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**SECURITIES AND EXCHANGECOMMISSION****WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

 

 
| **ý**                                                       | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of  1934**   |
|------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                             |                                                                                                |
| **for the quarterly period  ended June 30, 2001**                |
|                                                             |                                                                                                |
|                                                             | **or**                                                                                              |
|                                                             |                                                                                                |
| **o**                                                            | **Transition  report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of  1934.** |
|                                                             |                                                                                                |
| **for the transition period from  ____________ to ____________** |
|                                                             |                                                                                                |

 

**Commission file number 0-27444**

 

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

 
| **DELAWARE**                                                            | **75-2560895**                       |
|-------------------------------------------------------------------------|--------------------------------------|
| (State or other jurisdictionof 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 mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

Yes   ý      No o

As of July 31,2001, 16,989,155 shares of the registrant's Common Stock, $.01 par value pershare, were outstanding.

 

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**F.Y.I.INCORPORATED AND SUBSIDIARIES****FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2001**

**INDEX**

| **PART I.**   | **FINANCIAL  INFORMATION**                                                                                   |
|---------------|--------------------------------------------------------------------------------------------------------------|
|          |                                                                                                         |
| Item  1       | Financial  Statement                                                                                         |
|          |                                                                                                         |
|          | Consolidated Balance Sheets  – December 31, 2000 and June 30, 2001 (unaudited)                          |
|          |                                                                                                         |
|          | Consolidated  Statements of Operations – Three and Six months ended June 30, 2000 and 2001  (unaudited) |
|          |                                                                                                         |
|          | Consolidated  Statements of Cash Flows – Six months ended June 30, 2000 and 2001  (unaudited)           |
|          |                                                                                                         |
|          | Notes to  Consolidated Financial Statements                                                                  |
|          |                                                                                                         |
| 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 1        | Legal Proceedings                                                                                            |
|          |                                                                                                         |
| Item  4       | Submission  of Matters to a Vote of Security Holders                                                         |
|          |                                                                                                         |
| Item 5        | Other Information                                                                                            |
|          |                                                                                                         |
| Item  6       | Exhibits  and Reports on Form 8-K                                                                            |
|          |                                                                                                         |
|          | **SIGNATURES**                                                                                               |

 

| **PART I.** | **FINANCIAL  INFORMATION** |
|-------------|----------------------------|
|        |                       |
| **Item 1.** | **Financial Statements**   |

