<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-10583
-------
ATC ENVIRONMENTAL INC.
(Exact name of Registrant as specified in its charter)
Delaware 46-0399408
------------------------ ----------------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
104 East 25th Street,
10th Floor
New York, New York 10010
----------------------- ----------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (212) 353-8280
--------------
None
----
(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the Registrant's Common Stock as of
July 11, 1996 was 7,786,049.
PAGE
<PAGE>
ATC ENVIRONMENTAL INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31, 1996
Page
PART I - FINANCIAL INFORMATION:
Item 1 - Financial Statements:
Consolidated Balance Sheets
February 29, 1996 and May 31, 1996 (Unaudited) F-3
Consolidated Statements of Operations
Three months ended May 31, 1995 and 1996 (Unaudited) F-4
Consolidated Statements of Stockholders' Equity
Three months ended May 31, 1995 and 1996 (Unaudited) F-5
Consolidated Statements of Cash Flows
Three months ended May 31, 1995 and 1996 (Unaudited) F-6
Notes to Consolidated Financial Statements (Unaudited) F-7
Item 2 - Management's Discussion and Analysis of Financial F-12
Condition and Results of Operations
PART II - OTHER INFORMATION:
Items 1-6 F-16
Signatures F-17
Exhibit 11 - Computation of Earnings Per Share
Three months ended May 31, 1995 and 1996 (Unaudited) F-18
Exhibit 27 - Financial Data Schedule
May 31, 1996 (Unaudited) F-19
F-2
PAGE
<PAGE>
ATC ENVIRONMENTAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 29, 1996 AND MAY 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
February 29, May 31,
1996 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents ............................ $13,469,443 $6,744,916
Trade accounts receivable, less allowance for
doubtful accounts ($383,220 at February 29, 1996
and $1,057,355 at May 31, 1996)..................... 14,161,774 27,992,442
Costs in excess of billings on uncompleted contracts.. 2,333,835 11,431,899
Prepaid expenses and other current assets............. 906,289 3,423,754
Deferred income taxes................................. 440,600 440,600
----------- -----------
Total current assets................................ 31,311,941 50,033,611
PROPERTY AND EQUIPMENT, Net (Note C).................... 3,606,755 3,681,545
GOODWILL, net of accumulated amortization (Note B)
($453,646 at February 29, 1996 and $575,283 at
May 31, 1996)......................................... 11,375,399 34,791,339
COVENANTS NOT TO COMPETE, net of accumulated
amortization (Note B) ($258,099 at February 29, 1996
and $299,166 at May 31, 1996)......................... 274,401 763,334
OTHER ASSETS............................................ 116,104 783,471
----------- -----------
$46,684,600 $90,053,300
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term debt....................................... $1,122,552 $1,810,200
Current maturities of long-term debt.................. 354,858 1,414,927
Accounts payable...................................... 2,231,175 7,396,440
Income taxes payable.................................. 42,500 754,734
Accrued compensation.................................. 1,421,330 3,488,892
Other accrued expenses (Note B)....................... 1,162,210 11,976,812
----------- -----------
Total current liabilities........................... 6,334,625 26,842,005
LONG-TERM DEBT, less current maturities (Note A)........ 361,944 21,856,003
OTHER LIABILITIES....................................... 598,817 371,972
DEFERRED INCOME TAXES................................... 196,800 196,800
----------- -----------
Total liabilities................................... 7,492,186 49,266,780
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes B and E)
STOCKHOLDERS' EQUITY (Note D):
Common stock, par value $.01 per share; authorized
20,000,000 shares; issued and outstanding 7,796,577
shares at February 29, 1996 and 7,784,657 shares at
May 31, 1996........................................ 77,966 77,847
Additional paid-in capital........................... 29,030,189 28,978,430
Notes receivable - common stock...................... (45,000) (45,000)
Retained earnings.................................... 10,129,259 11,775,243
----------- -----------
Total stockholders' equity........................... 39,192,414 40,786,520
----------- -----------
$46,684,600 $90,053,300
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
PAGE
<PAGE>
ATC ENVIRONMENTAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1995 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
May 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
REVENUES............................................... $10,814,953 $16,645,983
COST OF REVENUES....................................... 5,545,411 9,363,971
----------- -----------
Gross profit...................................... 5,269,542 7,282,012
OPERATING EXPENSES:
Selling.............................................. 329,629 542,582
General and administrative........................... 3,365,964 3,918,015
Provision for bad debts.............................. 47,400 132,635
----------- -----------
3,742,993 4,593,232
----------- -----------
Operating income.................................. 1,526,549 2,688,780
----------- -----------
NONOPERATING EXPENSE (INCOME):
Interest expense..................................... 109,508 57,326
Interest income...................................... (43,772) (130,035)
Other................................................ (1,815) (10,814)
----------- -----------
63,921 (83,523)
----------- -----------
Income before income taxes........................ 1,462,628 2,772,303
INCOME TAX EXPENSE..................................... 567,500 1,054,000
----------- -----------
NET INCOME............................................. $895,128 $1,718,303
=========== ===========
EARNINGS PER COMMON SHARE AND
DILUTIVE COMMON EQUIVALENT SHARE:
Primary (Note D).................................. $ .15 $ .20
=========== ===========
Fully diluted (Note D)............................ $ .15 $ .20
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary........................................... 6,123,312 8,581,643
=========== ===========
Fully diluted..................................... 6,123,312 8,680,339
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
PAGE
<PAGE>
