** **

**SECURITIESAND EXCHANGE COMMISSION**WASHINGTON, D.C.20549FORM 10-Q

 

**ý        Quarterly report pursuant to Section 13 or 15(d) of theSecurities and Exchange Act of 1934 for the quarterly period ended September30, 2001, or**

 

**o****        Transition report pursuant to Section 13or 15(d) of the Securities and Exchange Act of 1934 for the transition periodfrom ____________ to ____________**

 

**Commission file number 0-27444**

 

**F.Y.I. INCORPORATED**(Exact name of registrant as specified in its charter)

 
| **DELAWARE**                                                   |   | **75-2560895**                       |
|----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                           |   |                                 |
| **3232 MCKINNEY  AVENUE, SUITE 1000   DALLAS, TEXAS**          |   | **75204**                            |
| (Address of principal executive offices)                       |   | (Zip code)                           |

 

# **REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: **(214) 953-7555

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  ý                   No  o

 

As of October 31, 2001, 17,377,210 shares of the registrant's CommonStock, $.01 par value per share, were outstanding.

 

**F.Y.I.INCORPORATED AND SUBSIDIARIESFORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2001**

 

**INDEX**

** **

** **
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                 |   |
|--------------|---------------------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                                      |   |
| Item 1       | Financial Statements                                                                                                      |   |
|         |                                                                                                                      |   |
|         | Consolidated Balance Sheets  – December 31, 2000 and September 30, 2001 (unaudited)                                  |   |
|         |                                                                                                                      |   |
|         | Consolidated  Statements of Operations – Three months and nine months ended September 30,  2000 and 2001 (unaudited) |   |
|         |                                                                                                                      |   |
|         | Consolidated  Statements of Cash Flows – Nine months ended September 30, 2000 and 2001  (unaudited)                  |   |
|         |                                                                                                                      |   |
|         | Notes to  Consolidated Financial Statements - September 30, 2001                                                          |   |
|         |                                                                                                                      |   |
| Item  2      | Management's  Discussion and Analysis of Financial Condition and Results of Operations                                    |   |
|         |                                                                                                                      |   |
| Item  3      | Quantitative  and Qualitative Disclosures about Market Risk                                                               |   |
|         |                                                                                                                      |   |
| **PART II.** | **OTHER INFORMATION**                                                                                                     |   |
|         |                                                                                                                      |   |
| Item 6       | Exhibits and  Reports on Form 8-K                                                                                         |   |
|         |                                                                                                                      |   |
|         | **SIGNATURES**                                                                                                            |   |
|         |                                                                                                                      |   |
|         | **INDEX TO EXHIBITS**                                                                                                     |   |

 

 

# **PART I.         FINANCIALINFORMATION**

 

**Item 1.            FinancialStatements**

 

 

**F.Y.I. INCORPORATED AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS****(IN THOUSANDS, EXCEPT SHARE DATA)**

** **
|                                                                                                                                                                            |   | **December 31,** |                 | **September 30,** |                 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|----------------------|-------------------|----------------------|
|                                                                                                                                                                            |   | **2000**         |                 | **2001**          |                 |
| **ASSETS**                                                                                                                                                                      |   |             |                 | **(unaudited)**   |                 |
| **CURRENT ASSETS:**                                                                                                                                                             |   |             |                 |              |                 |
| Cash and cash equivalents                                                                                                                                                       |   | $                | 9,504                |              | $                    | 5,754 |   |
| Accounts and notes receivable,  less allowance for doubtful accounts of $14,111 and $21,003, respectively                                                                       |   | 93,583           |                 | 98,935            |                 |
| Income tax receivable                                                                                                                                                           |   | —           |                 | 367               |                 |
| Deferred income taxes                                                                                                                                                           |   | 3,935            |                 | 6,019             |                 |
| Prepaid expenses and other  current assets                                                                                                                                      |   | 11,859           |                 | 9,207             |                 |
| Total  current assets                                                                                                                                                           |   | 118,881          |                 | 120,282           |                 |
|                                                                                                                                                                            |   |             |                 |              |                 |
| **PROPERTY, PLANT AND EQUIPMENT,**net of accumulated  depreciation of $46,326 and $37,500, respectively                                                                         |   | 50,341           |                 | 42,711            |                 |
| **GOODWILL AND OTHER INTANGIBLES,**net of amortization of $19,241 and $19,830,  respectively                                                                                    |   | 278,709          |                 | 294,568           |                 |
| **OTHER NONCURRENT  ASSETS**                                                                                                                                                    |   | 6,778            |                 | 8,435             |                 |
|                                                                                                                                                                            |   |             |                 |              |                 |
| Total assets                                                                                                                                                                    |   | $                | 454,709              |              | $                    | 465,996 |   |
|                                                                                                                                                                            |   |             |                 |              |                 |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY**                                                                                                                                       |   |             |                 |              |                 |
|                                                                                                                                                                            |   |             |                 |              |                 |
| **CURRENT LIABILITIES:**                                                                                                                                                        |   |             |                 |              |                 |
| Accounts payable and accrued  liabilities                                                                                                                                       |   | $                | 57,351               |              | $                    | 59,308 |   |
| Current maturities of  long-term obligations                                                                                                                                    |   | 851              |                 | 510               |                 |
| Income tax payable                                                                                                                                                              |   | 4,759            |                 | -                 |                 |
| Total current liabilities                                                                                                                                                       |   | 62,961           |                 | 59,818            |                 |
|                                                                                                                                                                            |   |             |                 |              |                 |
| **LONG-TERM OBLIGATIONS**, net of current maturities                                                                                                                            |   | 123,784          |                 | 124,111           |                 |
| **DEFERRED  INCOME TAX**                                                                                                                                                        |   | 3,541            |                 | 566               |                 |
| **OTHER  LONG-TERM OBLIGATIONS**                                                                                                                                                |   | 11,031           |                 | 16,847            |                 |
| Total liabilities                                                                                                                                                               |   | 201,317          |                 | 201,342           |                 |
|                                                                                                                                                                            |   |             |                 |              |                 |
| **COMMITMENTS  AND CONTINGENCIES**                                                                                                                                              |   |             |                 |              |                 |
|                                                                                                                                                                            |   |             |                 |              |                 |
| **STOCKHOLDERS' EQUITY:**                                                                                                                                                       |   |             |                 |              |                 |
| Preferred stock, $.01 par  value, 1,000,000 shares authorized, 0 shares issued and outstanding                                                                                  |   | —           |                 | —            |                 |
| Common stock, $.01 par value,  26,000,000 shares authorized, 16,191,416 and 17,284,364 shares issued and  outstanding at December 31, 2000 and September 30, 2001, respectively |   | 162              |       | 173               |       |
| Additional paid-in-capital                                                                                                                                                      |   | 166,608          |                 | 201,972           |                 |
| Accumulated other  comprehensive loss                                                                                                                                           |   | —           |                 | (1,322            | )                    |
| Retained earnings                                                                                                                                                               |   | 87,286           |                 | 64,813            |                 |
|                                                                                                                                                                            |   | 254,056          |                 | 265,636           |                 |
| Less – Treasury stock, $.01  par value, 42,605 and 56,028 shares at December 31, 2000 and September 30,  2001, respectively                                                |   | (664             | )                    | (982              | )                    |
| Total stockholders' equity                                                                                                                                                      |   | 253,392          |                 | 264,654           |                 |
|                                                                                                                                                                            |   |             |                 |              |                 |
| Total liabilities and  stockholders' equity                                                                                                                                     |   | $                | 454,709              |              | $                    | 465,996 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

