.............................................................. -- 2000.............................................................. -- Thereafter........................................................ -- -------- Total................................................... $563,232 ========
F-39 91 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:
SHARES PAR ------------------- ASSIGNED VALUE AUTHORIZED ISSUED VALUE ----- ---------- ------ -------- Imagent Corporation -- Preferred Stock................................ $ 500 50 -- $ -- Class A Common Stock........................... 10 5,000 200 2,000 Class B Common Stock........................... 10 2,500 200 2,000 Mobile Information Services...................... None 100 100 16,773 ----- --- -------- 7,650 500 $ 20,773 ===== === ========
11. PRO FORMA NET INCOME (UNAUDITED): Selling, general and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during the periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger. In connection with the merger, each stockholder has entered into a three-year employment agreement with FYI which provides for set base salary, participation in any FYI incentive bonus plans, four weeks paid vacation, a car allowance, health benefits, and a two year covenant-not-to-compete following termination of such person's employment. The stockholders' employment agreements provide for an aggregate base salary of $250,000. The unaudited pro forma data presents compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Offering. In addition, the following pro forma data presents the provision for income taxes as if the Company had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above. F-40 92 IMAGENT CORPORATION AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 12. SUBSEQUENT EVENTS: On January 26, 1996, the Company was acquired by FYI. In conjunction with the Merger, the Company will dividend cash and accounts receivable to its stockholders in the amount of $2,750,000 which represents the AAA accounts of the Company. In addition, the Company could make an additional distribution corresponding to the increase in net stockholders' equity from June 30, 1995 to November 30, 1995, not to exceed $400,000. The $400,000 available for the additional distribution was distributed prior to December 31, 1995. Had the $2,750,000 transaction been recorded at December 31, 1995, the effect on the accompanying balance sheet would be a decrease in total assets and stockholders' equity of $2,750,000. F-41 93 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Melanson and Associates, Inc.: We have audited the accompanying combined balance sheets of Melanson and Associates, Inc. (a California corporation) and Related Company as of December 31, 1994 and 1995, and the related combined statements of operations, stockholders' equity, and cash flows for each of the years ended July 31, 1993, and December 31, 1994 and 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Melanson and Associates, Inc. and Related Company as of December 31, 1994 and 1995, and the combined results of their operations and their combined cash flows for each of the years ended July 31, 1993, and December 31, 1994 and 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996 F-42 94 MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY COMBINED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents........................................ $ 339,031 $ 330,134 Accounts receivable, less allowance of $87,912 and $78,247....... 2,629,127 2,117,843 Stockholder receivable........................................... 641,547 310,634 Deferred tax assets.............................................. 10,179 -- Prepaid and other current assets................................. 3,413 19,310 ---------- ---------- Total current assets..................................... 3,623,297 2,777,921 ---------- ---------- PROPERTY AND EQUIPMENT, net........................................ 2,475,708 2,401,983 OTHER NONCURRENT ASSETS............................................ 120,514 16,830 ---------- ---------- Total assets............................................. $6,219,519 $5,196,734 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term obligations........................................... $ 395,000 $ 213,000 Current maturities of long-term obligations...................... 77,936 93,388 Accounts payable and accrued liabilities......................... 1,829,137 1,480,069 ---------- ---------- Total current liabilities................................ 2,302,073 1,786,457 LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES................... 1,532,469 1,435,814 DEFERRED INCOME TAXES.............................................. 187,473 70,473 ---------- ---------- Total liabilities........................................ 4,022,015 3,292,744 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, authorized 75,000 shares, 556 shares issued and outstanding............................................... 2,421 2,421 Retained earnings................................................ 2,195,083 1,901,569 ---------- ---------- Total stockholders' equity............................... 2,197,504 1,903,990 ---------- ---------- Total liabilities and stockholders' equity............... $6,219,519 $5,196,734 ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-43 95 MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED ---------------------------------------- DECEMBER 31, JULY 31, ------------------------- 1993 1994 1995 ---------- ---------- ---------- SERVICE REVENUE........................................ $8,738,476 $9,972,861 $9,874,336 COST OF SERVICES....................................... 5,650,307 6,311,498 6,942,566 DEPRECIATION........................................... 246,777 277,081 320,685 ---------- ---------- ---------- Gross profit................................. 2,841,392 3,384,282 2,611,085 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 2,453,307 2,619,401 2,394,867 ---------- ---------- ---------- Operating income............................. 388,085 764,881 216,218 OTHER (INCOME) EXPENSE: Interest expense..................................... 120,203 87,751 112,068 Interest income...................................... (786) (814) (36,467) Other (income) expense, net.......................... (4,974) (81,576) (53,417) ---------- ---------- ---------- INCOME BEFORE INCOME TAXES............................. 273,642 759,520 194,034 PROVISION (BENEFIT) FOR INCOME TAXES................... 88,289 183,146 (7,263) ---------- ---------- ---------- Net income................................... $ 185,353 $ 576,374 $ 201,297 ========== ========== ========== PRO FORMA DATA (Unaudited -- See Note 13): HISTORICAL NET INCOME.................................. $ 185,353 $ 576,374 $ 201,297 PRO FORMA COMPENSATION DIFFERENTIAL.................... 994,667 1,029,133 936,717 PRO FORMA PROVISION FOR INCOME TAXES................... 449,444 487,013 453,994 ---------- ---------- ---------- PRO FORMA NET INCOME................................... $ 730,576 $1,118,494 $ 684,020 ========== ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-44 96 MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL ----------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------ ---------- ------------- BALANCE, July 31, 1992........................... 556 $2,421 $1,653,924 $ 1,656,345 Dividends declared............................. -- -- (201,511) (201,511) Net income..................................... -- -- 185,353 185,353 --- ------ ---------- ----------- BALANCE, July 31, 1993........................... 556 2,421 1,637,766 1,640,187 Net income for the period August 1, 1993, to December 31, 1993........................... -- -- 229,428 229,428 --- ------ ---------- ----------- BALANCE, December 31, 1993....................... 556 2,421 1,867,194 1,869,615 Dividends declared............................. -- -- (248,485) (248,485) Net income..................................... -- -- 576,374 576,374 --- ------ ---------- ----------- BALANCE, December 31, 1994....................... 556 2,421 2,195,083 2,197,504 Dividends declared............................. -- -- (494,811) (494,811) Net income..................................... -- -- 201,297 201,297 --- ------ ---------- ----------- BALANCE, December 31, 1995....................... 556 $2,421 $1,901,569 $ 1,903,990 === ====== ========== ===========
The accompanying notes are an integral part of these combined financial statements. F-45 97 MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED ----------------------------------- DECEMBER 31, JULY 31, --------------------- 1993 1994 1995 ----------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................... $ 185,353 $ 576,374 $ 201,297 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation.......................................... 246,777 277,081 320,685 Deferred tax benefit.................................. (41,177) (526,790) (106,821) Loss (gain) on disposal of assets..................... -- (18,635) 516 Changes in operating assets and liabilities -- (Increase) decrease in -- Accounts receivable, net......................... 81,802 84,111 511,284 Stockholder receivable........................... -- (271,921) 330,913 Prepaid and other current assets................. 21,062 (147,004) 87,787 Increase (decrease) in -- Accounts payable and accrued liabilities......... 284,748 547,727 (349,068) ----------- --------- --------- Net cash provided by operating activities...... 778,565 520,943 996,593 ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment, net................. (326,466) (580,398) (291,691) Proceeds from sales of property.......................... -- 203,068 44,215 ----------- --------- --------- Net cash used in investing activities.......... (326,466) (377,330) (247,476) ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on short-term obligations............. (220,512) (288,124) (250,000) Proceeds from short-term borrowings...................... 158,124 525,000 68,000 Principal payments on long-term obligations.............. (1,246,603) (80,507) (81,203) Proceeds from long-term borrowings....................... 1,425,000 -- -- Payment of dividends..................................... (201,511) (248,485) (494,811) ----------- --------- --------- Net cash used in financing activities.......... (85,502) (92,116) (758,014) ----------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 366,597 51,497 (8,897) ADJUSTMENT TO CONFORM FISCAL YEAR-END TO A CALENDAR YEAR... -- (103,689) -- CASH AND CASH EQUIVALENTS, at beginning of period.......... 24,626 391,223 339,031 ----------- --------- --------- CASH AND CASH EQUIVALENTS, at end of period................ $ 391,223 $ 339,031 $ 330,134 =========== ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Interest.............................................. $ 120,203 $ 87,751 $ 112,068 Income taxes.......................................... $ 33,914 $ 52,500 $ 257,876
The accompanying notes are an integral part of these combined financial statements. F-46 98 MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: The accompanying combined financial statements include the accounts of Melanson and Associates, Inc. (dba Researchers) and Bay Area Micrographics (BAM -- or the "Related Company") (a sole proprietorship), (collectively the "Company"). The Company provides photocopying, microfilming, and electronic imaging of document services to its customers from its offices in California. In October 1995, the Company and its stockholders entered into a definitive agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will merge with FYI (the "Merger"). All outstanding shares of the Company's common stock and the ownership of the sole proprietorship will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation The Company is under common control. All significant intercompany transactions have been eliminated in combination. Fiscal Year-Ends BAM has a December 31 year-end. Researchers has a July 31 year-end. The accounts and results of BAM, using a December 31 year-end, have been combined with the July 31 year-end accounts and results of Researchers in the accompanying combined financial statements for 1993. Researcher's accounts and results for 1994 and 1995 have been recast to a December 31 year-end. Researcher's net income for the five-month period August 1, 1993, to December 31, 1993, was $229,428. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the accelerated and straight-line methods over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the asset's useful life or the lease term. Other Long-Lived Assets The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 to have any material effect on the combined financial statements. The Company will adopt SFAS 121 in 1996. Income Taxes Researchers is a C corporation. BAM is a sole proprietorship for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the owner. For purposes of these combined financial F-47 99 MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) statements, no federal and state income taxes have been provided for BAM. BAM's sole proprietorship status will terminate with the effective date of the Merger discussed in Note 1. Deferred income taxes for Researchers are provided for timing differences in the recognition of revenues and expenses for tax and financial reporting purposes. Temporary differences result primarily from accelerated depreciation and amortization for tax purposes, deferred contract revenues being taxed when billed and various accruals and reserves being deductible for tax purposes in different periods. Concentration of Credit Risk Financial instruments that potentially expose the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards (SFAS) No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in the Western states and the primary customers are legal institutions. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. 3. PROPERTY AND EQUIPMENT: Property and equipment consists of the following:
ESTIMATED USEFUL LIVES DECEMBER 31, DECEMBER 31, (YEARS) 1994 1995 ------------ ------------ ------------ Land......................................... $ 412,500 $ 412,500 Building and improvements.................... 15-31 1,289,327 1,289,327 Machinery and equipment...................... 7 1,310,220 1,351,255 Leasehold improvements....................... 5-7 107,621 107,621 Computer equipment........................... 5-7 606,702 804,314 Autos and aircraft........................... 5-7 229,289 244,809 Furniture and fixtures....................... 7 40,055 42,208 ------------ ------------ 3,995,714 4,252,034 Less -- Accumulated depreciation............. 1,520,006 1,850,051 ------------ ------------ $ 2,475,708 $ 2,401,983 ============ ============
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Accounts payable........................................... $ 414,073 $ 527,643 Sales tax payable.......................................... 76,435 77,961 Income taxes payable....................................... 846,248 687,933 Accrued compensation and benefits.......................... 273,139 180,837 Other accrued liabilities.................................. 219,242 5,695 ---------- ---------- Total accounts payable and accrued liabilities... $1,829,137 $1,480,069 ========== ==========
5. SHORT-TERM OBLIGATIONS: The Company has a $425,000 line of credit with interest payable at prime plus 1.5%, (7.5% and 10% at December 31, 1994 and 1995), on the outstanding principal balance. The line of credit, which expires in F-48 100 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:
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Mortgage payable -- bank, monthly payment of $3,981 through July 1993, $4,771 from August 1993, to July 1994, and $4,694 through maturity date of July 2003; payment includes principal and interest of 9.45% and 9.25%, respectively; secured by deed of trust on real property. ............................................... $ 564,851 $ 560,716 Note payable -- bank, monthly principal of $1,650 plus interest at prime plus 1.75% (9.25% and 10.5% at December 31, 1994 and 1995, respectively) and a maturity date of September 15, 1998....................................... 74,250 54,450 Note payable -- bank, monthly principal of $1,667 plus interest at prime plus 1.5% (9.0% and 10.25% at December 31, 1994 and 1995, respectively) and a maturity date of October 15, 1999......................................... 96,667 76,667 Note payable -- bank, monthly payment of $5,456 through maturity of November 2025; payment includes principal plus interest at 8%, secured by deed of trust on real property................................................. 738,094 739,498 Note payable -- bank, monthly principal of $1,667 plus interest at prime plus 1.75% (9.25% and 10.5% at December 31, 1994 and 1995, respectively) and a maturity date of September 15, 1997, guaranteed by the principal stockholder.............................................. 55,000 35,000 Note payable -- Xerox, monthly payment of $748, payment includes principal and interest at 15.5% and a maturity date of November 1999.................................... 44,872 33,287 Note payable -- bank, monthly payment of $768; payment includes principal plus interest at 8.5%; maturity dates of November 1998......................................... 36,671 29,584 ---------- ---------- Total obligation................................. 1,610,405 1,529,202 Less -- Current maturities................................. 77,936 93,388 ---------- ---------- $1,532,469 $1,435,814 ========== ==========
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: 1996............................................................. $ 93,388 1997............................................................. 88,095 1998............................................................. 68,915 1999............................................................. 39,660 2000............................................................. 17,532 Thereafter....................................................... 1,221,612 ---------- Total.................................................. $1,529,202 ==========
F-49 101 MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. LEASE COMMITMENTS AND RELATED-PARTY TRANSACTIONS: The Company leases office facilities in Sacramento and San Francisco, California, along with certain equipment from the Company's principal shareholder. The Company also leases office facilities in Los Angeles and San Jose, California, from third parties. The leases provide for lease terms on a month to month basis as well as over five to ten year periods commencing on August 1, 1991, through July 31, 2001, with monthly lease payments of $1,950 to $8,500. The lease agreements provide that the Company pay all related taxes and insurance. The total lease expense for the years ended July 31, 1993 and December 31, 1994 and 1995, totaled approximately $373,000 $429,000 and $520,000, respectively, including total lease payments to the Company's principal shareholder of approximately $187,000, $177,000 and $242,000, respectively. Minimum future lease payments under operating leases as of December 31, 1995, for each of the next five years and in the aggregate are as follows: 1996............................................................. $ 368,886 1997............................................................. 284,400 1998............................................................. 284,400 1999............................................................. 284,400 2000............................................................. 273,300 Thereafter....................................................... 828,000 ---------- Total.................................................. $2,323,386 ==========
8. EMPLOYEE BENEFIT PLAN: On January 1, 1993, the Company adopted a qualified 401(k) plan covering substantially all eligible employees who meet certain age and length of service requirements. The plan allows for employee and employer contributions. The plan also requires an employer matching contribution unless changed in writing by the employer. Employer contributions charged to operations for the years ended July 31, 1993, and December 31, 1994 and 1995, were approximately $0, $15,000, and $17,172, respectively. The Company offers no postretirement or postemployment benefits. 9. INCOME TAXES: The following income tax information for Researchers is presented in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109). This statement provides for a liability approach to accounting for income taxes. Federal and state income taxes are as follows:
YEAR ENDED ----------------------------------- DECEMBER 31, JULY 31, ---------------------- 1993 1994 1995 -------- --------- -------- Federal -- Current......................................... $ 98,578 $ 551,458 $ 76,491 Deferred........................................ (34,605) (419,015) (82,071) State -- Current......................................... 30,888 158,478 23,067 Deferred........................................ (6,572) (107,775) (24,750) -------- --------- -------- $ 88,289 $ 183,146 $ (7,263) ======== ========= ========
F-50 102 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:
YEAR ENDED ----------------------------------- DECEMBER 31, JULY 31, ---------------------- 1993 1994 1995 -------- --------- -------- Tax at statutory rate............................. $ 93,038 $ 258,237 $ 65,971 Add (deduct) -- State income taxes.............................. 16,418 26,498 (1,110) Nondeductible expenses.......................... 5,747 -- -- Effect of sole partnership nontaxable income.... (26,914) (101,589) (72,124) -------- --------- -------- $ 88,289 $ 183,146 $ (7,263) ======== ========= ========
The components of deferred income tax liabilities and assets are as follows:
YEAR ENDED DECEMBER 31, --------------------- 1994 1995 -------- -------- Deferred income tax liabilities -- Property and equipment....................................... $ 63,171 $ 73,175 Accrual to cash differences, net............................. 361,747 176,370 -------- -------- Total deferred income tax liabilities................ 424,918 249,545 Deferred income tax assets -- Allowance for doubtful accounts.............................. 35,286 31,408 Accrued expenses............................................. 212,338 147,664 -------- -------- Total deferred income tax assets..................... 247,624 179,072 -------- -------- Total net deferred income tax liabilities............ $177,294 $ 70,473 ======== ========
10. COMMITMENTS AND CONTINGENCIES: Litigation The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involves claims for workers' compensation incurred in connection with its operations. Management believes that none of these actions will have a material adverse effect on the financial position or results of operations of the Company. Employment Agreements The Company has employment agreements with certain personnel to pay specific amounts annually. The employment agreements provide for a total annual compensation amount of $595,500 to be disbursed to certain personnel of the Company in accordance with the terms of each employee's employment agreement 11. RELATED-PARTY TRANSACTION: The Company purchases digital coding services from Researchers LLC, an affiliated entity. The Company's principal shareholder has a controlling interest in Researchers LLC. During the years ended December 31, 1994 and 1995, the Company incurred expenses related to purchases and services of approximately $28,000 and $10,642 and had billings of approximately $3,500 and $40,377 to Researchers, LLC. F-51 103 MELANSON AND ASSOCIATES, INC. AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Stockholder receivable results from advances to the stockholder in excess of his earned salary and estimated bonus. Amounts are settled at year-end. 12. SIGNIFICANT CUSTOMER: For the year ended July 31, 1993, the Company had one customer which accounted for approximately 11% of combined revenue. For the year ended December 31, 1994, the Company had two customers which accounted for approximately 13% and 11% of combined revenue. For the year ended December 31, 1995, the Company had two customers which each accounted for approximately 12% of combined revenue. 13. PRO FORMA NET INCOME (UNAUDITED): Selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during the periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger. In connection with this merger, each stockholder has entered into a three year employment agreement with FYI which provides for set base salary, participation in any future FYI incentive bonus plans, four weeks paid vacation, a car allowance, health benefits and a two year covenant-not-to-compete following termination of such person's employment. The stockholders' employment agreements provide for an aggregate base salary of $250,000. The unaudited pro forma data presents compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Offering. In addition, the following pro forma data presents the provision for income taxes as if the sole proprietorship had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above. 14. SUBSEQUENT EVENTS: On January 26, 1996 the Company was acquired by FYI. In connection with the Merger, the Company will dividend land, building, and related improvements of $1,488,327 and the related mortgage payable of $1,300,224 to the principal stockholder. In addition the Company will make a cash distribution of $250,000 prior to the closing of the Merger. Had these transactions been recorded at December 31, 1995, the effect on the accompanying balance sheet would be a decrease in assets of $1,738,327, liabilities of $1,300,224, and stockholders' equity of $438,103. F-52 104 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Recordex Services, Inc.: We have audited the accompanying balance sheet of Recordex Services, Inc. (a wholly owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1995, and the related statements of operations, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Recordex Services, Inc. for the years ended December 31, 1994 and 1993, were audited by other auditors whose report dated September 15, 1995, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Recordex Services, Inc. (a wholly owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1995, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996 F-53 105 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors Recordex Services, Inc. Malvern, Pennsylvania We have audited the accompanying balance sheet of Recordex Services, Inc. (a wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1994, and the related statements of operations, changes in stockholder's equity, and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Recordex Services, Inc. (a wholly-owned subsidiary of Paragon Management Group, Inc.) as of December 31, 1994, and the results of its operations and its cash flows for the two years then ended in conformity with generally accepted accounting principles. ELKO, FISCHER, McCABE & RUDMAN, LTD. Certified Public Accountants Media, Pennsylvania September 15, 1995 F-54 106 RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.) BALANCE SHEETS
DECEMBER 31, ------------------------- 1994 1995 ---------- ---------- CURRENT ASSETS: Cash.............................................................. $ 2,538 $ -- Accounts receivable, net of contractual allowances and provision for uncollectible accounts of $470,000 and $363,032............ 1,364,193 1,585,322 Prepaid expenses and other assets................................. 34,280 74,007 Deferred tax asset................................................ 27,000 133,389 ---------- ---------- Total current assets...................................... 1,428,011 1,792,718 ---------- ---------- PROPERTY AND EQUIPMENT: Equipment......................................................... 946,450 1,281,427 Less accumulated depreciation..................................... 442,077 683,875 ---------- ---------- Net property and equipment................................ 504,373 597,552 ---------- ---------- OTHER ASSETS: Security deposits................................................. 15,039 19,471 Advances to parent................................................ 721,328 816,335 ---------- ---------- Total other assets........................................ 736,367 835,806 ---------- ---------- Total assets.............................................. $2,668,751 $3,226,076 ========== ========== CURRENT LIABILITIES: Line of credit.................................................... $ 142,527 $ 250,000 Accounts payable.................................................. 325,718 960,568 Accrued expenses.................................................. 197,189 118,363 Accrued payroll and payroll taxes................................. 195,052 282,442 Retrieval fees payable............................................ 425,699 127,989 Income taxes payable.............................................. 44,750 125,480 Current maturities -- Capitalized lease obligations.................................. 59,510 101,287 Notes payable.................................................. 86,249 105,125 ---------- ---------- Total current liabilities................................. 1,476,694 2,071,254 ---------- ---------- LONG-TERM LIABILITIES: Less current maturities -- Capitalized lease obligations.................................. 89,844 89,468 Notes payable.................................................. 188,380 86,867 Deferred income taxes.......................................... 41,600 48,200 ---------- ---------- Total long-term liabilities............................... 319,824 224,535 ---------- ---------- Total liabilities......................................... 1,796,518 2,295,789 ---------- ---------- COMMITMENTS AND CONTINGENCIES (NOTE 1) STOCKHOLDERS' EQUITY: Common stock -- par value $1; 1,000 shares authorized, issued, and outstanding.................................................... 1,000 1,000 Additional paid-in capital.......................................... 774,000 774,000 Retained earnings................................................... 97,233 155,287 ---------- ---------- Total stockholder's equity................................ 872,233 930,287 ---------- ---------- Total liabilities and stockholders' equity................ $2,668,751 $3,226,076 ========== ==========