ATC ENVIRONMENTAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MAY 31, 1995 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
1995
<S> <C> <C> <C> <C> <C> <C>
Notes
Additional Receivable
Common Stock Paid-in -Common Retailed
Shares Amount Capital Stock Earnings Total
----------- ---------- ----------- ------------ ----------- ---------
BALANCE, February 28, 1995..................... 5,738,018 $57,380 $7,484,453 $(15,000) $6,286,361 $13,813,194
Sale of common stock at $2.13 per share,
upon exercise of stock options and warrants 300 3 636 - - 639
Common stock commitment in connection with
asset purchase............................. - - 22,500 - - 22,500
Net income................................... - - - - 895,128 895,128
------------ ----------- ------------ ------------ ----------- -----------
BALANCE, May 31, 1995.......................... 5,738,318 $57,383 $7,507,589 $(15,000) $7,181,489 $14,731,461
============ =========== ============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
Notes
Additional Receivable
Common Stock Paid-in -Common Retailed
Shares Amount Capital Stock Earnings Total
----------- ----------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, February 29, 1996..................... 7,796,577 $77,966 $29,030,189 $(45,000) $10,129,259 $39,192,414
Sale of common stock at $4.13 per share, upon
exercise of stock options and warrants..... 400 4 1,646 - - 1,650
Continuing registration costs applied against
additional paid in capital................. - - (1,415) - - (1,415)
Stock received as consideration for
sale of assets............................. (12,320) (123) (51,990) - (72,319) (124,432)
Net income................................... - - - - 1,718,303 1,718,303
----------- ---------- ------------- ---------- ------------ -----------
BALANCE, May 31, 1996.......................... 7,784,657 $77,847 $28,978,430 $(45,000) $11,775,243 $40,786,520
=========== ========== ============= ========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
PAGE
<PAGE>
ATC ENVIRONMENTAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MAY 31, 1995 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
May 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $895,128 $1,718,303
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and leasehold amortization............ 170,133 198,728
Amorization of goodwill and covenants.............. 95,379 162,704
Provision for bad debts............................ 47,400 132,635
Other liabilities.................................. (54,107) (30,074)
Changes in operating assets and liabilities, net of
amounts acquired in acquisitions:
Accounts receivable and cost in excess of
billings on uncompleted contracts.............. (1,445,500) (2,849,887)
Prepaid expenses and other assets................ 147,542 (453,025)
Accounts payable and other liabilities........... (1,077,940) (3,149,254)
Income taxes payable............................. 215,142 712,252
----------- -----------
Net cash flows from operating activities....... (1,006,823) (3,557,618)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of American Testing and Engineering Corp.,
net of cash acquired............................... - (8,965,952)
Purchase of 3D Information Services, Inc
net of cash acquired............................... - (2,926,681)
Purchase of BSE Management, Inc. .................... (103,077) -
Purchase of Con-Test, Inc. .......................... (123,848) -
Purchase of R.E. Blattert and Associates............. (53,068) -
Purchase of property and equipment................... (122,649) (429,435)
Other................................................ (13,484) 49,910
----------- -----------
Net cash flows from investing activities....... (416,126) (12,272,158)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and notes
payable............................................. 816,660 20,919,941
Proceeds from issuance of common stock, net of
expenses ........................................... 639 1,650
Principal payments on long-term debt and notes
payable, including capital lease obligations........ (293,309) (11,814,927)
Payments for continuing registration costs........... - (1,415)
----------- -----------
Net cash flows from financing activities....... 523,990 9,105,249
----------- -----------
Net change in cash and cash equivalents........ (898,959) (6,724,527)
CASH AND CASH EQUIVALENTS, Beginning of period......... 1,377,862 13,469,443
----------- ----------
CASH AND CASH EQUIVALENTS, End of period............... $ 478,903 $6,744,916
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest........................................... $ 109,508 $ 58,190
=========== ===========
Income taxes....................................... $ 352,352 $ 356,969
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
PAGE
<PAGE>
ATC ENVIRONMENTAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 1996 (Unaudited)
A. GENERAL
Principles of Consolidation - The consolidated financial
statements include the accounts of ATC Environmental Inc. and its
wholly-owned subsidiaries ("ATC" or the "Company").
In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly, in all
material respects, the financial position, the results of operations
and the cash flows for the periods presented herein. These results of
operations are not necessarily indicative of the results to be expected
for the full year due to certain seasonality factors and the effects
and timing of large service projects.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. These condensed financial
statements should be read in conjunction with the consolidated
financial statements and the notes included in the Company's financial
statements for the fiscal year ended February 29, 1996, which are
included in the Company's Annual Report on Form 10-K.
Nature of Business - ATC is a national environmental consulting
and engineering firm providing assessment, monitoring, training,
analytical and management services for environmental projects. These
services are provided nation-wide through a network of regional
offices. Because the Company conducts its operations in a single
industry, segment information is not presented.
Significant Customers - Revenues from two customers comprised
approximately 5.6% of total revenues during the three months ended May
31, 1996 as compared to 8.7% for the three months ended May 31, 1995.