 

**F.Y.I. INCORPORATED AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OFOPERATIONS****(IN THOUSANDS, EXCEPT PER SHARE DATA)**

** **
|                                                      |   | **Three Months Ended** |    | **Nine Months Ended** |   |
|-----------------------------------------------------------|--------|------------------------|---------|-----------------------|--------|
|                                                      |   | **September 30,**      |    | **September 30,**     |   |
|                                                      |   | **2000**               |    | **2001**              |   | **2000** |   | **2001** |   |
|                                                      |   | **(unaudited)**        |    | **(unaudited)**       |   |
|                                                      |   |                   |    |                  |   |   |   |   |   |
| **REVENUE**                                               |   | $                      | 118,384 |                  | $      | 103,044 |   | $ | 340,548 |   | $ | 344,261 |   |
|                                                      |   |                   |    |                  |   |   |   |   |   |
| **COST  OF SERVICES**                                     |   | 70,376                 |    | 58,948                |   | 204,187 |   | 201,445 |   |
| **SPECIAL CHARGES**                                       |   | —                 |    | —                |   | — |   | 417 |   |
| **DEPRECIATION**                                          |   | 3,530                  |    | 3,054                 |   | 10,217 |   | 11,203 |   |
| Gross profit                                              |   | 44,478                 |    | 41,042                |   | 126,144 |   | 131,196 |   |
| **SELLING,  GENERAL, AND  ADMINISTRATIVE  EXPENSES** |   | 25,641                 |    | 22,791                |   | 74,447 |   | 76,985 |   |
| **SPECIAL CHARGES**                                       |   | —                 |    | (5,748                | )      | — |   | 62,167 |   |
| **AMORTIZATION**                                          |   | 2,318                  |    | 2,455                 |   | 6,254 |   | 7,506 |   |
| Operating income (loss)                                   |   | 16,519                 |    | 21,544                |   | 45,443 |   | (15,462 | ) |
|                                                      |   |                   |    |                  |   |   |   |   |   |
| **OTHER (INCOME) EXPENSE:**                               |   |                   |    |                  |   |   |   |   |   |
| Interest expense                                          |   | 2,901                  |    | 2,106                 |   | 7,212 |   | 7,567 |   |
| Interest income                                           |   | (125                   | )       | (40                   | )      | (338 | ) | (172 | ) |
| Other income, net                                         |   | (73                    | )       | 183                   |   | (292 | ) | 143 |   |
| Income (loss) before income  taxes                        |   | 13,816                 |    | 19,295                |   | 38,861 |   | (23,000 | ) |
|                                                      |   |                   |    |                  |   |   |   |   |   |
| **PROVISION  (BENEFIT) FOR INCOME TAXES**                 |   | 5,526                  |    | 7,332                 |   | 15,544 |   | (527 | ) |
|                                                      |   |                   |    |                  |   |   |   |   |   |
| **NET  INCOME (LOSS)**                                    |   | $                      | 8,290   |                  | $      | 11,963 |   | $ | 23,317 |   | $ | (22,473 | ) |
|                                                      |   |                   |    |                  |   |   |   |   |   |
| **NET  INCOME (LOSS) PER COMMON SHARE**                   |   |                   |    |                  |   |   |   |   |   |
| Basic                                                     |   | $                      | 0.54    |                  | $      | 0.70 |   | $ | 1.55 |   | $ | (1.36 | ) |
| Diluted                                                   |   | $                      | 0.51    |                  | $      | 0.67 |   | $ | 1.47 |   | $ | (1.36 | ) |
|                                                      |   |                   |    |                  |   |   |   |   |   |
| **WEIGHTED AVERAGE****COMMON SHARES OUTSTANDING**         |   |                   |    |                  |   |   |   |   |   |
| Basic                                                     |   | 15,471                 |    | 16,969                |   | 15,029 |   | 16,569 |   |
| Diluted                                                   |   | 16,368                 |    | 17,779                |   | 15,867 |   | 16,569 |   |

 

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

 

**F.Y.I. INCORPORATED AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASHFLOWS****(IN THOUSANDS)**

** **
|                                                                                      |   | **Nine Months  Ended** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                      |   | **September 30,**      |   |
|                                                                                      |   | **2000**               |   | **2001** |   |
|                                                                                      |   | **(unaudited)**        |   |
|                                                                                      |   |                   |   |   |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                 |   |                   |   |   |   |
| Net income (loss)                                                                         |   | $                      | 23,317 |   | $ | (22,473 | ) |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities: |   |                   |   |   |   |
| Special charges                                                                           |   | —                 |   | 62,584 |   |
| Depreciation and amortization                                                             |   | 16,471                 |   | 18,709 |   |
| Change in operating assets and  liabilities:                                              |   |                   |   |   |   |
| Accounts and notes receivable                                                             |   | (3,435                 | )      | (8,523 | ) |
| Prepaid expenses and other  assets                                                        |   | (1,457                 | )      | (2,086 | ) |
| Accounts payable and other  current liabilities                                           |   | (3,138                 | )      | (9,967 | ) |
| Net cash provided by operating  activities                                                |   | 31,758                 |   | 38,244 |   |
|                                                                                      |   |                   |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                 |   |                   |   |   |   |
| Purchase of property, plant  and equipment                                                |   | (9,739                 | )      | (10,661 | ) |
| Net proceeds from sale of  operating company assets                                       |   | —                 |   | 16,169 |   |
| Cash paid for acquisitions,  net of cash acquired                                         |   | (72,459                | )      | (59,771 | ) |
| Net cash used in investing  activities                                                    |   | (82,198                | )      | (54,263 | ) |
|                                                                                      |   |                   |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                 |   |                   |   |   |   |
| Proceeds from common stock  issuance                                                      |   | 11,768                 |   | 13,308 |   |
| Proceeds from long-term  obligations                                                      |   | 77,500                 |   | 183,482 |   |
| Principal payments on  long-term obligations                                              |   | (34,824                | )      | (183,061 | ) |
| Cash paid for debt issuance  costs                                                        |   | --                     |   | (1,460 | ) |
| Net cash provided by financing  activities                                                |   | 54,444                 |   | 12,269 |   |
|                                                                                      |   |                   |   |   |   |
| **NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                                 |   | 4,004                  |   | (3,750 | ) |
|                                                                                      |   |                   |   |   |   |
| **CASH AND CASH EQUIVALENTS,**beginning of period                                         |   | 9,396                  |   | 9,504 |   |
|                                                                                      |   |                   |   |   |   |
| **CASH AND CASH EQUIVALENTS,**end of period                                               |   | $                      | 13,400 |   | $ | 5,754 |   |

 

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

 

**F.Y.I. INCORPORATED AND SUBSIDIARIES****NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**1.   Basisof Presentation**

 

The accompanyingconsolidated financial statements and related notes to consolidated financialstatements include the accounts of F.Y.I. Incorporated and our subsidiaries.