The accompanying notes are an integral part of these financial statements. F-55 107 RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.) STATEMENTS OF OPERATIONS
DECEMBER 31, ---------------------------------------- 1993 1994 1995 ---------- ---------- ---------- NET SERVICE REVENUE.................................... $5,464,798 $6,825,633 $8,549,947 COSTS OF SERVICES...................................... 3,076,365 4,165,625 5,233,447 DEPRECIATION........................................... 130,073... 166,486 224,602 ---------- ---------- ---------- Gross profit................................. 2,258,360 2,493,522 3,091,898 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 2,185,239 2,368,242 2,923,065 ---------- ---------- ---------- Operating income............................. 73,121 125,280 168,833 INTEREST EXPENSE....................................... 26,357 58,038 85,088 ---------- ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE.......................... 46,764 67,242 83,745 PROVISION FOR INCOME TAXES............................. 19,000 22,600 25,691 ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE... 27,764 44,642 58,054 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES................................................ (17,500) -- -- ---------- ---------- ---------- NET INCOME............................................. $ 10,264 $ 44,642 $ 58,054 ========== ========== ========== PRO FORMA DATA (Unaudited -- See Note 10): HISTORICAL NET INCOME.................................. $ 10,264 $ 44,642 $ 58,054 PRO FORMA COMPENSATION DIFFERENTIAL.................... 94,696 109,710 207,666 PRO FORMA PROVISION FOR INCOME TAXES................... 38,475 36,873 82,941 ---------- ---------- ---------- PRO FORMA NET INCOME................................... $ 66,485 $ 117,479 $ 182,779 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-56 108 RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.) STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL ------ ---------- -------- -------- BALANCE, December 31, 1992....................... $1,000 $ 774,000 $ 42,327 $817,327 Net income..................................... -- -- 10,264 10,264 ------ --------- -------- -------- BALANCE, December 31, 1993....................... 1,000 774,000 52,591 827,591 Net income..................................... -- -- 44,642 44,642 ------ --------- -------- -------- BALANCE, December 31, 1994....................... 1,000 774,000 97,233 872,233 Net income..................................... -- -- 58,054 58,054 ------ --------- -------- -------- BALANCE, December 31, 1995....................... $1,000 $ 774,000 $155,287 $930,287 ====== ========= ======== ========
The accompanying notes are an integral part of these statements. F-57 109 RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.) STATEMENTS OF CASH FLOWS
DECEMBER 31, ------------------------------------- 1993 1994 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................ $ 10,264 $ 44,642 $ 58,054 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization...................... 241,832 208,024 224,602 Loss on investment................................. -- 16,667 -- Deferred income taxes.............................. 36,500 (21,900) (99,789) (Increase) decrease in assets -- Accounts receivable, net......................... (62,820) (398,111) (221,129) Prepaid expenses and other assets.................. (8,097) 1,700 (39,727) Security deposits.................................. 4,913 (5,614) (4,432) Advances to parent................................. (217,609) (51,815) (95,007) Increase (decrease) in liabilities -- Accounts payable................................. (32,192) 35,398 634,850 Accrued expenses................................. (17,332) 46,862 (78,826) Accrued payroll and payroll taxes................ 68,824 63,893 87,390 Retrieval fees................................... 20,509 214,220 (297,710) Income taxes payable............................. -- 44,750 80,730 --------- --------- --------- Total adjustments............................. 34,528 154,074 190,952 --------- --------- --------- Net cash provided by operating activities..... 44,792 198,716 249,006 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment.................... (94,923) (86,703) (186,779) Purchase of investment................................ (30,000) -- -- --------- --------- --------- Net cash used in investing activities......... (124,923) (86,703) (186,779) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on notes payable............................. -- (15,371) (82,637) Borrowings on notes payable........................... 150,000 -- -- Borrowings (payments) on line of credit............... 134,500 (1,973) 107,473 Repayment of capital lease obligations................ (65,014) (50,261) (89,601) Advances to parent.................................... (134,500) (46,725) -- --------- --------- --------- Net cash provided by (used in) financing activities.................................. 84,986 (114,330) (64,765) --------- --------- --------- NET INCREASE (DECREASE) IN CASH......................... 4,855 (2,317) (2,538) CASH, BEGINNING OF YEAR................................. -- 4,855 2,538 --------- --------- --------- CASH, END OF YEAR....................................... $ 4,855 $ 2,538 $ -- ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid......................................... $ 26,357 $ 58,038 $ 85,088 NONCASH TRANSACTIONS: Equipment acquired through capital lease obligations........................................ $ 26,397 $ 160,828 $ 131,002 Sale of investment.................................... -- 13,333 --
The accompanying notes are an integral part of these financial statements. F-58 110 RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.) NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization On October 16, 1991, Paragon Management Group, Inc. (the "Parent"), acquired all of the issued and outstanding shares of common stock of Recordex Services, Inc. (the "Company"). Established in 1987, the Company is a supplier of computerized correspondence management systems to hospital medical records departments. The Company provides services to over 100 hospitals in 11 states. In October 1995, the Company, its Parent, and the shareholders of its Parent entered into a definitive agreement with F.Y.I. Incorporated (FYI), pursuant to which the Company will be acquired by FYI (the "Merger"). All outstanding shares of the Company will be exchanged for cash and shares of FYI Common Stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI. (See Note 11.) Accounts Receivable The Company follows the reserve method of providing for doubtful accounts receivable. Transactions with Parent The Company pays management fees to its Parent for management, consulting, and other services. These costs are presented in selling, general, and administrative costs on the statement of operations. The Company pays certain expenses on behalf of its Parent including salaries, occupancy costs, and benefits. These payments are recorded as advances to Parent on the Company's books until the Company is reimbursed by the Parent. These advances are noninterest bearing obligations. (See Note 11.) Equipment Capital additions including assets acquired under capital leases are stated at cost. Maintenance, repairs, and minor renewals are charged to operations as incurred. Depreciation is provided over the estimated useful lives of the assets using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. The estimated useful lives used for depreciation vary for financial reporting and tax purposes. The range of lives for equipment is three to five years for financial reporting purposes. Intangible and Other Long-Lived Assets The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121) which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 to have any effect on the financial statements. The Company will adopt SFAS 121 in 1996. Supplemental Cash Flow Information The Company purchased an investment for $30,000 in 1993. As of December 31, 1994, the Company had accepted an offer to have the investee buy back the investment for $13,333 and a $16,667 loss was recorded in the 1994 statement of operations. The Company did not receive the proceeds of the sale until January 1995, and a $13,333 receivable was presented as part of other current assets on the 1994 balance sheet. F-59 111 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:
DECEMBER 31, ---------------------------------------- 1993 1994 1995 ---------- ---------- ---------- Gross service revenue.......................... $6,034,321 $7,553,828 $9,240,603 Less -- Contractual allowances and provision for uncollectible accounts................... 569,523 728,195 690,656 ---------- ---------- ---------- Net service revenue.................. $5,464,798 $6,825,633 $8,549,947 ========== ========== ==========
2. LINE OF CREDIT: The Company has a line of credit agreement with a bank for $300,000. The interest rate on the line is the lending bank's prime rate plus 0.75% (10.5% and 10.25% at December 31, 1995 and 1994, respectively), payable monthly on outstanding borrowings. The line is secured by all assets of the Company and guarantees of the Parent and certain stockholders of the Parent. Payment of principal is due on demand and the line is reviewed annually by the bank. The outstanding borrowings on the line were $250,000 and $142,527 at December 31, 1995 and 1994, respectively. Interest expense on the line was $30,121, $26,829, and $15,387 for the years ended December 31, 1995, 1994, and 1993, respectively. 3. TERM LOANS: In October 1993, the Company entered into an agreement with a bank whereby the outstanding balance on its line of credit of $150,000 was converted to a term loan. The term loan is payable in monthly installments F-60 112 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: 1996.............................................................. $105,125 1997.............................................................. 51,867 1998.............................................................. 35,000 1999.............................................................. -- 2000.............................................................. -- -------- Total................................................... $191,992 ========
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: 1996.............................................................. $120,727 1997.............................................................. 83,163 1998.............................................................. 9,904 1999.............................................................. 1,744 2000.............................................................. 1,163 -------- Total................................................... 216,701 Less -- Amounts representing interest............................. 25,946 -------- Net present value of minimum lease payments....................... 190,755 Less -- Current portion........................................... 101,287 -------- Long-term obligation.............................................. $ 89,468 ========
F-61 113 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:
1994 1995 -------- -------- Equipment...................................................... $202,711 $333,508 Less -- Accumulated depreciation............................... 30,722 77,516 -------- -------- Total................................................ $171,989 $255,992 ======== ========
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:
DECEMBER 31, --------------------------------- 1993 1994 1995 ------- -------- -------- Currently payable: Federal........................................... $ -- $ 32,200 $ 96,699 State............................................. -- 12,300 28,781 ------- -------- -------- -- 44,500 125,480 ------- -------- -------- Deferred: Federal........................................... 14,700 (16,900) (79,455) State............................................. 4,300 (5,000) (20,334) ------- -------- -------- Total..................................... $19,000 $ 22,600 $ 25,691 ======= ======== ========
Deferred taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes and relate primarily to depreciation and contractual allowances and provision for uncollectible accounts. Deferred income taxes are recognized for tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years, to differences between the financial reporting and the tax basis of existing assets and liabilities. F-62 114 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:
TAX EFFECTS DECEMBER 31, ---------------------- 1994 1995 --------- -------- Deferred tax assets: Contractual allowances and provision for uncollectible accounts................................................. $ 96,000 $127,649 Accrual of legal settlement................................. 11,000 5,740 --------- -------- 107,000 133,389 --------- -------- Deferred tax liabilities: Retrieval fees and accrued expenses......................... (80,000) -- Fixed assets and depreciation............................... (41,600) (48,200) --------- -------- (121,600) (48,200) --------- -------- Total net deferred assets (liabilities)....................... $ (14,600) $ 85,189 ========= ========
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:
DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Income before income taxes and cumulative effect of accounting changes............................................. $46,764 $67,242 $83,745
DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Taxes using federal statutory rates at 34%............ $15,900 $22,900 $28,473 State income taxes, net of the federal tax benefit.... 2,800 4,000 5,568 Nondeductible travel and entertainment................ 100 4,600 3,400 Effects of utilizing graduated tax rates for current provision........................................... -- (8,700) (11,750) Other................................................. 200 (200) -- ------- ------- ------- Provision for income taxes.................. $19,000 $22,600 $25,691 ======= ======= =======
For purposes of the consolidated federal tax return, the Parent has a net operating loss carryforward available to offset taxable income of the Company in 1994. The net operating loss carryforward will be fully utilized for the tax year 1994. 7. 401(K) PLAN: The Company has adopted a contributory 401(k) plan (the "Plan") as of September 1, 1993. The Plan allows employees to make elective contributions through salary reduction. The Plan allows for discretionary employer matching. Participation in the Plan is limited based on certain age and service requirements. The Company made no contribution to the Plan for the years ended December 31, 1995 and 1994. F-63 115 RECORDEX SERVICES, INC. (A WHOLLY OWNED SUBSIDIARY OF PARAGON MANAGEMENT GROUP, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. OPERATING LEASES The Company leases office space under an operating lease which expires in 1998. The future minimum annual rental payments required under this operating lease as of December 31, 1995 are as follows: 1996..................................................................... $69,804 1997..................................................................... 69,804 1998..................................................................... 29,805
Rent expense charged against operations for the years ended December 31, 1995, 1994 and 1993 was $77,172, $55,173, and $47,175, respectively. 9. COMMITMENTS AND CONTINGENCIES: The Company is named as a defendant, with other medical records copying copy services and numerous hospitals, in a federal and three state lawsuits contesting the reasonableness of the fees charged for medical records reproduction. The plaintiff's in each of these cases are seeking class certification. In November 1994, the plaintiff's motion for class certification and all other claims were denied in the federal lawsuit. The plaintiffs filed an appeal on January 3, 1995. On April 4, 1996, the Court of Appeals affirmed the decision in favor of the Company on the substantive claims, but remanded the case to the District Court for a hearing on the individual plaintiff's request for injunctive relief. The three state lawsuits, two in Pennsylvania, and one in Ohio, are similar to the federal suit described above. In February 1996, one of the Pennsylvania lawsuits was concluded favorably to the Company. Management of the Company and its counsel believe that the outcome of the remaining cases will be influenced by the outcome of the other cases. Although the ultimate outcome of the remaining litigation is not presently determinable, management of the Company and its counsel believe that they can successfully defend these cases and any liability resulting from them will not have a material effect on the Company's financial statements. 10. PRO FORMA NET INCOME (UNAUDITED): Selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during the periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger. In connection with the Merger, two of the Parent's stockholders have entered into a three year employment agreement with FYI which provides for set base salary, participation in any future FYI incentive bonus plans, four weeks, paid vacation, a car allowance, health benefits, and a two year covenant-not-to- compete following termination of such person's employment. The stockholders' employment agreements provide for an aggregate base salary of $300,000. The unaudited pro forma data presents compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Offering. In addition, the pro forma data presents the incremental provision for income taxes for the impact of the compensation differential discussed above. 11. SUBSEQUENT EVENTS: On January 26, 1996, the Company was acquired by FYI. In connection with the Merger, the Company assumed a note payable to the Parent's stockholders in the amount of $190,590 and distributed advances receivable from the Parent of $816,335. Had these transactions been recorded at December 31, 1995, the effect on the accompanying balance sheet would be an increase in liabilities of $190,590, a decrease in assets of $816,335 and a decrease in stockholders' equity of $1,006,925. (See Note 1.) F-64 116 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Leonard Archives, Inc.: We have audited the accompanying balance sheets of Leonard Archives, Inc. (a Michigan corporation) as of December 31, 1994 and 1995, and the related statements of operations, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Leonard Archives, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996 F-65 117 LEONARD ARCHIVES, INC. BALANCE SHEETS
DECEMBER 31, ------------------------- 1994 1995 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents......................................... $ 36,190 $ 13,414 Accounts receivable, less allowance for doubtful accounts of $35,000 for each period........................................ 901,459 888,352 Accounts receivable -- affiliates................................. 280,033 259,236 Accounts receivable -- officer and employees...................... 14,189 67,043 Prepaids and other current assets................................. 104,702 124,106 ---------- ---------- Total current assets...................................... 1,336,573 1,352,151 PROPERTY AND EQUIPMENT, net......................................... 1,670,307 1,962,635 OTHER NONCURRENT ASSETS............................................. 14,275 16,775 ---------- ---------- Total assets.............................................. $3,021,155 $3,331,561 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Short-term obligations............................................ $ 625,431 $ 315,797 Short-term obligations to stockholder............................. -- 500,000 Current maturities of long-term obligations....................... 219,823 707,241 Accounts payable and accrued liabilities.......................... 846,065 662,379 Unearned income................................................... 377,372 333,590 ---------- ---------- Total current liabilities................................. 2,068,691 2,519,007 LONG-TERM OBLIGATIONS, net of current maturities.................... 664,926 723,603 LONG-TERM OBLIGATIONS TO AFFILIATES, net of current maturities........................................................ 42,484 19,326 ---------- ---------- Total liabilities......................................... 2,776,101 3,261,936 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, par value $10, 8,500 shares authorized, 4,293 shares outstanding for all periods.................................... 42,930 42,930 Retained earnings................................................. 202,124 26,695 ---------- ---------- Total stockholders' equity................................ 245,054 69,625 ---------- ---------- Total liabilities and stockholders' equity................ $3,021,155 $3,331,561 ========== ==========
The accompanying notes are an integral part of these financial statements. F-66 118 LEONARD ARCHIVES, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------- 1993 1994 1995 ---------- ---------- ---------- SERVICE REVENUE........................................ $4,372,109 $5,006,725 $5,858,023 COST OF SERVICES....................................... 2,395,102 3,135,573 3,136,965 DEPRECIATION........................................... 133,668 231,261 305,614 ---------- ---------- ---------- Gross profit................................. 1,843,339 1,639,891 2,415,444 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 1,543,994 1,576,865 1,627,377 ---------- ---------- ---------- Operating income............................. 299,345 63,026 788,067 OTHER (INCOME) EXPENSE: Interest expense..................................... 74,354 114,894 144,155 Interest income...................................... (14,657) (18,653) (18,320) Other (income) expense, net.......................... 5,062 (44,161) 2,661 ---------- ---------- ---------- NET INCOME............................................. $ 234,586 $ 10,946 $ 659,571 ========== ========== ========== PRO FORMA DATA (Unaudited -- See Note 11): HISTORICAL NET INCOME.................................. $ 234,586 $ 10,946 $ 659,571 PRO FORMA COMPENSATION DIFFERENTIAL.................... 159,470 60,000 144,821 PRO FORMA PROVISION FOR INCOME TAXES................... 130,175 35,485 276,893 ---------- ---------- ---------- PRO FORMA NET INCOME................................... $ 263,881 $ 35,461 $ 527,499 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-67 119 LEONARD ARCHIVES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL ------------------ RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------- --------- ------------- BALANCE, December 31, 1992....................... 4,293 $42,930 $ 145,492 $ 188,422 Dividends declared............................. -- -- (107,900) (107,900) Net income..................................... -- -- 234,586 234,586 ----- ------- --------- --------- BALANCE, December 31, 1993....................... 4,293 42,930 272,178 315,108 Dividends declared............................. -- -- (81,000) (81,000) Net income..................................... -- -- 10,946 10,946 ----- ------- --------- --------- BALANCE, December 31, 1994....................... 4,293 42,930 202,124 245,054 Dividends declared............................. -- -- (835,000) (835,000) Net income..................................... -- -- 659,571 659,571 ----- ------- --------- --------- BALANCE, December 31, 1995....................... 4,293 $42,930 $ 26,695 $ 69,625 ===== ======= ========= =========
The accompanying notes are an integral part of these financial statements. F-68 120 LEONARD ARCHIVES, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------- 1993 1994 1995 --------- --------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net income........................................... $ 234,586 $ 10,946 $ 659,571 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization..................... 133,668 231,261 305,614 Changes in operating assets and liabilities-- (Increase) decrease in-- Accounts receivable, net..................... (209,273) (183,387) (18,950) Prepaid and other assets..................... (13,578) (5,796) (21,904) Increase (decrease) in-- Accounts payable and accrued liabilities..... 131,010 229,416 (183,686) Unearned income.............................. 74,525 94,280 (43,782) --------- --------- ----------- Net cash provided by operating activities............................ 350,938 376,720 696,863 --------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.................. (139,750) (607,035) (504,023) --------- --------- ----------- Net cash used in investing activities... (139,750) (607,035) (504,023) --------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on short-term obligations......... -- (79,434) (1,546,196) Principal payments on long-term obligations.......... (118,084) (127,115) (170,982) Proceeds from short-term obligations................. 16,401 531,515 1,736,562 Proceeds from long-term obligations.................. -- -- 600,000 Payment of dividends................................. (107,900) (81,000) (835,000) --------- --------- ----------- Net cash provided by (used in) financing activities............................ (209,583) 243,966 (215,616) --------- --------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 1,605 13,651 (22,776) CASH AND CASH EQUIVALENTS, at beginning of period...... 20,934 22,539 36,190 --------- --------- ----------- CASH AND CASH EQUIVALENTS, at end of period............ $ 22,539 $ 36,190 $ 13,414 ========= ========= =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for-- Interest.......................................... $ 69,378 $ 102,951 $ 136,029 NONCASH TRANSACTIONS: Equipment acquired through capital lease obligations....................................... $ 90,111 $ 149,500 $ 93,919
The accompanying notes are an integral part of these financial statements. F-69 121 LEONARD ARCHIVES, INC. NOTES TO FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Leonard Archives, Inc. (the "Company") stores records, computer media and microfilm for all industries. The Company also provides document destruction as a complement to complete records management. The Company operates out of two Detroit facilities and three other facilities, in Ann Arbor and Farmington Hills, Michigan, and in Toledo, Ohio. In October 1995, the Company and its stockholder entered into a definitive agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will merge with FYI (the "Merger"). All outstanding shares of the Company's common stock will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Building improvements are depreciated over the lesser of the asset's useful life or the lease-term. Unearned Income Unearned income represents customer storage services which are billed in advance. Other Long-Lived Assets The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121), which is establishing accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 to have any effect on the financial statements. The Company will adopt SFAS 121 in 1996. Revenue Recognition Revenue is recognized when the services are rendered. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards (SFAS) No. 105, consist primarily of trade receivables. Trade receivables are primarily short-term receivables from clients located in Michigan and Ohio. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. F-70 122 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:
ESTIMATED DECEMBER 31, USEFUL LIVES --------------------------- (YEARS) 1994 1995 ------------ ----------- ----------- Land......................................... NA $ 2,581 $ 2,581 Building and building improvements........... 7-18 900,015 904,524 Warehouse and vault equipment................ 5-15 1,306,586 1,696,107 Transportation equipment..................... 3-7 65,752 72,572 Equipment under capital leases............... 5 274,833 359,088 Office equipment............................. 5-7 236,280 327,851 Data disintegration equipment................ 10 249,644 261,245 ----------- ----------- 3,035,691 3,623,968 Less -- Accumulated depreciation and amortization............................... 1,365,384 1,661,333 ----------- ----------- $ 1,670,307 $ 1,962,635 =========== ===========
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:
DECEMBER 31, --------------------- 1994 1995 -------- -------- Bank demand note, expiring June 1999, interest at prime plus 0.75% (9.25% at December 31, 1994), secured by accounts receivable and machinery and equipment....................... $118,621 $ -- Bank master equipment line of credit, each borrowing payable on demand and is termed-out over 36 equal monthly payments, accrued interest at prime plus 0.75% (9.25% at December 31, 1994), payable monthly, secured by accounts receivable and machinery and equipment...................................... 241,810 -- Bank working capital line of credit, payable on demand, accrued interest at prime plus 1.25% (9.75% at December 31, 1995), secured by a first security interest in all accounts receivable, machinery, and equipment, and a personal guarantee by the stockholder ................................ -- 315,797 Bank demand master equipment note, monthly payment of $5,000 plus accrued interest at prime plus 0.75% (9.25% at December 31, 1994), matures 1999, secured by accounts receivable and machinery and equipment...................................... 265,000 -- -------- -------- $625,431 $315,797 ======== ========
F-71 123 LEONARD ARCHIVES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Short-term obligations to affiliates consist of the following:
DECEMBER 31, ----------------------- 1994 1995 -------- ---------- Note payable -- stockholder, payable on demand, accrued interest at 8.75%, unsecured............................... $ -- $ 500,000
5. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following:
DECEMBER 31, ----------------------- 1994 1995 -------- ---------- Mortgage payable -- bank, monthly payment of $8,500, including principal and interest at prime plus 0.75% (9% and 9.5% at December 31, 1994 and 1995, respectively), maturing October 1, 1996, secured by a first mortgage on the land, building, and certain equipment and guaranteed by the stockholder and a former stockholder................... $561,644 $ 503,529 Note payable -- Detroit Economic Growth Council, monthly payment of $1,353, including principal and interest at 6.1%, maturing June 1, 1995, secured by certain assets of the Company and guaranteed by the stockholder and his wife....................................................... 7,979 -- Mortgage payable -- bank, monthly payment of $7,978, including principal and interest at prime plus 1.25% (9.75% at December 31, 1995), maturing December 1, 2000, secured by a second mortgage on the land, building, and certain equipment and guaranteed by the stockholder. .............. -- 600,000 Note payable -- bank, monthly payment of $517, including principal and interest at 12%, maturing May 1998, secured by automobile.............................................. 17,310 12,895 Capital lease obligations -- interest rates ranging from 3% to 15.9%, maturing at dates from January 1996 to September 2000....................................................... 202,249 233,951 -------- ---------- Total.............................................. 789,182 1,350,375 Less -- Current maturities................................... 124,256 626,772 -------- ---------- $664,926 $ 723,603 ======== ==========
Long-term obligations to affiliates consist of the following:
DECEMBER 31, -------------------- 1994 1995 -------- ------- Note payable -- Leonard Investments, monthly payment of $1,185, including principal and interest at prime plus 1% (9.5% at December 31, 1994 and 1995), maturing in 1998, unsecured...... $ 37,193 $26,157 Note payable -- Leonard Investments, monthly payment of $861, including principal and interest at prime plus 1% (9.5% at December 31, 1994 and 1995), maturing January 1996, unsecured..................................................... 31,691 14,471
F-72 124 LEONARD ARCHIVES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, --------------------- 1994 1995 -------- -------- Note payable -- Leonard Investments, interest payable annually at prime plus 1% (9.5% and 8.75% at December 31, 1994 and 1995, respectively), maturing January 1996, unsecured......... $ 69,167 $59,167 -------- ------- Total................................................. 138,051 99,795 Less -- Current maturities...................................... 95,567 80,469 -------- ------- $ 42,484 $19,326 ======== =======
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:
DECEMBER 31, --------------------- 1994 1995 -------- -------- Accounts payable............................................... $582,185 $409,972 Accrued compensation, benefits, and taxes...................... 117,582 179,009 Other.......................................................... 146,298 73,398 -------- -------- $846,065 $662,379 ======== ========
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:
CAPITAL OPERATING LEASES LEASES -------- ---------- 1996......................................................... $100,136 $ 459,882 1997......................................................... 65,156 672,467 1998......................................................... 66,179 657,903 1999......................................................... 27,234 590,892 2000......................................................... 10,840 475,280 Thereafter................................................... -- 2,355,520 -------- ---------- Total minimum lease payments................................. 269,545 $5,211,944 ========== Less -- Amounts representing interest........................ 35,594 -------- Present value of net minimum lease payments.................. 233,951 Less -- Current portion of obligations under capital leases..................................................... 82,083 -------- Long-term portion of obligations under capital leases........ $151,868 ========
Rental expense for all operating leases was approximately $354,894, $569,762, and $531,735 for the years ended December 31, 1993, 1994 and 1995, respectively. F-73 125 LEONARD ARCHIVES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. EMPLOYEE BENEFIT PLAN: In 1994, the Company adopted a discretionary retirement plan covering substantially all of its employees. Retirement expenses are funded through annual contributions to the plan. Expenses related to the plan were $15,982 and $24,227 for the years ended December 31, 1994 and 1995, respectively. 9. COMMITMENTS AND CONTINGENCIES: Litigation The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involves claims for workers' compensation, unemployment, and property damage incurred in connection with its operations. Management believes none of these actions will have a material adverse effect on the financial position or results of operations of the Company. 10. RELATED-PARTY TRANSACTIONS: The Company leases its operating facilities in Toledo and Trumbull (Detroit) from Leonard Investments. These leases are for various lengths and annual amounts. The rental expense for these operating leases for the years ended December 31, 1993, 1994 and 1995, were $127,000, $126,000, and $127,000, respectively. The Company is also borrowing funds from Leonard Investments as described in Note 5. Leonard Investments is a partnership owned by the stockholder and a former stockholder of the Company. The Ann Arbor facility is leased from a former stockholder. Rental expense for the Ann Arbor facility was $62,064 for the years ended December 31, 1993, 1994, and 1995. Accounts receivable -- affiliate represents amounts due from Accumed Billing, Inc. and Pathfinders, Inc. The sole stockholder of the Company and his relatives own a 78% interest in Accumed Billing, Inc. and a 33% interest in Pathfinders, Inc. The receivables relate primarily to employee services provided to Accumed Billing, Inc. and Pathfinders, Inc. Leonard has guaranteed a promissory note in the principal amount of approximately $636,000 as of December 31, 1995, with interest at 10%, payable in monthly installments in varying amounts through December 1, 2004. The promissory note is from the stockholder to the former joint owner in Leonard. Leonard's guarantee and security interest are subordinate to all other notes payable to the bank and the Detroit Economic Growth Council. 11. PRO FORMA NET INCOME (UNAUDITED): Selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during these periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger. In connection with this merger, the stockholder has entered into a three year employment agreement with FYI which provides for set base salary, participation in any future FYI incentive bonus plans, four week paid vacation, a car allowance, health benefits, and a two year covenant-not-to-compete following termination of such person's employment. The stockholder's employment agreement provides for a $100,000 base salary. The unaudited pro forma data presents compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Offering. In addition, the pro forma data presents the provision for income taxes as if the Company had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above. F-74 126 LEONARD ARCHIVES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 12. SUBSEQUENT EVENTS: In October 1995, the Company and its stockholder entered into a definitive agreement to be acquired by FYI. This transaction was subsequently closed on January 26, 1996. In conjunction with this merger, prior to year-end, the Company distributed cash to its stockholder in the amount of $700,000 which represented the AAA account of the Company. In addition, the Company can make an additional distribution corresponding to the increase in net stockholders' equity from June 30, 1995 to November 30, 1995, not to exceed $75,000. The amount available for the additional distribution at December 31, 1995, is $75,000. Had these transactions been recorded at December 31, 1995, the effect on the accompanying balance sheet would be a decrease in total assets and a decrease in stockholder's equity of $75,000. F-75 127 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To C.&T. Management Services, Inc.: We have audited the accompanying combined balance sheets of C.&T. Management Services, Inc. (a California corporation) and Related Company as of December 31, 1994 and 1995, and the related combined statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of C.&T. Management Services, Inc. and Related Company as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996 F-76 128 C. & T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY COMBINED BALANCE SHEETS
DECEMBER 31, ----------------------------- 1994 1995 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents........................................ $ 24,115 $ 58,823 Accounts receivable, less allowance of $44,265 and $19,286....... 820,896 956,089 Note receivable -- current....................................... 52,386 424,649 Prepaid and other current assets................................. 34,259 36,748 ---------- ---------- Total current assets..................................... 931,656 1,476,309 PROPERTY AND EQUIPMENT, net........................................ 221,773 257,716 NOTE RECEIVABLE, NET OF CURRENT PORTION............................ 429,219 -- OTHER NONCURRENT ASSETS, net....................................... 25,108 17,255 ---------- ---------- Total assets............................................. $1,607,756 $1,751,280 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Short-term obligations........................................... $ 757,189 $ 496,809 Current maturities of long-term obligations...................... 24,034 26,234 Accounts payable and accrued liabilities......................... 429,799 468,845 Stockholder note payable -- current.............................. 519,808 563,514 Current portion of deferred income taxes......................... 15,857 15,857 ---------- ---------- Total current liabilities................................ 1,746,687 1,571,259 LONG-TERM OBLIGATIONS: Notes payable.................................................... 6,221 -- Stockholder note payables, net of current........................ 35,126 19,969 ---------- ---------- Total liabilities............................................. 1,788,034 1,591,228 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $1 par value and no par (Note 12), authorized 125,000 shares, 3,100 shares issued and outstanding........... 4,000 4,000 Additional paid-in capital....................................... 1,285 1,285 Retained (deficit) earnings...................................... (185,563) 154,767 ---------- ---------- Total stockholders' equity (deficit)..................... (180,278) 160,052 ---------- ---------- Total liabilities and stockholders' equity (deficit)..... $1,607,756 $1,751,280 ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-77 129 C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------- 1993 1994 1995 ---------- ---------- ---------- REVENUES............................................... $5,804,738 $5,337,100 $5,369,412 COST OF SERVICES....................................... 4,001,734 3,975,161 3,560,791 DEPRECIATION EXPENSE................................... 66,999 52,797 53,007 ---------- ---------- ---------- Gross profit................................. 1,736,005 1,309,142 1,755,614 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 1,633,876 1,508,037 1,414,629 ---------- ---------- ---------- Operating income (loss)........................... 102,129 (198,895) 340,985 OTHER (INCOME) EXPENSE: Interest expense..................................... 93,815 102,969 126,406 Interest income...................................... (10,969) (50,116) (51,460) Other income, net.................................... (46,255) (135,809) (95,891) ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES...................... 65,538 (115,939) 361,930 PROVISION FOR INCOME TAXES............................. 1,600 1,600 1,600 ---------- ---------- ---------- Net income (loss)............................ $ 63,938 $ (117,539) $ 360,330 ========== ========== ========== PRO FORMA DATA (Unaudited -- See Note 14): HISTORICAL NET INCOME (LOSS)........................... $ 63,938 $ (117,539) $ 360,330 PRO FORMA COMPENSATION DIFFERENTIAL.................... 224,187 177,531 171,383 PRO FORMA PROVISION FOR INCOME TAXES................................................ 119,101 22,231 199,326 ---------- ---------- ---------- PRO FORMA NET INCOME................................... $ 169,024 $ 37,761 $ 332,387 ========== ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-78 130 C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
TOTAL COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS' ---------------- PAID-IN EARNINGS EQUITY SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT) ------ ------ ---------- --------- ------------- BALANCE, December 31, 1992................. 3,100 4,000 1,285 (131,962) (126,677) Net income............................... -- -- -- 63,938 63,938 ----- ------ ------ ---------- ---------- BALANCE, December 31, 1993................. 3,100 4,000 1,285 (68,024) (62,739) Net loss................................. -- -- -- (117,539) (117,539) ----- ------ ------ ---------- ---------- BALANCE, December 31, 1994................. 3,100 4,000 1,285 (185,563) (180,278) Dividend................................. -- -- -- (20,000) (20,000) Net income............................... -- -- -- 360,330 360,330 ----- ------ ------ ---------- ---------- BALANCE, December 31, 1995................. 3,100 $4,000 $1,285 $ 154,767 $ 160,052 ===== ====== ====== ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-79 131 C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 1993 1994 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 63,938 $(117,539) $ 360,330 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation/amortization.............................. 66,999 52,797 53,007 Gain on sale........................................... -- (40,000) -- Deferred tax benefit................................... (3,307) -- -- Changes in operating assets and liabilities -- (Increase) decrease in -- Accounts receivable, net.......................... 74,750 (49,785) (135,193) Prepaid and other assets.......................... (77,165) 39,161 5,364 Increase (decrease) in -- Accounts payable and accrued liabilities.......... (49,645) 107,135 39,046 --------- --------- --------- Net cash provided by (used in) operating activities................................. 75,570 (8,231) 322,554 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: (Additions) dispositions of property and equipment........ (15,696) (34,967) (88,950) --------- --------- --------- Net cash (used in) investing activities...... (15,696) (34,967) (88,950) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from line of credit.......................... 25,000 -- -- Principal payments on stockholder notes payable........... (179,195) (116,970) (13,451) Proceeds from stockholder notes payable................... -- 310,000 42,000 Principal payments on short-term obligations.............. (204,117) (210,990) (260,380) Principal payments on long-term obligations............... (146,687) (17,606) (24,036) Proceeds from short-term borrowings....................... 253,352 11,162 20,015 Principal collected on note receivable.................... 14,157 78,092 56,956 Issuance of note receivable............................... (14,410) -- -- Dividends paid............................................ -- -- (20,000) --------- --------- --------- Net cash provided by (used in) financing activities................................. (251,900) 53,688 (198,896) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (192,026) 10,490 34,708 CASH AND CASH EQUIVALENTS, at beginning of year............. 205,651 13,625 24,115 --------- --------- --------- CASH AND CASH EQUIVALENTS, at end of year................... $ 13,625 $ 24,115 $ 58,823 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Interest............................................. $ 92,397 $ 105,757 $ 128,192 Taxes................................................ 4,300 1,600 1,600 NONCASH TRANSACTIONS: Note receivable received in connection with sale of building............................................... $ 550,000 $ -- $ --
The accompanying notes are an integral part of these combined financial statements. F-80 132 C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: The accompanying combined financial statements include the accounts of C.&T. Management Services, Inc. (dba DPAS) and Qualidata, Inc. (dba The Mail House -- the "Related Company") (collectively the "Company"). The Company's principal business is providing data processing, information management, and bulk mailing services for its customers who are located primarily on the West Coast. The Company and its stockholders entered into a definitive agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will merge with FYI (the "Merger"). All outstanding shares of the Company's common stock will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation The companies discussed in Note 1 are all under common control of two stockholders. All significant intercompany transactions have been eliminated in combination. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Intangible and Other Long-Lived Assets The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121: Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS 121) which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 to have any effect on the combined financial statements. The Company will adopt SFAS 121 in 1996. Revenue Recognition Revenue is recognized when services are rendered. Income Taxes The companies are S corporations for income tax purposes and, accordingly, any federal income tax liabilities are the responsibility of the stockholders. The Company's S corporation status will terminate with the effective date of the Merger discussed in Note 1. Reclassifications Certain prior year amounts have been reclassified to make their presentation consistent with the current year. Concentration of Credit Risk Financial instruments that potentially expose the Company to concentration of credit risk, as defined by Statement of Financial Accounting Standards (SFAS) No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in the Western United States and the primary F-81 133 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:
DECEMBER 31, --------------------- 1995 1994 -------- -------- Sunrise Mushroom -- interest rate at 12% with monthly principal and interest payments of $9,125, balloon payment due at maturity on January 16, 1996. The note is secured by a commercial building sold to Sunrise Mushroom by the Company in 1993...................................................... $480,000 $424,649 Other notes receivable, noninterest bearing.................... 1,605 -- -------- -------- Total notes receivable............................... 481,605 424,649 Less -- Current portion........................................ 52,386 424,649 -------- -------- $429,219 $ -- ======== ========
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:
ESTIMATED DECEMBER 31, USEFUL LIVES -------------------------- (YEARS) 1994 1995 ------------- ---------- ----------- Autos and trucks.............................. 5 $ 198,794 $ 198,794 Furniture and equipment....................... 5-10 1,754,905 1,842,360 ---------- ----------- 1,953,699 2,041,154 Less -- Accumulated depreciation.............. 1,731,926 1,783,438 ---------- ----------- $ 221,773 $ 257,716 ========== ===========
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, --------------------- 1994 1995 -------- -------- Accounts payable............................................... $282,972 $384,967 Sales tax payable.............................................. 17,027 15,991 Other accrued liabilities...................................... 114,766 59,498 Accrued compensation, benefits, and taxes...................... 15,034 8,389 -------- -------- $429,799 $468,845 ======== ========
F-82 134 C.&T. MANAGEMENT SERVICES, INC. AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 6. SHORT-TERM OBLIGATION:
DECEMBER 31, --------------------- 1994 1995 -------- -------- Note payable -- bank; interest at the bank's index rate prime plus 1.0%; monthly payments of $10,000, 9.5% and 10.75% at December 31, 1994 and 1995, maturing January 1, 1998......... $300,000 $252,724 Trust deed payable; interest at the Bank's index rate prime plus 1.5% (floor of 9.0%); monthly payments of $6,085; maturity January 15, 1998; at December 31, 1994 and 1995, the interest rate was 11% and 11.25% secured by first trust deed on commercial property....................................... 197,189 144,085 Note payable -- bank; monthly principal of $8,333 plus interest at prime plus 2% and a maturity date of December 1996; interest rate at December 31, 1994 and 1995, was 10.5% and 10.75%; secured by non-real estate assets of the Company..... 200,000 100,000 Note payable -- bank; monthly principal of $5,000 plus interest at prime plus 2% and a maturity date of January 1996; secured by non-real estate assets of the Company..................... 60,000 -- -------- -------- Total................................................ $757,189 $496,809 ======== ========
7. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following:
DECEMBER 31, ------------------- 1994 1995 ------- ------- Note payable -- EMC Corp.; interest rate at 14.658% with monthly payments of $1,004 and a maturity date of June, 1996........... $16,129 $ 5,772 Note payable -- bank; interest rate at 11.25% with monthly payments of $227 and a maturity date of February 1996; secured by 1990 Ford truck............................................. 2,964 447 Vendor notes payable............................................. 11,162 20,015 ------- ------- Total.................................................. 30,255 26,234 Less -- Current maturities....................................... 24,034 26,234 ------- ------- $ 6,221 $ -- ======= =======
As of December 31, 1994 and 1995, the Company has complied with all loan covenants. 8. OPERATING LEASES: The Company leases its office buildings, office equipment, and computer software under noncancelable lease agreements which expire at various dates. Lease payments for the years ended December 31, 1993, 1994, F-83 135 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: 1996............................................................. $ 262,465 1997............................................................. 266,917 1998............................................................. 261,969 1999............................................................. 245,081 2000............................................................. 226,147 Thereafter....................................................... 709,259 ---------- Total.................................................. $1,971,838 ==========
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:
YEAR ENDED DECEMBER 31, ----------------------------- 1993 1994 1995 ------- ------ ------ Current......................................... $ 4,907 $1,600 $1,600 Deferred........................................ (3,307) -- -- ------- ------ ------ $ 1,600 $1,600 $1,600 ======= ====== ======
11. COMMITMENTS AND CONTINGENCIES: Litigation The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involve workers' compensation and unemployment claims incurred in connection with its operations. Management believes that none of these actions will have a material adverse effect on the financial position or results of operations of the Company. F-84 136 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:
SHARES -------------------------- PAR ISSUED AND TOTAL VALUE AUTHORIZED OUTSTANDING VALUE ------ ---------- ----------- ------ C&T Management Services, Inc.............. $1.00 25,000 3,000 $3,000 Qualidata, Inc. .......................... No par 100,000 100 1,000 ------- ----- ------ 125,000 3,100 $4,000 ======= ===== ======
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: 1996............................................................... $18,012 1997............................................................... 19,969 ------- $37,981 =======
14. PRO FORMA NET INCOME (UNAUDITED): Selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that the owner and certain key employees received during the periods. The owner and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger. In connection with the Merger, each stockholder has entered into a three-year employment agreement with FYI which provides for set base salary, participation in any future FYI incentive bonus plans, four week paid vacation, a car allowance, health benefits and a two year covenant-not-to-compete following termination of such person's employment. The stockholders' employment agreements provide for an aggregate base salary of $220,000. The unaudited pro forma data presents compensation at the level the officers and owner of the Company have agreed to receive subsequent to the Offering. In addition, the following pro forma data presents the provision for income taxes as if the Company had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above. 15. SUBSEQUENT EVENTS: In October 1995, the Company and its stockholders entered into a definitive agreement to be acquired by FYI. This transaction was subsequently closed on January 26, 1996. In conjunction with the Merger, the Company will dividend to the stockholders, a note receivable totaling $424,649 and related mortgage note payable of $144,085. In addition, the Company will make a cash distribution of $250,000 prior to the closing of the merger of which $20,000 was distributed prior to year-end. Had these transactions been recorded at December 31, 1995, the effect on the accompanying balance sheet would be a decrease in total assets of $654,649, total liabilities of $144,085, and stockholders' equity of $510,564. In addition certain cash proceeds of the Offering will be used to repay the stockholder notes payable of $583,483. F-85 137 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Deliverex, Incorporated: We have audited the accompanying combined balance sheets of Deliverex, Incorporated (a California corporation) and Subsidiary and Related Company as of September 30, 1994, and December 31, 1995, and the related combined statements of operations, stockholders' equity, and cash flows for each of the years ended September 30, 1993 and 1994, and December 31, 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Deliverex, Incorporated and Subsidiary and Related Company as of September 30, 1994 and December 31, 1995, and the combined results of their operations and their combined cash flows for each of the years ended September 30, 1993 and 1994, and December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996 F-86 138 DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY COMBINED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1994 1995 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents........................................ $ 120,948 $ 210,444 Accounts receivable.............................................. 129,397 288,197 Accounts receivable -- stockholder............................... 314,731 314,731 Deferred tax assets current...................................... 112,030 -- Prepaid and other current assets................................. 3,180 9,410 --------- ---------- Total current assets..................................... 680,286 822,782 PROPERTY AND EQUIPMENT, net........................................ 172,675 172,926 ADVANCES TO OFFICER................................................ 73,403 73,403 OTHER NONCURRENT ASSETS, net....................................... 48,948 48,948 --------- ---------- Total assets............................................. $ 975,312 $1,118,059 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term obligations........................................... $ 47,270 $ 39,258 Deferred tax liabilities......................................... -- 10,964 Current maturities of long-term obligations...................... 27,564 22,098 Accounts payable and accrued liabilities......................... 250,614 196,725 --------- ---------- Total current liabilities................................ 325,448 269,045 LONG-TERM OBLIGATIONS, net of current maturities................... 430,318 403,263 OTHER LONG-TERM LIABILITIES........................................ 49,728 -- --------- ---------- Total liabilities........................................ 805,494 672,308 --------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, authorized 510,000 shares, 107,000 shares issued........................................................ 9,900 9,900 Retained earnings................................................ 160,918 435,851 --------- ---------- 170,818 445,751 Less -- Treasury stock, 10,000 shares in 1994, no par; $1,000 assigned value................................................ 1,000 -- --------- ---------- Total stockholders' equity............................... 169,818 445,751 --------- ---------- Total liabilities and stockholders' equity............... $ 975,312 $1,118,059 ========= ==========