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

|                                                                                                 |                                                                                                                                                                       | **December  31,** |    | **June  30,**        |    |
|------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------|---------|----------------------|---------|
|                                                                                                 |                                                                                                                                                                       | **2000**          |    | **2001**             |    |
|                                                                                                 |                                                                                                                                                                       | ****              |    | ****                 |    |
| **ASSETS**                                                                                           |                                                                                                                                                                       |              |    | **(Unaudited)**      |    |
|                                                                                                 |                                                                                                                                                                       |              |    |                 |    |
| **CURRENT ASSETS:**                                                                                  |                                                                                                                                                                       |              |    |                 |    |
|                                                                                                 | Cash and cash  equivalents                                                                                                                                                 |              | $       | 9,504                |    | $ | 8,205 |   |
|                                                                                                 | Accounts and notes  receivable, less allowance for doubtful accounts of $14,111 and $20,686,  respectively                                                                 |              | 93,583  |                 | 101,651 |   |
|                                                                                                 | Income tax receivable                                                                                                                                                      |              | -       |                 | 7,843   |   |
|                                                                                                 | Deferred income taxes                                                                                                                                                      |              | 3,935   |                 | 6,019   |   |
|                                                                                                 | Prepaid expenses and  other current assets                                                                                                                                 |              | 11,859  |                 | 10,304  |   |
|                                                                                                 | Net assets held for sale                                                                                                                                                   |              | -       |                 | 6,283   |   |
|                                                                                                 |                                                                                                                                                                       |                   |    |                      |    |
|                                                                                                 | Total current assets                                                                                                                                                       |              | 118,881 |                 | 140,305 |   |
|                                                                                                 |                                                                                                                                                                       |              |    |                 |    |
| **PROPERTY, PLANT AND EQUIPMENT,**net of  accumulated depreciation $46,326 and $43,967, respectively |                                                                                                                                                                       | 50,341            |    | 43,805               |    |
| **GOODWILL AND OTHER INTANGIBLES,**net of  amortization of $19,241 and $17,653, respectively         |                                                                                                                                                                       | 278,709           |    | 286,807              |    |
| **OTHER NONCURRENT ASSETS**                                                                          |                                                                                                                                                                       | 6,778             |    | 7,452                |    |
|                                                                                                 |                                                                                                                                                                       |                   |    |                      |    |
|                                                                                                 | Total assets                                                                                                                                                               |              | $       | 454,709              |    | $ | 478,369 |   |
|                                                                                                 |                                                                                                                                                                       |                   |    |                      |    |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY**                                                            |                                                                                                                                                                       |              |    |                 |    |
|                                                                                                 |                                                                                                                                                                       |              |    |                 |    |
| **CURRENT LIABILITIES:**                                                                             |                                                                                                                                                                       |              |    |                 |    |
|                                                                                                 | Accounts payable and  accrued liabilities                                                                                                                                  |              | $       | 57,351               |    | $ | 79,176 |   |
|                                                                                                 | Current maturities of  long-term obligations                                                                                                                               |              | 851     |                 | 572     |   |
|                                                                                                 | Income tax payable                                                                                                                                                         |              | 4,759   |                 | -       |   |
|                                                                                                 |                                                                                                                                                                       |              |         |                 |         |   |
|                                                                                                 | Total current  liabilities                                                                                                                                                 |              | 62,961  |                 | 79,748  |   |
|                                                                                                 |                                                                                                                                                                       |              |    |                 |    |
| **LONG-TERM OBLIGATIONS**, net of current  maturities                                                |                                                                                                                                                                       | 123,784           |    | 139,021              |    |
| **DEFERRED INCOME TAX**                                                                              |                                                                                                                                                                       | 3,541             |    | 971                  |    |
| **OTHER LONG-TERM OBLIGATIONS**                                                                      |                                                                                                                                                                       | 11,031            |    | 19,488               |    |
|                                                                                                 |                                                                                                                                                                       |                   |    |                      |    |
|                                                                                                 | Total liabilities                                                                                                                                                          |              | 201,317 |                 | 239,228 |   |
|                                                                                                 |                                                                                                                                                                       |              |    |                 |    |
| **COMMITMENTS AND CONTINGENCIES**                                                                    |                                                                                                                                                                       |              |    |                 |    |
|                                                                                                 |                                                                                                                                                                       |              |    |                 |    |
| **STOCKHOLDERS' EQUITY:**                                                                            |                                                                                                                                                                       |              |    |                 |    |
|                                                                                                 | Preferred stock, $.01  par value, 1,000,000 shares authorized, no shares issued and outstanding                                                                            |              | —  |            | —  |     |
|                                                                                                 | Common stock, $.01 par  value, 26,000,000 shares authorized, 16,191,416 and 16,919,111 shares issued  and outstanding at December 31, 2000 and June 30, 2001, respectively |              | 162     |       | 170     |       |
|                                                                                                 | Additional  paid-in-capital                                                                                                                                                |              | 166,608 |                 | 187,452 |   |
|                                                                                                 | Accumulated other  comprehensive loss                                                                                                                                      |              | —  |                 | (662    | ) |
|                                                                                                 | Retained earnings                                                                                                                                                          |              | 87,286  |                 | 52,845  |   |
|                                                                                                 |                                                                                                                                                                       |              |         |                 |         |   |
|                                                                                                 |                                                                                                                                                                       | 254,056           |    | 239,805              |    |
|                                                                                                 | Less – Treasury stock,  $.01 par value, 42,605 shares at December 31, 2000 and June 30, 2001                                                                          |              | (664    | )                    | (664    | ) |
|                                                                                                 |                                                                                                                                                                       |                   |    |                      |    |
|                                                                                                 | Total stockholders'  equity                                                                                                                                                |              | 253,392 |                 | 239,141 |   |
|                                                                                                 |                                                                                                                                                                       |                   |    |                      |    |
|                                                                                                 | Total liabilities and  stockholders' equity                                                                                                                                |              | $       | 454,709              |    | $ | 478,369 |   |
|                                                                                                 |                                                                                                                                                                       |                   |    |                      |    |
|                                                                                                      |                                                                                                                                                                            |                   |         |                      |         |  |  |  |  |  |

The accompanying notes arean integral part of these consolidated financial statements.****F.Y.I. INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS(IN THOUSANDS, EXCEPT PER SHARE DATA)**
 **Three Months Ended** **Six Months Ended**  **June  30,** **June  30,**  **** ****  **2000** **2001** **2000** **2001**  **** **** **** ****  **(unaudited)** **(unaudited)**          **REVENUE**$114,400 $119,813 $222,165 $241,217          **COST OF SERVICES**68,140 70,817 133,813 142,495 **SPECIAL CHARGES**— 417 — 417 **DEPRECIATION**3,571 4,236 6,687 8,148       Gross profit42,689 44,343 81,665 90,157 **SELLING, GENERAL, AND**  **ADMINISTRATIVE EXPENSES**25,331   27,101   48,805   54,193   **SPECIAL CHARGES**— 67,908 — 67,908 **AMORTIZATION**2,046 2,560 3,936 5,052       Operating income (loss)15,312 (53,226)28,924 (36,996)         **OTHER (INCOME) EXPENSE:**         Interest expense2,458 3,120 4,310 5,461  Interest income(111)(27)(212)(132) Other income, net(143)- (219)(29)       Income (loss) before  income taxes13,108 (56,319)25,045 (42,296)         **PROVISION (BENEFIT) FOR INCOME TAXES**5,243 (13,188)10,018 (7,859)              **NET INCOME (LOSS)**$7,865 $(43,131)$15,027 $(34,437)              **NET INCOME (LOSS) PER COMMON SHARE**         Basic$0.52 $(2.60)$1.01 $(2.10)       Diluted$0.50 $(2.60)$0.96 $(2.10)               **WEIGHTED AVERAGE**        **COMMON  SHARES OUTSTANDING** ** ** ** ** ** ** ** **  Basic15,050 16,575 14,807 16,379        Diluted15,715 16,575 15,617 16,379       
 

The accompanying notes are an integral part of theseconsolidated financial statements.