 

In the opinion of ourmanagement, the accompanying consolidated financial statements include all ofour accounts and the adjustments necessary to present fairly our financialposition at September 30, 2001, our results of operations for the three andnine months ended September 30, 2000 and 2001, and our cash flows for the ninemonths ended September 30, 2000 and 2001. All significant intercompanytransactions have been eliminated. Although we believe that the disclosures areadequate to make the information presented not misleading, certain informationand footnote disclosures normally included in annual financial statementsprepared in accordance with generally accepted accounting principles have been condensedor omitted pursuant to the rules and regulations of the Securities and ExchangeCommission (the "Commission"). These consolidated financialstatements should be read in conjunction with our consolidated financialstatements and the related notes thereto in our Annual Report on Form 10-Kfiled with the Commission on March30, 2001.  The results ofoperations for the three and nine month periods ended September 30, 2000 and2001 may not be indicative of the results for the full year.

 

 

**2. Special Charges**

 

Duringthe second and third quarters, the Company completed its Business ProcessOutsourcing realignment strategic plan. As part of this plan, the Company identified certain non-strategicoperating units for divestiture or closure, and accordingly, developed andcommitted to a divestiture plan. The non-strategic operating units wereevaluated based on criteria such as market growth potential, current operating performance, revenue andearning growth potential, and expected sources and uses of capital.  In June 2001, the Company completed the sale of fourautomated litigation support companies, two legal copy companies, two recordsacquisition companies and its commercial systems integration consultingservices company.  During the thirdquarter, the Company completed the sale of three print-on-demand companies andits investors’ services company. As a result of the divestiture plan and the completed actions discussed,the Company recorded $62.6 million of pre-tax special charges. Additionally, in the second quarter, the Companyrecorded a $0.5 million charge to write-off deferred debt costs due to therefinancing of long-term obligations, which is included in interestexpense.  The following details thecomponents of the charges discussed (in millions):

 
|                                              |   | **Three  Months Ended** |   | **Nine  Months Ended**  |   |
|---------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                              |   | **September  30, 2001** |   | **September  30, 2001** |   |
| Net gain (loss)  on sale of assets                |   | $                       | 5.3    |                    | $      | (55.4 | ) |
| Costs to exit non-strategic  activities/locations |   | .4                      |   | (5.7                    | )      |
| One–time legal charge                        |   | ---                     |   | (1.5                    | )      |
| Total special charges                             |   | 5.7                     |   | (62.6                   | )      |
| Write-down of deferred financing cost             |   | ---                     |   | (0.5                    | )      |
|                                              |   |                    |   |                    |   |
| Total pre-tax charges                             |   | $                       | 5.7    |                    | $      | (63.1 | ) |
|                                                   |        |                         |        |                         |        |  |  |  |

 

 

The following table reflects the components of the special chargeliability (included in accounts payable and accrued liabilities) as ofSeptember 30, 2001 (in millions):

 
|                                              |   | **Special  Charge  September 30, 2001** |   | **Net  Book Value of Assets Diverted** |   | **Net  Consideration** |   | **Cash  Payments** |   | **Balance  September 30, 2001** |   |
|---------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|------------------------|--------|--------------------|--------|--------------------------------------|--------|
| Net loss on sale of assets                        |   | $                                            | 55.4   |                                        | $      | 68.5                   |   | $                  | 19.4   |                                 | $      | 1.1 |   | $ | 5.2 |   |
| Costs to exit non-strategic  activities/locations |   | 5.7                                          |   | 5.1                                         |   | 0.4                    |   | 0.4                |   | 0.6                                  |   |
| One-time legal charge                             |   | 1.5                                          |   | -                                           |   | -                      |   | 0.9                |   | 0.6                                  |   |
|                                              |   | $                                            | 62.6   |                                        | $      | 73.6                   |   | $                  | 19.8   |                                 | $      | 2.4 |   | $ | 6.4 |   |

 

The Company hascollected $16.2 million of the net proceeds as of September 30, 2001. Theremaining net consideration will be collected by June 2002.

 

The net loss on the completed divestitures (the“Divestitures”) and the related net book value of the assets sold aresummarized as follows (in millions):

 
|                                     |   | **Three  Months Ended** |   | **Nine  Months Ended**  |   |
|------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                     |   | **September  30, 2001** |   | **September  30, 2001** |   |
| Total consideration                      |   |                    | 10.6   |                    | $      | 19.4 |   |
| Net book value of assets and liabilities |   | 3.2                     |   | 68.5                    |   |
| Selling and other expenses               |   | 2.1                     |   | 6.3                     |   |
|                                     |   |                    |   |                    |   |
| Net gain (loss) on sale                  |   | $                       | 5.3    |                    | $      | (55.4 | ) |
|                                          |        |                         |        |                         |        |  |  |  |

 

 

Duringsecond quarter, the Company developed plans to exit certain non-strategicactivities/locations. Management completed these closures by September 30,2001. The components of the charges related to these activities are summarizedbelow (in millions):

 
|                                               |   | **Three  Months Ended** |   | **Nine  Months Ended**  |   |
|----------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                               |   | **September  30, 2001** |   | **September  30, 2001** |   |
| Proceeds                                           |   | $                       | 0.4    |                    | $      | 0.4 |   |
| Long-lived  asset impairment                       |   | -                       |   | 4.3                     |   |
| Contract  termination cost and related commitments |   | -                       |   | 0.5                     |   |
| Excess  and obsolete inventory                     |   | -                       |   | 0.4                     |   |
| Allowance  for doubtful accounts                   |   | 0.1                     |   | 0.5                     |   |
| Other                                              |   | (0.1                    | )      | 0.4                     |   |
|                                               |   |                    |   |                    |   |
| Net  gain (loss)                                   |   | $                       | 0.4    |                    | $      | (5.7 | ) |

 

 

Also, during the second quarter, the Company recorded $1.5 million inone-time legal charges.  During thisthird quarter $0.9 million was paid with the remaining $0.6 million to be paidby March 2002. As a part of the $62.6 million special charge, $7.3 million wasaccrued for exiting cost, personnel cost and various selling expenses. $1.5million of these costs have been paid with the remaining $5.8 million to bepaid by June 2003. This item is presented as a part of the $62.6 millionspecial charge.

 

In connection with the divestitures and closures, theCompany has reduced the number of segments from four to two to reflect thego-forward segment focus.  The identifiedsegments are as follows:

 

**Information Management andDistribution**. Thissegment includes companies that provide the following services: (i) imaging;(ii) conversion of paper documents to microfilm; (iii) data capture anddatabase management; (iv) document conversion services for state governmentdisability, workers compensation claims and other government agencies; (v)full-service printing; and (vi) statement processing.

** **

**Healthcare, Regulatory andLegal Compliance.**Thissegment includes companies that provide the following services: (i) processinga request for a patient’s medical records; (ii) off-site active storage of ahealthcare institution’s medical records; (iii) online delivery of images ofselected medical records; (iv) document and data conversion services forhealthcare institutions; (v) temporary staffing services; (vi) providingattending physicians’ statements for life and health insurance underwriting;(vii) managed care compliance reviews; (viii) legal claims administration; and(ix) professional services related to labor discrimination, forensic analysisand other trial support services.