Credit Facilities - On May 24, 1996 the Company entered into a
$20,000,000 bridge credit facility with Chemical Bank and Atlantic Bank
of New York. Under the terms of the credit agreement, the Company may
borrow up to the amount of the facility, with interest payable monthly
at 1.75% above the adjusted Eurodollar rate (7.2% at May 31, 1996).
The agreement contains certain restrictive covenants which are
consistent for this type of facility, including restrictions on
dividend payments. Amounts borrowed are due September 20, 1996. The
Company is currently negotiating and anticipates entering into a longer
term agreement with the banks prior to the maturity date of the credit
agreement. As a result of the Company's intent and ability to secure
long term financing, the amounts borrowed under the bridge credit
facility have been classified as long term debt in the accompanying
consolidated balance sheet.
Earnings Per Share Data - Earnings per common share and dilutive
common equivalent share have been computed by using the weighted
average number of shares outstanding during each period. Outstanding
dilutive stock warrants and options are included in the computation of
weighted average number of shares.
Reclassifications - Certain reclassifications have been made to
the prior period's financial statements to conform to the current years
presentation.
F-7
PAGE
<PAGE>
B. BUSINESS ACQUISITIONS AND MERGER
The following acquisitions have been accounted for as purchases.
The acquired company's assets and liabilities are included in the
accompanying consolidated balance sheets at fair value at the date of
purchase. The acquired company's operations subsequent to the
acquisition are included in the accompanying consolidated statements of
operations.
Fiscal 1997
- -----------
American Testing and Engineering Corporation - On May 24, 1996
ATC purchased certain assets and assumed certain liabilities of
American Testing and Engineering Corporation ("ATEC"), a national
environmental consulting firm. ATEC provides environmental engineering
and consulting services through a large network of branch and regional
offices. The purchase price was comprised of the following
consideration:
Amounts paid to seller and a majority owner:
Cash............................................ $ 9,000,000
Payment obligations, for property and facility
rentals and non-compete consideration......... 6,001,000
Liabilities assumed:
Current liabilities............................. 15,731,076
Bank debt....................................... 10,750,000
Direct expenses related to acquisition............. 139,438
-----------
$41,621,514
===========
The payment obligations to seller/majority owner are payable
monthly or quarterly and are included in other accrued expenses in the
accompanying consolidated balance sheet at May 31,1996.
The Company is contingently liable to ATEC for additional purchase
consideration up to $10,750,000 if certain net revenue levels are
achieved and certain other conditions are met. The maximum amount
payable, if fully earned, would be paid as follows: $3,883,333 in
fiscal 1998, $3,873,333 in fiscal 1999, $1,293,334 in fiscal 2000 and
$1,700,000 in fiscal 2002.
The initial purchase price allocation is summarized as follows:
Accounts receivable and unbilled work in process,
net of allowances................................. $18,957,768
Other current assets............................... 2,023,996
Other assets....................................... 548,301
Covenant not to compete............................ 430,000
Goodwill........................................... 19,661,449
-----------
$41,621,514
===========
The purchase price is subject to adjustment based upon a final
accounting of adjusted net equity as of the effective closing date of
the purchase. The Company may set-off against certain payment
obligations the amount of any uncollected accounts receivable and
work in process, net of recorded allowances, not collected within one
year.
3D Information Services, Inc. - On May 28, 1996, ATC purchased
certain assets and assumed certain liabilities of 3D Information
Services, Inc. ("3D"), a New Jersey based information services company
providing technical information consulting services in all phases of
information system design, development, maintenance and management in
client server and mainframe based environments. The purchase price was
comprised of the following consideration:
Amounts paid to seller:
Cash............................................ $3,000,000
Note payable.................................... 2,500,000
Assumed liabilities................................ 197,969
Direct expenses related to acquisition............. 904
----------
$5,698,873
==========
F-8
PAGE
<PAGE>
The initial purchase price allocation is summarized as follows:
Accounts receivable................................ $1,163,981
Work in process.................................... 279,047
Property and equipment............................. 77,381
Other current assets............................... 77,560
Covenant not to compete............................ 100,000
Goodwill........................................... 4,000,904
----------
$5,698,873
==========
Fiscal 1996
Hill Businesses - In November 1995, ATC purchased certain assets
and assumed certain liabilities of Kaselaan & D'Angelo Associates,
Inc., Hill Environmental, Inc. (formerly the environmental division of
Gibbs & Hill, Inc.) and Particle Diagnostics, Inc., wholly owned
subsidiaries of Hill International, Inc. (collectively the "Hill
Businesses").
The Hill Businesses provide environmental consulting and
engineering services, including asbestos management, industrial hygiene
and indoor air quality consulting, environmental auditing and
permitting, environmental regulatory compliance, water and wastewater
engineering, solid waste landfill management and analytical laboratory
services. The purchase price was comprised of the following
consideration:
Amounts paid to seller:
Cash............................................ $2,517,949
Letter of credit, net of imputed interest....... 700,000
Note payable at 8.75% interest.................. 300,000
Liabilities assumed................................ 414,544
Direct expenses related to acquisition............. 263,475
----------
$4,195,968
==========
In addition, the Company issued to certain selling shareholders,
50,000 stock options to purchase restricted common stock at $13.875 per
share as consideration for non compete agreements.
