<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 August 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 GROUP SERVICES 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
--------------
ATC ENVIRONMENTAL INC.
----------------------
(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
October 11, 1996 was 7,793,518.
PAGE
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996
Page
PART I - FINANCIAL INFORMATION:
Item 1 - Financial Statements:
Consolidated Balance Sheets
February 29, 1996 and August 31, 1996 (Unaudited) F-3
Consolidated Statements of Operations
Three months and six months ended August 31, 1995 and 1996 F-4
(Unaudited)
Consolidated Statements of Stockholders' Equity
Six months ended August 31, 1995 and 1996 (Unaudited) F-5
Consolidated Statements of Cash Flows
Six months ended August 31, 1995 and 1996 (Unaudited) F-6
Notes to Consolidated Financial Statements
Three months and six months ended August 31, 1996 F-7
(Unaudited)
Item 2 - Management's Discussion and Analysis of Financial F-13
Condition and Results of Operations
PART II - OTHER INFORMATION:
Items 1-6 F-18
Signatures F-20
Exhibit 11 - Computation of Earnings Per Share
Three months and six months ended August F-21
31, 1995 and 1996 (Unaudited)
Exhibit 27 - Financial Data Schedule
August 31, 1996 (Unaudited) F-22
PAGE
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 29, 1996 AND AUGUST 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
February 29, August 31,
1996 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents ............................ $13,469,443 $3,437,326
Trade accounts receivable, less allowance for
doubtful accounts ($383,220 at February 29, 1996
and $1,141,778 at August 31, 1996).................. 14,161,774 31,943,417
Costs in excess of billings on uncompleted contracts.. 2,333,835 8,633,371
Prepaid expenses and other current assets............. 906,289 3,758,623
Deferred income taxes................................. 440,600 440,600
----------- -----------
Total current assets................................ 31,311,941 48,213,337
PROPERTY AND EQUIPMENT, Net (Note C).................... 3,606,755 3,801,711
GOODWILL, net of accumulated amortization (Note B)
($453,646 at February 29, 1996 and $881,686 at
August 31, 1996)...................................... 11,375,399 34,910,069
COVENANTS NOT TO COMPETE, net of accumulated
amortization (Note B) ($258,099 at February 29, 1996
and $334,854 at August 31, 1996)...................... 274,401 732,646
OTHER ASSETS............................................ 116,104 842,657
----------- -----------
$46,684,600 $88,500,420
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term debt....................................... $1,122,552 $1,055,000
Current maturities of long-term debt.................. 354,858 1,471,072
Accounts payable...................................... 2,231,175 7,627,323
Income taxes payable.................................. 42,500 676,551
Accrued compensation.................................. 1,421,330 3,217,446
Accrued payment obligations - ATC aquisition (Note B). - 4,423,761
Other accrued expenses (Note B)....................... 1,162,210 4,336,892
----------- -----------
Total current liabilities........................... 6,334,625 22,808,045
LONG-TERM DEBT, less current maturities (Note A)........ 361,944 22,229,413
OTHER LIABILITIES....................................... 598,817 337,549
DEFERRED INCOME TAXES................................... 196,800 196,800
----------- -----------
Total liabilities................................... 7,492,186 45,571,807
----------- -----------
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 7,787,237 shares at
August 31, 1996..................................... 77,966 77,872
Additional paid-in capital........................... 29,030,189 28,974,005
Notes receivable - common stock...................... (45,000) -
Retained earnings.................................... 10,129,259 13,876,736
----------- -----------
Total stockholders' equity........................... 39,192,414 42,928,613
----------- -----------
$46,684,600 $88,500,420
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
PAGE
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1995 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, 1996 August 31, 1996
-------------------------- --------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES............................................... $11,649,478 $33,922,028 $22,464,431 $50,568,011
REIMBURSABLE COSTS..................................... 1,364,001 5,077,483 2,248,867 7,699,061
----------- ----------- ----------- -----------
NET REVENUES........................................... 10,285,477 28,844,545 20,215,564 42,868,950
COST OF NET REVENUES................................... 4,756,061 16,314,731 9,416,606 23,057,124
----------- ----------- ----------- -----------
Gross profit...................................... 5,529,416 12,529,814 10,798,958 19,811,826
OPERATING EXPENSES:
Selling.............................................. 384,564 750,818 714,193 1,293,400
General and administrative........................... 2,986,647 7,660,199 6,352,611 11,578,214
Provision for bad debts.............................. 71,815 208,666 119,215 341,301
----------- ----------- ----------- -----------
3,443,026 8,619,683 7,186,019 13,212,915
----------- ----------- ----------- -----------
Operating income.................................. 2,086,390 3,910,131 3,612,939 6,598,911
----------- ----------- ----------- -----------
NONOPERATING EXPENSE (INCOME):
Interest expense..................................... 139,959 512,773 249,467 570,099
Interest income...................................... (3,801) (65,412) (47,573) (195,447)
Other................................................ 28,615 (22,723) 26,800 (33,537)
----------- ----------- ----------- -----------
164,773 424,638 228,694 341,115
----------- ----------- ----------- -----------