** **

The Companymeasures segment profit as income before income taxes. The Company hasreclassified the 2000 amounts to be consistent with the new segmentreporting.  Information on the revisedsegments follows (in thousands):

 
|                               |   | **THREE MONTHS ENDED SEPTEMBER 30,  2001**    |       |                                             |       |
|------------------------------------|--------|-----------------------------------------------|------------|--------------------------------------------------|------------|
|                               |   |                                          |       |                                             |       |   |   |   |   |   |   |
|                               |   | **Information Management  and  Distribution** |       | **Healthcare,  Regulatory and Legal Compliance** |       | **Divestitures  and Closures** |   | **Special  Charges** |   | **Consolidated** |   |
|                               |   |                                          | ** ** |                                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                               |   |                                          | ** ** |                                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenue                            |   | $                                             | 50,663     |                                             | $          | 51,292 |   | $ | 1,089 |   | $ | - |   | $ | 103,044 |   |
|                               |   |                                          |       |                                             |       |   |   |   |   |   |   |
| Income (loss) before income  taxes |   | $                                             | 5,502      |                                             | $          | 8,195 |   | $ | (150 | ) | $ | 5,748 |   | $ | 19,295 |   |

 
|                       |   | **THREE MONTHS ENDED SEPTEMBER 30,  2000**    |       |                                             |       |
|----------------------------|--------|-----------------------------------------------|------------|--------------------------------------------------|------------|
|                       |   |                                          |       |                                             |       |   |   |   |   |   |   |
|                       |   | **Information Management  and  Distribution** |       | **Healthcare, Regulatory and  Legal Compliance** |       | **Divestitures  and Closures** |   | **Special Charges** |   | **Consolidated** |   |
|                       |   |                                          | ** ** |                                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                       |   |                                          | ** ** |                                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenue                    |   | $                                             | 43,030     |                                             | $          | 49,699 |   | $ | 25,655 |   | $ | - |   | $ | 118,384 |   |
|                       |   |                                          |       |                                             |       |   |   |   |   |   |   |
| Income before income taxes |   | $                                             | 4,268      |                                             | $          | 8,924 |   | $ | 624 |   | $ | - |   | $ | 13,816 |   |

 
|                               |   | **NINE MONTHS ENDED SEPTEMBER 30,  2001**     |       |                                             |       |
|------------------------------------|--------|-----------------------------------------------|------------|--------------------------------------------------|------------|
|                               |   |                                          |       |                                             |       |   |   |   |   |   |   |
|                               |   | **Information Management  and  Distribution** |       | **Healthcare, Regulatory and  Legal Compliance** |       | **Divestitures  and Closures** |   | **Special  Charges (1)** |   | **Consolidated** |   |
|                               |   |                                          | ** ** |                                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                               |   |                                          | ** ** |                                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenue                            |   | $                                             | 153,614    |                                             | $          | 154,352 |   | $ | 36,295 |   | $ | - |   | $ | 344,261 |   |
|                               |   |                                          |       |                                             |       |   |   |   |   |   |   |
| Income (loss) before income  taxes |   | $                                             | 18,754     |                                             | $          | 24,422 |   | $ | (3,125 | ) | $ | (63,051 | ) | $ | (23,000 | ) |

----

(1)         Includes$0.5 million of charges writing-down deferred financial cost

 
|                       |   | **NINE MONTHS ENDED SEPTEMBER 30,  2000**     |       |                                             |       |
|----------------------------|--------|-----------------------------------------------|------------|--------------------------------------------------|------------|
|                       |   |                                          |       |                                             |       |   |   |   |   |   |   |
|                       |   | **Information Management  and  Distribution** |       | **Healthcare, Regulatory and  Legal Compliance** |       | **Divestitures  and Closures** |   | **Special  Charges** |   | **Consolidated** |   |
|                       |   |                                          | ** ** |                                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                       |   |                                          | ** ** |                                             | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenue                    |   | $                                             | 123,879    |                                             | $          | 136,978 |   | $ | 79,691 |   | $ | - |   | $ | 340,548 |   |
|                       |   |                                          |       |                                             |       |   |   |   |   |   |   |
| Income before income taxes |   | $                                             | 12,209     |                                             | $          | 23,978 |   | $ | 2,674 |   | $ | - |   | $ | 38,861 |   |

 

**3.     RecentAccounting Pronouncements**

 

In June 2001, theFinancial Accounting Standards Board ("FASB") issued Statement ofFinancial Accounting Standards (“SFAS”) No. 141, “Business Combinations” andSFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 requires the use of the purchase method ofaccounting for all business combinations initiated after June 30, 2001, therebyeliminating the pooling-of-interests method of accounting.  SFAS No. 141 also addresses the recognitionand measurement of goodwill and other intangible assets acquired in a businesscombination.  The adoption of SFAS No.141 by the Company on July 1, 2001, did not have a significant effect on theCompany’s financial statements.

 

Upon the adoptionof SFAS No. 142, goodwill and intangible assets that have indefinite usefullives will not be amortized but rather will be tested at least annually forimpairment.  The Company will adopt theprovisions of SFAS No. 142 on January 1, 2002. Goodwill amortization will be approximately $10.0 million for fiscal2001, $6.0 million of which is deductible for tax purposes.  The Company will complete its assessment ofgoodwill impairment by March 31, 2002. The impact of an impairment, if any determined during such assessment,would be recorded as a cumulative effect of a change in accounting principleduring the first quarter of fiscal 2002.

 

 

**4. Weighted Average Shares Outstanding**

 

Basic and diluted net income percommon share were computed in accordance with Statement of Financial AccountingStandards No. 128, "Earnings Per Share." The differences betweenbasic weighted average common shares and diluted weighted average common sharesand common stock equivalents are as follows (in thousands):

 
|                                                                   |   | **Three Months Ended** |   | **Nine Months  Ended** |   |
|------------------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                                                   |   | **September 30,**      |   | **September 30,**      |   |
|                                                                   |   | **2000**               |   | **2001**               |   | **2000** |   | **2001** |   |
|                                                                   |   |                   |   |                   |   |   |   |   |   |
| Basic weighted average common  shares                                  |   | 15,471                 |   | 16,969                 |   | 15,029 |   | 16,569 |   |
|                                                                   |   |                   |   |                   |   |   |   |   |   |
| Weighted average options,  warrants and other contingent consideration |   | 897                    |   | 810                    |   | 838 |   | - |   |
| Diluted weighted average common  shares                                |   | 16,368                 |   | 17,779                 |   | 15,867 |   | 16,569 |   |

 

**5.             Business Combinations**

 

*2001Acquisitions*

 

During the first nine months of2001, the Company acquired five business process outsourcing solutionsbusinesses, which were accounted for as purchases (the "PurchasedCompanies"). These acquisitions were (i) STAT Healthcare Consultants,Inc., (ii) Micromedia of New England, Inc., (iii) Image Entry Inc., Image Entryof Owsley County Inc., Image Entry of Indianapolis Inc., Image Entry FederalSystems Inc., Image Entry of Arkansas Inc., and Image Entry of Alabama Inc(collectively “Image Entry”), (iv) Kinsella Communications, Ltd., and(v) Digital Data Resources, Inc.  Theaggregate consideration paid for the Purchased Companies consisted of $44.4 million in cash and 180,714 shares ofcommon stock.  The preliminary allocation ofthe purchase price is set forth below (in thousands):

 

| Consideration  Paid                         | $      | 50,046 |
|---------------------------------------------|--------|--------|
| Estimated Fair Value of Identifiable Assets | 13,869 |
| Estimated Fair Value of Liabilities         | 5,685  |
| Goodwill                                    | 41,862 |

 

The weighted average fair marketvalues of the shares of common stock used in calculating the consideration paidfor the Purchased Companies was $31.47 per share, which represents a 10%discount from the average trading price of the common stock based on the lengthand type of restrictions in the purchase agreements.