**F.Y.I. INCORPORATED AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS)**
  **Six  Months** **Ended**   **June  30,**   ****   **2000** **2001**   **** ****   **(Unaudited)** **CASH FLOWS FROM OPERATING ACTIVITIES:**      Net income (loss) $15,027 $(34,437) Adjustments to reconcile  net income (loss) to net cash provided by operating activities:          Special Charges - 68,325  Depreciation and  amortization 10,623 13,200  Change in operating  assets and liabilities:      Accounts and notes  receivable (2,874)(11,602) Prepaid expenses and  other assets (3,066)(6,179) Accounts payable and  other current liabilities (6,576)(5,645)      Net cash provided by  operating activities 13,134 23,662       **CASH FLOWS FROM INVESTING ACTIVITIES:**      Purchase of property,  plant and equipment (6,656)(8,777) Proceeds from sale of  operating company assets - 1,250  Cash paid for  acquisitions, net of cash acquired (61,008)(44,924)      Net cash used for  investing activities (67,664)(52,451)      **CASH FLOWS FROM FINANCING ACTIVITIES:**      Proceeds from common  stock issuance, net of underwriting      discounts and other  costs 7,075 12,573  Distribution to  shareholders of pooled companies (174)-  Proceeds from long-term  obligations 69,500 88,932  Principal payments on  long-term obligations (17,747)(73,815) Cash paid for debt  issuance costs - (200)      Net cash provided by financing  activities 58,654 27,490       **NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS** 4,124 (1,299)      **CASH AND CASH EQUIVALENTS,**beginning of  period 9,396 9,504           **CASH AND CASH EQUIVALENTS,**end of period $13,520 $8,205     
 

The accompanying notes are an integral part of theseconsolidated financial statements.**F.Y.I.INCORPORATED AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTS**
**1.  Basis of Presentation:**

             The accompanying consolidatedfinancial statements and related notes to consolidated financial statementsinclude the accounts of F.Y.I. Incorporated and our subsidiaries.

             In the opinion of our management,the accompanying consolidated financial statements include all of our accountsand the adjustments necessary to present fairly our financial position at June30, 2001, our results of operations for the three and six months ended June 30,2000 and 2001, and our cash flows for the six months ended June 30, 2000 and2001. All significant intercompany transactions have been eliminated. Althoughwe believe that the disclosures are adequate to make the information presentednot misleading, certain information and footnote disclosures normally includedin annual financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted pursuant to the rules andregulations of the Securities and Exchange Commission (the"Commission"). These consolidated financial statements should be readin conjunction with our consolidated financial statements and the related notesthereto in our Annual Report on Form 10-K filed with the Commission on June 30,2001.  The results of operations for thethree and six month periods ended June 30, 2000 and 2001 may not be indicativeof the results for the full year.

**2.Special Charges**

**            **During the second quarter,the Company completed several steps of its Business Process Outsourcingrealignment strategic plan.  The Companycompleted a strategic review of its operations and determined markets that itintends to concentrate on for future growth. Additionally, the Company identified certain non-strategic operatingunits for divestiture or closure, and accordingly, developed and committed to adivestiture plan. The non-strategic operating units were evaluated based oncriteria such as marketgrowth potential, current operating performance, revenue and earning growthpotential, and expected sources and uses of capital.  As a result of thedivestiture plan and the completed actions discussed, the Company recorded$68.3 million of pre-tax special charges. ALSO, the Company recorded a $0.5 million charge towrite-off deferred debt costs due to the refinancing of long-term obligations,which is included in interest expense. Additionally, included as a reduction to revenue, the Company incurred$1 million of bad debt expense related specifically to a single projectcompleted during fiscal 2000 within the Healthcare, Regulatory and LegalCompliance segment.  The followingdetails the components of the charges discussed (in millions):
Net loss on sale of assets $53.4 Net loss on assets held for sale 7.3 Costs to exit certain non-strategic activities/locations 6.1 Nonrecurring legal charge 1.5     Total Special Charges $68.3  Write-down of deferred  financing cost 0.5     Total Pre-tax Charges 68.8     
             In June 2001, the Company completedthe sale of four automated litigation support companies two legal copycompanies, two records acquisition companies and its commercial systemsintegration consulting services company. Additionally, the Company was in the process of finalizing the sale ofthree print on demand companies and its investors' service company. These saleswere completed early in the third quarter. The Company expects that the sale of the print on demand companies willresult in a loss.  Therefore, at June30, 2001 the net assets to be sold were written down to the proceeds to bereceived resulting in a $7.3 million charge. The Company expects that the investors' services company will be soldfor a gain of approximately $ 9.2 million, which will be recognized uponcompletion of the sale.  The Company'snet assets to be sold at June 30, 2001 have been reclassified as "Netassets for sale" in the current asset section of the balance sheet.

             The net loss on the completed and planned divestitures(the “Divestitures”) and the related net book value of the assets sold aresummarized as follows (in thousands):
 Total **Assets  Sold:**  Total consideration (1)$7,088 Net book value of assets  and liabilities57,334 Selling Expenses3,131  Net Loss on Sale$53,377 **Assets  Held for Sale:**  Expected total  consideration$1,725 Net book value of assets  and liabilities as of June 30, 20017,966 Expected selling  expenses1,084  Net Loss on Assets Held  for Sale$7,325 
 
(1)As a part of the total consideration, the Company received notes  receivable in the amount of $6.2 million.   The notes receivable have payment terms between 3 and 18 months.   
 

             During June 2001, the Company developed plans to exitcertain non-strategic activities/locations. Management currently anticipatesthat these closures will be substantially completed by September 30, 2001. Thecomponents of the charges related to these activities recorded during thesecond quarter are summarized below (in thousands):
Long-lived asset  impairment$4,302Contract termination  cost and related commitments529Excess and obsolete  inventory417Allowance for doubtful  accounts400Other525 Total$6,173
             With respect to the contract termination costs and othercash charges, $43,000 was paid in the second quarter, and the remaining$1,011,000 is anticipated to be paid by the end of June 30, 2003.