Income before income taxes........................ 1,921,617 3,485,493 3,384,245 6,257,796
INCOME TAX EXPENSE (Note B)............................ 402,500 1,384,000 970,000 2,438,000
----------- ----------- ----------- -----------
NET INCOME............................................. $ 1,519,117 $ 2,101,493 2,414,245 3,819,796
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE AND
DILUTIVE COMMON EQUIVALENT SHARE:
Primary (Note D) (1).............................. $ .23 $ .25 $ .38 $ .45
=========== =========== =========== ===========
Fully diluted (Note D) (1)........................ $ .23 $ .25 $ .38 $ .44
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary........................................... 6,542,002 8,576,018 6,332,657 8,578,831
=========== =========== =========== ===========
Fully diluted..................................... 6,542,002 8,576,018 6,332,657 8,628,179
=========== =========== =========== ===========
</TABLE>
(1) Includes a one-time tax benefit of $.05 per share related to the merger
of Aurora Environmental Inc. for the three months and six months ended
August 31, 1995. (Note B)
See notes to consolidated financial statements.
F-4
PAGE
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED AUGUST 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 $1.83 to $2.13 per
share, upon exercise of stock options and
warrants................................... 33,000 330 60,309 - - 60,639
Net issuance of common stock and adjustments
in connection with the merger of Aurora
Environmental Inc. into ATC (Note B)....... 83,452 835 61,719 (30,000) - 32,554
Continuing registration costs applied against
additional paid-in captial................. - - (88,827) - - (88,827)
Other capital transactions................... 2,920 29 22,471 - - 22,500
Net income................................... - - - - 2,414,245 2,414,245
------------ ----------- ------------ ------------ ----------- -----------
BALANCE, August 31, 1995....................... 5,857,390 $ 58,574 $ 7,540,125 $ (45,000) $ 8,700,606 $16,254,305
============ =========== ============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------
<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, 1996..................... 7,796,577 $ 77,966 $29,030,189 $ (45,000) $10,129,259 $39,192,414
Sale of common stock at $2.50 to $10.00 per
share, upon exercise of stock options and
warrants................................... 2,980 29 24,376 - - 24,405
Stock received as consideration for sale of
assets..................................... (12,320) (123) (51,990) - (72,319) (124,432)
Continuing registration costs applied against
additional paid-in captial................. - - (28,570) - - (28,570)
Other capital transactions................... - - - 45,000 - 45,000
Net income................................... - - - - 3,819,796 3,819,796
------------ ----------- ------------ ------------ ----------- -----------
BALANCE, August 31, 1996....................... 7,787,237 $ 77,872 $ 28,974,005 $ - $13,876,736 $42,928,613
============ =========== ============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
PAGE
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED AUGUST 31, 1995 AND 1996 (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
August 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 2,414,245 $3,819,796
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and leasehold amortization............ 348,763 405,074
Amorization of goodwill and covenants.............. 194,037 524,795
Provision for bad debts............................ 119,215 341,301
Other.............................................. (562,161) (85,292)
Changes in operating assets and liabilities, net of
amounts acquired in acquisitions:
Accounts receivable and cost in excess of
billings on uncompleted contracts.............. (3,489,439) (4,042,124)
Prepaid expenses and other assets................ (453,753) (847,080)
Accounts payable and other liabilities........... (170,130) (6,808,932)
Income taxes payable............................. (128,250) 634,069
----------- -----------
Net cash flows from operating activities....... (1,727,473) (6,058,393)
----------- -----------
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. .................... (207,990) -
Purchase of Con-Test, Inc. .......................... (135,344) -
Purchase of R.E. Blattert and Associates............. (38,146) -
Purchase of property and equipment................... (507,287) (783,686)
Other................................................ (7,669) 16,477
----------- -----------
Net cash flows from investing activities....... (896,436) (12,659,842)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and notes
payable............................................. 2,175,000 20,923,572
Proceeds from issuance of common stock, net of
expenses ........................................... 123,193 24,405
Principal payments on long-term debt and notes
payable, including capital lease obligations........ (499,159) (12,233,289)
Payments for continuing registration costs........... (88,827) (28,570)
----------- -----------
Net cash flows from financing activities....... 1,710,207 8,686,118
----------- -----------
Net change in cash and cash equivalents........ (913,702) (10,032,117)
CASH AND CASH EQUIVALENTS, Beginning of period......... 1,377,862 13,469,443
----------- -----------
CASH AND CASH EQUIVALENTS, End of period............... $ 464,160 $ 3,437,326
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest........................................... $ 248,556 $ 527,314
=========== ===========
Income taxes....................................... $ 1,448,250 $ 1,803,931
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
PAGE
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1996 (Unaudited)
A. GENERAL
Name Change - Effective October 8, 1996, the Company received
shareholder approval to change its name to "ATC Group Services Inc."