The initial purchase price allocation is summarized as follows:
Costs in excess of billings on uncompleted contracts,
net of unrealizable amounts...................... $ 620,000
Property and equipment............................. 175,000
Covenants not to compete........................... 37,500
Other assets....................................... 30,572
Goodwill........................................... 3,332,896
----------
$4,195,968
==========
The Company is contingently liable to reimburse up to $150,000 of
certain facility lease costs if incurred by Hill International, Inc.
Applied Geosciences Inc. - Effective February 29, 1996, ATC
purchased certain assets and assumed certain liabilities of Applied
Geosciences, Inc. ("AGI"), a California based environmental consulting
company having offices in San Diego, Tustin and San Jose, California.
The purchase price was comprised of the following consideration:
Cash to seller..................................... $147,546
Cash to secured creditors of seller................ 441,514
Liabilities assumed................................ 225,538
Direct expenses related to acquisition............. 31,246
--------
$845,844
========
F-9
PAGE
<PAGE>
In addition, AGI will receive contingent consideration of up to
$190,000 subject to actual collections of the purchased trade
receivables in excess of a minimum amount established under the
agreement.
The initial purchase price allocation is summarized as follows:
Accounts receivable, net........................... $474,973
Property and equipment............................. 115,060
Covenants not to compete........................... 30,000
Goodwill........................................... 225,811
--------
$845,844
========
Aurora Environmental Inc. Merger - ATC and its parent, Aurora
Environmental Inc. ("Aurora") were merged pursuant to an agreement (the
"Merger Agreement") approved by a majority of shareholders of each
company on June 29, 1995, with ATC being the surviving corporation.
Under the Merger Agreement, ATC exchanged .545 of a share of ATC Common
Stock for each of Aurora's 6,131,104 shares of stock outstanding. ATC's
common shares held by Aurora of 3,258,000 were canceled. Actual common
shares outstanding increased by 83,356 shares. The merger has been
accounted for in a manner similar to a pooling of interests. Under this
method of accounting, recorded assets and liabilities of Aurora were
combined with those of ATC and the results of operations of ATC and
Aurora were combined as of the effective date of the merger. In
addition, the intercompany balance between ATC and Aurora was forgiven.
Pro Forma Financial Information (Unaudited) - The following
unaudited pro forma information sets forth the results of operations of
ATC as if the merger of Aurora and ATC's purchase of the Hill
Businesses, ATEC and 3D had occurred on March 1, 1995:
<TABLE>
<CAPTION>
PRO FORMA
Three
Months Ended
May 31,
1995 1996
------------- -------------
<S> <C> <C>
Revenues......................................... $37,861,042 $38,014,358
Net income....................................... $ 2,179,517 $ 2,612,889
Earnings per share (fully diluted)............... $ .32 $ .30
Weighted average shares (fully diluted).......... 6,728,037 8,680,339
</TABLE>
C. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
February 29, May 31,
1996 1996
---------- ----------
<S> <C> <C>
Office equipment............................... $2,645,325 $3,230,973
Laboratory and field.equiptment................ 3,528,410 3,162,745
Transportation equipment....................... 267,304 255,504
Leasehold improvements......................... 633,595 646,376
---------- ----------
7,074,634 7,295,598
Less accumulated depreciation................... (3,467,879) (3,614,053)
---------- ----------
$3,606,755 $3,681,545
========== ==========
</TABLE>
F-10
PAGES
<PAGE>
D. COMMON STOCK OFFERING
On October 10, 1995, the Company filed a Registration Statement
with the Securities and Exchange Commission for the sale of 1,800,000
shares of Common Stock of which 1,700,000 were sold by ATC, while the
remaining were sold by an officer/director of ATC. On October 30, 1995,
the Company sold an additional 270,000 shares to cover over-allotments
under the same terms and conditions as the public offering.
E. CONTINGENCIES
First Fidelity Bank, N.A., et al v. Hill International, Inc. et
al, Superior Court of New Jersey, Law Division, Burlington County,
Docket No. Bur-L-03400-95, filed December 19, 1995- On December 19,
1995, a second amended complaint was filed in the above-entitled action
which joined the Company as a defendant and included a count against
the Company seeking recovery of certain assets purchased from Hill
International, Inc. on the grounds that plaintiff banks hold security
interests in the assets and that Hill is in default under the security
agreement creating such alleged security interests. The plaintiffs in
this action are First Fidelity Bank, N.A. and United Jersey Bank, N.A.
The primary defendants are Hill International, Inc. and certain of
its subsidiaries, and Irvin Richter, David Richter, Janice Richter and
William Doyle. Irvin Richter and David Richter are officers and
stockholders of Hill. In April 1996, the Company filed a cross-claim
against Hill, Irvin Richter and David Richter alleging breach of
contract, fraud, among other allegations and seeking unspecified
damages, including punitive damages and equitable relief. The cross-
defendants have not yet answered the Company's allegations; however,
Hill has filed a demand for arbitration seeking the payment from the
Company of the remaining approximately $1.3 million in consideration
that Hill has yet to receive from its sale of assets to the Company.
The Company disputes Hill's cliam on breach of contract and other
grounds. These related cases are in their early stages with discovery
yet to take place. In the Company's opinion, the outcome of this matter
will not have a signifnicant effect on the Company's financial position
or future results of operations, although no assurances can be given
in this regard.