             Also, duringthe second quarter, the Company recorded $1.5 million in non-recurring legalcharges.  This item is presented as apart of the $67.9 million special charge.

             In connection with the divestituresand closures, the Company has reduced the number of segments from four to twoto reflect the go-forward segment focus. The identified segments are as follows:

**             InformationManagement and Distribution**. This segment includes companiesthat provide the following services: (i) imaging; (ii) conversion of paperdocuments to microfilm; (iii) data capture and database management; (iv)document conversion services for state government disability; workerscompensation claims and other government agencies; (v) full-service printing;and (vi) statement processing.

**             Healthcare,Regulatory and Legal 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 institutions 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.

          We measure segment profit as income beforeincome taxes. We have reclassified the 2000 amounts to agree with our newsegment reporting.  Information on therevised segments follows (in thousands):
  THREE  MONTHS ENDED JUNE 30, 2001        Information  Management  & Distribution Healthcare,  Regulatory and Legal Compliance Divestitures  and Closures Special  Charges (1) Consolidated   **** **** **** **** ****              Revenue$55,671 $51,206 $12,936 $- $119,813               Income  (loss) before income taxes$7,626 $7,955 $(3,101) $(68,799) $(56,319)             (1)Includes  $0.5 million of charges writing-down deferred financing cost 
 
     THREE  MONTHS ENDED JUNE 30, 2000      Information  Management  & Distribution Healthcare,  Regulatory and Legal Compliance Divestitures  and Closures Special  Charges Consolidated  **** **** **** **** ****            Revenue$40,056 $47,206 $27,138 $- $114,400             Income  before income taxes$3,318 $8,659 $1,131 $- $13,108             
 
       SIX  MONTHS ENDED JUNE 30, 2001        Information  Management  & Distribution Healthcare,  Regulatory and Legal Compliance Divestitures  and Closures Special  Charges (1) Consolidated   **** **** **** **** ****              Revenue$102,951 $104,060 $34,206 $- $241,217               Income  (loss) before income taxes$13,252 $17,228 $(3,977)$(68,799) $(42,296) (1)Includes  $0.5 million of charges writing-down deferred financing cost 
 
 SIX  MONTHS ENDED JUNE 30, 2000      Information  Management  & Distribution Healthcare,  Regulatory and Legal Compliance Divestitures  and Closures Special  Charges Consolidated  **** **** **** **** ****            Revenue$80,849 $87,279 $54,037 $- $222,165             Income  before income taxes$7,941 $15,054 $2,050 $- $25,045 
**3.**  **RecentAccounting Pronouncement**

             In June 2001, the FinancialAccounting Standards Board ("FASB") issued Statement of FinancialAccounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No.142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires the use of the purchase method of accounting forall business combinations initiated after June 30, 2001, thereby eliminatingthe pooling-of-interests method of accounting. SFAS No. 141 also addresses the recognition and measurement of goodwilland other intangible assets acquired in a business combination.  The adoption of SFAS No. 141 by the Companyon July 1, 2001, will not have a significant effect on the Company’s financialstatements.

             Upon the adoption of SFAS No. 142,goodwill and intangible assets that have indefinite useful lives will not beamortized but rather will be tested at least annually for impairment.  The Company will adopt the provisions ofSFAS No. 142 on January 1, 2002. Goodwill amortization will be approximately $9.6 million for fiscal2001, $5.8 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 AverageShares Outstanding**

             Basic and diluted net income per common share werecomputed in accordance with Statement of Financial Accounting Standards No.128, "Earnings Per Share." The differences between basic weightedaverage common shares and diluted weighted average common shares and commonstock equivalents are as follows (in thousands):
  **Three Months Ended** **Six  Months Ended**   **June 30,** **June  30,**   **** ****   **2000** **2001** **2000** **2001**                 Basic weighted average  common shares 15,050 16,575 14,807 16,379           Weighted average  options, warrants and other contingent consideration 665 — 810 —                 Diluted weighted average  common shares 15,715 16,575 15,617 16,379       
** **

**5.  BusinessCombinations**

*2001 Acquisitions*

             During the first six months of 2001, we acquired fivebusiness process outsourcing solutions businesses, which were accounted for aspurchases (the "Purchased Companies"). These acquisitions were (i)STAT Healthcare Consultants, Inc., (ii) Micromedia of New England, Inc., (iii)Image Entry Inc., Image Entry of Owsley County Inc., Image Entry ofIndianapolis Inc., Image Entry Federal Systems Inc., Image Entry of ArkansasInc., 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 $49,433 Estimated Fair Value of  Identifiable Assets 13,869 Estimated Fair Value of  Liabilities 5,685 Goodwill 41,249 
             The weighted average fair market values of the shares ofcommon stock used in calculating the consideration paid for the PurchasedCompanies was $28.08 per share, which represents a 20% discount from theaverage trading price of the common stock based on the length and type ofrestrictions in the purchase agreements.

             The estimated fair market values reflected above arebased on preliminary estimates and assumptions and are subject to revision. Inmanagement's opinion, the preliminary allocations are not expected to bematerially different from the final allocations.