 

The estimated fair market valuesreflected above are based on preliminary estimates and assumptions and aresubject to revision. In management's opinion, the preliminary allocations arenot expected to be materially different from the final allocations.

 

*ContingentConsideration*

 

Certain of these acquisitionsare subject to adjustments in their overall consideration based upon theachievement of specified earning targets over one to three year periods. Duringthe first nine months of 2001, the Company paid consideration of $18.4 millionin cash and 467,148 shares of common stock at an average price of $37.14 inrelation to contingent consideration agreements that have been finalized. Basedupon the evaluation of cumulative earnings through September 30, 2001 againstthe specified earnings targets, the Company has accrued aggregate contingentconsideration of approximately $14.6 million, of which $10.0 million isclassified as accounts payable and accrued liabilities and will be settled incash and $4.6 million is classified as long-term obligations and will besettled in common stock. All of the periods applicable for the earnout targetshave not been completed, and additional amounts may be payable in futureperiods under the terms of the agreements.

 

*Intangible Assets*

 

Intangibles consist primarily of goodwill. Based on the historicalprofitability of the purchased companies and trends in the legal, healthcare,financial services, government and other industries regarding the outsourcingof document management functions in the foreseeable future, goodwill is beingamortized over periods not to exceed 30 years. Management continually evaluateswhether events and circumstances indicate that the remaining estimated usefullife of intangible assets might warrant revisions or that the remaining balanceof intangibles or other long-lived assets may not be recoverable. To make thisevaluation, management compares the estimated undiscounted future cash flowsover the remaining life of the intangibles or other long-lived assets to thecarrying amount of the assets being evaluated.

 

If the expected future cash flows do not exceed the carrying amount ofthe assets being evaluated, an impairment loss is recognized based on theexcess of the carrying amount of the impaired assets over their fairvalue.  The goodwill associated with amajority of our acquisitions is not deductible for income tax purposes.

 

On January 1, 2002, the Company will adopt SFAS No. 142, which willchange the Company's current goodwill amortization policy.  See Note 3 to F.Y.I. Incorporated andSubsidiaries Notes to Consolidated Financial Statements.

 

**6.Derivatives and Other Comprehensive Loss**

 

Effective January 1, 2001, the Company adopted Statement of FinancialAccounting Standards No. 133, "Accounting for Derivative Instruments andHedging Activities." This statement requires that all derivative financialinstruments be recognized as either assets or liabilities in the balance sheetand carried at fair value. Gains or losses on derivatives designated as cashflow hedges are initially reported as a component of other comprehensive incomeand later classified into earnings in the period in which the hedged item alsoaffects earnings.

 

The Company has entered into an interest rate swap for a notional amountof $50 million to hedge, through March 31, 2003, its exposure to fluctuationsin interest rates on $50 million of its debt. The swap has been designated by the Company as a cash flow hedge.  As of September 30, 2001, the fair value ofthe interest rate swap was a liability of $2.1 million ($1.3 million, net oftax), which was recorded in the accompanying consolidated balance sheet inother long-term obligations with an offset recorded in equity as accumulatedother comprehensive loss.  This swap hasthe effect of fixing the interest rate on $50 million of the Company’s debt at5.775% plus the applicable floating spread.

 

Comprehensive income (loss) is defined as the change in equity during aperiod from transactions and other events, except those resulting frominvestments by and distributions to stockholders.  The components of comprehensive income (loss) for the three andnine month periods ended September 30, 2000 and 2001 are as follows (inthousands):

 
|                                                                                           |   | **Three Months  Ended** |   | **Nine Months  Ended** |   |
|------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                                           |   | **September 30,**       |   | **September 30,**      |   |
|                                                                                           |   |                    |   |                   |   |   |   |   |   |
|                                                                                           |   | **2000**                |   | **2001**               |   | **2000** |   | **2001** |   |
|                                                                                           |   |                    |   |                   |   |   |   |   |   |
|                                                                                           |   |                    |   |                   |   |   |   |   |   |
| Net income (loss)                                                                              |   | $                       | 8,290  |                   | $      | 11,963 |   | $ | 23,317 |   | $ | (22,473 | ) |
| Other comprehensive income  (loss):                                                            |   |                    |   |                   |   |   |   |   |   |
| Change in fair value of  interest rate swap, net of tax benefit of $405 and $811, respectively |   | –                  |   | (660                   | )      | – |   | (1,322 | ) |
|                                                                                           |   |                    |   |                   |   |   |   |   |   |
| Total comprehensive income  (loss)                                                             |   | $                       | 8,290  |                   | $      | 11,303 |   | $ | 23,317 |   | $ | (23,795 | ) |

 

 

**Item2.            Management's Discussion andAnalysis of Financial Condition and Results of Operations**

 

Thefollowing discussion should be read in conjunction with our financialstatements and the related notes thereto appearing elsewhere in this Report onForm 10-Q.

 

**Introduction**

 

We are a leading provider of business process outsourcingsolutions.  We offer customers ininformation intensive industries – such as legal, healthcare, financialservices and government – the solutions to manage key information and documentintensive business processes, enabling these organizations to concentrate ontheir core competencies.

 

Since our inception, we have acquired 71 and divested 16companies.  We evaluate candidates foracquisition and periodically for divestiture as a part of our strategic plan ofproviding customers a single solution for business process outsourcing.  The criteria for evaluation includegeographic need, additional technology, market growth potential, industryexpertise, service expansion to broaden service offerings, expansion of ourcustomer base, revenue and earnings growth potential, and expected sources anduses of capital.

 

**Significant Developments**

 

During the second and  third quarters, we completed several steps involved with ourBusiness Process Outsourcing realignment strategic plan.  We completed a strategic review of ouroperations and determined markets that we intend to concentrate on for futuregrowth.  Additionally, we identifiedcertain non-strategic operating units for divestiture or closure, and accordingly,developed and committed to a divestiture plan. The divested operating unitswere evaluated based on criteria such as market growth potential, current operating performance, revenue andearning growth potential, and expected sources and uses of capital.  This plan resulted in divestiturescomprising approximately 23% of 2000 revenues and 4% of 2000 operating income.

 

Effective June 1, 2001, we completed the sale of 10 operating unitspursuant to the divestiture plan.  Theseunits related to the following services: (i) automated litigation support; (ii)high-speed, multiple-set reproduction of documents; (iii) records acquisitionin the form of subpoena of business documents and service of process; and (iv)a commercial system integrationservices company.  The total proceedsreceived from these transactions were $7.5 million and resulted in a loss of$53.8 million.  During the thirdquarter, an additional $1.5 million was incurred primarily for personnel costand additional allowances for bad debt for retained trade accounts receivablesfor divested units.