State of New York Department of Taxation and Finance - The
Company has received a notice of audit from the New York State
Department of Taxation and Finance for the three fiscal years 1993,
1994, and 1995. The State has made a routine request for information
to which the Company has responded.
F-11
PAGE
<PAGE>
ATC ENVIRONMENTAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Developments
FY1997
- ------
Acquisition of American Testing and Engineering Corporation -
On May 24, 1996, ATC purchased certain assets and assumed certain
liabilities of American Testing and Engineering Corporation ("ATEC"),
a national environmental consulting firm. ATEC provides environmental
consulting and engineering services including risk assessments,
compliance audits, environmental remediation consulting, geotechnical,
materials testing, industrial hygiene and analytical services through
a large network of branch and regional offices. For its year ended
December 31, 1995, ATEC had revenues of $85,020,000 and a net loss of
($1,820,000).
The acquisition has been accounted for as a purchase. The assets
acquired include customer contract rights, customer lists, order
backlog, customer records, and certain tangible assets consisting of
accounts receivable, work in process and customer and certain other
deposits. Additionally, ATC executed an agreement to lease
substantially all of ATEC's equipment and executed several sublease
agreements for premises leased by ATEC. ATC also obtained non-
competition agreements with ATEC, a non-acquired subsidiary, and the
majority shareholder of ATEC.
The purchase price consideration consisted of $9,000,000 of cash
paid at closing and property and facility lease payments and non-
compete payment obligations of $6,001,000 payable during the first year
following the purchase. The Company also assumed liability for ATEC's
bank debt, approximately $10,750,000, its accounts payable, and certain
other recorded liabilities. The Company is contingently liable to ATEC
for additional purchase consideration up to $10,750,000 if certain net
revenue levels are achieved and certain other conditions are met.
The maximum amounts payable, if fully earned, would be paid as follows;
$3,883,333 in fiscal 1998, $3,873,333 in fiscal 1999, $1,293,334 in
fiscal 2000 and $1,700,000 in fiscal 2002.
Acquisition of 3D Information Services, Inc. - Effective May 28,
1996, ATC purchased certain assets and assumed certain specified
liabilities of 3D Information Services, Inc. ("3D"), a New Jersey based
information services company providing technical information system
consulting services in all phases of information system design,
development, maintenance and management in client server and mainframe
based environments. Its clients include major companies in the
telecommunications, financial services and pharmaceutical industries.
3D reported revenues and net income of approximately $10,360,000 and
$85,000 respectively, for its year ended December 31, 1995.
The acquisition will be accounted for as a purchase. Assets
purchased include customer contract rights, customer lists, order
backlog, customer records, employee contracts and tangible assets
including accounts receivable, unbilled work in process, field and
office supplies, and equipment. Consideration paid consisted of
$3,000,000 of cash at closing and a note payable for $2,500,000 payable
in three annual payments plus interest. In addition, ATC assumed
certain liabilities of approximately $198,000. ATC also entered into a
three year non-compete agreement with the majority stockholder.
FY 1996
- -------
Acquisition of Hill International Inc. Environmental Subsidiaries
- - On November 10, 1995, ATC purchased certain assets and assumed
certain liabilities of the subsidiary companies at Hill International,
Inc. that provided environmental consulting and engineering services
(collectively the "Hill Businesses"). These services include asbestos
management, industrial hygiene and indoor air quality consulting,
environmental auditing and permitting, environmental regulatory
compliance, water and wastewater engineering, solid waste and landfill
management, hazardous waste management and analytical laboratory
services. The Hill Businesses operated from facilities located in New
York City, Boston and Willingboro, New Jersey. The Boston and New York
offices have been integrated with ATC's existing operations, and ATC
will benefit from other cost-saving measures taken, including the
elimination of certain employees previously with the Hill Businesses.
Acquisition of Applied Geosciences, Inc. - Effective February 29,
1996, ATC purchased certain assets and assumed certain liabilities of
Applied Geosciences, Inc. ("AGI"). AGI services included environmental
and hazardous waste site assessments, remediation design, air quality
management, asbestos services, litigation support and engineering
geology through its offices located in San Diego, Tustin, and San Jose,
California.
F-12
PAGE
<PAGE>
Common Stock Offering
Effective October 1995, the Company sold 1,970,000 shares of
common stock at an offering price of $12.00 per share and received
$21,554,000 net of underwriting and other related expenses.
Merger of Aurora into ATC
Effective June 29, 1995, ATC and its parent, Aurora Environmental
Inc. ("Aurora"), were merged pursuant to an agreement approved by the
majority of shareholders of each company, with ATC as the surviving
corporation (the "Aurora Merger"). Prior to the Aurora Merger, Aurora
was a holding company which owned approximately 57% of ATC's
outstanding Common Stock and had substantially no other assets. In
connection with the merger, each outstanding share of Aurora Common
stock was exchanged for .545 shares of ATC Common Stock. ATC issued
3,341,356 shares of ATC Common Stock in exchange for 6,131,104 shares
of Aurora's common stock, and issued options and warrants entitling the
holders thereof to purchase up to 604,950 shares of ATC Common Stock
upon exercise in replacement of previously outstanding options and
warrants to purchase Aurora's common stock. ATC common shares held by
Aurora of 3,258,000 were canceled. Actual common shares outstanding
increased by 83,356 shares. As a result of the Aurora Merger, ATC
utilized Aurora's net operating loss carryforward to reduce its taxable
income and accordingly recorded a one-time reduction in income tax
expense of approximately $350,000 ($.05 per share) in the second
quarter of fiscal 1996.