The accompanying notes are an integral part of these combined financial statements. F-87 139 DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED ------------------------------------------ SEPTEMBER 30, ------------------------- DECEMBER 31, 1993 1994 1995 ---------- ---------- ------------ REVENUES: Service revenue..................................... $2,321,024 $2,338,379 $2,555,394 Other revenue....................................... 251,026 267,601 311,653 ---------- ---------- ---------- 2,572,050 2,605,980 2,867,047 COST OF SERVICES...................................... 1,647,265.. 1,684,738 1,643,271 DEPRECIATION.......................................... 75,656.... 58,320 52,393 ---------- ---------- ---------- Gross profit................................ 849,129 862,922 1,171,383 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES......... 672,894 798,407 822,942 ---------- ---------- ---------- Operating income............................ 176,235 64,515 348,441 OTHER (INCOME) EXPENSE: Interest expense.................................... 24,934 21,937 23,435 Interest income..................................... (140) (135) (3,614) Other (income) expense, net......................... (592) (9,112) (1,665) ---------- ---------- ---------- INCOME BEFORE INCOME TAXES............................ 152,033 51,825 330,285 PROVISION (BENEFIT) FOR INCOME TAXES.................. 51,846 (10,519) 99,529 ---------- ---------- ---------- Net income.................................. $ 100,187 $ 62,344 $ 230,756 ========== ========== ========== PRO FORMA DATA (Unaudited -- see Note 13): HISTORICAL NET INCOME................................. $ 100,187 $ 62,344 $ 230,756 PRO FORMA COMPENSATION DIFFERENTIAL................... 80,679 189,200 211,864 PRO FORMA PROVISION FOR INCOME TAXES.................. 41,268 75,868 103,150 ---------- ---------- ---------- PRO FORMA NET INCOME.................................. $ 139,598 $ 175,676 $ 339,470 ========== ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-88 140 DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON SHARES RETAINED TREASURY STOCK TREASURY TOTAL ---------------- EARNINGS ----------------- STOCK STOCKHOLDERS' SHARES AMOUNT (DEFICIT) SHARES AMOUNT SUBSCRIBED EQUITY ------- ------ -------- ------- -------- -------- --------- BALANCE, September 30, 1992......... 107,000 $9,900 $ (1,613) 10,000 $(1,000) $ -- $ 7,287 Net income........................ -- -- 100,187 -- -- -- 100,187 ------- ------ -------- ------- ------- -------- --------- BALANCE, September 30, 1993......... 107,000 9,900 98,574 10,000 (1,000) -- 107,474 Net income........................ -- -- 62,344 -- -- -- 62,344 ------- ------ -------- ------- ------- -------- --------- BALANCE, September 30, 1994......... 107,000 9,900 160,918 10,000 (1,000) -- 169,818 Treasury stock subscribed......... -- -- -- -- -- 1,000 1,000 Net income -- October 1, 1994, to December 31, 1994............... -- -- 44,177 -- -- -- 44,177 ------- ------ -------- ------- ------- -------- --------- BALANCE, January 1, 1995............ 107,000 9,900 205,095 10,000 (1,000) 1,000 214,995 Reissuance of treasury stock...... -- -- -- (10,000) 1,000 (1,000) -- Net income........................ -- -- 230,756 -- -- -- 230,756 ------- ------ -------- ------- ------- -------- --------- BALANCE, December 31, 1995.......... 107,000 $9,900 $435,851 -- $ -- $ -- $ 445,751 ======= ====== ======== ======= ======= ======== =========
The accompanying notes are an integral part of these combined financial statements. F-89 141 DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED --------------------------------------- SEPTEMBER 30, DECEMBER 31, ---------------------- ------------ 1993 1994 1995 --------- -------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................ $ 100,187 $ 62,344 $ 230,756 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation....................................... 75,656 58,320 52,393 Deferred tax expense (benefit)..................... 26,965 (8,396) 107,970 Changes in operating assets and liabilities -- (Increase) decrease in -- Accounts receivable, net...................... (33,803) 8,711 (143,461) Prepaid expenses and other assets............. 16,001 1,138 (6,230) Increase (decrease) in -- Accounts payable and accrued liabilities...... (157,655) (8,998) (48,277) Other liabilities............................. 77,641 (46,568) (19,402) --------- -------- ---------- Net cash provided by operating activities............................. 104,992 66,551 173,749 --------- -------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment................... (65,477) (60,150) (63,350) Decrease in notes receivable.......................... (40,193) (4,575) -- --------- -------- ---------- Net cash used in investing activities.... (105,670) (64,725) (63,350) --------- -------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on short-term obligations.............. -- 47,270 (6,674) Proceeds from long-term obligations................... 30,178 6,267 -- Principal payments on long-term obligations........... (47,121) (35,274) (21,964) --------- -------- ---------- Net cash provided by (used in) financing activities............................. (16,943) 18,263 (28,638) --------- -------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (17,621) 20,089 81,761 ADJUSTMENT TO CONFORM FISCAL YEAR-END TO A CALENDAR YEAR-END.............................................. -- -- 7,735 CASH AND CASH EQUIVALENTS, at beginning of period................................ 118,480 100,859 120,948 --------- -------- ---------- CASH AND CASH EQUIVALENTS, at end of period...................................... $ 100,859 $120,948 $ 210,444 ========= ======== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Interest.............................................. $ 24,934 $ 21,824 $ 23,548 Income taxes.......................................... 12,813 9,496 24,934
The accompanying notes are an integral part of these combined financial statements. F-90 142 DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: The accompanying combined financial statements include the accounts of Deliverex, Incorporated (DLX), its wholly owned subsidiary Peninsula Records Management, Inc. (PRM) and ASK Record Management, Inc. (ASK -- the "Related Company") (collectively the "Company"). The Company specializes in storing and managing active and inactive files for hospitals throughout the United States but has customers primarily located on the West Coast. The Company also has franchises that are located in San Francisco, Sacramento, Seattle, and Denver. In October 1995, the Company's stockholders entered into a definitive agreement with F.Y.I. Incorporated ("FYI") pursuant to which the Company will be acquired by FYI (the "Merger"). All outstanding shares of the Company's common stock will be exchanged for cash and shares of FYI's common stock concurrent with the consummation of the initial public offering (the "Offering") of the common stock of FYI. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation The companies referred to in Note 1 are all under common control. All significant intercompany transactions have been eliminated in combination. Fiscal Year-Ends ASK has a December 31 year-end. The accompanying combined financial statements reflect the accounts and results of ASK combined with the September 30 year-end accounts and results of DLX and PRM. DLX and PRM's net income for the period from October 1 through December 31, 1994, of $44,177 is reflected as an adjustment to retained earnings on the combined statement of stockholders' equity. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. Receivable from Shareholder Receivable from shareholder represents advances made to the shareholder which are payable on demand and will be repaid as a result of the transaction discussed in Note 14. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the asset's useful life or the lease term. Franchise and License Agreements DLX has four franchise agreements and three licensee agreements. Initial franchise fees are recognized as DLX's initial services and material obligations are performed. Franchise and license agreements are for periods of up to twenty years and contain options to renew. Revenue Recognition Revenue is recognized by PRM and ASK when the services are rendered to the Company's customers. DLX's revenue is derived from monthly royalties under its franchise and licensee agreements and is F-91 143 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:
ESTIMATED USEFUL LIVES SEPTEMBER 30, DECEMBER 31, (YEARS) 1994 1995 ------------ ------------- ------------ Vehicles...................................... 5 $ 78,317 $ 81,189 Leasehold improvements........................ 5-7 17,462 20,806 Machinery and equipment....................... 7 310,169 335,032 Furniture and fixtures........................ 7 96,015 125,363 Computer equipment............................ 5 13,691 13,691 Computer system development................... 5 13,784 19,941 --------- --------- 529,438 596,022 Less -- Accumulated depreciation and amortization................................ (356,763) (423,096) --------- --------- $ 172,675 $ 172,926 ========= =========
Leasehold improvements are depreciated over the lesser of the asset's useful life or the lease term. F-92 144 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:
SEPTEMBER 30, DECEMBER 31, 1994 1995 ------------- ------------ Accounts payable........................................... $ 53,932 $100,599 Sales tax payable.......................................... 1,866 153 Income taxes payable....................................... 15,542 -- Other accrued liabilities.................................. 179,274 95,973 --------- -------- $ 250,614 $196,725 ========= ========
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:
SEPTEMBER 30, DECEMBER 31, 1994 1995 ----------- ---------- Notes payable -- Small Business Administration, due November 17, 2014, interest at 4%; monthly payments of $2,702 secured by deed of trust on real estate and non-real estate assets of the Company.................... $ 429,699 $ 409,766 Notes payable -- bank, due April 15, 1998, interest at prime plus 4% (12.5% and 13.0% at September 30, 1994 and December 31, 1995, respectively); monthly principal payments of $155 plus accrued interest; secured by 1993 Toyota truck............................................. 6,676 4,816 Notes payable -- bank, due September 15, 1998, interest at 10.15%; monthly payments of $191; secured by 1991 Ford van...................................................... 7,333 5,244 Notes payable -- bank, due April 15, 1998, interest at prime plus 3% (11.50% and 12% at September 30, 1994 and December 31, 1995, respectively); monthly principal payments of $197, plus accrued interest; secured by 1993 Toyota trucks............................................ 7,908 5,535 Other...................................................... 6,266 -- ----------- ---------- 457,882 425,361 Less -- Current maturities................................. 27,564 22,098 ----------- ---------- $ 430,318 $ 403,263 =========== ==========
The Small Business Administration note payable is secured by machinery and equipment, furniture and fixtures, and leasehold improvements of PRM as well as by personal guarantees of DLX's stockholder. DLX's stockholder has also guaranteed certain of the bank notes payable. As of September 30, 1994, and through December 31, 1995, the Company has complied with all loan covenants. F-93 145 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: 1996.............................................................. $ 22,098 1997.............................................................. 22,943 1998.............................................................. 21,263 1999.............................................................. 18,127 2000.............................................................. 14,991 Thereafter........................................................ 325,939 -------- $425,361 ========
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: 1996............................................................. $ 473,607 1997............................................................. 442,924 1998............................................................. 454,330 1999............................................................. 452,785 2000............................................................. -- ---------- Total.................................................. $1,823,646 ==========
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:
SEPTEMBER 30, DECEMBER 31, -------------------- ------------ 1993 1994 1995 ------- -------- ------------ Federal -- Current......................................... $17,756 $ (2,878) $ (8,085) Deferred........................................ 21,014 (6,488) 82,774 State -- Current......................................... 7,124 755 (356) Deferred........................................ 5,952 (1,908) 25,196 ------- --------- -------- $51,846 $(10,519) $ 99,529 ======= ========= ========
F-94 146 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:
SEPTEMBER 30, DECEMBER 31, -------------------- ------------ 1993 1994 1995 ------- -------- ------------ Tax at statutory rate............................. $51,691 $ 17,620 $113,316 Add (deduct) -- State income taxes.............................. 14,370 4,948 16,666 Nondeductible expenses.......................... 255 551 -- Effect of graduated tax rates................... (5,484) (9,068) (5,027) Effect of S corporation nontaxable income....... (8,986) (24,570) (25,426) ------- -------- -------- $51,846 $(10,519) $ 99,529 ======= ======== ========
The components of deferred income tax liabilities and assets are as follows:
SEPTEMBER 30, DECEMBER 31, 1994 1995 ------------- ------------ Deferred income tax liabilities -- Accrual to cash differences.............................. $ 49,389 $ 81,637 --------- --------- Total deferred income tax liabilities............ 49,389 81,637 Deferred income tax assets Accrual to cash differences.............................. 102,841 54,352 Accrued expenses......................................... 58,578 16,321 --------- --------- Total deferred income tax assets................. 161,419 70,673 --------- --------- Total net deferred income tax assets (liabilities).................................. $ 112,030 $(10,964) ========= =========
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:
SHARES PAR ---------------------- ASSIGNED VALUE AUTHORIZED ISSUED VALUE ----- ---------- ------- -------- Deliverex, Incorporated...................... None 10,000 7,000 $ 900 ASK Record Management, Inc................... None 500,000 100,000 9,000 ------- ------- ------ 510,000 107,000 $9,900 ======= ======= ======
ASK's common stock is 65% owned by the 100% stockholder of DLX. PRM has 10,000 shares of no par value common stock authorized, issued, and outstanding. PRM's common stock is owned by DLX. In December 1994, ASK approved the reissuance of 10,000 shares of treasury stock to its minority stockholder. Compensation expense was recorded in 1994, equivalent to the repurchase cost in 1992. The shares were reissued on January 1, 1995. F-95 147 DELIVEREX, INCORPORATED AND SUBSIDIARY AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 12. SIGNIFICANT CUSTOMER: In 1994 and 1995, the Company had one customer that accounted for 15% and 16%, respectively, of combined revenues. 13. PRO FORMA NET INCOME (UNAUDITED): Selling, general and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during the periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Merger. In connection with this merger, each stockholder has entered into a three-year employment agreement with FYI which provides for set base salary, participation in any future FYI incentive bonus plans, four-week paid vacations, a car allowance, health benefits, and a two-year covenant-not-to-compete following termination of such person's employment. The stockholders' employment agreements provide for an aggregate base salary of $247,000. The unaudited pro forma data presents compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Offering. In addition, the following pro forma data presents the provision for income taxes as if the S corporation had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above. 14. SUBSEQUENT EVENTS On January 26, 1996 the Company was acquired by FYI. In conjunction with the Merger, the Company can make an additional distribution corresponding to the increase in net stockholders' equity from June 30, 1995 to November 30, 1995, not to exceed $200,000. The amount available for the additional distribution at December 31, 1995, is $80,000. Had this transaction been recorded at December 31, 1995, the effect on the accompanying balance sheet would be a decrease in total assets and stockholders' equity of $80,000, respectively. F-96 148 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Permanent Records, Inc.: We have audited the accompanying balance sheets of Permanent Records, Inc. (a Texas corporation) as of December 31, 1994 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Permanent Records, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, March 15, 1996 F-97 149 PERMANENT RECORDS, INC. BALANCE SHEETS
DECEMBER 31, --------------------- 1994 1995 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................................ $ 16,879 $ 56,010 Accounts receivable, net of allowance for uncollectible accounts of $0 and $26,308.................................................... 163,663 266,431 Inventories.......................................................... 4,313 25,000 Prepaids and other current assets.................................... 20,841 58,395 -------- -------- Total current assets......................................... 205,696 405,836 PROPERTY AND EQUIPMENT, net............................................ 61,411 105,738 NOTE RECEIVABLE........................................................ 6,000 34,500 -------- -------- Total assets................................................. $273,107 $546,074 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term obligations............................................... $ 3,155 $115,000 Accounts payable and accrued liabilities............................. 32,303 66,383 Current portion of deferred income taxes............................. 54,761 93,041 -------- -------- Total current liabilities.................................... 90,219 274,424 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, par value $1, 100,000 shares authorized, 91,660 shares outstanding for all periods....................................... 91,660 91,660 Retained earnings.................................................... 91,228 179,990 -------- -------- Total stockholders' equity................................... 182,888 271,650 -------- -------- Total liabilities and stockholders' equity................... $273,107 $546,074 ======== ========
The accompanying notes are an integral part of these financial statements. F-98 150 PERMANENT RECORDS, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------- 1993 1994 1995 ---------- ---------- ---------- SERVICE REVENUE........................................ $1,192,633 $1,148,926 $1,562,883 COST OF SERVICE........................................ 671,845 685,235 944,747 DEPRECIATION........................................... 30,902 12,000 12,739 ---------- ---------- ---------- Gross profit................................. 489,886 451,691 605,397 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.......... 359,430 393,533 466,939 ---------- ---------- ---------- Operating income............................. 130,456 58,158 138,458 OTHER (INCOME) EXPENSE: Interest expense..................................... -- 2,338 1,350 Interest income...................................... (2,052) (1,174) (290) Other income, net.................................... (1,599) (8,929) (11,730) ---------- ---------- ---------- Income before income taxes................... 134,107 65,923 149,128 PROVISION FOR INCOME TAXES............................. 40,797 13,859 43,358 ---------- ---------- ---------- NET INCOME............................................. $ 93,310 $ 52,064 $ 105,770 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-99 151 PERMANENT RECORDS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK TOTAL ------------------ RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------- -------- ------------- BALANCE, December 31, 1992....................... 91,660 $91,660 $ 31,401 $ 123,061 Dividends declared............................. -- -- (46,201) (46,201) Net income..................................... -- -- 93,310 93,310 ------ ------- -------- --------- BALANCE, December 31, 1993....................... 91,660 91,660 78,510 170,170 Dividends declared............................. -- -- (39,346) (39,346) Net income..................................... -- -- 52,064 52,064 ------ ------- -------- --------- BALANCE, December 31, 1994....................... 91,660 91,660 91,228 182,888 Dividends declared............................. -- -- (17,008) (17,008) Net income..................................... -- -- 105,770 105,770 ------ ------- -------- --------- BALANCE, December 31, 1995....................... 91,660 $91,660 $179,990 $ 271,650 ====== ======= ======== =========
The accompanying notes are an integral part of these statements. F-100 152 PERMANENT RECORDS, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------ 1993 1994 1995 --------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................. $ 93,310 $ 52,064 $ 105,770 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation...................................... 30,902 12,000 12,739 Deferred tax expense.............................. 37,306 2,431 38,280 Changes in operating assets and liabilities -- (Increase) decrease in -- Accounts receivable, net..................... (104,709) 28,727 (102,768) Prepaid and other assets..................... -- (20,841) (37,554) Inventory.................................... -- -- (20,687) Note receivable.............................. (5,000) (1,000) (28,500) Increase (decrease) in -- Accounts payable and accrued liabilities..... (1,016) 3,378 34,080 --------- -------- --------- Net cash provided by operating activities.............................. 50,793 76,759 1,360 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.................... (16,795) (41,555) (57,066) --------- -------- --------- Net cash used in investing activities..... (16,795) (41,555) (57,066) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (payments) on line of credit, net........... (5,248) (6,767) 111,845 Payment of dividends................................... (46,201) (39,346) (17,008) --------- -------- --------- Net cash (used in) provided by financing activities.............................. (51,449) (46,113) 94,837 --------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (17,451) (10,909) 39,131 CASH AND CASH EQUIVALENTS, at beginning of period........ 45,239 27,788 16,879 --------- -------- --------- CASH AND CASH EQUIVALENTS, at end of period.............. $ 27,788 $ 16,879 $ 56,010 ========= ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Interest............................................ $ -- $ 2,338 $ 1,350 Taxes............................................... $ 4,125 $ 3,491 $ 12,017
The accompanying notes are an integral part of these financial statements. F-101 153 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-102 154 PERMANENT RECORDS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. PROPERTY AND EQUIPMENT: Property and equipment consists of the following:
ESTIMATED DECEMBER 31, USEFUL LIVES ----------------------- (YEARS) 1994 1995 ------------ --------- --------- Machinery and equipment......................... 5-7 $ 224,580 $ 282,717 Auto and trucks................................. 5-7 17,979 17,979 Construction-in-progress........................ 13,346 -- Computer software............................... 3-5 -- 12,275 --------- --------- 255,905 312,971 Less -- Accumulated depreciation................ 194,494 207,233 --------- --------- $ 61,411 $ 105,738 ========= =========
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, ------------------- 1994 1995 ------- ------- Income taxes payable............................................. $ 7,303 $ 5,078 Other accrued liabilities........................................ 25,000 61,305 ------- ------- Total accounts payable and accrued liabilities......... $32,303 $66,383 ======= =======
5. SHORT-TERM OBLIGATIONS: The Company has a $175,000 line of credit with interest payable at 1% over the bank's base rate (10.5% at December 31, 1995) on the outstanding principal balance. The line of credit, which expires in January 1996, is secured by non-real estate assets of the Company and a life insurance policy on a stockholder. The Company had amounts outstanding of $3,155 and $115,000 at December 31, 1994 and 1995. 6. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS: Operating Leases The Company leases office and warehouse facilities in Fort Worth, Texas. The Company entered into an agreement to lease a building, beginning on July 1, 1995, from the Company's stockholders. Lease expense per year will be approximately $90,000. The lease term is 15 years. The Company also leases vehicles and equipment from unrelated parties. The total lease expense for the years ended December 31, 1993, 1994 and 1995, totaled approximately $35,100, $56,700, and $122,323, respectively. Minimum future lease payments under operating leases as of December 31, 1995, for each of the next five years and thereafter are as follows: 1996............................................................. $ 109,278 1997............................................................. 105,120 1998............................................................. 90,637 1999............................................................. 90,000 2000............................................................. 90,000 Thereafter....................................................... 780,000 ---------- Total.................................................. $1,265,035 ==========
F-103 155 PERMANENT RECORDS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES: The following income tax information is presented in accordance with SFAS No. 109, which provides for a liability approach to accounting for income taxes. Federal income taxes are as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1993 1994 1995 ------- ------- ------- Federal -- Current............................................. $ 3,491 $11,428 $ 5,078 Deferred............................................ 37,306 2,431 38,280 ------- ------- ------- $40,797.. $13,859 $43,358 ======= ======= =======
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:
YEAR ENDED DECEMBER 31, -------------------------------- 1993 1994 1995 ------- -------- ------- Tax at statutory rate................................ $45,596 $ 22,414 $50,703 Add (deduct) -- Effect of graduated tax rates...................... (4,422) (10,914) (9,044) Other.............................................. (377) 2,359 1,699 ------- -------- ------- $40,797 $ 13,859 $43,358 ======= ======== =======
The components of deferred income tax liabilities and assets are as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1994 1995 ------- -------- Deferred income tax liabilities -- Tax over book depreciation.................................... $ 862 $ 7,539 Accrual to cash differences, net.............................. 62,732 107,388 ------- -------- Total deferred income tax liabilities................. 63,594 114,927 Deferred income tax assets -- Accrued expenses.............................................. 8,833 21,886 ------- -------- Total deferred income tax assets...................... 8,833 21,886 ------- -------- Total deferred income tax liabilities................. $54,761 $ 93,041 ======= ========