from it former name, ATC Environmental Inc. The change was made to
reflect the Company's expanded operations which extends beyond
environmental consulting and now includes information technology
consulting services.
Principles of Consolidation - The consolidated financial statements
include the accounts of ATC Group Services 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 business services firm
providing technical and project management services relating to
environmental consulting (the "environmental consulting and engineering"
segment) and information technology consulting services (the
"information technology consulting" segment). The Company's
environmental consulting and engineering segment provides environmental
and geotechnical engineering services, architectural engineering
services, construction materials testing and analytical testing. The
Company's information technology consulting segment provides analysis
and design services and system programming services to assist clients in
building new or modifying existing computer systems. This business unit
also provides support to clients in maintaining computer systems.
Credit Facility - On August 24, 1996 the Company entered into a
$20,000,000 bridge credit facility with The Chase Manhattan Bank
(formally 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 (for an effective interest rate of 7.1875% at August 31,
1996). The agreement contains certain restrictive covenants which are
consistent for this type of facility, including restrictions on dividend
payments. Pursuant to an amendment, the facility was increased to
$23,000,000 and amounts borrowed are due January 13, 1997. 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.
Statement of Financial Accounting Standards No. 121 - On March 1,
1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets to
be Disposed Of." The adoption of SFAS No. 121 has not had a material
effect on the Company's financial statements.
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
Business Acquisitions - 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 August 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 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.
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 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................................ 175,724
Direct expenses related to acquisition............. 23,149
----------
$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.
Hill International, Inc. has requested reimbursement of the full amount
of the facility lease costs, however, the Company is disputing the
reimbursement based on its counter-claims.
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. At August 31, 1996, no contingent amounts had been earned.
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
========
Merger of Aurora Environmental Inc. - 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.
As a result of the 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.
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 Six Months Ended
August 31, August 31,
1995 1996 1995 1996
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 39,004,497 $ 33,922,028 $ 76,490,759 $ 72,043,995
Net income....................................... $ 3,145,877 $ 2,101,493 $ 5,503,902 $ 4,944,968
Earnings per share (fully diluted)............... $ .47 $ .25 $ .82 $ .57
Weighted average shares (fully diluted).......... 6,734,515 8,576,018 6,729,340 8,628,179
</TABLE>
Reductions of pro forma revenue, net income and earnings per share
from 1995 to 1996 are attributable to declining revenue levels of the
Hill Businesses and ATEC in the periods preceding their purchase by ATC
and the increased weighted average shares resulting from the common
stock offering.
C. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
February 29, August 31,
1996 1996
---------- ----------
<S> <C> <C>
Office equipment............................... $2,645,325 $2,890,102
Laboratory and field.equiptment................ 3,528,410 3,481,444
Transportation equipment....................... 267,304 264,755
Leasehold improvements......................... 633,595 743,099
---------- ----------
7,074,634 7,379,400
Less accumulated depreciation................... (3,467,879) (3,577,689)
---------- ----------
$3,606,755 $3,801,711
========== ==========
</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. ("Hill") 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 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. In August,
1996, Hill and the Richters filed an answer denying ATC's cross claims,
a cross-claim against ATC and a third party claim against certain
members of ATC's management. The cross claim and third party claim seek
unspecified damages, including punitive damages, for defamation, breach
of the Richters' non-competition agreements and securities fraud. The
defamation claim is based on plaintiff banks' allegation of fraud
against Hill and the Richters in their amended complaint, which Hill and
the Richters allege was based on defamatory statements made by ATC in
settlement discussions with the plaintiff banks. The Company both
denies that it made defamatory statements and asserts that the
defamation allegations fail to state a legally valid claim. The breach
of contract and securities claims are based on allegations that ATC made
representations concerning a registration rights agreement to be
provided in connection with options issued to the Richters as
consideration for their non-competition agreements. The Company denies
that an agreement concerning registration rights was ever reached and
asserts that the Richters forfeited any such rights in any case as a
result of their conduct in connection with the asset purchase. 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 significant effect on the Company's financial position or future
results of operations, although no assurances can be given in this
regard.