Results of Operations
Three Months Ended May 31, 1996 Compared with Three Months Ended May
- -----------------------------------------------------------------------
31, 1995
- --------
Revenues in the three months ended May 31, 1996 increased 53.9% to
$16,645,983, compared with $10,814,953 in the three months ended May
31, 1995. This increase was primarily attributable to the positive
effect of acquisitions completed during the second half of fiscal 1996
and from the acquisition of ATEC and 3D in May 1996.
Revenues in the three months ended May 31, 1996 from ATC's branch
offices having comparable operations in the three months ended May 31,
1995 increased 6.8% to $11,553,945, compared with $10,814,953 in the
three months ended May 31, 1995. In the three months ended May 31,
1996, ATC continued to penetrate its existing markets and benefited
from the acquisitions of certain assets of the Hill Businesses, AGI,
ATEC, and 3D. Revenues attributable to operations resulting from
these acquisitions totaled $5,092,038, or 30.6% of revenues, for the
three months ended May 31, 1996.
Revenues in the three months ended May 31, 1996 earned directly
from the New York City School Construction Authority (the "NYCSCA")
increased 19.9% to $714,550, compared with $596,147 in the three months
ended May 31, 1995. As a percentage of revenues, revenues from the
NYCSCA decreased to 4.3% in the three months ended May 31, 1996,
compared with 5.5% in the three months ended May 31, 1995.
Revenues in the three months ended May 31, 1996 from the Army
Corps of Engineers (the "Corps") decreased 34.5% to $224,967, compared
with $343,603 in the three months ended May 31, 1995. As a percentage
of revenues, revenues from the Corps decreased to 1.4% in the three
months ended May 31, 1996, compared with 3.2% in the three months ended
May 31, 1995. The Company's revenues from the Corps relate to certain
asbestos management services and decreased due to the completion of
most phases of the current project during the first nine months of
fiscal 1996. Revenues from the Corps are expected to continue at
current levels for the remainder of fiscal 1997 and work on this
project is expected to continue through 1999 as part of the federal
Base Realignment and Closure project. However, no assurance can be made
as to the amount of revenues, if any, that ATC will receive from the
Corps in the future once current projects are completed.
Gross profit in the three months ended May 31, 1996 increased
38.2% to $7,282,012, compared with $5,269,542 in the three months ended
May 31, 1995. Gross margin decreased to 43.7% in the three months ended
May 31, 1996, compared with 48.7% in the three months ended May 31,
1995. ATC's gross margin decreased due to higher subcontract and
project costs on certain large contracts and from the acquired
operations of ATEC which incurs a larger proportion of such expenses in
connection with its traditional environmental services consisting of
drilling, material testing and engineering services. The gross margin
for the quarter ended May 31, 1995 was higher than normal due to the
profitability level of several large, high margin projects.
F-13
PAGE
<PAGE>
Operating expenses in the three months ended May 31, 1996
increased 22.7% to $4,593,232, compared with $3,742,993 in the three
months ended May 31, 1995. Operating expenses decreased as a percentage
of revenues to 27.6% in the three months ended May 31, 1996, compared
with 34.6% in the three months ended May 31, 1995. The decrease in
operating expenses as a percentage of revenue is the result of ATC's
ability to service its greater revenue levels without corresponding
increases in fixed and administrative costs and the effect of increased
revenues of ATEC operations resulting from subcontractor and other
direct project expenses relative to service revenues. Employee costs
increased only 8.5% to $2,202,445, or 13.4% of revenues, in the three
months ended May 31, 1996 compared with $2,029,978, or 18.8% of
revenues, in the three months ended May 31, 1995. These increases in
total cost were due to employees hire in connection with the expansion
of ATC's operations. Other increases in operating expenses resulted
from higher facility costs and administrative expenses resulting
from the growth in operations and increased employee levels.
Additionally, in the three months ended May 31, 1996, amortization of
goodwill and intangibles increased to $162,704, compared with $95,379
in the three months ended May 31, 1995 reflecting the additional
goodwill amortization resulting from acquisitions.
Operating income in the three months ended May 31, 1996 increased
76.1% to $2,688,780, compared with $1,526,549 in the three months ended
May 31, 1995. Operating income increased as a percentage of revenues to
16.2% in the three months ended May 31, 1996, compared with 14.1% in
the three months ended May 31, 1995.
Nonoperating income in the three months ended May 31, 1996
increased to $83,523 compared with nonoperating expenses of $63,921 in
the three months ended May 31, 1995. The change in nonoperating
expense (income) is primarily attributable to interest income earned on
the net offering proceeds invested in short term investments and
decreased interest expense due to reduced bank debt outstanding during
the quarter.
Income tax expense in the three months ended May 31, 1996 was
$1,054,000, compared with $567,500 in the three months ended May 31,
1995. During the three months ended May 31, 1996 and 1995, the
Company's effective tax rates were 38.0% and 38.8%, respectively.