8. COMMITMENTS AND CONTINGENCIES: Litigation The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involves claims for workers' compensation and unemployment incurred in connection with its operations. Management believes that none of these actions will have a material adverse effect on the financial position or results of operations of the Company. 9. SUBSEQUENT EVENTS On January 26, 1996, the Company was acquired by FYI. F-104 156 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Cook and Staff, Inc.: We have audited the accompanying combined balance sheets of Cook and Staff, Inc. (a California corporation) and Related Company as of December 31, 1994 and 1995, and the related combined statements of operations, stockholder's equity, and cash flows for the three years in the period ended December 31, 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Cook and Staff, Inc. and Related Company as of December 31, 1994 and 1995, and the combined results of their operations and their combined cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, June 22, 1996 F-105 157 COOK AND STAFF, INC. AND RELATED COMPANY COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 ---------- ---------- ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents.............................. $1,153,664 $1,261,271 $ 1,943,773 Accounts receivable, less allowance for doubtful accounts of $100,000, $150,000, and $150,000 respectively........................................ 1,587,782 1,856,161 1,850,460 ---------- ---------- ----------- Total current assets........................... 2,741,446 3,117,432 3,794,233 PROPERTY AND EQUIPMENT, net.............................. 449,230 346,493 309,587 OTHER NONCURRENT ASSETS.................................. 40,786 41,586 41,586 ---------- ---------- ----------- Total assets................................... $3,231,462 $3,505,511 $ 4,145,406 ========== ========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities............... $ 220,140 $ 185,044 $ 199,896 Sales tax payable...................................... 48,445 42,427 57,406 Accrued compensation and benefits...................... 168,970 199,176 116,804 ---------- ---------- ----------- Total current liabilities...................... 437,555 426,647 374,106 ---------- ---------- ----------- DEFERRED INCOME TAXES.................................... 27,902 32,134 34,837 ---------- ---------- ----------- Total liabilities.............................. 465,457 458,781 408,943 ---------- ---------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock........................................... 13,851 13,851 13,851 Additional paid in capital............................. 405 405 405 Retained earnings...................................... 2,751,749 3,032,474 3,722,207 ---------- ---------- ----------- Total stockholder's equity..................... 2,766,005 3,046,730 3,736,463 ---------- ---------- ----------- Total liabilities and stockholder's equity..... $3,231,462 $3,505,511 $ 4,145,406 ========== ========== ===========
The accompanying notes are an integral part of these combined financial statements. F-106 158 COOK AND STAFF, INC. AND RELATED COMPANY COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED --------------------------------------- MARCH 31, 1993 1994 1995 ----------------------- ----------- ----------- ----------- 1995 1996 ---------- ---------- (UNAUDITED) (UNAUDITED) SERVICE REVENUE................. $11,448,402 $12,014,034 $11,951,513 $2,845,343 $3,173,373 COST OF SERVICES................ 7,210,020 7,549,289 7,427,090 1,969,407 2,004,298 DEPRECIATION AND AMORTIZATION... 278,731 254,750 226,912 56,703 56,703 ----------- ----------- ----------- ---------- ---------- Gross profit.......... 3,959,651 4,209,995 4,297,511 819,233 1,112,372 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....... 3,184,328 1,555,595 1,709,945 381,875 418,919 ----------- ----------- ----------- ---------- ---------- Operating income...... 775,323 2,654,400 2,587,566 437,358 693,453 OTHER (INCOME) EXPENSE: Interest income............... (29,499) (44,240) (49,445) (1,788) (3,372) Other (income) expense, net... (340,188) (13,055) 690 (309) (1,736) ----------- ----------- ----------- ---------- ---------- INCOME BEFORE INCOME TAXES...... 1,145,010 2,711,695 2,636,321 439,455 698,561 PROVISION FOR INCOME TAXES...... 28,626 54,234 39,596 6,592 8,828 ----------- ----------- ----------- ---------- ---------- Net income............ $ 1,116,384 $ 2,657,461 $ 2,596,725 $ 432,863 $ 689,733 =========== =========== =========== ========== ========== PRO FORMA DATA (Unaudited -- see Note 8) HISTORICAL NET INCOME........... $ 1,116,384 $ 2,657,461 $ 2,596,725 $ 432,863 $ 689,733 PRO FORMA COMPENSATION DIFFERENTIAL.................. 1,572,002 -- -- -- -- PRO FORMA PROVISION FOR INCOME TAXES......................... 1,058,179 1,030,444 1,014,932 169,190 267,065 ----------- ----------- ----------- ---------- ---------- PRO FORMA NET INCOME............ $ 1,630,207 $ 1,627,017 $ 1,581,793 $ 263,673 $ 422,668 =========== =========== =========== ========== ==========
The accompanying notes are an integral part of these combined financial statements. F-107 159 COOK AND STAFF, INC. AND RELATED COMPANY COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK ADDITIONAL TOTAL ----------------- PAID-IN RETAINED STOCKHOLDER'S SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------- ---------- ----------- ------------- BALANCE, December 31, 1992............. 100 $10,000 $405 $ 2,159,329 $ 2,169,734 Dividends declared................... -- -- -- (681,425) (681,425) Net income........................... -- -- -- 1,116,384 1,116,384 --- ------- ---- ----------- ------------ BALANCE, December 31, 1993............. 100 10,000 405 2,594,288 2,604,693 Contribution......................... 100 3,851 -- -- 3,851 Dividends declared................... -- -- -- (2,500,000) (2,500,000) Net income........................... -- -- -- 2,657,461 2,657,461 --- ------- ---- ----------- ------------ BALANCE, December 31, 1994............. 200 13,851 405 2,751,749 2,766,005 Dividends declared................... -- -- -- (2,316,000) (2,316,000) Net income........................... -- -- -- 2,596,725 2,596,725 --- ------- ---- ----------- ------------ BALANCE, December 31, 1995............. 200 13,851 405 3,032,474 3,046,730 Net income (unaudited)............... -- -- -- 689,733 689,733 --- ------- ---- ----------- ------------ BALANCE, March 31, 1996 (unaudited).... 200 $13,851 $405 $ 3,722,207 $ 3,736,463 === ======= ==== =========== ============
The accompanying notes are an integral part of these combined financial statements. F-108 160 COOK AND STAFF, INC. AND RELATED COMPANY COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31, ---------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ---------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................ $1,116,384 $ 2,657,461 $ 2,596,725 $ 432,863 $ 689,733 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization expense... 278,731 254,750 226,912 56,703 56,703 Deferred income taxes................... 9,399 (6,923) 4,232 6,177 2,703 Loss on disposal of assets.............. 36,337 -- 8,847 -- 822 Changes in operating assets and liabilities -- Increase) decrease in -- Accounts receivable, net........... (366,286) 298,333 (268,379) (131,857) 5,701 Increase (decrease) in -- Accounts payable and accrued liabilities...................... (74,072) (37,696) (35,096) (57,906) 14,852 Sales tax payable.................. 49,575 (1,084) (6,018) (38,582) 14,979 Accrued compensation and benefits......................... 1,231 (3,183) 30,206 65,811 (82,372) ---------- ----------- ----------- ---------- ---------- Net cash provided by operating activities..................... 1,051,299 3,161,658 2,557,429 333,209 703,121 ---------- ----------- ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment, net..................................... (305,045) (166,222) (137,422) (75,781) (20,619) Proceeds from sales of property........... 24,781 -- 4,400 -- -- Other..................................... (3,878) (610) (800) -- -- ---------- ----------- ----------- ---------- ---------- Net cash used in investing activities....................... (284,142) (166,832) (133,822) (75,781) (20,619) ---------- ----------- ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends............................ (681,425) (2,500,000) (2,316,000) -- -- ---------- ----------- ----------- ---------- ---------- Net cash used in financing activities....................... (681,425) (2,500,000) (2,316,000) -- -- ---------- ----------- ----------- ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS... 85,732 494,826 107,607 257,428 682,502 CASH AND CASH EQUIVALENTS, at beginning of period.................................... 573,106 658,838 1,153,664 1,153,664 1,261,271 ---------- ----------- ----------- ---------- ---------- CASH AND CASH EQUIVALENTS, at end of period.................................... $ 658,838 $ 1,153,664 $ 1,261,271 $ 1,411,092 $ 1,943,773 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Income taxes............................ $ 800 $ 52,500 $ 39,750 $ 18,000 $ 9,756 NONCASH FINANCING TRANSACTIONS: Contribution, equipment................... $ -- $ 3,851 $ -- $ -- $ --
The accompanying notes are an integral part of these combined financial statements. F-109 161 COOK AND STAFF, INC. AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: The accompanying combined financial statements include the accounts of Cook and Staff, Inc. and RAC Services, Inc. (the "Related Company", collectively the "Company"). The Company provides litigation support services to its customers from its offices in California. In June 1996, the Company and its stockholder intend to enter into a definitive agreement with F.Y.I. Incorporated ("F.Y.I.") pursuant to which the Company will sell selected assets to F.Y.I. (the "Acquisition"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation Cook and Staff, Inc. and Related Company are under common control. All significant intercompany transactions have been eliminated in combination. Fiscal Year-Ends RAC Services, Inc. has a December 31 year-end. Cook and Staff, Inc. has a June 30 year-end. Cook and Staff, Inc. accounts and results for the three years have been recast to a December 31 year-end. The accounts and results of RAC Services, Inc., using a December 31 year-end, have been combined with the recast December 31 year-end accounts and results of Cook and Staff, Inc. in the accompanying combined financial statements for 1993, 1994, and 1995. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using accelerated methods over the estimated useful lives of the assets. Other Long-Lived Assets The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 would have any material effect on the combined financial statements. Revenue Recognition Revenue is recognized when services are rendered to the Company's customers. Income Taxes The Company is an S corporation for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the stockholder. F-110 162 COOK AND STAFF, INC. AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Concentration of Credit Risk Financial instruments that potentially expose the Company to concentration of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in the Western United States and the primary customers are insurance companies and legal institutions. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. 3. PROPERTY AND EQUIPMENT: Property and equipment consist of the following at December 31:
ESTIMATED USEFUL LIVES (YEARS) 1994 1995 ------------ ----------- ----------- Machinery and equipment...................... 5-7 $ 1,038,070 $ 1,109,464 Computer equipment........................... 5 706,630 756,677 Autos........................................ 5 50,203 50,203 ----------- ----------- 1,794,903 1,916,344 Less -- Accumulated depreciation............. (1,345,673) (1,569,851) ----------- ----------- $ 449,230 $ 346,493 =========== ===========
4. INCOME TAXES: The Company has elected S corporation status under the Internal Revenue Code. In lieu of federal income taxes, the shareholder is taxed on the Company's taxable income. Therefore, no provision or liability for federal income tax has been included in the financial statements for the years ended December 31, 1993, 1994, and 1995. A deferred state tax liability exists primarily due to the cash basis method of reporting for income tax purposes. The deferred tax liability represents the State of California S corporation tax on the net temporary differences. State income taxes are as follows at December 31:
1993 1994 1995 ------- ------- ------- Current............................................... $19,227 $61,157 $35,364 Deferred.............................................. 9,399 (6,923) 4,232 ------- ------- ------- $28,626 $54,234 $39,596 ======= ======= =======
F-111 163 COOK AND STAFF, INC. AND RELATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. COMMITMENTS AND CONTINGENCIES: Leases The Company leases office facilities in California. The leases provide for lease terms over five years commencing on November 1, 1989, through June 30, 1999, with monthly lease payments of $2,534 to $20,866. The lease agreements provide that the Company pay all related taxes and insurance. The total lease expense for the years ended 1993, 1994, and 1995, totaled approximately $399,000, $411,000 and $416,000, respectively. Minimum future lease payments under operating leases as of December 31, 1995, for each of the next five years and in the aggregate are as follows: 1996.............................................. $385,863 1997.............................................. 136,455 1998.............................................. 86,135 1999.............................................. 15,966 Thereafter........................................ -- -------- Total................................... $624,419 ========
Litigation The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involves claims for workers' compensation incurred in connection with its operations. Management believes that none of these actions will have a material adverse effect on the financial position or results of operations of the Company. 6. COMMON STOCK: Common stock at December 31, 1994 and 1995 consists of the following:
PAR ASSIGNED VALUE AUTHORIZED ISSUED VALUE ----- ---------- ------ -------- Cook and Staff, Inc....................................... $ 100 1,000 100 $ 10,000 RAC Services, Inc......................................... None 1,000,000 100 3,851 --------- --- -------- 1,001,000 200 $ 13,851 ========= === ========
7. SIGNIFICANT CUSTOMER: The Company has two litigation support customer relationships which combined billings to the respective customer branches and their independent vendor attorneys were approximately 25% and 12% for the year ended December 31, 1995, 23% and 12% for the year ended December 31, 1994, and 11% and 12% for the year ended December 31, 1993. 8. PRO FORMA NET INCOME (UNAUDITED): Selling, general, and administrative expenses for the periods presented reflect compensation and related benefits that owners and certain key employees received during the periods. These owners and key employees have agreed to certain reductions in salaries and benefits in connection with the Acquisition. The unaudited pro forma data present compensation at the level the officers and owners of the Company have agreed to receive subsequent to the Acquisition. In addition, the pro forma data present the incremental provision for income taxes as if the Company had been subject to federal and state income taxes and adjusted for the impact of the compensation differential discussed above. F-112 164 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors B & B Information and Image Management, Inc. Upper Marlboro, Maryland We have audited the accompanying balance sheets of B & B Information and Image Management, Inc. (an S Corporation) as of December 31, 1995 and 1994, and the related statements of income, stockholder's equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of B & B Information and Image Management, Inc. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. C.W. AMOS & COMPANY, LLC Baltimore, Maryland March 20, 1996 (except for Note 8 for which the date is May 31, 1996) F-113 165 B & B INFORMATION AND IMAGE MANAGEMENT, INC. BALANCE SHEETS ASSETS
DECEMBER 31, ------------------------- MARCH 31, 1994 1995 1996 ---------- ---------- ---------- (UNAUDITED) ---------- CURRENT ASSETS Cash................................................. $ 246,350 $ 173,189 $ 242,353 Trade and other receivables, less allowance for doubtful accounts in 1994 of $11,200 and 1995 of $20,200........................................... 1,280,436 1,851,326 1,756,097 Inventories.......................................... 172,700 154,715 242,023 Prepaid expenses..................................... 56,812 80,627 46,779 ---------- ---------- ---------- Total current assets......................... $1,756,298 $2,259,857 $2,287,252 ---------- ---------- ---------- PROPERTY AND EQUIPMENT, net............................ $3,083,803 $3,125,103 $3,156,065 ---------- ---------- ---------- OTHER ASSETS Prepaid expenses and deposits........................ $ 30,260 $ 1,418 $ 2,243 Debt issuance costs, net of accumulated amortization in 1994 of $90,303 and 1995 of $131,389........... 87,893 103,235 101,848 ---------- ---------- ---------- $ 118,153 $ 104,653 $ 104,091 $4,958,254 $5,489,613 $5,547,408 ========== ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Note payable, bank................................... $ -- $ 50,000 $ 150,000 Current maturities of long-term debt................. 231,827 157,612 159,366 Accounts payable and accrued expenses................ 637,941 984,884 771,692 Dividends payable.................................... -- -- 252,928 Deferred revenue..................................... 241,522 290,599 255,130 ---------- ---------- ---------- Total current liabilities.................... $1,111,290 $1,483,095 $1,589,116 ---------- ---------- ---------- LONG-TERM DEBT......................................... $2,729,236 2,491,070 $2,450,022 ---------- ---------- ---------- CONTINGENCY STOCKHOLDER'S EQUITY Capital stock, par value $10 per share; 100 shares authorized, issued and outstanding................ $ 1,000 $ 1,000 $ 1,000 Additional paid-in capital........................... 81,590 81,590 81,590 Retained earnings.................................... 1,035,138 1,432,858 1,425,680 ---------- ---------- ---------- $1,117,728 $1,515,448 $1,508,270 ---------- ---------- ---------- $4,958,254 $5,489,613 $5,547,408 ========== ========== ==========
The Notes to Financial Statements are an integral part of these statements. F-114 166 B&B INFORMATION AND IMAGE MANAGEMENT, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ------------------------ ---------------------------- 1994 1995 1995 1996 ---------- ---------- ---------- ---------- (UNAUDITED) REVENUES: Service revenue............................ $5,343,032 $6,495,449 $1,570,720 $1,944,715 Product revenue............................ 777,896 1,549,756 211,982 271,064 Other revenue.............................. 59,910 34,749 14,401 10,945 ---------- ---------- ---------- ---------- $6,180,838 $8,079,954 $1,797,103 $2,226,724 COST OF SERVICES............................. 3,108,429 3,658,599 827,515 1,115,918 COST OF PRODUCT SOLD......................... 610,836 1,250,228 162,714 235,779 DEPRECIATION................................. 301,455 332,937 75,519 84,510 ---------- ---------- ---------- ---------- Gross profit....................... $2,160,118 $2,838,190 $ 731,355 $ 790,517 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES................................... 1,621,830 1,920,570 439,081 500,153 ---------- ---------- ---------- ---------- Operating income................... $ 538,288 $ 917,620 $ 292,274 $ 290,364 OTHER (INCOME) EXPENSE: Interest income............................ (83) (706) (184) (825) Interest expense........................... 138,836 183,708 52,383 41,552 Amortization............................... 65,355 41,086 -- 1,387 Other, net................................. (3,918) 6,043 -- (15,000) ---------- ---------- ---------- ---------- Net income......................... $ 338,098 $ 687,489 $ 240,075 $ 263,250 ========== ========== ========== ==========
The Notes to Financial Statements are an integral part of these statements. F-115 167 B&B INFORMATION AND IMAGE MANAGEMENT, INC. STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
COMMON STOCK ADDITIONAL ---------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------ ------ ---------- ---------- ---------- BALANCE, December 31, 1993................ 100 $1,000 $ 81,590 $ 927,406 $1,009,996 Net income.............................. -- -- -- 338,098 338,098 Shareholder dividends................... -- -- -- (230,366) (230,366) --- ------ -------- ---------- ---------- BALANCE, December 31, 1994................ 100 $1,000 $ 81,590 $1,035,138 $1,117,728 Net income.............................. -- -- -- 687,489 687,489 Shareholder dividends................... -- -- -- (289,769) (289,769) --- ------ -------- ---------- ---------- BALANCE, December 31, 1995................ 100 $1,000 $ 81,590 $1,432,858 $1,515,448 Net income (unaudited).................. -- -- -- 263,250 263,250 Shareholder dividends (unaudited)....... -- -- -- (270,428) (270,428) --- ------ -------- ---------- ---------- BALANCE, March 31, 1996 (unaudited)....... 100 $1,000 $ 81,590 $1,425,680 $1,508,270 === ====== ======== ========== ==========
The Notes to Financial Statements are an integral part of these statements. F-116 168 B & B INFORMATION AND IMAGE MANAGEMENT, INC. STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------- ----------------------- 1994 1995 1995 1996 --------- --------- --------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................. $ 338,098 $ 687,489 $ 240,075 $ 263,250 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................ 301,455 332,937 75,519 84,510 Amortization............................ 65,355 41,086 -- 1,387 Increase (decrease) in provision for doubtful accounts..................... (58,500) 9,000 -- 3,000 (Gain) loss on sale of property and equipment............................. -- 6,833 -- (15,000) Changes in assets and liabilities: (Increase) decrease in: Trade and other receivables........ (351,096) (579,890) (80,170) 92,229 Inventories........................ 14,649 17,985 (57,052) (87,308) Prepaid expenses and deposits...... (18,283) 5,027 (3,330) 33,023 Increase (decrease) in: Accounts payable and accrued expenses......................... 20,078 256,605 (24,246) (213,192) Deferred revenue................... 71,781 49,077 (29,350) (35,469) --------- --------- --------- --------- Net cash provided by operating activities.................... $ 383,537 $ 826,149 $ 121,446 $ 126,430 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment........ $(245,082) $(359,432) $ (40,667) $(118,166) Proceeds from sale of property and equipment............................... -- 68,700 -- 17,694 --------- --------- --------- --------- Net cash used by investing activities.................... $(245,082) $(290,732) $ (40,667) $(100,472) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds (repayment) of short-term borrowings.............................. $(439,000) $ 50,000 $ -- $ 100,000 Proceeds from long-term borrowings......... 565,352 223,787 13,489 -- Payments on long-term debt................. (139,120) (536,168) (45,257) (39,294) Debt issuance costs........................ -- (56,428) -- -- Shareholder dividends...................... (230,366) (289,769) (120,037) (17,500) --------- --------- --------- --------- Net cash used by financing activities.................... $(243,134) $(608,578) $(151,805) $ 43,206 --------- --------- --------- --------- Net increase (decrease) in cash.............. $(104,679) $ (73,161) $ (71,026) $ 69,164 Cash, beginning of year...................... 351,029 246,350 246,350 173,189 --------- --------- --------- --------- Cash, end of year............................ $ 246,350 $ 173,189 $ 175,324 $ 242,353 ========= ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid.............................. $ 134,633 $ 180,544 $ 52,383 $ 41,552 ========= ========= ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchases of property and equipment included in accounts payable............ $ -- $ 90,338 $ -- $ -- ========= ========= ========= ========= Dividends declared and payable............. $ -- $ -- $ -- $ 252,928 ========= ========= ========= =========
The Notes to Financial Statements are an integral part of these statements. F-117 169 NOTES TO FINANCIAL STATEMENTS NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES B & B Information and Image Management, Inc. ("Company") is in the principal business of converting paper documents into electronic and microfilm images for customers in the Mid-Atlantic region. Significant accounting policies not disclosed elsewhere in the financial statements are as follows: Depreciation: Depreciation is provided on the straight-line method over the estimated useful lives of the related assets. Amortization: Debt issuance costs are being amortized on the straight-line method over the terms of the related debt. Income taxes: The Company has elected to be treated as a Small Business Corporation (an S Corporation) under the provisions of the Internal Revenue Code. The financial statements do not include a provision for income taxes since taxable income is allocated to and reported directly by the shareholder. Revenue recognition: Microfilm processing revenue is recognized on a percentage-of-completion basis. Service contract revenue is recognized on a straight-line basis over the terms of the individual service contracts. Revenue from the sale of supplies and equipment is recognized upon shipment. Credit risk: The Company has deposits in a financial institution in excess of amounts insured by the Federal Deposit Insurance Corporation. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. NOTE 2. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market, and include the following:
1994 1995 -------- -------- Parts and supplies............................................. $167,083 $154,530 Equipment for resale........................................... 5,617 185 -------- -------- $172,700 $154,715 ======== ========
F-118 170 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3. PROPERTY AND EQUIPMENT Property and equipment is carried at cost and consists of the following:
ESTIMATED DECEMBER 31, USEFUL LIVES ------------------------ (YEARS) 1994 1995 ------------ ---------- ---------- Land and land improvements....................... -- $ 599,773 $ 599,773 Building......................................... 40 1,961,701 1,972,704 Production equipment............................. 5 to 7 1,590,491 1,892,259 Furniture and fixtures........................... 5 to 7 192,413 203,186 Transportation equipment......................... 3 279,264 282,342 ---------- ---------- $4,623,642 $4,950,264 Less accumulated depreciation.................... 1,539,839 1,825,161 ---------- ---------- $3,083,803 $3,125,103 ========== ==========
NOTE 4. NOTE PAYABLE AND LONG-TERM DEBT Long-term debt consists of the following:
INTEREST DESCRIPTION RATE 1994 1995 ---------------------------------------------- ------------- ---------- ---------- Industrial Revenue Bonds; Variable Rate Variable Demand/Fixed Rate Revenue Bonds, Prince (3.95% at George's County, Maryland; due beginning in December 31, 1996 through 2014........................... 1995) $2,400,000 $2,400,000 Consolidated term loan, bank; due December, 1997; paid in full in 1995.................. Prime + 1.0% 460,443 -- Term loan, bank; due April, 1998.............. Prime + 1.0% -- 161,111 Notes payable, vehicles; due at various dates Varies 8.99% through November, 1998...................... to 13.2% 54,890 58,068 Note payable, equipment; due July, 1997....... 6.00% 16,502 10,237 Note payable, equipment; due August, 1997..... 4.77% 29,228 19,266 ---------- ---------- $2,961,063 $2,648,682 Current maturities............................ 231,827 157,612 ---------- ---------- Long-term debt................................ $2,729,236 $2,491,070 ========== ==========
During 1995, the Company obtained a $250,000 demand revolving line of credit for short-term working capital financing which is limited to 80% of eligible accounts receivable at the bank's prime rate plus 1%, expiring in April, 1996. The note is collateralized by all assets of the Company excluding real estate and is guaranteed by the Company's shareholder. Borrowings on the line of credit at December 31, 1995 were $50,000. The Industrial Revenue Bonds were issued to provide funds for the construction of the Company's office and operating facility, for the purchase of certain equipment to be used in that facility, and for certain related expenses. All real estate, equipment, and other tangible property at the location are pledged as collateral to the bond holders. The Industrial Revenue Bonds are secured by a letter of credit issued by a bank on behalf of the Company for approximately $2,450,000, expiring on December 31, 1996. The letter of credit is guaranteed by F-119 171 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) the Company's shareholder. The letter of credit was placed with a new bank during 1995 resulting in issuance costs of $56,428. The Company has the option to extend the letter of credit based on the bank's annual review. The Company had a consolidated term loan with its former bank, payable in monthly installments of $12,500 plus interest at the bank's prime rate plus 1%, maturing on December 31, 1997. During 1995, the Company borrowed $200,000 from a bank, and used the proceeds and operating cash to repay the consolidated term loan. The new term loan is payable in 36 equal monthly installments of principal, plus interest through April, 1998, and is collateralized by all assets of the Company, excluding real estate, and is guaranteed by the Company's shareholder. The bond indenture, term loan and letter of credit agreements have covenants which, among other things, require the maintenance of certain financial ratios. In addition, cross-default provisions exist among the bond indenture and related agreements. Notes payable, vehicles and equipment have senior collateral rights to certain property and equipment, excluding the facility and related land pledged to the bondholders, and are subordinated to the term loan as to accounts receivable and inventories. Maturities of long-term debt are as follows: 1996............................................. $ 157,612 1997............................................. 153,098 1998............................................. 87,972 1999............................................. 100,000 2000............................................. 100,000 Thereafter....................................... 2,050,000 ---------- $2,648,682 ==========