Commonwealth of Massachusetts v. TLT Construction Corp. et al, Civ.
Action No. 96-02281 F, Superior Court of Middlesex County,
Massachusetts. This is an action brought by the Commonwealth of
Massachusetts in April 1996, against the architects and general
contractor on a renovation and construction project on the Suffolk
County Courthouse in Massachusetts. The basis of the lawsuit is that
one or more damp-proofing products specified by the architect defendants
and installed by the contractor defendant made employees in the
courthouse ill because of the off-gassing of harmful vapors. Dennison
Environmental Services Inc., ("Dennison") an ATC subsidiary, was joined
on August 13, 1996, as a third party defendant by TLT Construction
Corporation, the general contractor, because Dennison performed some air
quality testing of the air in the courthouse for the Commonwealth of
Massachusetts during the construction process. The contractor alleges
that it acted in reliance on these tests in continuing to install the
material after the test report was given to it by the state. Dennison
has just recently been served and has not yet answered the complaint.
At this point, ATC considers the case to be totally without merit, and
ATC intends to vigorously defend the action. The Company currently has
in force a professional liability insurance policy covering this claim
in the amount of $10,000,000 with a deductable of $250,000. Notice of
claim has been made regarding this action and the insurer has agreed to
assume the defense. 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 significant 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
PAGES
<PAGE>
F. INDUSTRY SEGMENT DATA
The Company provides services through its environmental consulting
and engineering segment and its information technology consulting
segment. Prior year segment data is not presented as the Company only
operated in the environmental and engineering segment.
<TABLE>
<CAPTION>
Environmental Information Adjustments &
Industry Segment Data & Engineering Technology Elimination's Total
------------- ------------- ------------- -------------
Quarter Ended August 31, 1996
- -----------------------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 31,401,790 $ 2,520,238 $ - $ 33,922,028
Operating Income................................. 3,752,618 157,513 - 3,910,131
Depreciation and amortization................... 206,175 171 - 206,346
Capital expenditures............................. 354,251 - - 354,251
Six Months Ended August 31, 1996
- --------------------------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 47,899,812 $ 2,668,199 $ - $ 50,568,011
Operating Income................................. 6,422,882 176,029 - 6,598,911
Depreciation and amortization................... 400,941 4,133 - 405,074
Capital expenditures............................. 737,367 46,319 - 783,686
Identifiable assets as of August 31, 1996 $ 84,596,463 $ 5,903,957 $ (2,000,000) $ 88,500,420
- -----------------------------------------
</TABLE>
F-12
PAGES
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Developments
FY 1997
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 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 has been 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 $175,724. 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.
Acquisition of Applied Geosciences, Inc. - Effective February 29,
1996, ATC purchased certain assets and assumed certain liabilities of
Applied Geosciences, Inc. ("AGI"). AGI's services include environmental
and hazardous waste site assessments, remediation design, air quality
management, asbestos services, litigation support and engineering
geology through its offices located in Southern California.
F-13
PAGES
<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 $21,554,461
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 carried forward 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 August 31, 1996 Compared with Three Months Ended
August 31, 1995
Revenues in the three months ended August 31, 1996 increased 191%
to $33,922,028, compared with $11,649,478 in the three months ended
August 31, 1995. This increase was primarily attributable to the
acquisition of ATEC and 3D in May 1996 and from the acquisitions of the
Hill Businesses and AGI completed during the second half of fiscal 1996.