As a result of the foregoing, net income in the three months ended
May 31, 1996 increased 92.0% to $1,718,303, or $.20 per share on a
fully diluted basis, compared with $895,128 or $0.15 per share on a
fully diluted basis, in the three months ended May 31, 1995. The fully
diluted weighted average number of shares outstanding increased
2,557,027 shares to 8,680,339 shares primarily due to an increase in
shares issued from the Common Stock Offering and from shares, options
and warrants outstanding as a result of the Aurora merger effective
June 29, 1995. Net income increased as a percentage of revenues to
10.3% in the three months ended May 31, 1996, compared with 8.3% in the
three months ended May 31, 1995.
Liquidity and Capital Resources
At May 31, 1996, working capital was $23,191,606 compared with
working capital of $24,977,316 at February 29, 1996, a decrease of
$1,785,710. This decrease in working capital is primarily a result of
ATC's acquisitions of ATEC and 3D and the resulting increase in current
liabilities, including payment obligations to sellers, in excess of
acquired current assets, primarily accounts receivable and unbilled
receivables, offset by cash consideration paid. As a result of the
Company's recent aquisitions of ATEC and 3D, the Company's tangible net
worth decreased to $5,231,847 at May 31, 1996 from $27,542,614 at
February 29, 1996 primarily as a result of goodwill and non-compete
amounts recognized in connection with these transactions.
During the three months ended May 31, 1996, net cash flows used in
operating activities were $3,557,618, primarily due to the decrease in
accounts payable and other liabilities, a portion of which was related
to payments of assumed liabilities from acquisitions, and an increase
in billed and unbilled receivables. Net cash flows used in investing
activities were $12,272,158, resulting from the acquisitions of ATEC and
3D and purchases of property and equipment. Net cash flows provided by
financing activities were $9,105,249, primarily representing the net
proceeds of the bridge credit facility, less payments made on long-term
debt and notes payable of $11,814,927
During the three months ended May 31, 1995, net cash flows used by
operating activities were $1,006,823. Net cash flows used in investing
activities were $416,126 consisting of additional acquisition costs in
connection with the Con-Test and R.E. Blattert acquisitions plus
contingent purchase obligations related to the acquisition of BSE and
the purchase of property and equipment. Also during this period, net
cash flows from financing activities were $523,990, primarily from
proceeds from increased bank debt less principal payments on long-term
debt and notes payable of $293,309.
In October 1995 the Company sold 1,970,000 shares in a common
stock offering. The Company utilized a portion of the net proceeds of
the offering to repay outstanding bank debt under its credit
facilities.
F-14
PAGE
<PAGE>
In May 1996, the Company entered into a bridge credit facility
with Chemical Bank and Atlantic Bank which provided $20,000,000 of
funds, of which $14,025,000 was used as of May 31, 1996 in connection
with the Company's acquisition of ATEC and 3D. The Company expects to
complete a longer term agreement with the banks prior to the maturity
date of the bridge facility in September 1996. The Company may also
seek to obtain additional public or private equity financing in the
future in order to reduce debt and provide funds for future
acquisitions, however no assurance can be given as to the Company's
ability to obtain funds on acceptable terms and conditions.
Management believes that as a result of cash on hand and, upon the
completion of a long-term bank credit line agreement which should
result in increased availability of funds, ATC's working capital, and
anticipated funds generated internally from operations will be
sufficient to finance ATC's operations and, to make payments as they
come due on ATC's completed acquisitions and to meet ATC's short-term
and long-term liquidity requirements.
F-15
PAGE
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
First Fidelity Bank, N. A., et al. Hill International,
Inc. et al, Superior Court of New Jersey, Law Division,
Burlington County, Docket No. Bur-L-03400-95, filed December 19,
1995. On December 19, 1995, a second amended complaint was
filed in the above-entitled action which joined the company as a
defendant and included a count against the Company seeking
recovery of certain assets purchased from Hill International,
Inc. on the grounds that plaintiff banks hold security interests
in the assets and that Hill is in default under the security
agreement creating such alleged security interests. The
plaintiffs in this action are First Fidelity Bank, N.A. and
United Jersey Bank, N.A. The primary defendants are Hill
International, Inc. and certain of its subsidiaries, and Irvin
Richter, David Richter, Janice Richter and William Doyle. Irvin
Richter and David Richter are officers and stockholders of Hill.
In April 1996, the Company filed a cross-claim against Hill,
Irvin Richter and David Richter alleging breach of contract,
fraud, among other allegations and seeking unspecified damages,
including punitive damages and equitable relief. The cross-
defendants have not yet answered the Company's allegations;
however, Hill as filed a demand for arbitration seeking the
payment from the Company of the remaining approximately $1.3
million in consideration that Hill has yet to receive from its
sale of assets to the Company. The Company disuptes Hill's claim
on breach of contract and other grounds. These related cases
are in their early stages with discovery yet to take place. In
the Company's opinion, the outcome of this matter will not have
a signifnicant effect on the Company's financial position or
future results of operations, although no assurances can be given
in the regard.
Item 2. Changes in Securities:
Not Applicable
Item 3. Defaults Upon Senior Securities:
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders:
Not Applicable
Item 5. Other Information:
Not Applicable
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
11 - Computation of Earnings Per Share
Three months ended May 31, 1996 (Unaudited)
27 - Financial Data Schedule
May 31, 1996 (Unaudited)
(b) Reports on Form 8-K:
A Form 8-K dated May 24, 1996 - date of earliest event reported
- was filed during the three months ended May 31, 1996.