 

We finalized the sale of three print-on-demand companies and our investorservices company during the third quarter. The sale of the print-on-demand companies resulted in a loss of $8.2million.  We recognized $6.0 million ofthis loss in the second quarter and the additional $2.2 million was recognizedin the third quarter.  The thirdquarter loss consisted of $1.8 million reduction in expected consideration and$400 thousand in other charges.  The investor services company was sold for atotal gain of approximately $8.1 million. A portion of the investor services company was sold for a $1.1 millionloss, which was recognized at June 30, 2001. The remaining assets and liabilities of the investor services companywas sold for a gain of $9.2 million. The purchase price for the investor services company was $14.5 millionand was collected during the third quarter. Also, we have the opportunity to collect $1.7 million of contingentconsideration based on future operating results of the investor servicescompany.

 

The proceedsfrom these divestitures will be used to pay down amounts outstanding under ourcredit facility and should provide $0.5 million in annualized interest expensesavings (using the company's current incremental borrowing rate).  The full effect of the interest expensebenefit should begin during the third quarter of fiscal 2002 once the fullamounts of proceeds are collected.

 

Additionally, we closed two non-strategic business units in June2001.  The $5.7 million charge recordedfor these closures resulted from long-lived asset impairment, contracttermination costs and related commitments, obsolete inventory write-downs, andallowance for doubtful accounts.

 

**Business Segments**

 

After the effectof the divestitures and closures, the Company reduced the number of segmentsfrom four to two to reflect the go-forward segment focus.  The identified segments are as follows:

 

**Information Management andDistribution.**  This segment includes companies that providethe following services: (i) imaging; (ii) conversion of paper documents tomicrofilm; (iii) data capture and database management; (iv) document conversionservices for state government disability, workers compensation claims and othergovernment agencies; (v) full-service printing; and (vi) statement processing.

 

**Healthcare, Regulatory and LegalCompliance.**   This segment includes companies thatprovide the following services: (i) processing a request for a patient’smedical records; (ii) off-site active storage of a healthcare institutionsmedical records; (iii) online delivery of images of selected medical records;(iv) document and data conversion services for healthcare institutions; (v)temporary staffing services; (vi) providing attending physicians’ statementsfor life and health insurance underwriting; (vii) managed care compliancereviews, (viii) legal claims administration, and  (ix) professional services related to labor discrimination, forensicanalysis, and other trial support services.

 

**Basis for Management Discussion andAnalysis**

 

Cost of services consists primarily of compensation and benefits toemployees providing goods and services to our clients, occupancy costs,equipment costs and supplies. Our cost of services also includes the cost ofproducts sold for micrographics supplies and equipment, computer hardware andsoftware and business imaging supplies and equipment.

 

Selling, general andadministrative expenses ("SG&A") consist primarily of: (i)compensation and related benefits to sales and marketing, executive management,accounting, human resources and other administrative employees; (ii) othersales and marketing costs; (iii) communications costs; (iv) insurance costs;and (v) legal and accounting professional fees and expenses.

 

The 2001 results include pre-tax special charges totaling $62.6 million due to thedivestiture of non-strategic operating companies, closures of two non-strategicbusiness units, and one-time legal charges. Also, the Company recognized charges for the write-down of deferred debtcosts due to refinancing long-term obligations.  Additionally, included as a reduction to nine months endedSeptember 30, 2001 revenue was $1.0 million of bad debt expense relatedspecifically to a single project within the Healthcare, Regulatory and LegalCompliance Segment.

 

**THREEMONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,2000**

** **

**To understand theongoing company, the following table is provided to show the results of ongoingoperations exclusive of pro forma adjustments that include: the results fromoperations for the divested companies and closed facilities, the effect of thespecial charges, write-down of deferred financing cost, and the aforementionedbad debt expense.**

** **
|                  |   | **Three Months Ended September 30,** |       |
|-----------------------|--------|--------------------------------------|------------|
|                  |   | **2000**                             |       | **2001** |   |
|                  |   | **Adjusted Reportable Segments**     |       | **Pro – forma  Adjustments** |   | **Consolidated** |   | **Adjusted Reportable Segments** |   | **Pro – forma  Adjustments** |   | **Consolidated** |   |
| **Revenue**           |   | **$**                                | **92,729** | ** ** | **$** | **25,655** | ** ** | **$** | **118,384** | ** ** | **$** | **101,955** | ** ** | **$** | **1,089** | ** ** | **$** | **103,044** | ** ** |
| **Gross profit**      |   | **37,402**                           | ** ** | **7,076** | ** ** | **44,478** | ** ** | **40,923** | ** ** | **119** | ** ** | **41,042** | ** ** |
| **SG&A**          |   | **19,591**                           | ** ** | **6,050** | ** ** | **25,641** | ** ** | **22,521** | ** ** | **270** | ** ** | **22,791** | ** ** |
| **Operating income**  |   | **15,946**                           | ** ** | **573** | ** ** | **16,519** | ** ** | **15,957** | ** ** | **5,587** | ** ** | **21,544** | ** ** |
| **Income before tax** |   | **13,192**                           | ** ** | **624** | ** ** | **13,816** | ** ** | **13,697** | ** ** | **5,598** | ** ** | **19,295** | ** ** |
| **Net income**        |   | **7,939**                            | ** ** | **351** | ** ** | **8,290** | ** ** | **8,492** | ** ** | **3,471** | ** ** | **11,963** | ** ** |
|                       |        |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

 

**Revenue**

 

Revenueincreased 9.9% from $92.7 million for the three months ended September 30, 2000to $102.0 million for the three months ended September 30, 2001.  Increases in revenue growth were derivedfrom imaging, data capture and contributions from acquisitions.

 

**Gross profit**

 

Gross profit increased 9.4% from$37.4 million for the three months ended September 30, 2000 to $40.9 millionfor the three months ended September 30, 2001. Gross profit as a percentage ofrevenue decreased from 40.3% for the three months ended September 30, 2000 to40.1% for the three months ended September 30, 2001, primarily due to economicslowdown related to direct mail.

 

**Selling, general and administrativeexpenses**

 

SG&A increased 15% from$19.6 million, or 21.1% of revenue, for the three months ended September 30,2000 to $22.5 million, or 22.1% of revenue, for the three months endedSeptember 30, 2001.  This increase was dueto planned increased compensation costs, outside service fees such as taxplanning, the consolidation of administrative and accounting functions,providing increased control, standardization and visibility, all as a part ofour on-going integration process.

 

**Operating income**

 

Operating income increased 0.4%from $15.9 million, or 17.1% of revenue, for the three months ended September30, 2000 to $16.0 million, or 15.7% of revenue, for the three months endedSeptember 30, 2001, largely attributable to the factors discussed above.

 

**Income before income taxes and net income**

 

Income before income taxesincreased 3.8% from $13.2 million for the three months ended September 30, 2000to $13.7 million for the three months ended September 30, 2001, and net incomeincreased 7.0% from $7.9 million for the three months ended September 30, 2000to $8.5 million for the three months ended September 30, 2001, largelyattributable to the factors discussed above.  The effective tax rate of approximately 38%exceeded the federal statutory rate of 35% due primarily to the amortization ofcertain acquisition-related costs that are non-deductible for tax purposes,plus the net effect of state income taxes.