*Contingent Consideration*

             Certain of our acquisitions are subject to adjustmentsin their overall consideration based upon the achievement of specified earningtargets over one to three year periods. During the first six months of 2001, wepaid consideration of $1.5 million in cash and 132,069 shares of common stockat an average price of $28.17 in relation to contingent considerationagreements that have been finalized. Based upon the evaluation of cumulativeearnings through June 30, 2001 against the specified earnings targets, we haveaccrued aggregate contingent consideration of approximately $36.0 million, ofwhich $20.1 million is classified as accounts payable and accrued liabilitiesand will be settled in cash and $15.9 million is classified as long-termobligations and will be settled in common stock. All of the periods applicablefor the earnout targets have not been completed, and additional amounts may bepayable in future periods under the terms of the agreements.

*IntangibleAssets*

             Intangibles consistprimarily of goodwill. Based on the historical profitability of the purchasedcompanies and trends in the legal, healthcare and other industries regardingthe outsourcing of document management functions in the foreseeable future,goodwill is being amortized over periods not to exceed 30 years. Managementcontinually evaluates whether events and circumstances indicate that theremaining estimated useful life of intangible assets might warrant revisions orthat the remaining balance of intangibles or other long-lived assets may not berecoverable. To make this evaluation, management compares the estimatedundiscounted future cash flows over the remaining life of the intangibles orother long-lived assets to the carrying amount of the assets being evaluated.

             If the expected futurecash flows do not exceed the carrying amount of the assets being evaluated, animpairment loss is recognized based on the excess of the carrying amount of theimpaired assets over their fair value. The goodwill associated with a majority of our acquisitions is notdeductible for income tax purposes.

             On January 1, 2002, theCompany will adopt SFAS No. 142, which will change the Company's currentgoodwill amortization policy.  See Note3 to F.Y.I. Incorporated and Subsidiaries Notes to Consolidated FinancialStatements.

**6.  New Credit Facility**

**            **OnApril 3, 2001, we entered into a new $297.5 million line of credit with Bank ofAmerica as arrangement agent and SunTrust Bank and Wells Fargo Bank asco-agents.  The Annual interest rateapplicable to borrowings under this facility is, at our option, (i) gridpricing ranging from 0.0% to 0.5% plus the prime rate based on the ratio offunded debt to EBITDA (as defined in the credit agreement) or (ii) grid pricingranging from 1.125% to 2.0% plus LIBOR 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.

**7.  Derivatives and Other Comprehensive Loss**

             Effective January 1,2001, the Company adopted Statement of Financial Accounting Standards No. 133,"Accounting for Derivative Instruments and Hedging Activities." Thisstatement requires that all derivative financial instruments be recognized aseither assets or liabilities in the balance sheet and carried at fair value.Gains or losses on derivatives designated as cash flow hedges are initiallyreported as a component of other comprehensive income and later classified intoearnings in the period in which the hedged item also affects earnings.

             The Company has enteredinto an interest rate swap for a notional amount of $50 million to hedge,through March 31, 2003, its exposure to fluctuations in interest rates on $50million of its debt.  The swap has beendesignated by the Company as a cash flow hedge.  As of June 30, 2001, the fair value of the interest rate swap wasa liability of $1.1 million ($0.7 million, net of tax), which was recorded inthe accompanying consolidated balance sheet in other long-term obligations withan offset recorded in equity as other comprehensive loss.  This swap has the effect of fixing theinterest rate on $50 million of the Company’s debt at 5.775% plus theapplicable floating spread.

             Comprehensive income(loss) is defined as the change in equity during a period from transactions andother events, except those resulting from investments by and distributions tostockholders.  The components ofcomprehensive income (loss) for the three and six month periods ended June 30,2000 and 2001 are as follows (in thousands):
 **Three  Months Ended** **Six  Months Ended**  **June  30,** **June  30,**  **** ****  **2000** **2001** **2000** **2001**                Net income (loss)$7,865 $(43,131)$15,207 $(34,437)Other comprehensive  income (loss):        Change in fair value of  interest rate swap, net of tax benefit of $0 and $406, respectively– –  – (662)     Total comprehensive  income (loss)$7,865 $(43,131)$15,207 $(35,099)     
** **
**Item 2.****Management's Discussion and Analysis of Financial Condition  and Results of Operations**
             The following discussion should be read in conjunctionwith our financial statements and the related notes thereto appearing elsewherein this Report on Form 10-Q.

**Introduction**

             We are a leading provider of business processoutsourcing solutions.  We offer customersin information intensive industries – such as legal, financial services andgovernment – the solutions to manage key information and document intensivebusiness processes, enabling these organizations to concentrate on their corecompetencies.

             Since our inception, we haveacquired 71 and divested approximately 12 companies.  We evaluate candidates for acquisition and periodically fordivestiture as a part of our strategic plan of providing customers a single solutionfor business process outsourcing.  Thecriteria for evaluation include geographic need, additional technology, marketgrowth potential, industry expertise, service expansion to broaden serviceofferings, expansion of our customer base, revenue and earnings growthpotential, and expected sources and uses of capital.

**Significant Developments**

                           During the second quarter, we completed severalsteps involved with our Business Process Outsourcing realignment strategicplan.  We completed a strategic reviewof our operations and determined markets that we intend to concentrate on forfuture growth.  Additionally, weidentified certain non-strategic operating units for divestiture or closure,and accordingly, developed and committed to a divestiture plan. The divestedoperating units were evaluated based on criteria such as market growthpotential, current operating performance, revenue and earning growth potential,and expected sources and uses of capital. When completed, this plan will result in divestitures comprisingapproximately 23% of  2000 revenues and4% of 2000 operating income.