F-16
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ATC ENVIRONMENTAL, INC.
-----------------------
(Registrant)
Dated: July 15, 1996 /s/ Morry F. Rubin
-------------------- ------------------------------------
Morry F. Rubin,
President and Chief Executive Officer
Dated: July 15, 1996 /s/ Richard L. Pruitt
-------------------- -------------------------------------
Richard L. Pruitt,
Vice President and Principal
Accounting Officer
F-17
PAGE
<PAGE>
ATC ENVIRONMENTAL INC. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED MAY 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
Three
Months Ended
May 31,
1995 1996
---------- ----------
<S> <C> <C>
Primary earnings per share:
- ----------------------------
Weighted average number of shares of common stock
outstanding..................................... 5,738,298 7,788,586
Additional shares assuming exercise of dilutive
stock options and stock warrants................ 385,014 793,057
---------- ----------
Total average common and common equivalent
shares outstanding............................ 6,123,312 8,581,643
========== ==========
Net income....................................... $ 895,128 $1,718,303
========== ==========
Earnings per common and dilutive common
equivalent share ............................... $ .15 $ .20
========== ==========
Fully diluted earnings per share:
Weighted average number of shares of common stock
outstanding..................................... 5,738,298 7,788,586
Additional shares assuming exercise of dilutive
stock options and stock warrants................ 385,014 891,753
---------- ----------
Total average common and common equivalent
shares outstanding............................ 6,123,312 8,680,339
========== ==========
Net income....................................... $ 895,128 $1,718,303
========== ==========
Earnings per common and dilutive common
equivalent share................................ $ .15 $ .20
========== ==========
</TABLE>
F-18
PAGE
<PAGE>
ATC ENVIRONMENTAL INC. AND SUBSIDIARIES EXHIBIT 27
FINANCIAL DATA SCHEDULE
MAY 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
As of
Item Number Item Description May 31, 1996
- ----------- ---------------- ------------
<C> <C> <C>
5-02(1) Cash and cash items.............................. $6,744,916
5-02(2) Marketable securities and short-term investments. N/A
5-02(3)a(1) Notes and accounts receivable - trade............ 29,049,797
5-02(4) Allowances for doubtful accounts................. 1,057,355
5-02(6) Inventory........................................ N/A
5-02(9) Total current assets............................. 50,033,611
5-02(13) Property, plant and equipment.................... 7,295,598
5-02(14) Accumulated depreciation......................... 3,614,545
5-02(18) Total assets..................................... 90,053,300
5-02(21) Total current liabilities........................ 26,842,005
5-02(22) Bonds mortgages and similar debt................. 21,856,003
5-02(28) Preferred stock - mandatory redemption........... N/A
5-02(29) Preferred stock - no mandatory redemption........ N/A
5-02(30) Common stock..................................... 77,847
5-02(31) Other stockholders' equity....................... 40,708,673
5-02(32) Total liabilities and stockholders' equity....... 90,053,300
Three Months
ended
May 31, 1996
------------
5-03(b)1(a) Net sales of tangible products................... N/A
5-03(b)1 Total revenues................................... $16,645,983
5-03(b)2(a) Cost of tangible goods sold...................... N/A
5-03(b)2 Total costs and expenses applicable to sales and
revenues........................................ 9,363,971
5-03(b)3 Other costs and expenses......................... 4,319,748
5-03(b)5 Provision for doubtful accounts and notes........ 132,635
5-03(b)(8) Interest and amortization of debt discount....... 57,326
5-03(b)(10) Income before taxes and other items.............. 2,772,303
5-03(b)(11) Income tax expense............................... 1,054,000
5-03(b)(14) Income continuing operations..................... 1,718,303
5-03(b)(15) Discontinued operations.......................... N/A
5-03(b)(17) Extraordinary items.............................. N/A
5-03(b)(18) Cumulative effect - changes in accounting
principles...................................... N/A
5-03(b)(19) Net Income....................................... 1,718,303
5-03(b)(20) Earning per share - primary...................... $ .20
5-03(b)(20) Earnings per share - fully diluted .............. $ .20
</TABLE>
F-19
PAGE
<PAGE>
<TABLE> <S> <C>
PAGE
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 6,744,916
<SECURITIES> 0
<RECEIVABLES> 29,049,797
<ALLOWANCES> 1,057,355
<INVENTORY> 0
<CURRENT-ASSETS> 50,033,661
<PP&E> 7,295,598
<DEPRECIATION> 3,614,545
<TOTAL-ASSETS> 90,053,300
<CURRENT-LIABILITIES> 26,842,005
<BONDS> 21,856,003
<COMMON> 77,847
0
0
<OTHER-SE> 40,708,673
<TOTAL-LIABILITY-AND-EQUITY> 90,053,300
<SALES> 0
<TOTAL-REVENUES> 16,645,983
<CGS> 0
<TOTAL-COSTS> 9,363,971
<OTHER-EXPENSES> 4,319,748
<LOSS-PROVISION> 132,635
<INTEREST-EXPENSE> 57,326
<INCOME-PRETAX> 2,772,303
<INCOME-TAX> 1,054,000
<INCOME-CONTINUING> 1,718,303
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,718,303
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