The fair value of the note payable and long-term debt at December 31, 1995 approximates $2,301,000 based upon loans with similar terms and average maturities currently being offered to the Company. NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
DECEMBER 31, --------------------- 1994 1995 -------- -------- Accounts payable............................................... $355,908 $530,471 Accrued payroll and related benefits........................... 256,178 409,623 Other accrued expenses......................................... 25,855 44,790 -------- -------- $637,941 $984,884 ======== ========
NOTE 6. RELATED PARTY TRANSACTIONS The Company traded with a related party in the amount of $120,000 for the years ended December 31, 1995 and 1994. At December 31, 1994, $20,000 was included in accounts payable and accrued expenses. NOTE 7. CONTINGENCY A former employee has filed a grievance against the Company with the Equal Employment Opportunity Commission for discrimination and wrongful termination. Management and the Company's counsel believe that the allegations and grievance are without merit, and intend to vigorously contest this claim. F-120 172 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8. SUBSEQUENT EVENT (UNAUDITED) On May 31, 1996, the Company and its shareholder entered into an agreement to be merged into F.Y.I. Incorporated effective May 1, 1996. The Company will continue to operate as a wholly-owned subsidiary of F.Y.I. F-121 173 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors Premier Document Management, Inc. We have audited the accompanying combined balance sheet of Premier Document Management, Inc. and Affiliate as of December 31, 1995 and the related combined statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Premier Document Management, Inc. and Affiliate as of December 31, 1995 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. MOSS ADAMS LLP Seattle, Washington June 21, 1996 F-122 174 PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, MARCH 31, 1995 1996 ------------ ----------- (UNAUDITED) CURRENT ASSETS Cash and cash equivalents......................................... $ 87,550 $ 267,258 Accounts receivable -- trade, net of allowance for doubtful accounts of $13,494 in 1995 and $13,778 in 1996................ 196,655 229,729 Refundable income taxes........................................... 23,000 10,100 Prepaid expenses.................................................. 86,846 65,962 -------- --------- Total current assets...................................... 394,051 573,049 PROPERTY AND EQUIPMENT, net......................................... 311,090 341,335 DEPOSITS............................................................ 10,888 10,888 -------- --------- $716,029 $ 925,272 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.................................................. $ 12 $ 49,697 Notes payable..................................................... 34,944 34,944 Accrued liabilities Wages.......................................................... 11,170 105,037 Vacation....................................................... 20,000 32,600 Payroll taxes.................................................. 346 21,803 Business taxes................................................. 14,669 4,435 Deferred income taxes............................................. 82,900 81,900 -------- --------- Total current liabilities................................. 164,041 330,416 -------- --------- COMMITMENTS AND CONTINGENCY (Notes 7 and 10) STOCKHOLDERS' EQUITY Common stock...................................................... 21,000 21,000 Additional paid-in capital........................................ 72,229 72,229 Retained earnings................................................. 458,759 501,627 -------- --------- 551,988 594,856 -------- --------- $716,029 $ 925,272 ======== =========
The accompanying notes are an integral part of these combined financial statements. F-123 175 PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, --------------------------- 1995 1996 1995 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) SERVICE REVENUE........................................ $3,022,691 $ 866,752 $ 696,022 COST OF SERVICES....................................... 1,632,568 498,389 371,472 DEPRECIATION........................................... 84,367 27,733 16,235 ---------- --------- --------- Gross profit................................. 1,305,756 340,630 308,315 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 1,185,033 286,571 256,466 ---------- --------- --------- Operating income............................. 120,723 54,059 51,849 OTHER INCOME (EXPENSE) Interest income...................................... 8,379 709 3,242 Interest expense..................................... (209) -- -- ---------- --------- --------- Income before income taxes................... 128,893 54,768 55,091 PROVISION FOR INCOME TAXES............................. 32,243 11,900 12,100 ---------- --------- --------- NET INCOME............................................. $ 96,650 $ 42,868 $ 42,991 ========== ========= =========
The accompanying notes are an integral part of these combined financial statements. F-124 176 PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ------------------ PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------- ------- ---------- -------- -------- BALANCE, December 31, 1994, as previously reported (Unaudited)..................... 120,000 $21,000 $ 72,229 $374,109 $467,338 Prior period adjustment (Note 11)........ (12,000) (12,000) ------- ------- -------- -------- -------- BALANCE, December 31, 1994, as restated.... 120,000 21,000 72,229 362,109 455,338 Net income....................... 96,650 96,650 ------- ------- -------- -------- -------- BALANCE, December 31, 1995................. 120,000 21,000 72,229 458,759 551,988 Net income....................... 42,868 42,868 ------- ------- -------- -------- -------- BALANCE, March 31, 1996 (Unaudited)........ 120,000 $21,000 $ 72,229 $501,627 $594,856 ======= ======= ======== ======== ========
The accompanying notes are an integral part of these combined financial statements. F-125 177 PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE COMBINED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------------------- 1995 1996 1995 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................... $ 96,650 $ 42,868 $ 42,991 Adjustments to reconcile income from operations to net cash from operating activities Depreciation and amortization......................... 118,555 37,154 24,324 Deferred income taxes................................. 15,000 (1,000) (5,600) Changes in assets and liabilities Accounts receivable -- trade, net................... (37,851) (33,074) (28,704) Refundable income taxes............................. (40,000) 12,900 (4,400) Prepaid expenses.................................... (16,825) 20,884 35,303 Deposits............................................ 1,406 -- -- Accounts payable.................................... (3,275) 49,685 42,028 Accrued liabilities................................. 16,338 117,690 46,183 ---------- --------- --------- 149,998 247,107 152,125 ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment...................... (240,063) (67,399) (59,166) Receipts (advances) on note receivable................... 45,500 -- (3,156) ---------- --------- --------- (194,563) (67,399) (62,322) ---------- --------- --------- CHANGE IN CASH............................................. (44,565) 179,708 89,803 CASH AND CASH EQUIVALENTS Beginning of period...................................... 132,115 87,550 132,116 ---------- --------- --------- End of period............................................ $ 87,550 $ 267,258 $ 221,919 ---------- --------- --------- SUPPLEMENTAL INFORMATION Cash paid during the period for Interest.............................................. $ 209 $ -- $ -- ---------- --------- --------- Income tax............................................ $ 57,243 $ -- $ 22,100 ---------- --------- ---------
The accompanying notes are an integral part of these combined financial statements. F-126 178 PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS -- Premier Document Management, Inc. and Affiliate (the "Company") provides medical records reproduction and management services on behalf of hospitals and medical clinics in the Pacific Northwest. The amount the Company can charge requesting parties for reproduction services is regulated by law. It operates out of facilities located throughout Washington and in San Jose, California. On May 31, 1996, the Company merged with Premier Acquisition Corp., a wholly-owned subsidiary of F.Y.I. Incorporated (see Note 12). PRINCIPLES OF COMBINATION -- The combined financial statements include the accounts of Premier Document Management, Inc. and PDM Services, Inc., an affiliate controlled through common ownership. All material intercompany transactions have been eliminated. USE OF ESTIMATES -- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS -- For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. DEPRECIATION AND AMORTIZATION -- Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the related assets or the length of the lease, whichever is less. INCOME TAXES -- Income taxes are provided for the effect of transactions reported in the financial statements tax provision consists of taxes currently due plus deferred taxes related to differences in the financial statement and tax bases of certain assets and liabilities. PDM Services, Inc., with consent of its stockholder, has elected to be taxed as an S corporation. In lieu of corporate income taxes, the stockholders of an S corporation are taxed on their proportionate share of taxable income. On May 31, 1996, the Company merged with Premier Acquisition Corp. and ceased to be an S corporation (see Note 12). INTERIM FINANCIAL STATEMENTS -- The accompanying combined statements of income and cash flows for the three months ended March 31, 1996 and 1995 are unaudited. The unaudited results of operations and cash flows have been prepared on the same basis as the audited combined financial statements and, in the opinion of management, include all adjustments necessary for a fair presentation for the periods presented. F-127 179 PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, MARCH 31, 1995 1996 ------------ ----------- (UNAUDITED) Copying equipment........................................... $189,907 $ 209,845 Vehicles.................................................... 144,054 158,467 Computer hardware........................................... 222,120 249,792 Computer software........................................... 20,352 20,352 Office furniture............................................ 56,857 62,233 Production equipment........................................ 29,574 29,574 Leasehold improvements...................................... 7,233 7,233 -------- --------- 670,097 737,496 Less accumulated depreciation and amortization.............. 359,007 396,161 -------- --------- $311,090 $ 341,335 ======== =========
NOTE 3 -- RELATED PARTY TRANSACTIONS NOTE RECEIVABLE -- At December 31, 1994, the Company held a $45,500 promissory note receivable from its President and majority stockholder. During 1995, payment was received in full, along with $3,326 of interest. NOTES PAYABLE -- The Company has four unsecured promissory notes totaling $34,944 payable to its President and majority stockholder. The notes are payable on demand and bear interest at 4%. Subsequent to March 31, 1996, the stockholder contributed the notes to the Company. Accordingly, the balance was reclassified to additional paid-in capital. NOTE 4 -- INCOME TAXES The provision for income taxes consists of the following:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------------- 1995 1996 1995 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Current expense.................................. $ 17,243 $12,900 $12,600 Deferred expense (benefit)....................... 15,000 (1,000) (500) -------- ------- ------- $ 32,243 $11,900 $12,100 ======== ======= =======
F-128 180 PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes differs from the amount determined by applying U.S. statutory federal income tax rates to income before income taxes as a result of the following differences:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------------- 1995 1996 1995 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Tax at statutory rates........................... $ 30,332 $ 8,692 $ 9,186 Non-deductible loss of PDM Services, Inc., an S corporation................................. 940 379 (17) Non-deductible items........................... 1,262 143 61 Effect of estimated higher rates used to calculate deferred tax assets and liabilities................................. (291) 2,686 2,870 -------- ------- ------- Provision for income taxes....................... $ 32,243 $11,900 $12,100 ======== ======= =======
Deferred income taxes are computed based on temporary differences between the financial statement and tax bases of certain assets and liabilities. The Company has elected to prepare its income tax return using the cash method of accounting. Accordingly, temporary differences relate to accrual basis assets and liabilities as well as differences in accumulated depreciation. Gross deferred income tax assets and liabilities are comprised of the following:
DECEMBER 31, MARCH 31, 1995 1996 ------------ ----------- (UNAUDITED) Deferred tax liabilities Accrual basis income...................................... $ 92,100 $ 92,100 Depreciation.............................................. 8,600 7,600 -------- --------- 100,700 99,700 Deferred tax assets Accrual basis expenses.................................... (17,800) (17,800) -------- --------- Net deferred tax liability.................................. $ 82,900 $ 81,900 ======== =========
Income taxes for the three months ended March 31, 1995 and 1996 were computed using the effective tax rate estimated to be applicable for the full fiscal year. NOTE 5 -- COMMON STOCK Common stock consists of the following:
DECEMBER 31, MARCH 31, 1995 1996 ------------ ----------- (UNAUDITED) Premier Document Management, Inc. $1 par value; 50,000 shares authorized; 20,000 shares issued and outstanding.................................... $ 20,000 $20,000 PDM Services, Inc. No par value, 1,000,000 shares authorized; 100,000 shares issued and outstanding.................................... 1,000 1,000 -------- ------- $ 21,000 $21,000 ======== =======
F-129 181 PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- RETIREMENT PLAN The Company sponsors a defined contribution employee retirement plan qualified under IRC Section 401(k). The plan covers substantially all employees 18 years of age or older with one year of service. The Company makes annual matching contributions to the plan ranging up to 1.5% of eligible participants' compensation. Total pension expense for the year ended December 31, 1995 and the three months ended March 31, 1996 (unaudited) and 1995 (unaudited) was $6,068, $1,524 and $1,479, respectively. The Company may also make contributions that are discretionary, as determined by the Board of Directors. No discretionary contributions were made during 1995 or the first three months of 1996. NOTE 7 -- COMMITMENTS The Company is obligated under operating lease agreements for three office facilities. Future minimum lease payments under these leases for years ending December 31 are as follows:
SEATTLE SPOKANE TACOMA TOTAL ------- ------- ------ ------- 1996.......................................... $70,400 $ 5,400 $4,300 $80,100 1997.......................................... -- 5,400 2,100 7,500 1998.......................................... -- 4,500 -- 4,500 ------- ------- ------ ------- $70,400 $15,300 $6,400 $92,100 ======= ======= ====== =======
Future minimum lease payments at March 31, 1996 were not materially different from the amounts at December 31, 1995. The Company also leases office space in San Jose, California for $500 per month. The lease may be terminated by either party with 60 days notice. Rent expense for the year ended December 31, 1995 and three months ended March 31, 1996 (unaudited) and 1995 (unaudited) was approximately $75,500, $18,200 and $20,100, respectively. NOTE 8 -- FAIR VALUE OF FINANCIAL INSTRUMENTS Notes payable to stockholder are carried at $34,944, bear interest at 4%, and are payable on demand. Because of the related party nature of these financial instruments, which allows for possible modification to their terms and maturities, it is not practicable to estimate fair value. NOTE 9 -- CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMER CONCENTRATIONS OF CREDIT RISK -- Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and trade receivables. The Company places its temporary cash investments with major financial institutions. At times, deposits may exceed federally insured limits. The Company generally does not require collateral on trade receivables, however, prepayment is required from customers whose outstanding balance exceeds 90 days. Historically, credit related losses have not been significant. MAJOR CUSTOMER -- The Company receives more than ten percent of its revenue from the State of Washington Department of Social and Human Services. Following is a summary of the percentage of revenue earned and accounts receivable due from this customer:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------------------- 1995 1996 1995 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues......................................... 15.8% 12.6% 15.2% ==== ==== ==== Accounts receivable.............................. 14.3% 14.9% ---- ----
F-130 182 PREMIER DOCUMENT MANAGEMENT, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- CONTINGENCY The Company is a co-defendant in a lawsuit alleging improper disclosure of an individual's medical records. The amount of damages has not been specified. Defense of the claim has been assumed by the Company's insurance carrier. Management believes the suit is without merit and will not have a material effect on the Company's financial position. NOTE 11 -- PRIOR PERIOD ADJUSTMENT Management has determined that accrued vacation expense was not recorded in prior years. Accrual of this liability, net of tax, resulted in a $12,000 decrease in retained earnings at December 31, 1994. NOTE 12 -- SUBSEQUENT EVENTS COMPANY MERGER -- On May 31, 1996, the Company merged with Premier Acquisition Corp. ("Premier"), a wholly-owned subsidiary of F.Y.I. Incorporated ("F.Y.I."). Under the terms of the Agreement and Plan of Reorganization, Company stockholders received consideration consisting of cash and shares of F.Y.I. common stock. Additional consideration is contingent on the performance of Premier during the eight month period ended December 31, 1996. In connection with the merger, the Company President and majority stockholder executed a five year noncompetition agreement with Premier and F.Y.I. All other stockholders executed similar agreements with terms of three years. The majority stockholder also entered into a three year employment agreement as President of Premier. EXECUTIVE BONUS -- On May 30, 1996, the Company paid a $225,000 bonus to its President. F-131 183 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To C.M.R.S. Incorporated: We have audited the accompanying balance sheet of C.M.R.S. Incorporated (a California corporation) as of February 29, 1996, and the related statements of operations, stockholder's equity, and cash flow for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 C.M.R.S. Incorporated as of February 29, 1996, and the results of its operations and its cash flow for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, August 28, 1996 F-132 184 C.M.R.S. INCORPORATED BALANCE SHEETS ASSETS
FEBRUARY 29, JUNE 30, 1996 1996 ------------ ----------- (UNAUDITED) CURRENT ASSETS: Cash.............................................................. $ 38,247 $ 31,873 Accounts receivable, less allowance for doubtful accounts of $136,000 for each period....................................... 255,830 311,660 Loan receivable -- affiliates..................................... 15,000 33,830 Employee advances................................................. 1,664 6,299 Prepaid expenses.................................................. -- 12,668 Loan receivable -- shareholder.................................... 28,210 8,210 -------- -------- Total current assets...................................... 338,951 404,540 PROPERTY AND EQUIPMENT, net......................................... 66,409 82,038 OTHER ASSETS: Investment in subsidiary.......................................... 54,621 61,946 Deposits.......................................................... 1,958 1,958 -------- -------- Total other assets........................................ 56,579 63,904 -------- -------- Total assets.............................................. $461,939 $ 550,482 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable.................................................. $ 15,843 $ 16,112 Accrued liabilities............................................... 22,230 19,730 Sales tax payable................................................. 4,552 3,890 Income taxes payable.............................................. 15,268 22,778 Loan payable -- affiliates........................................ 20,568 20,568 Deferred income taxes............................................. 123,565 151,576 -------- -------- Total liabilities......................................... 202,026 234,654 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, par value $1; 100,000 shares authorized, 500 shares issued and outstanding for all periods......................... 500 500 Retained earnings................................................. 259,413 315,328 -------- -------- Total stockholder's equity................................ 259,913 315,828 -------- -------- Total liabilities and stockholder's equity................ $461,939 $ 550,482 ======== ========
The accompanying notes are an integral part of this financial statement. F-133 185 C.M.R.S. INCORPORATED. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 29, 1996
FOUR MONTHS ENDED JUNE 30, 1996 1996 ---------- ----------- (UNAUDITED) SERVICE REVENUE..................................................... $1,019,960 $ 492,796 COST OF SERVICES.................................................... 635,887 297,505 DEPRECIATION AND AMORTIZATION....................................... 30,970 3,183 ---------- -------- Gross profit.............................................. 353,103 192,108 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....................... 798,535 401,603 ---------- -------- Operating loss............................................ (445,432) (209,495) OTHER INCOME: Income from investment in subsidiary.............................. 36,164 7,325 Management fees received.......................................... 500,500 314,000 ---------- -------- Other income.............................................. 536,664 321,325 INCOME BEFORE INCOME TAXES.......................................... 91,232 111,830 PROVISION FOR INCOME TAXES.......................................... 45,987 55,915 ---------- -------- Net income................................................ $ 45,245 $ 55,915 ========== ========
The accompanying notes are an integral part of this financial statement. F-134 186 C.M.R.S. INCORPORATED STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEAR ENDED FEBRUARY 29, 1996 AND FOUR MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
COMMON STOCK TOTAL ---------------- RETAINED STOCKHOLDER'S SHARES AMOUNT EARNINGS EQUITY ------ ------ -------- ------------- BALANCE, February 28, 1995............................ 500 $500 $214,168 $ 214,668 Net income.......................................... -- -- 45,245 45,245 --- ---- -------- -------- BALANCE, February 29, 1996............................ 500 500 259,413 259,913 Net income (unaudited).............................. -- -- 55,915 55,915 --- ---- -------- -------- BALANCE, June 30, 1996 (unaudited).................... 500 $500 $315,328 $ 315,828 === ==== ======== ========
The accompanying notes are an integral part of this financial statement. F-135 187 C.M.R.S. INCORPORATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED FEBRUARY 29, 1996
FOUR MONTHS ENDED JUNE 30, 1996 1996 -------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................................... $ 45,245 $ 55,915 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization expense........................... 30,970 3,183 Provision for deferred income taxes............................. 26,387 28,011 Income in subsidiary............................................ (36,164) (7,325) Changes in operating assets and liabilities -- (Increase) decrease in -- Accounts receivable, net...................................... (36,522) (55,830) Loan receivable............................................... -- (18,830) Employee advances............................................. 1,567 (4,635) Prepaid expenses.............................................. -- (12,668) Increase (decrease) in -- Accounts payable and accrued liabilities...................... 11,564 (2,231) Sales tax payable............................................. 3,030 (662) Income taxes payable.......................................... 14,243 7,510 -------- -------- Net cash provided by (used in) operating activities........ 60,320 (7,562) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of equipment.......................................... (28,019) (18,812) -------- -------- Net used in provided by investing activities............... (28,019) (18,812) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Disbursement of loan receivable -- shareholder..................... (25,000) -- Collection of loan receivable -- shareholder....................... -- 20,000 -------- -------- Net cash (used in) provided by financing activities........ (25,000) 20,000 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................................ 7,301 (6,374) CASH, at beginning of period......................................... 30,946 38,247 -------- -------- CASH, at end of period............................................... $ 38,247 $ 31,873 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Income taxes.................................................... $ 5,357 $ 21,680
The accompanying notes are an integral part of this financial statement. F-136 188 C.M.R.S. INCORPORATED NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 1996 1. BUSINESS AND ORGANIZATION: C.M.R.S. Incorporated (the "Company") is a California Corporation. The Company is an in-house correspondence service for doctors and hospitals. In August 1996, the Company and its stockholders intend to enter into a definitive agreement with F.Y.I. Incorporated ("F.Y.I.") pursuant to which the Company will be acquired by F.Y.I. All outstanding shares of the Company will be exchanged for cash and shares of F.Y.I. common stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are computed using accelerated methods over the estimated useful lives of the individual assets which range from five to seven years. Other Long-Lived Assets The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 would have any material effect on the financial statements. Revenue Recognition Revenue is recognized when services are rendered to the Company's customers. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Interim Financial Statements The accompanying balance sheet and statements of operations, stockholder's equity and cash flow as of and for the four months ended June 30, 1996 are unaudited. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments necessary for a fair presentation for the period presented. Concentration of Credit Risk Financial instruments that potentially expose the Company to concentration of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in the Western United States and the primary customers are attorneys and insurance companies. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. F-137 189 C.M.R.S. INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes Income taxes are provided based upon the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires recognition of deferred income taxes under the asset and liability method. The Company is a C corporation for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the corporation. 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 the recognition of revenues and various accruals and reserves being deductible for tax purposes in different periods. 3. LOAN RECEIVABLE -- AFFILIATE: The Company has loaned monies to an affiliate, 50% owned by the sole shareholder, for operations. The loan is due upon demand and non-interest bearing. 4. LOAN RECEIVABLE -- SHAREHOLDER: The Company has loaned monies to its shareholder. The loan is due upon demand and non-interest bearing. 5. INVESTMENT IN SUBSIDIARY: The Company owns forty-nine percent of the commons stock of Texas Medical Record Service, Inc., a Texas Corporation. The Company accounts for this investment using the equity method. 6. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at February 29:
ESTIMATED USEFUL LIVES (YEARS) 1996 ------------ -------- Autos......................................................... 5-7 $ 49,407 Equipment..................................................... 7 99,442 Furniture and fixtures........................................ 7 3,854 -------- 152,703 Less -- Accumulated depreciation.............................. (86,294) -------- $ 66,409 ========
7. LOAN PAYABLE -- AFFILIATE: The Company has borrowed monies from its affiliate (Minnesota Medical Record Service, Inc.) for operations. The loan is payable upon demand. 8. EMPLOYEE BENEFIT PLAN: In 1996, the Company adopted a deferred compensation 401(k) plan (the "Plan"). Employees who have completed twelve months of service and have attained age 21 are eligible to participate in the Plan. The Plan allows for employee and employer contributions. Employer contributions are at the discretion of the Company. The Company's contributions were $453 in fiscal year 1996. F-138 190 C.M.R.S. INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES: The provision for income taxes for February 29, 1996 is comprised as follows: Current provision Federal................................................................. $ 11,819 State................................................................... 7,781 Deferred provision........................................................ 26,387 -------- Total provision for income taxes................................ $ 45,987 ========
Deferred income tax liabilities for February 29, 1996 are comprised as follows: Income from investment in subsidiary...................................... 21,824 Cash to accrual........................................................... 93,740 Property and Equipment.................................................... 8,001 -------- Net current deferred tax liability.............................. $123,565 ========
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: Tax at statutory rate..................................................... $ 31,019 Add (deduct) State income taxes, net of federal...................................... 5,419 Nondeductible expenses.................................................. 11,391 Effect of graduated tax rates........................................... (1,842) -------- Total provision for income taxes................................ $ 45,987 ========
10. COMMITMENTS AND CONTINGENCIES: Leases The Company leases office facilities in California under noncancelable lease agreements which expire at various dates. The leases provide for lease terms over three to five years through September 2001, with monthly lease payments of $328 to $3,991. The property lease agreements provide that the Company pay all related taxes and insurance. The total lease expense for the year ended 1996 totaled approximately $13,825. Minimum future lease payments under operating leases as of February 29, 1996, for each of the next five years and in the aggregate are as follows: 1997.............................................................. $ 25,890 1998.............................................................. 47,887 1999.............................................................. 47,887 2000.............................................................. 47,887 2001.............................................................. 47,887 Thereafter........................................................ 27,934 -------- Total................................................... $245,372 ========
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. F-139 191 C.M.R.S. INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 11. RELATED PARTY: The Company receives a management fee from its subsidiary (Texas Medical Record Service, Inc.) and another affiliate (Minnesota Medical Record Service, Inc.). The management fee income for fiscal year 1996 was $500,500. F-140 192 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Minnesota Medical Record Service, Inc.: We have audited the accompanying balance sheet of Minnesota Medical Record Service, Inc. (a Minnesota corporation) as of September 30, 1995, and the related statements of operations, stockholder's equity, and cash flow for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 Minnesota Medical Record Service, Inc. as of September 30, 1995, and the results of its operations and its cash flow for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas August 28, 1996 F-141 193 MINNESOTA MEDICAL RECORD SERVICE, INC. BALANCE SHEETS ASSETS
SEPTEMBER 30, JUNE 30, 1995 1996 ------------- ----------- (UNAUDITED) CURRENT ASSETS: Cash............................................................. $ 3,395 $ 16,683 Accounts receivable, less allowance for doubtful accounts of $107,000 for each period...................................... 173,265 169,151 Prepaid expenses................................................. 328 6,413 Loans receivable -- affiliates................................... 105,568 105,568 --------- --------- Total current assets..................................... 282,556 297,815 PROPERTY AND EQUIPMENT, net........................................ 89,778 101,625 --------- --------- Total assets............................................. $ 372,334 $ 399,440 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable................................................. $ 1,132 $ 3,038 Accrued liabilities.............................................. 28,001 25,006 Retrieval fees payable........................................... 11,161 14,156 Income taxes payable............................................. 14,218 8,832 Deferred income taxes............................................ 73,355 82,652 --------- --------- Total liabilities........................................ 127,867 133,684 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, no par value, 1,000 shares authorized, 3,000 shares issued and outstanding for all periods........................ 33,051 33,051 Retained earnings................................................ 211,416 232,705 --------- --------- Total stockholder's equity............................... 244,467 265,756 --------- --------- Total liabilities and stockholder's equity............... $ 372,334 $ 399,440 ========= =========
The accompanying notes are an integral part of this financial statement. F-142 194 MINNESOTA MEDICAL RECORD SERVICE, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1995
NINE MONTHS ENDED JUNE 30, 1995 1996 ---------- ----------- (UNAUDITED) SERVICE REVENUE..................................................... $2,187,451 $1,733,826 COST OF SERVICES.................................................... 476,207 402,410 DEPRECIATION........................................................ 32,175 28,678 ---------- ---------- Gross profit.............................................. 1,679,069 1,302,738 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....................... 1,232,516 930,222 ---------- ---------- Operating income.......................................... 446,553 372,516 OTHER EXPENSE: Management fees expense........................................... 515,000 334,500 ---------- ---------- (LOSS) INCOME BEFORE INCOME TAXES................................... (68,447) 38,016 (BENEFIT) PROVISION FOR INCOME TAXES................................ (30,117) 16,727 ---------- ---------- Net (loss) income......................................... $ (38,330) $ 21,289 ========== ==========
The accompanying notes are an integral part of this financial statement. F-143 195 MINNESOTA MEDICAL RECORD SERVICE, INC. STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEAR ENDED SEPTEMBER 30, 1995 AND NINE MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
COMMON STOCK TOTAL ----------------- RETAINED STOCKHOLDER'S SHARES AMOUNT EARNINGS EQUITY ------ ------- -------- ------------- BALANCE, September 30, 1994.......................... 3,000 $33,051 $249,746 $ 282,797 Net loss........................................... -- -- (38,330) (38,330) ----- ------- -------- --------- BALANCE, September 30, 1995.......................... 3,000 33,051 211,416 244,467 Net income (unaudited)............................. -- -- 21,289 21,289 ----- ------- -------- --------- BALANCE, June 30, 1996 (unaudited)................... 3,000 $33,051 $232,705 $ 265,756 ===== ======= ======== =========
The accompanying notes are an integral part of this financial statement. F-144 196 MINNESOTA MEDICAL RECORD SERVICE, INC. STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30, 1995
NINE MONTHS ENDED JUNE 30, 1995 1996 -------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.................................................. $(38,330) $ 21,289 Adjustments to reconcile net (loss) income to net cash provided by operating activities -- Depreciation expense............................................ 32,175 28,678 Provision for deferred income taxes............................. (44,335) 9,297 Changes in operating assets and liabilities -- (Increase) decrease in -- Accounts receivable, net...................................... 58,304 4,114 Prepaid expenses.............................................. 917 (6,085) Increase (decrease) in -- Accounts payable and accrued liabilities...................... 1,132 1,906 Income taxes payable.......................................... 14,218 (5,386) -------- --------- Net cash provided by operating activities.................. 24,081 53,813 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of equipment.......................................... (34,379) (40,525) -------- --------- Net cash used in investing activities...................... (34,379) (40,525) -------- --------- NET (DECREASE) INCREASE IN CASH...................................... (10,298) 13,288 CASH, at beginning of period......................................... 13,693 3,395 -------- --------- CASH, at end of period............................................... $ 3,395 $ 16,683 ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Income taxes.................................................... $ -- $ 15,042
The accompanying notes are an integral part of this financial statement. F-145 197 MINNESOTA MEDICAL RECORD SERVICE, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1995 1. BUSINESS AND ORGANIZATION: Minnesota Medical Record Service, Inc. (the "Company") is a Minnesota Corporation. The Company is an in-house correspondence service for doctors and hospitals. In August 1996, the Company and its stockholders intend to enter into a definitive agreement with F.Y.I. Incorporated ("F.Y.I.") pursuant to which the Company will be acquired by F.Y.I. All outstanding shares of the Company will be exchanged for cash and shares of F.Y.I. common stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are computed using accelerated methods over the estimated useful lives of the individual assets which range from five to seven years. Other Long-Lived Assets The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 would have any material effect on the financial statements. 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 according to specific contract terms. Revenue Recognition Revenue is recognized when services are rendered to the Company's customers. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Interim Financial Statements The accompanying balance sheet and statements of operations, stockholder's equity and cash flow as of and for the nine months ended June 30, 1996 are unaudited. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments necessary for a fair presentation for the period presented. F-146 198 MINNESOTA MEDICAL RECORD SERVICE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Concentration of Credit Risk Financial instruments that potentially expose the Company to concentration of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in Minnesota and the primary customers are attorneys and insurance companies. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Income Taxes Income taxes are provided based upon the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires recognition of deferred income taxes under the asset and liability method. The Company is a C corporation for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the corporation. 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 the recognition of revenues and various accruals and reserves being deductible for tax purposes in different periods. 3. LOANS RECEIVABLE -- AFFILIATES: The Company has loaned monies to two affiliate companies, 50% and 100% (California Medical Record Service, Inc.) owned by the sole shareholder, for operations. The loans are due upon demand and non-interest bearing. 4. PROPERTY AND EQUIPMENT: PROPERTY AND EQUIPMENT CONSISTS OF THE FOLLOWING AT SEPTEMBER 30:
ESTIMATED USEFUL LIVES (YEARS) 1995 ------------ --------- Equipment.................................................. 5-7 $ 195,894 Leasehold improvements..................................... 7 5,850 Furniture and fixtures..................................... 7 7,708 --- 209,452 Less -- Accumulated depreciation and amortization.......... (119,674) --------- $ 89,778 =========
5. EMPLOYEE BENEFIT PLAN: In 1996, the Company adopted a deferred compensation 401(k) plan (the "Plan"). Employees who have completed twelve months of service and have attained age 21 are eligible to participate in the Plan. The Plan allows for employee and employer contributions. Employer contributions are at the discretion of the Company. F-147 199 MINNESOTA MEDICAL RECORD SERVICE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. INCOME TAXES: The provision for income taxes for September 30 is comprised as follows:
1995 -------- Current provision Federal................................................................. $ 7,499 State................................................................... 6,719 Deferred benefit.......................................................... (44,335) --------- Total provision for income taxes................................ $(30,117) =========
Deferred income tax liabilities for September 30 are comprised of the following: Property and equipment.................................................... $ 14,848 Cash to accrual........................................................... 58,507 --------- Net deferred income tax liability............................... $ 73,355 =========
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: Tax at statutory rate..................................................... $(23,272) Add (deduct) State income taxes........................................... (6,845) --------- Total provision for income taxes........................................ $(30,117) =========
7. COMMITMENTS AND CONTINGENCIES: Leases The Company leases office facilities in Minnesota under month to month lease agreements. Monthly lease payments range from $254 to $1,008. The property lease agreements provide that the Company pay all related taxes and insurance. The total lease expense for the year ended 1995 totaled approximately $42,644. 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. 8. RELATED PARTY: The Company pays a management fee to California Medical Record Service, Inc. The management fee for fiscal year 1995 was $515,000. F-148 200 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Texas Medical Record Service, Inc.: We have audited the accompanying balance sheet of Texas Medical Record Service, Inc. (a Texas corporation) as of February 29, 1996, and the related statements of operations, stockholders' equity, and cash flow for the then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 Texas Medical Record Service, Inc. as of February 29, 1996, and the results of its operations and its cash flow for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, August 28, 1996 F-149 201 TEXAS MEDICAL RECORD SERVICE, INC. BALANCE SHEETS ASSETS
FEBRUARY 29, JUNE 30, 1996 1996 ------------ ----------- (UNAUDITED) CURRENT ASSETS: Cash............................................................... $ 4,326 $ 19,702 Accounts receivable, less allowance for doubtful accounts of $47,000 for both periods........................................ 172,339 175,265 Employee advances.................................................. 2,475 200 Shareholder loan................................................... 1,500 1,500 -------- --------- Total current assets....................................... 180,640 196,667 PROPERTY AND EQUIPMENT, net.......................................... 68,994 64,662 OTHER ASSETS......................................................... 2,465 6,004 -------- --------- Total assets............................................... $252,099 $ 267,333 ======== ========= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable................................................... $ 26,637 $ 27,659 Accrued liabilities................................................ 28,405 30,632 Equipment contract payable......................................... 13,000 9,000 Retrieval fee payable.............................................. 6,879 1,863 Income taxes payable............................................... 1,972 1,416 Deferred income taxes.............................................. 52,972 59,580 -------- --------- Total liabilities.......................................... 129,865 130,150 -------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, par value $1; 100,000 shares authorized, 1,235 shares issued and outstanding for all periods.......................... 1,235 1,235 Additional paid-in capital......................................... 3,263 3,263 Retained earnings.................................................. 117,736 132,685 -------- --------- Total stockholders' equity................................. 122,234 137,183 -------- -------- Total liabilities and stockholders' equity................. $252,099 $ 267,333 ======== =========
The accompanying notes are an integral part of this financial statement. F-150 202 TEXAS MEDICAL RECORD SERVICE, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED FEBRUARY 29, 1996
FOUR MONTHS ENDED JUNE 30, 1996 1996 ---------- ----------- (UNAUDITED) SERVICE REVENUE..................................................... $2,280,037 $ 834,849 COST OF SERVICES.................................................... 1,717,441 580,555 DEPRECIATION........................................................ 23,272 5,377 ---------- --------- Gross profit.............................................. 539,324 248,917 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....................... 379,163 165,982 ---------- --------- Operating income.......................................... 160,161 82,935 OTHER EXPENSE: Management fees expense........................................... 60,000 60,000 ---------- --------- INCOME BEFORE INCOME TAXES.......................................... 100,161 22,935 PROVISION FOR INCOME TAXES.......................................... 33,992 7,986 ---------- --------- Net income................................................ $ 66,169 $ 14,949 ========== =========
The accompanying notes are an integral part of this financial statement. F-151 203 TEXAS MEDICAL RECORD SERVICE, INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED FEBRUARY 29, 1996 AND FOUR MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
COMMON STOCK ADDITIONAL TOTAL ---------------- PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ------ ------ ---------- -------- ------------- BALANCE, February 28, 1995................... 1,235 $1,235 $3,263 $ 51,567 $ 56,065 Net income................................. -- -- -- 66,169 66,169 ----- ------ ------ -------- --------- BALANCE, February 29, 1996................... 1,235 1,235 3,263 117,736 122,234 Net income (unaudited)..................... -- -- -- 14,949 14,949 ----- ------ ------ -------- --------- BALANCE, June 30, 1996 (unaudited)........... 1,235 $1,235 $3,263 $132,685 $ 137,183 ===== ====== ====== ======== =========
The accompanying notes are an integral part of this financial statement. F-152 204 TEXAS MEDICAL RECORD SERVICE, INC. STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED FEBRUARY 29, 1996
FOUR MONTHS ENDED JUNE 30, 1996 1996 -------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................ $ 66,169 $14,949 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation expense........................................... 23,272 5,377 Provision for deferred income taxes............................ 31,428 6,608 Changes in operating assets and liabilities (Increase) decrease in -- Accounts receivable, net..................................... (70,342) (2,926) Employee advances............................................ 1,650 2,275 Increase (decrease) in -- Accounts payable, accrued liabilities, equipment contract payable and retrieval fees payable.......................... 4,466 (5,767) Income taxes payable......................................... 1,273 (556) -------- ------- Net cash provided by operating activities................. 57,916 19,960 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment............................ (53,140) (1,045) Change in other assets............................................ (450) (3,539) -------- ------- Net cash used in investing activities..................... (53,590) (4,584) -------- ------- NET INCREASE IN CASH................................................ 4,326 15,376 CASH, at beginning of period........................................ -- 4,326 -------- ------- CASH, at end of period.............................................. $ 4,326 $19,702 ======== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Income taxes................................................... $ 1,291 $ 1,923
The accompanying notes are an integral part of this financial statement. F-153 205 TEXAS MEDICAL RECORD SERVICE, INC. NOTES TO FINANCIAL STATEMENTS FEBRUARY 29, 1996 1. BUSINESS AND ORGANIZATION: Texas Medical Record Service, Inc. (the "Company") is a Texas Corporation. The Company is an in-house correspondence service for doctors and hospitals. In August 1996, the Company and its stockholders intend to enter into a definitive agreement with F.Y.I. Incorporated ("F.Y.I.") pursuant to which the Company will be acquired by F.Y.I. All outstanding shares of the Company will be exchanged for cash and shares of F.Y.I. common stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using accelerated methods over the estimated useful lives of the individual assets which range from five to seven years. Other Long-Lived Assets The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 would have any material effect on the financial statements. 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 the 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 services are rendered to the Company's customers. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Interim Financial Statements The accompanying balance sheet and statements of operations, stockholders' equity and cash flow as of and for the four months ended June 30, 1996 are unaudited. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments necessary for a fair presentation for the period presented. F-154 206 TEXAS MEDICAL RECORD SERVICE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Concentration of Credit Risk Financial instruments that potentially expose the Company to concentration of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in the Southern United States and the primary customers are attorneys and insurance companies. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Income Taxes Income taxes are provided based upon the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires recognition of deferred income taxes under the asset and liability method. The Company is a C corporation for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the corporation. 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 the recognition of revenues and various accruals and reserves being deductible for tax purposes in different periods. 3. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at February 29:
ESTIMATED USEFUL LIVES (YEARS) 1996 ------------ --------- Equipment.................................................... 5-7 218,010 Furniture and fixtures....................................... 5-7 8,985 --------- 226,995 Less -- Accumulated depreciation............................. (158,001) --------- $ 68,994 =========
4. EMPLOYEE BENEFIT PLAN: In 1996, the Company adopted a deferred compensation 401(k) plan (the "Plan"). Employees who have completed twelve months of service and have attained age 21 are eligible to participate in the Plan. The Plan allows for employee and employer contributions. Employer contributions are at the discretion of the Company. The Company's contributions were $585 in fiscal year 1996. 5. INCOME TAXES: The provision for income taxes for February 29, 1996 is comprised as follows: Current provision Federal.................................................................. $ 1,972 State.................................................................... 592 Deferred provision......................................................... 31,428 ------- Total provision for income taxes................................. $33,992 =======
F-155 207 TEXAS MEDICAL RECORD SERVICE, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Deferred income tax liabilities for February 29, 1996 are comprised as follows: Cash to accrual difference................................................. 45,898 Property and equipment..................................................... 7,074 ------- Total deferred tax liability..................................... $52,972 =======
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: Tax at statutory rate...................................................... $34,055 Add (deduct) State income taxes, net of federal....................................... 592 Nondeductible expenses................................................... 1,381 Effect of graduated tax rates............................................ (2,036) ------- Total provision for income taxes................................. $33,992 =======
6. COMMITMENTS AND CONTINGENCIES: Leases The Company leases office facilities in Texas and various office equipment under noncancelable lease agreements which expire at various dates. The leases provide for lease terms over three to six years commencing June 1993, through November 2000, with monthly lease payments of $116 to $1,662. The property lease agreements provide that the Company pay all related taxes and insurance. The total lease expense for the fiscal year ended 1996 totaled approximately $42,959. Minimum future lease payments under operating leases as of February 29, 1996, for each of the next five years and in the aggregate are as follows: 1997.............................................................. $ 50,240 1998.............................................................. 47,085 1999.............................................................. 44,088 2000.............................................................. 16,953 2001.............................................................. 8,649 -------- Total................................................... $167,015 ========
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. 7. RELATED PARTY: The Company pays a management fee to California Medical Record Service, Inc., who owns 49% of the Company's outstanding common stock. The management fee for fiscal year 1996 was $60,000. F-156 208 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To ZIA Information Analysis Group: We have audited the accompanying balance sheet of ZIA Information Analysis Group (a California corporation) as of December 31, 1995, and the related statements of operations, stockholders' equity, and cash flow for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 ZIA Information Analysis Group as of December 31, 1995, and the results of its operations and its cash flow for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, August 23, 1996 F-157 209 ZIA INFORMATION ANALYSIS GROUP BALANCE SHEETS ASSETS
DECEMBER 31, JUNE 30, 1995 1996 ------------ ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents......................................... $ 41,610 $ 107,363 Accounts receivable............................................... 575,302 984,795 Unbilled work-in-process.......................................... 121,651 139,788 Prepaid expenses and other current assets......................... 14,816 34,348 Deferred income taxes............................................. 35,600 -- -------- ---------- Total current assets...................................... 788,979 1,266,294 PROPERTY AND EQUIPMENT, net......................................... 119,596 180,685 -------- ---------- Total assets.............................................. $908,575 $ 1,446,979 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade payable..................................................... $225,025 $ 166,362 Income taxes payable.............................................. 24,800 82,311 Accrued liabilities -- Officers' bonus................................................ 500,000 500,000 Employee bonus................................................. 15,000 57,510 Payroll and related benefits................................... 7,975 96,024 Other.......................................................... 34,572 23,480 Note payable to bank -- revolver.................................. 30,000 -- Current portion of deferred income taxes.......................... -- 114,420 -------- ---------- Total current liabilities................................. 837,372 1,040,107 DEFERRED INCOME TAXES............................................... 19,000 19,000 -------- ---------- Total liabilities......................................... 856,372 1,059,107 -------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par value, 1,000,000 shares authorized, 2,000 issued and outstanding for all periods......................... 50,000 50,000 Retained earnings................................................. 2,203 337,872 -------- ---------- Total stockholders' equity................................ 52,203 387,872 -------- ---------- Total liabilities and stockholders' equity................ $908,575 $ 1,446,979 ======== ==========