 

 

**NINEMONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,2000**

** **

**To understand theongoing company, the following table is provided to show the results of ongoingoperations exclusive of pro forma adjustments that include: the results fromoperations for the divested companies and closed facilities, the effect of thespecial charges, write-down of deferred financing cost, and the aforementionedbad debt expense have been removed from the 2000 and 2001 results in thefollowing discussions.**
|                          |   | **Nine Months Ended September 30,** |        |
|-------------------------------|--------|-------------------------------------|-------------|
|                          |   | **2000**                            |        | **2001** |   |
|                          |   | **Adjusted Reportable Segments**    |        | **Pro – forma  Adjustments** |   | **Consolidated** |   | **Adjusted Reportable Segments** |   | **Pro – forma  Adjustments** |   | **Consolidated** |   |
| **Revenue**                   |   | **$**                               | **260,857** | ** ** | **$** | **79,691** | ** ** | **$** | **340,548** | ** ** | **$** | **308,966** | ** ** | **$** | **35,295** | ** ** | **$** | **344,261** | ** ** |
| **Gross profit**              |   | **102,596**                         | ** **  | **23,548** | ** ** | **126,144** | ** ** | **124,848** | ** ** | **6,348** | ** ** | **131,196** | ** ** |
| **SG&A**                  |   | **54,826**                          | ** **  | **19,621** | ** ** | **74,447** | ** ** | **66,808** | ** ** | **10,177** | ** ** | **76,985** | ** ** |
| **Operating income/(Loss)**   |   | **42,879**                          | ** **  | **2,564** | ** ** | **45,443** | ** ** | **51,305** | ** ** | **(66,767** | **)** | **(15,462** | **)** |
| **Income before  tax/(Loss)** |   | **36,187**                          | ** **  | **2,674** | ** ** | **38,861** | ** ** | **44,176** | ** ** | **(67,176** | **)** | **(23,000** | **)** |
| **Net income/(Loss)**         |   | **21,736**                          | ** **  | **1,581** | ** ** | **23,317** | ** ** | **27,389** | ** ** | **(49,862** | **)** | **(22,473** | **)** |
|                               |        |                                     |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

 

**Revenue**

 

Revenueincreased 18.4% from $260.9 million for the nine months ended September 30,2000 to $309.0 million for the nine months ended September 30, 2001.Conversion, data capture, and government related acquisition revenues were thekey drivers, offset by direct mail.

 

**Gross profit**

 

Gross profit increased 21.7%from $102.6 million for the nine months ended September 30, 2000 to $124.8million for the nine months ended September 30, 2001. Gross profit as a percentageof revenue increased from 39.3% for the nine months ended September 30, 2000 to40.4% for the nine months ended September 30, 2001, primarily due to completionof several large projects in the first half of the year.

 

**Selling, general and administrativeexpenses**

 

SG&A increased 21.9% from$54.8 million, or 21.0% of revenue, for the nine months ended September 30,2000 to $66.8 million, or 21.6% of revenue, for the nine months ended September30, 2001.  This increase is due toplanned increased compensation costs, outside service fees such as taxplanning, the consolidation of administrative and accounting functions,providing increased control, standardization and visibility, all as a part ofour on-going integration process.

 

**Operating income**

 

Operating income increased 19.7%from $42.9 million, or 16.4% of revenue, for the nine months ended September30, 2000 to $51.3 million, or 16.6% of revenue, for the nine months endedSeptember 30, 2001. Operating margin was positively impacted by project revenuewithin government services and legal claims administration related to veryprofitable projects completed during the first half of the year. Additionally,continued strong performance from data capture and conversion service offeringscontribute  to the year-to-datecomparisons.

 

**Income before income taxes and net income**

 

Income before income taxesincreased 22.3% from $36.1 million for the nine months ended September 30, 2000to $44.2 million for the nine months ended September 30, 2001, and net incomeincreased 26.0% from $21.7 million for the nine months ended September 30, 2000to $27.4 million for the nine months ended September 30, 2001, largelyattributable to the factors discussed above. The effective tax rateof approximately 38% exceeded the federal statutory rate of 35% due primarilyto the amortization of certain acquisition-related costs that arenon-deductible for tax purposes, plus the net effect of state income taxes.

 

 

 

### **LIQUIDITYAND CAPITAL RESOURCES**

 

At September 30, 2001, we had$60.5 million of working capital and $5.8 million of cash. Cash flows providedby operating activities for the nine months ended September 30, 2001 were $38.2million. Net cash provided by operating activities was approximately 140% ofnet income for the nine months ended September 30, 2001, mostly due to cashsavings from our tax planning, as well as strong cash flow from recent businessadditions. Net cash used in investing activities was $54.3 million for the ninemonths ended September 30, 2001, as we paid $59.8 million for acquisitions, netof cash acquired, including contingent consideration related to prior yearacquisitions. Net cash provided by financing activities was $12.3 million forthe nine months ended September 30, 2001, primarily due to proceeds from commonstock issuance.

 

Relating to the $62.6 millionspecial charge, $16.2 million was received from sales of operating companieswith an additional $3.2 million to be received by June 2002.  The Company has paid $2.4 million in exitcosts.   The remaining special chargeliability of $6.4 million will be paid through June 2003.  Additionally, we do not anticipate theeffect of the divesture plan to significantly impact operating cash flow.

 

On April 3, 2001,we entered into a new $297.5 million line of credit with Bank of America asarrangement agent and SunTrust Bank and Wells Fargo Bank as co-agents.  The annual interest rate applicable toborrowings under this facility is, at our option, (i) grid pricing ranging from0.0% to 0.5% plus the prime rate based on the ratio of funded debt to EBITDA(as defined in the credit agreement) or (ii) grid pricing ranging from 1.125%to 2.0% plus the Eurodollar rate based on the ratio of funded debt toEBITDA.  This credit facility replacedthe previous $175 million facility. This new credit facility matures in April 2004 and is subject tocustomary borrowing capacity requirements.

 

On June 27, 2001,we amended our credit facility to permit the completion of certaindivestitures. On August 2, 2001, we received a waiver from our lenders underour credit facility, waiving a technical debt covenant noncompliance resultingfrom the timing of certain of the divestitures.

 

In January 2000, we registered on Form S-4(Registration No. 333-92981) 3,012,217 shares of common stock for issuance inconnection with our acquisition program (the "Acquisition Shelf"), ofwhich 1,562,814 shares were available as of September 30, 2001.