             Effective June 1, 2001, wecompleted the sale of 10 operating units pursuant to the divestiture plan.  These units related to the followingservices: (i) automated litigation support; (ii) high-speed, multiple-setreproduction of documents; (iii) records acquisition in the form of subpoena ofbusiness documents and service of process; and (iv) a commercial system integration services company.  The total proceeds received from thesetransactions were $7 million and resulted in a loss of $53.4 million.  The proceeds from these divestitures will beused to pay down amounts outstanding under our credit facility and shouldprovide $0.5 million in annualized interest expense savings (using thecompany's current incremental borrowing rate). The full effect of the interest expense benefit should begin during the3rd quarter of fiscal 2002 once the full amount of proceeds iscollected.

             Also, we were in the process offinalizing the sale of three print-on-demand companies and our investor'sservices company. These sales were completed early in the third quarter.  The sale of the print-on-demand companiesresulted in a loss. Therefore, at June 30, 2001 the net assets to be sold werewritten down to the proceeds to be received resulting in a charge of $7.3million.  The investor's servicescompany was sold for a gain of approximately $9.2 million. The Company's netassets to be sold at June 30, 2001 were reclassified as"Net assets for sale" in thecurrent asset section of the balance sheet.

             Additionally, we closed two non-strategicbusiness units in June 2001.  The chargerecorded for 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 effect of thedivestitures and closures, the Company reduced the number of segments from fourto two to reflect the go-forward segment focus.  The identified segments are as follows:

             **Information Management and Distribution.**  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 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,forensic analysis, and other trial support services.

**Basis for Management Discussion and Analysis**

             Cost of services consists primarilyof compensation and benefits to employees providing goods and services to ourclients, occupancy costs, equipment costs and supplies. Our cost of servicesalso includes the cost of products sold for micrographics supplies andequipment, computer hardware and software and business imaging supplies andequipment.

             Selling,general and administrative expenses ("SG&A") consist primarilyof: (i) compensation and related benefits to sales and marketing, executivemanagement, accounting, human resources and other administrative employees;(ii) other sales and marketing costs; (iii) communications costs; (iv) insurancecosts; and (v) legal and accounting professional fees and expenses.

             The2001 results include pre-tax special chargestotaling $68.3 million due to the divestiture of non-strategic operatingcompanies, closures of two non-strategic business units, and non-recurringlegal charges.  Also, the Companyrecognized charges for the write-down of deferred debt costs due to refinancinglong-term obligations.  Additionally,included as a seduction to June 30, 2001 revenue was $1 million of bad debtexpense related specifically to a single project completed during fiscal 2000within the Healthcare, Regulatory and Legal Compliance Segment.  These items are discussed above in Note 2"Special Charges" to the consolidated financial statements.  To understand the ongoing company, theresults from operations for the divested companies and closed facilities, andthe effect of the special charges and write-down of deferred financing cost,and the aforementioned bad debt expense have been removed from the 2000 and2001 results in the following discussions.

**THREE MONTHS ENDED JUNE 30,2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000**

             **Revenue**

             Revenue increased 22%from $87.3 million for the three months ended June 30, 2000 to $106.9 millionfor the three months ended June 30, 2001. This increase was largely due to revenue from the acquisitions completedsubsequent to June 30, 2000 and internal revenue growth, excluding acquiredrevenue, of 5.7%. This revenue growth was primarily attributable to an increasein government services and otherdocument imaging and higher revenue from data capture services and healthcareprofessional services.

             **Grossprofit**

             Gross profit increased 29% from $34.4 million for thethree months ended June 30, 2000 to $43.6 million for the three months endedJune 30, 2001.  This increase is largelydue to acquisitions completed subsequent to June 30, 2000. Gross profit as apercentage of revenue, increased from 39% for the three months ended June 30,2000 to 41% for the three months ended June 30, 2001, primarily due to thefavorable operating leverage afforded from revenue growth in the governmentbusiness and higher margins earned on data capture services.

             **Selling,general and administrative expenses**

             SG&A increased 24% from $18.7 million, or 21% of revenue,for the three months ended June 30, 2000 to $23.1 million, or 22% of revenue,for the three months ended June 30, 2001. This increase was a resultof SG&A at companies acquired subsequent to June 30, 2000 and increasedoutside services primarily related to legal and tax planning, and plannedannual salary increases occurring during the first quarter of 2001.

             **Operatingincome**

             Operating income increased 28% from $14.2 million, or16% of revenue, for the three months ended June 30, 2000 to $18.2 million, or17% of revenue, for the three months ended June 30, 2001, largely attributableto the factors discussed above.

             **Incomebefore income taxes and net income**

             Income before income taxes increased 30% from $12.0million for the three months ended June 30, 2000 to $15.6 million for the threemonths ended June 30, 2001.  Net incomeincreased 35% from $7.2 million for the three months ended June 30, 2000 to$9.7 million for the three months ended June 30, 2001, largely attributable tothe factors discussed above, and to the change in the effective tax rate from40% to 38%.  The effective tax rate ofapproximately 38% exceeded the federal statutory rate of 35% due primarily tothe amortization of certain acquisition-related costs that are non-deductiblefor tax purposes, plus the net effect of state income taxes.