The accompanying notes are an integral part of this financial statement. F-158 210 ZIA INFORMATION ANALYSIS GROUP STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
SIX MONTHS ENDED JUNE 30, 1995 1996 ---------- ----------- (UNAUDITED) SERVICE REVENUE, net................................................ $2,291,032 $ 1,718,971 COST OF SERVICES.................................................... 999,654 702,767 DEPRECIATION........................................................ 34,710 19,034 ---------- ----------- Gross profit.............................................. 1,256,668 997,170 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....................... 1,237,720 436,399 ---------- ----------- Operating income.......................................... 18,948 560,771 OTHER (INCOME) EXPENSE: Interest expense.................................................. 4,016 795 Interest income................................................... (924) (800) Other expense, net................................................ 2,871 394 ---------- ----------- INCOME BEFORE INCOME TAXES.......................................... 12,985 560,382 PROVISION FOR INCOME TAXES.......................................... 7,600 224,713 ---------- ----------- Net income................................................ $ 5,385 $ 335,669 ========== ===========
The accompanying notes are an integral part of this financial statement. F-159 211 ZIA INFORMATION ANALYSIS GROUP STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1995 AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
COMMON STOCK RETAINED TOTAL ----------------- EARNINGS STOCKHOLDERS' SHARES AMOUNT (DEFICIT) EQUITY ------ ------- -------- ------------ BALANCE, December 31, 1994........................... 2,000 $50,000 $ (3,182) $ 46,818 Net income......................................... -- -- 5,385 5,385 ----- ------- -------- -------- BALANCE, December 31, 1995........................... 2,000 50,000 2,203 52,203 Net income (unaudited)............................. -- -- 335,669 335,669 ----- ------- -------- -------- BALANCE, June 30, 1996 (unaudited)................... 2,000 $50,000 $337,872 $387,872 ===== ======= ======== ========
The accompanying notes are an integral part of this financial statement. F-160 212 ZIA INFORMATION ANALYSIS GROUP STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995
SIX MONTHS ENDED JUNE 30, 1995 1996 --------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................ $ 5,385 $ 335,669 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation expense........................................... 34,710 19,034 Provision for deferred income taxes............................ (18,000) 150,020 Loss on disposal of property and equipment..................... 598 -- Changes in operating assets and liabilities -- Increase in -- Accounts receivable, net and unbilled work-in-process........ (346,248) (427,630) Prepaid expenses and other current assets.................... (5,292) (19,532) Increase (decrease) in -- Trade payable................................................ 82,157 (58,663) Accrued liabilities.......................................... 306,721 119,467 Income taxes payable......................................... 24,800 57,511 --------- --------- Net cash provided by operating activities................. 84,831 175,876 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of equipment......................................... (28,124) (80,123) --------- --------- Net cash used in investing activities..................... (28,124) (80,123) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on notes to officers..................................... (13,750) -- Proceeds from line of credit...................................... 876,518 270,000 Repayment of line of credit....................................... (883,018) (300,000) --------- --------- Net cash used in financing activities..................... (20,250) (30,000) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS........................... 36,457 65,753 CASH AND CASH EQUIVALENTS, at beginning of period................... 5,153 41,610 --------- --------- CASH AND CASH EQUIVALENTS, at end of period......................... $ 41,610 $ 107,363 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for -- Income taxes................................................... $ 800 $ 8,000 Interest....................................................... $ 4,016 $ 411
The accompanying notes are an integral part of this financial statement. F-161 213 ZIA INFORMATION ANALYSIS GROUP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 1. BUSINESS AND ORGANIZATION: ZIA Information Analysis Group (the "Company") is a California Corporation which commenced operations on June 1, 1994. The Company provides litigation and regulatory support services, including information management and fact finding relating to liability, damage and regulatory issues. The Company provides its services to law firms, corporations and regulated entities throughout California. In August 1996, the Company and its stockholders intend to enter into a definitive agreement with F.Y.I. Incorporated ("F.Y.I.") pursuant to which the Company will be acquired by F.Y.I. All outstanding shares of the Company will be exchanged for cash and shares of F.Y.I. common stock. During 1995, the Company outsourced approximately $230,000 of services to companies that were acquired by F.Y.I. in 1996. 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 lives of the individual assets which range from five to seven years. Other Long-Lived Assets The Financial Accounting Standards Board has issued Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill. Adoption is required in financial statements for fiscal years beginning after December 15, 1995. The Company does not expect the adoption of SFAS 121 would have any material effect on the financial statements. Revenue Recognition Service revenue consists of fee revenue and client job expenses. Fee revenue, net of adjustments, is recognized when services are rendered. Client job expenses consist of out-of-pocket expenditures made on behalf of clients. Client job expense is recognized when the expense is incurred. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. F-162 214 ZIA INFORMATION ANALYSIS GROUP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Interim Financial Statements The accompanying balance sheet and statements of operations, stockholders' equity and cash flow as of and for the six months ended June 30, 1996 are unaudited. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments necessary for a fair presentation for the period presented. Concentration of Credit Risk Financial instruments that potentially expose the Company to concentration of credit risk, as defined by SFAS No. 105, consist primarily of trade accounts receivable. The Company's customers are concentrated in the Western United States and the primary customers are legal institutions. The Company establishes an allowance for doubtful accounts when factors surrounding the credit risk of specific customers, historical trends, and other information indicate that such reserve is needed. Income Taxes Income taxes are provided based upon the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires recognition of deferred income taxes under the asset and liability method. The Company is a C corporation for income tax purposes and, accordingly, any income tax liabilities are the responsibility of the corporation. 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 the recognition of revenues and various accruals and reserves being deductible for tax purposes in different periods. 3. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at December 31:
ESTIMATED USEFUL LIVES (YEARS) 1995 ------------ -------- Computer equipment............................................ 5 $ 73,622 Office equipment.............................................. 7 50,422 Furniture and fixtures........................................ 7 45,915 -------- 169,959 Less -- Accumulated depreciation (50,363) -------- $119,596 ========
4. NOTE PAYABLE TO BANK: At December 31, 1995, the Company had a bank line of credit that provided for maximum borrowings of $150,000 at an interest rate of 2% over the bank's index rate. The credit line was secured by accounts receivable and property and equipment and was personally guaranteed by the Company's three officers. The line of credit agreement contained certain terms and conditions including financial covenants with respect to tangible net worth and profitability. As of December 31, 1995, the Company had complied with all terms and conditions of the agreement, except for the completion of annual financial statements within ninety days after the fiscal year end. The Company has received a waiver from the Bank for this breach of the agreement. The bank line of credit expired May 20, 1996. The Company executed a credit agreement on June 20, 1996 which consisted of a $250,000 revolving credit facility (the "Revolver"). Under the Revolver, the outstanding F-163 215 ZIA INFORMATION ANALYSIS GROUP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) balance is due June 30, 1997. Interest accrues at prime plus 1.5%, and is payable monthly. As of June 30, 1996, there was no outstanding balance under the Revolver. 5. EMPLOYEE BENEFIT PLAN: In 1995, the Company adopted a defined compensation (401(k) plan, the "Plan"). Employees who have completed three months of service and have attained age 21 are eligible to participate in the Plan. The Plan allows for employee and employer contributions. Employer contributions are at the discretion of the Company's board of directors. The Company's contributions were $10,637 in 1995, to be funded during 1996. 6. INCOME TAXES: The provision for income taxes for December 31, 1995 is comprised as follows: Current provision Federal................................................................. $ 15,200 State................................................................... 10,400 Deferred benefit.......................................................... (18,000) -------- Total provision for income taxes................................ $ 7,600 ========
Deferred income tax liabilities and assets for December 31, 1995 are comprised as follows: Deferred income tax liabilities -- Property and equipment.................................................. $ 19,000 Accrual to cash differences, net........................................ 195,500 -------- Total deferred income tax liabilities........................... 214,500 Deferred income tax assets -- Accrued expenses........................................................ 231,100 -------- Total deferred income tax assets................................ 231,100 -------- Net current deferred tax asset.................................. $ 16,600 ========
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: Tax at statutory rate..................................................... $ 4,415 Add (deduct) State income taxes...................................................... 6,346 Nondeductible expenses.................................................. 3,381 Effect of graduated tax rates........................................... (6,542) -------- Total provision for income taxes................................ $ 7,600 ========
F-164 216 ZIA INFORMATION ANALYSIS GROUP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES: Leases The Company leases its office facility in California and various office equipment under noncancelable lease agreements which expire at various dates. The leases provide for lease terms over two to three years commencing February 1995, through June 1998, with monthly lease payments of $200 to $18,686. The property lease agreements provide that the Company pay all related taxes and insurance. The total lease expense for the year ended 1995 totaled approximately $190,248. Future minimum future lease payments under operating leases as of December 31, 1995, for the remainder of the term and in the aggregate are as follows: 1996.............................................................. $224,235 1997.............................................................. 205,549 -------- Total................................................... $429,784 ========
Subleases The Company subleases a portion of its office facility in California under noncancelable lease agreements which expire at various dates to two unrelated businesses. Future minimum sublease rental income as of December 31, 1995, for the remainder of the term and in the aggregate are as follows: 1996.............................................................. $ 56,870 1997.............................................................. 53,064 -------- Total................................................... $109,934 ========
8. SIGNIFICANT CUSTOMER: At December 31, 1995, the Company had two customers which each accounted for 56% and 14% of gross service revenue and 22% and 3% of accounts receivable, respectively. F-165 217 F.Y.I. INCORPORATED AND SUBSIDIARIES UNAUDITED PRO FORMA FINANCIAL STATEMENTS These pro forma combined financial statements should be read in conjunction with the historical financial statements of the Founding Companies Combined, F.Y.I. Incorporated financial statements and the individual Founding Company and New Acquisitions financial statements. See "Index to Financial Statements." F.Y.I. acquired, simultaneously with and as a condition to the closing of the Offering in January 1996, Imagent, Researchers, Recordex, DPAS, Leonard, Deliverex and Permanent Records. The Acquisitions have been accounted for in accordance with generally accepted accounting principles ("GAAP") as a combination of the Founding Companies at historical cost, because the Founding Companies' stockholders transferred assets to F.Y.I. in exchange for Common Stock and cash simultaneously with F.Y.I.'s initial public offering, the nature of future operations of the Company will be substantially identical to the combined operations of the Founding Companies, and no former stockholder group of any of the Founding Companies obtained a majority of the outstanding voting shares of the Company. Accordingly, historical financial statements of these Founding Companies have been combined throughout all relevant periods as if the Founding Companies had always been members of the same operating group. However, since the Founding Companies were not under common control or management, historical combined results may not be comparable to, or indicative of, future performance. For accounting purposes the acquisitions of the Founding Companies were recorded by the Company as of January 31, 1996. In May 1996, the Company acquired B&B Information and Image Management, Inc. ("B&B") and Premier Document Management, Inc. and PDM Services, Inc. ("Premier"). In June 1996, the Company acquired all of the non-cash assets of Robert A. Cook and Staff, Inc. and RAC Services, Inc. ("Cook"). In August 1996, the Company acquired 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"). 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 June 30, 1996 have been recast and combined with the results of F.Y.I. for the six months ended June 30, 1996. As of August, 1996, the Company signed a definitive agreement to acquire ZIA Information Analysis Group ("ZIA"), subject to certain closing conditions. All of the New Acquisitions are accounted for under the purchase method of accounting. The following unaudited pro forma financial statements of F.Y.I. Incorporated and subsidiaries gives effect to: (i) the acquisitions of B&B, Premier, Cook, Medical Record, and the pending acquisition of ZIA and (ii) the acquisition of the Founding Companies for the periods prior to the consummation of the Acquisitions (January 31, 1996). The unaudited pro forma balance sheet is based upon: (i) the unaudited consolidated balance sheet of F.Y.I. as of June 30, 1996, which includes the purchase accounting for B&B, Premier and Cook; and (ii) the unaudited balance sheets of Medical Record purchased during August 1996 and the pending acquisition of ZIA as if the acquisitions had occurred on June 30, 1996. The unaudited pro forma statement of operations for the year ended December 31, 1995 is based upon: (i) the audited combined financial statements of the Founding Companies for the year ended December 31, 1995; and F-166 218 (ii) the audited financial statements of B&B, Premier, Cook, ZIA and Medical Record for the year ended December 31, 1995. The unaudited pro forma statement of operations for the six months ended June 30, 1996 is based upon: (i) the unaudited statement of operations of F.Y.I. for the period from February 1, 1996 to June 30, 1996 combined with the unaudited 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 and Cook from January 1, 1996 to the respective effective date of the acquisition; and (iii) the unaudited statements of operations for ZIA and Medical Records from January 1, 1996 to June 30, 1996. 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 anticipates that it will realize significant benefits from: (i) the reduction in interest payments related to the prepayment of outstanding Founding Company debt; (ii) its ability to borrow at lower interest rates than the Founding Companies; and (iii) the interest earned on the net proceeds of the Offering remaining after payment of the expenses of the Offering and the cash portion of the consideration for the Founding Companies. These savings will be offset by the costs of being a public company and the incremental increase in costs related to the Company's new management. Accordingly, neither the anticipated savings nor the anticipated costs have been included in the pro forma financial information of F.Y.I. Incorporated and Subsidiaries for the periods prior to the acquisition of the Founding Companies. The pro forma financial data 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-167 219 F.Y.I. INCORPORATED AND SUBSIDIARIES PRO FORMA BALANCE SHEET (UNAUDITED) JUNE 30, 1996 (IN THOUSANDS) ASSETS
HISTORICAL F.Y.I. NEW PRO FORMA INCORPORATED ACQUISITIONS COMBINED ------------ ------------ --------- CURRENT ASSETS: Cash and cash equivalents............................ $ 2,521 $ 126(A) $ 2,647 Accounts receivable, less allowance.................. 12,107 1,880(A) 13,987 Prepaids and other current assets.................... 1,226 290(A) 1,516 ------- ------- ------- Total current assets......................... 15,854 2,296 18,150 PROPERTY AND EQUIPMENT, net............................ 8,995 316(A) 9,311 INTANGIBLE ASSETS, net................................. 18,516 8,307(A) 26,823 OTHER NON CURRENT ASSETS............................... 2,330 14(A) 2,344 ------- ------- ------- Total assets................................. $ 45,695 $ 10,933 $56,628 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities............. $ 10,263 $ 1,393(A) $11,656 Short-term obligations............................... 1,049 --(A) 1,049 Current maturities of long-term obligations.......... 282 8(A) 290 ------- ------- ------- Total current liabilities.................... 11,594 1,401 12,995 LONG-TERM OBLIGATIONS, net of current.................. 11,071 4,607(A) 15,678 DEFERRED INCOME TAXES, net............................. 114 388(A) 502 ------- ------- ------- Total liabilities............................ 22,779 6,396 29,175 STOCKHOLDERS' EQUITY Preferred Stock...................................... -- -- -- Common Stock......................................... 55 3(A) 58 Additional paid-in capital........................... 21,488 4,534(A) 26,022 Retained earnings.................................... 1,373 -- 1,373 ------- ------- ------- Total stockholders' equity................... 22,916 4,537 27,453 ------- ------- ------- Total liabilities and stockholders' equity... $ 45,695 $ 10,933 $56,628 ======= ======= =======
F-168 220 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. FOUNDING NEW PRO FORMA INCORPORATED COMPANIES ADJUST ACQUISITIONS ADJUST COMBINED ------------ --------- ------ ------------ ------- --------- REVENUE: Service revenue........................ $ -- $40,615 $ -- $ 29,248 $ (458)(I) $69,405 Product revenue........................ -- 6,138 -- 1,550 -- 7,688 Other revenue.......................... -- 873 -- 35 -- 908 ------ ------ ------ ------ ------ ------ Total revenue.................... -- 47,626 -- 30,833 (458) 78,001 COST OF SERVICES......................... -- 25,937 -- 16,548 (458)(I) 42,027 COST OF PRODUCTS SOLD.................... -- 4,972 -- 1,250 -- 6,222 DEPRECIATION............................. -- 1,238 -- 765 (371)(B) 1,632 ------ ------ ------ ------ ------ ------ Gross profit..................... -- 15,479 -- 12,270 371 28,120 SELLING, GENERAL AND ADMINISTRATIVE...... -- 12,425 (1,976)(F) 8,463 (1,412)(C) 17,500 AMORTIZATION............................. 64 832(B) 896 ------ ------ ------ ------ ------ ------ Operating income................. -- 2,990 1,976 3,807 951 9,724 OTHER (INCOME) EXPENSE: Interest expense....................... -- 492 -- 229 1,135(H) 1,856 Interest income........................ -- (139) -- (59) -- (198) Other.................................. -- (214) -- 48 (38)(J) (204) ------ ------ ------ ------ ------ ------ Income before income taxes....... -- 2,851 1,976 3,589 (146) 8,270 PROVISION FOR INCOME TAXES............... -- 163 1,631 (G) 130 1,248(D) 3,172 ------ ------ ------ ------ ------ ------ NET INCOME............................... $ -- $ 2,688 $ 345 $ 3,459 $(1,394) $ 5,098 ====== ====== ====== ====== ====== ====== NET INCOME PER COMMON SHARE.............. $ 0.87 ====== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................ 5,286 586(E) 5,872 ====== ====== ======
F-169 221 F.Y.I. INCORPORATED AND SUBSIDIARIES PRO FORMA STATEMENT OF OPERATIONS FOR THE SIX MONTHS JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
F.Y.I. FOUNDING NEW PRO FORMA INCORPORATED COMPANIES ADJUST ACQUISITIONS ADJUST COMBINED ------------ --------- ------ ------------ ------ --------- REVENUE: Service revenue............................ $ 21,714 $ 3,487 $ -- $ 14,130 $(395 )(I) $38,936 Product revenue............................ 2,640 395 -- 362 -- 3,397 Other revenue.............................. 297 34 -- 11 -- 342 ------- ------ - -- ------ ------ ------ ------ Total revenue........................ 24,651 3,916 -- 14,503 (395 ) 42,675 COST OF SERVICES............................. 13,630 2,196 -- 7,665 (395 )(I) 23,096 COST OF PRODUCTS SOLD........................ 1,974 307 -- 313 -- 2,594 DEPRECIATION................................. 633 90 -- 307 (142 )(B) 888 ------- ------ - -- ------ ------ ------ ------ Gross profit......................... 8,414 1,323 -- 6,218 142 16,097 SELLING, GENERAL AND ADMINISTRATIVE.......... 6,169 1,497 (683 )(F) 3,759 (752 )(C) 9,990 AMORTIZATION................................. 72 6 347 (B) 425 ------- ------ - -- ------ ------ ------ ------ Operating income..................... 2,173 (180) 683 2,459 547 5,682 OTHER (INCOME) EXPENSE Interest expense........................... 117 24 -- 58 568 (H) 767 Interest income............................ (180) -- -- (15) -- (195) Other...................................... (60) (69) -- (24) 12 (J) (141) ------- ------ - -- ------ ------ ------ ------ Income before income taxes........... 2,296 (135) 683 2,440 (33 ) 5,251 PROVISION FOR INCOME TAXES................... 923 (130) 351 (G) 319 644 (D) 2,107 ------- ------ - -- ------ ------ ------ ------ NET INCOME................................... $ 1,373 $ (5) $ 332 $ 2,121 $(677 ) $ 3,144 ====== ====== ======== ====== ======== ====== NET INCOME PER COMMON SHARE.................. $ 0.26 $ 0.54 ====== ====== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING... 5,335 537 (E) 5,872 ====== ======== ======
F-170 222 NOTES TO PRO FORMA FINANCIAL STATEMENTS THE PRO FORMA ADJUSTMENTS TO THE ACCOMPANYING BALANCE SHEET AS OF JUNE 30, 1996 ARE SUMMARIZED AS BELOW: A. To record the purchase of B&B, Premier Cook, ZIA and Medical Record assets and liabilities including the preliminary allocation of the purchase price (including estimated direct costs) and the disbursement of $20,129,000 cash and issuance of 585,589 shares of Common Stock to consummate the acquisitions. The estimated fair market values reflected below are based on preliminary estimates and assumptions and are subject to revision. In management's opinion, the preliminary allocation is not expected to be materially different than the final allocation. The fair market value of the shares of Common Stock used in calculating the Consideration Paid was $13.65, which is based on approximately a 35% discount from the average trading price of the Common Stock based on the length and type of restrictions in the purchase agreements. Consideration Paid.............................................. $28,123,000 Estimated Fair Value of Assets.................................. $10,758,000 Estimated Fair Value of Liabilities............................. $ 7,527,000 Goodwill........................................................ $24,892,000
All intangibles are considered enterprise goodwill. Based on the historical profitability of the purchased companies and the trends in the legal, healthcare and other industries to outsource document management functions further in the foreseeable future, the enterprise goodwill will be amortized over a period of 30 years. Management continually evaluates whether events and circumstances indicate that the remaining estimated useful life of intangible assets may warrant revisions or that the remaining balance of intangibles or other long-lived assets may not be recoverable. To make this evaluation management uses an estimate of undiscounted net income over the remaining life of the intangibles or other long-lived assets. THE PRO FORMA ADJUSTMENTS TO THE ACCOMPANYING STATEMENTS OF OPERATIONS ARE SUMMARIZED BELOW: B. Adjustment to depreciation and amortization expense related to the preliminary purchase price allocations described above. C. To record the difference between the compensation paid to the stockholders of B&B, Premier, ZIA and Medical Record for the historical periods presented and the F.Y.I. employment contract compensation to the stockholders. D. Adjustment of the federal and state income tax provisions based on the pro forma combined operations. E. To adjust the weighted average shares outstanding to reflect the pro forma effect of the shares issued for the purchase of B&B, Premier, ZIA and Medical Record. F. To record the difference between the compensation paid to the stockholders of the Founding Companies and the F.Y.I. employment contract compensation for the one month ended January 31, 1996 and the year ended December 31, 1995. G. Adjustment of the federal and state income tax provisions based on the pro forma combined operations of F.Y.I. and the Founding Companies. H. To record interest expense on the $12,757,000 term debt issued for the purchase of Cook, ZIA and Medical Records. Proceeds remaining from the Offering were used for the purchase of B&B and Premier, and a portion of Cook. I. To eliminate intercompany revenue between the New Acquisitions and the Founding Companies. J. To eliminate net management fees due to the different fiscal year ends of Medical Record. Statements throughout this Prospectus that state the Company's or management's intentions, hopes, beliefs, anticipations, expectations or predictions of the future are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the "Risk Factors" section of this Prospectus. F-171 223 NO DEALER, REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. TABLE OF CONTENTS
SECTION - --------------------------------------- PAGE ---- Prospectus Summary..................... 2 Risk Factors........................... 6 The Company............................ 10 Recent Developments.................... 12 Price Range of Common Stock............ 13 Dividend Policy........................ 13 Capitalization......................... 14 Selected Financial Data................ 15 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 19 SECTION - --------------------------------------- PAGE ---- Business............................... 28 Management............................. 39 Principal Stockholders................. 45 Description of Capital Stock........... 46 Certain Transactions................... 48 Shares Eligible for Future Sale........ 49 Legal Matters.......................... 49 Experts................................ 50 Additional Information................. 51 Index to Financial Statements.......... F-1
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