 

### **RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS**

 

**ThisReport contains certain forward-looking statements such as our intentions,hopes, beliefs, expectations, strategies, predictions or any other variationthereof or comparable phraseology of our future activities or other futureevents or conditions within the meaning of Section 27A of the Securities Act of1933, as amended (the "Act"), and Section 21E of the SecuritiesExchange Act of 1934, as amended, which are intended to be covered by the safeharbors created thereby. Investors are cautioned that all forward-lookingstatements involve risks and uncertainty, including, without limitation,variations in quarterly results, volatility of our stock price, development bycompetitors of new or superior products, technology or services, the entry intothe market by new competitors, actual and potential terrorist activities, thesufficiency of our working capital and our ability to realize benefits fromconsolidating certain general and administrative functions, to assimilate andintegrate acquisitions, to continue our acquisition program, to manage ourgrowth, to retain management, to implement our focused business strategy, toexpand our document and information management services geographically, toattract and retain customers, to increase revenue by cross-selling services, tosuccessfully manage the impact of slowing economic conditions and tosuccessfully defend our company in ongoing and future litigation. Although webelieve that the assumptions underlying the forward-looking statementscontained herein are reasonable, any of the assumptions could be inaccurate,and, therefore, there can be no assurance that the forward-looking statementsincluded in this Report will prove to be accurate. In light of the significantuncertainties inherent in the forward-looking statements included herein, theinclusion of such information should not be regarded as a representation by usor any other person that our objectives and plans will be achieved.  Further, we disclaim any obligation toupdate any such forward-looking statements.**

 

 

**Item3.            Quantitative and QualitativeDisclosures about Market Risk**

 

The Company is subject to interest rate risk on its term loans andrevolving credit facility.  Interestrates are fixed on the indenture and capital lease agreements.  The Company has entered into an interestrate swap for a notional amount of $50 million to hedge, through March 31,2003, its exposure to fluctuations in interest rates on $50 million of itsdebt.  The swap has the effect of fixingthe interest rate on $50 million of the Company’s debt at 5.775% plus theapplicable floating spread.  The swaphas been designated by the Company as a cash flow hedge.  As of September 30, 2001, the fair value ofthe interest rate swap was a liability of $2.1 million ($1.3 million, net oftax), which was recorded in the accompanying consolidated balance sheet inother long-term obligations with an offset recorded in equity as othercomprehensive loss.

 

**PART II.        OTHERINFORMATION**

 

 

### **Item 6.            Exhibits and Reports on Form 8-K**

 

(a)   Exhibits

 

10.1           Credit Agreement,dated as of April 3, 2001, by and among F.Y.I. Incorporated, Bank of America,N.A. and the other signatories thereto.*

 

10.2           First Amendment toCredit Agreement, dated as of June 27, 2001, by and among F.Y.I. Incorporated,Bank of America, N.A. and the other signatories thereto (incorporated byreference to Exhibit 10.92 to the Company’s Form 10-Q/A Quarterly Report filedon August 17, 2001).

 

10.3           Letter Agreement,dated August 10, 2001, by and among F.Y.I. Incorporated, Bank of America, N.A.and the other signatories thereto.*

 

10.4           Master GuarantyAgreement, dated as of April 3, 2001, by and among certain subsidiaries ofF.Y.I. Incorporated and Bank of America, N.A.

 

10.5           Pledge Agreement,dated as of April 3, 2001, by and between F.Y.I. Incorporated and Bank ofAmerica, N.A.

 

10.6           Master PledgeAgreement, dated as of April 3, 2001, by and among certain subsidiaries ofF.Y.I. Incorporated and Bank of America, N.A.

 

10.7           ISDA MasterAgreement and Schedule to ISDA Master Agreement dated as of December 20, 2000,between F.Y.I. Incorporated and SunTrust Bank.

 

10.8           Confirmation ofInterest Rate Transaction Letter Agreement dated December 21, 2000, betweenF.Y.I. Incorporated and SunTrust Bank.

*               Schedules and similar attachments are omitted and abrief description of such omitted schedules and similar attachments is includedherein. The Company undertakes to supplementally provide the Commission with acopy of any such omitted schedule or similar attachment upon request.

 

(b)   Reports on Form 8-K

 

During the Quarter ended September 30, 2001, theCompany filed the following Current Reports on Form 8-K:

On August 10, 2001, the Company filed a Current Reporton Form 8-K with the Commission dated August 9, 2001, reporting under Item 5thereto, the Company's press release relating to earnings for the Quarter endedJune 30, 2001.

On September 18, 2001, the Company filed a CurrentReport on Form 8-K with the Commission dated September 17, 2001, reportingunder Item 5 thereto, certain pro forma summary quarterly income statementinformation for the last two fiscal quarters of the fiscal year ended December31, 2000.

 

 

 

**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this Reporton Form 10-Q to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                          | F.Y.I. Incorporated |
|-------------------------------|---------------------|
|                          |                |   |
| Date:  November 14, 2001 | By:                 | /s/ Ed H. Bowman, Jr. |
|                          |                | Ed H. Bowman, Jr. |
|                          |                | Chief Executive Officer and President |
|                          |                |   |
| Date:  November 14, 2001 | By:                 | /s/ Barry L. Edwards |
|                          |                | Barry L. Edwards |
|                          |                | Executive Vice President and ChiefFinancial Officer (Principal Financialand Accounting Officer) |

 

**INDEX TOEXHIBITS**

 
| **Exhibit Number** |   | **Description**                                                                                                                                                                                                                                                                             |
|--------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1               |   | Credit Agreement, dated as  of April 3, 2001, by and among F.Y.I. Incorporated, Bank of America, N.A. and  the other signatories thereto.*                                                                                                                                                  |
|               |   |                                                                                                                                                                                                                                                                                        |
| 10.2               |   | First Amendment to Credit  Agreement, dated as of June 27, 2001, by and among F.Y.I. Incorporated, Bank  of America, N.A. and the other signatories thereto (incorporated by reference  to Exhibit 10.92 to the Company’s Form 10-Q/A Quarterly Report filed on  August 17, 2001).     |
|               |   |                                                                                                                                                                                                                                                                                        |
| 10.3               |   | Letter Agreement, dated  August 10, 2001, by and among F.Y.I. Incorporated, Bank of America, N.A. and  the other signatories thereto.*                                                                                                                                                      |
|               |   |                                                                                                                                                                                                                                                                                        |
| 10.4               |   | Master Guaranty Agreement,  dated as of April 3, 2001, by and among certain subsidiaries of F.Y.I.  Incorporated and Bank of America, N.A.                                                                                                                                                  |
|               |   |                                                                                                                                                                                                                                                                                        |
| 10.5               |   | Pledge Agreement, dated as  of April 3, 2001, by and between F.Y.I. Incorporated and Bank of America,  N.A.                                                                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                        |
| 10.6               |   | Master Pledge Agreement,  dated as of April 3, 2001, by and among certain subsidiaries of F.Y.I.  Incorporated and Bank of America, N.A.                                                                                                                                                    |
|               |   |                                                                                                                                                                                                                                                                                        |
| 10.7               |   | ISDA Master Agreement and  Schedule to ISDA Master Agreement dated as of December 20, 2000, between  F.Y.I. Incorporated and SunTrust Bank.                                                                                                                                                 |
|               |   |                                                                                                                                                                                                                                                                                        |
| 10.8               |   | Confirmation of Interest  Rate Transaction Letter Agreement dated December 21, 2000, between F.Y.I.  Incorporated and SunTrust Bank.                                                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                        |
| *                  |   | Schedules and similar attachments are omitted and a brief description  of such omitted schedules and similar attachments is included herein. The  Company undertakes to supplementally provide the Commission with a copy of  any such omitted schedule or similar attachment upon request. |