 

**SIX MONTHS ENDED JUNE 30, 2001COMPARED TO SIX MONTHS ENDED JUNE 30, 2000**

             **Revenue**

             Revenue increased 23%from $168.1 million for the six months ended June 30, 2000 to $207.0 millionfor the six months ended June 30, 2001. This increase was largely due to revenue from the acquisitions completedsubsequent to June 30, 2000 and internal revenue growth, excluding acquiredrevenue, of 8.5%. This revenue growth was primarily attributable to an increasein revenue for data capture services, class action administrative services, andhealthcare professional services.

             **Grossprofit**

             Gross profit increased 29% from $65.2 million for thesix months ended June 30, 2000 to $83.9 million for the six months ended June30, 2001.  This increase is largely dueto acquisitions completed subsequent to June 30, 2000. Gross profit as apercentage of revenue, increased from 39% for the six months ended June 30,2000 to 41% for the six months ended June 30, 2001, primarily due to higherthan average margins on acquisitions completed subsequent to June 30, 2000 anddata capture and imaging services.

             **Selling,general and administrative expenses**

             SG&A increased 26% from $35.2 million, or 21% ofrevenue, for the six months ended June 30, 2000 to $44.3 million, or 23% ofrevenue, for the six months ended June 30, 2001.  This increase was a result of SG&A at companies acquiredsubsequent to June 30, 2000 andincreased outside services primarily related to legal and tax planning, andplanned annual salary increases occurring during the first quarter of 2001.

             **Operatingincome**

             Operating income increased 32% from $26.9 million, or16% of revenue, for the six months ended June 30, 2000 to $35.4 million, or 17%of revenue, for the six months ended June 30, 2001, largely attributable to thefactors discussed above.

             **Incomebefore income taxes and net income**

             Income before income taxes increased 33% from $23.0million for the six months ended June 30, 2000 to $30.5 million for the sixmonths ended June 30, 2001. Net income increased 37% from $13.8 million for thesix months ended June 30, 2000 to $18.9 million for the three months ended June30, 2001, largely attributable to the factors discussed above, and to thechange in the effective tax rate from 40% to 38%.  The effective tax rate of approximately 38% exceeded the federalstatutory rate of 35% due primarily to the amortization of certainacquisition-related costs that are non-deductible for tax purposes, plus thenet effect of state income taxes.

 

**LIQUIDITY AND CAPITAL RESOURCES**

                           At June 30, 2001, we had $60.6 million ofworking capital and $8.2 million of cash. Cash flows provided by operatingactivities for the six months ended June 30, 2001 were $24.9 million. Net cashprovided by operating activities was approximately 132% of net income for thesix months ended June 30, 2001, mostly due to cash savings from our taxplanning, as well as strong cash flow from some recent business additions.Additionally, we do not anticipate the effect of the divestiture plan tosignificantly impact operating cash flow. Net cash used in investing activitieswas $53.7 million for the six months ended June 30, 2001, as we paid $44.9million for acquisitions, net of cash acquired, including contingent considerationrelated to prior year acquisitions. Net cash provided by financing activitieswas $27.5 million for the six months ended June 30, 2001, primarily due toproceeds of $88.9 million on our line of credit, net of paydowns of $73.8million on long-term obligations.

                           On April 3, 2001, weentered 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, weamended our credit facility to permit the completion of certain divestitures.On August 2, 2001, we received a waiver from our lenders under our creditfacility, waiving a technical debt covenant noncompliance resulting from thetiming of certain of the divestitures.

                           In January 2000, weregistered on Form S-4 (Registration No. 333-92981) 3,012,217 shares of commonstock for issuance in connection with our acquisition program (the"Acquisition Shelf"), of which 1,894,418 shares were available as ofJune 30, 2001.

**RISKS ASSOCIATED WITH FORWARD-LOOKINGSTATEMENTS**

                           This Report containscertain forward-looking statements such as our intentions, hopes, beliefs,expectations, strategies, predictions or any other variation thereof orcomparable phraseology of our future activities or other future events orconditions within the meaning of Section 27A of the Securities Act of 1933, asamended (the "Act"), and Section 21E of the Securities Exchange Actof 1934, as amended, which are intended to be covered by the safe harborscreated thereby. Investors are cautioned that all forward-looking statementsinvolve risks and uncertainty, including, without limitation, variations inquarterly results, volatility of our stock price, development by competitors ofnew or superior products, technology or services, the entry into the market bynew competitors, the sufficiency of our working capital and our ability torealize benefits from consolidating certain general and administrativefunctions, to assimilate and integrate acquisitions, to continue our acquisitionprogram, to manage our growth, to retain management, to implement our focusedbusiness strategy, to expand our document and information management servicesgeographically, to attract and retain customers, to increase revenue bycross-selling services and to successfully defend our company in ongoing andfuture litigation. Although we believe that the assumptions underlying theforward-looking statements contained herein are reasonable, any of theassumptions could be inaccurate, and, therefore, there can be no assurance thatthe forward-looking statements included in this Report will prove to beaccurate. In light of the significant uncertainties inherent in theforward-looking statements included herein, the inclusion of such informationshould not be regarded as a representation by us or any other person that ourobjectives and plans will be achieved. Further, we disclaim any obligation to update any such forward-lookingstatements.

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

             The Company is subject to interest rate risk on its termloans and revolving credit facility. Interest rates are fixed on the indenture and capital leaseobligations.  The Company has enteredinto an interest rate swap for a notional amount of $50 million to hedge,through March 31, 2003, its exposure to fluctuations in interest rates on $50million of its debt.    This swap hasthe effect of fixing the interest rate on $50 million of the Company’s debt at5.775% plus the applicable floating spread. The swap has been designated by the Company as a cash flow hedge.  As of June 30, 2001, the fair value of theinterest rate swap was a liability of $1.1 million, which was recorded in theaccompanying consolidated balance sheet in other long-term obligations with anoffset recorded in equity as other comprehensive loss

**PART II.         OHER INFORMATION**

**Item 1.             Legal Proceedings**

                      Afterreceiving a notice from Identitech, Inc. alleging that our registered trademark"F.Y.I. INCORPORATED" infringed Identitech's registered trademark"FYI", on April 7, 2000, we filed an action in the United StatesDistrict Court for the Northern District of Texas seeking a declaration thatour use of this mark and certain other of our trademarks for documentmanagement services did not infringe Identitech, Inc.'s registered trademark"FYI" for computer software. Identitech answered the complaint andbrought counterclaims alleging infringement of its mark by us.  On May 22, 2001, the Company and Identitechreached an agreement that settled their dispute on mutually acceptable terms.

**Item 4.            Submissionof Matters to a Vote of Security Holders**

             On May 10, 2001, we held our annual meeting ofstockholders. The stockholders elected eight (8) directors. The directornominees received the following votes:
 Number of Votes   NomineeFor Against/Withheld Abstentions Broker Non-Votes     Ed H. Bowman, Jr.13,638,058 761,534 - - Michael J. Bradley13,650,833 748,759 - - David Lowenstein13,634,678 764,914 - - Donald F. Moorehead, Jr.13,649,733 749,859 - - Joe A. Rose13,634,778 764,814 - - Hon. Edward M. Rowell13,649,603 749,989 - - Jonathan B. Shaw13,550,736 848,856 - - Thomas C. Walker11,949,162 2,450,430 - - 
Additionally, the proposedwarrants were approved and adopted with the following votes:
Number of Votes  For Against/Withheld Abstentions Broker Non-Votes     8,410,392 4,545,730 81,822 1,361,648 
** **

**Item 5.**                 **OtherInformation**

***RECENT DEVELOPMENTS***

*Acquisitions*

             Since March 31, 2001, we have acquired the followingbusiness process outsourcing solutions businesses: (i) Kinsella Communications,Ltd., a class-action lawsuit notification service located in Washington D.C.,and (ii) Digital Data Resources, Inc., a document imaging business located inIowa.

*Divestitures*

             During the second quarter and thefirst part of the third quarter, the Company sold the stock or assets of thefollowing companies as part of the Divestitures:  Advanced Digital Graphics, Inc.; CH Acquisition Corp.; T.C.H.Group, Inc.; TCH Mailhouse, Inc.; Eagle Legal Services Acquisition Corp.;Pinnacle Legal Management Limited Partnership; Researchers Acquisition Corp.;The Rust Consulting Group, Inc; PMI Imaging Systems, Inc.; F.Y.I. DiscoveryServices Incorporated; MAVRICC Management Systems, Inc.; MMS Escrow andTransfer Agency, Inc.; and MMS Securities, Inc.

**Item 6.            Exhibits and Reports on Form 8-K**
(a)Exhibits   10.84Amended and Restated Employment Agreement, dated as of May 18, 2001  between F.Y.I. Incorporated and Barry L. Edwards.    10.85Amended and Restated Employment Agreement, dated as of May 18, 2001,  between F.Y.I. Incorporated and Charles S. Gilbert.    10.86Amended and Restated Employment Agreement, dated as of May 18, 2001  between F.Y.I. Incorporated and Ed H. Bowman, Jr.    10.87Amended and Restated Employment Agreement, dated as of May 18, 2001,  between F.Y.I. Incorporated and Joe A. Rose.    10.88Employment Agreement, dated as of May 18, 2001, between F.Y.I  Incorporated and Kerry D. Walbridge.    10.89Amended and Restated Employment Agreement, dated as of May 18, 2001,  between F.Y.I. Incorporated and Michael S. Rupe.    10.90Amended and Restated Employment Agreement, dated as of May 18, 2001,  between F.Y.I. Incorporated and Ronald Zazworsky.    10.91Amended and Restated Employment Agreement, dated as of May 18, 2001,  between F.Y.I. Incorporated and Thomas C. Walker.    10.92First 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.   (b)Reports on Form 8-K.   During the Quarter ended June 30, 2001, the Company filed on April 12,  2001, a Current Report on Form 8-K with the Commission dated March 31, 2001,  reporting under Item 2 thereto, the acquisition of Image Entry Inc., Image  Entry of Owsley County Inc., Image Entry of Indianapolis Inc., Image Entry  Federal Systems Inc., Image Entry of Arkansas Inc. and Image Entry of Alabama  Inc.   During the Company's third quarter, the Company filed on August 10,  2001, a Current Report on Form 8-K with the Commission dated August 9, 2001,  reporting under Item 5 thereto, the Company's press release relating to  earnings for the Quarter ended June 30, 2001.
 

**SIGNATURES**

             Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report on Form 10-Q to besigned on its behalf by the undersigned thereunto duly authorized.
  F.Y.I. Incorporated   Date:  August 14, 2001 By:  /s/ Ed H. Bowman, Jr.      Ed  H. Bowman, Jr.   Chief Executive Officer and President      Date:  August 14, 2001 By:  /s/ Barry L. Edwards      Barry L. Edwards   Executive Vice President and Chief   Financial Officer (Principal Financial   and Accounting Officer)
 **