Revenues in the three months ended August 31, 1996 from ATC's
branch offices having comparable operations in the three months ended
August 31, 1995 decreased 1.6% to $11,020,010, compared with $11,201,153
in the three months ended August 31, 1995. Revenues attributable to the
acquisitions of certain assets of the Hill Businesses, AGI, ATEC and 3D
totaled $22,902,018, or 67.5% of revenues, for the three months ended
August 31, 1996. Revenues from branch operations sold or discontinued
prior to the second quarter of fiscal 1997 contributed revenues of
$448,325 in the three months ended August 31, 1995.
Reimbursable costs represent direct project expenses billed to
environmental and engineering segment clients. For the three months
ended August 31, 1996, reimbursable costs increased 272% to $5,077,483
compared with $1,364,001, in the three months ended August 31, 1995.
Reimbursable costs as a percentage of revenues increased to 15.0% in the
three months ended August 31, 1996 compared with 11.7% in the three
months ended August 31, 1995. ATEC's traditional consulting services,
consisting of drilling, materials testing and engineering services,
utilize higher amounts of outside services and direct project expenses
compared to those consulting services being provided prior to the
acquisition. For its year ended December 31, 1995, ATEC's reimbursable
costs were approximately 21% of revenues, compared to ATC's fiscal 1996
reimbursable costs which were approximately 11% of revenues.
Gross profit in the three months ended August 31, 1996 increased
127% to $12,529,814, compared with $5,529,416 in the three months ended
August 31, 1995. Gross profit as a percentage of net revenue decreased
to 43.4% in the three months ended August 31, 1996, compared with 53.8%
in the three months ended August 31, 1995. The gross profit percentage
decrease is due to lower margins earned on certain of ATEC's
environmental services, the costs incurred to complete a large fixed-
price contract which could not be billed to the client, and the impact
of lower net revenues in certain regions where costs could not be
reduced proportionately. In addition, the gross profit percentage for
the prior year was higher than normal due to the profitability level of
certain large projects.
F-14
PAGES
<PAGE>
Operating expenses in the three months ended August 31, 1996
increased 150% to $8,619,683, compared with $3,443,026 in the three
months ended August 31, 1995. Operating expenses decreased as a
percentage of net revenues to 29.9% in the three months ended August 31,
1996, compared with 33.5% in the three months ended August 31, 1995. The
decrease in operating expenses as a percentage of net revenue is the
result of the additional net revenue from the ATEC and other
acquisitions without corresponding increases in fixed and administrative
costs. Employee costs increased 120% to $3,517,889, or 12.2% of
net revenues, in the three months ended August 31, 1996 compared with
$1,601,014, or 15.6% of net revenues, in the three months ended
August 31, 1995. These increases in total cost were due to employees
hired 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
August 31, 1996, amortization of goodwill and intangibles increased to
$362,091, compared with $98,658 in the three months ended August 31,
1995 reflecting the additional goodwill amortization resulting from
acquisitions.
Operating income in the three months ended August 31, 1996
increased 87% to $3,910,131, compared with $2,086,390 in the three
months ended August 31, 1995. Operating income decreased as a percentage
of net revenues to 13.6% in the three months ended August 31, 1996,
compared with 20.3% in the three months ended August 31, 1995.
Nonoperating expense in the three months ended August 31, 1996
increased to $424,638 compared with $164,773 in the three months ended
August 31, 1995. The increase is primarily attributable to increased
interest expense due to increased bank debt borrowed in connection with
the ATEC and 3D acquisitions.
Income tax expense in the three months ended August 31, 1996 was
$1,384,000, compared with $402,500 in the three months ended August 31,
1995. The income tax expense for the prior year quarter ended August 31,
1995 reflects a one-time benefit of $350,000 resulting from the merger
of Aurora into ATC which allowed ATC to utilize Aurora's net operating
loss carryforward as offsets to future taxable income. During the three
months ended August 31, 1996 and 1995, after adjusting for the one-time
tax benefit, the Company's effective tax rates were 39.7% and 39.2%,
respectively.
As a result of the foregoing, net income in the three months ended
August 31, 1996 increased 38.3% to $2,101,493, or $.25 per share on a
fully diluted basis, compared with $1,519,117 or $.23 per share on a
fully diluted basis, in the three months ended August 31, 1995.
Excluding the impact of the one-time tax benefit of $350,000, net income
and fully diluted earning per share for the three months ended August
31, 1995 would have been $1,169,117 and $.18, respectively. The fully
diluted weighted average number of shares outstanding increased
2,034,016 shares to 8,576,018 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 decreased as a percentage of net revenues to
7.3% in the three months ended August 31, 1996, compared with 11.4% in
the three months ended August 31, 1995 after adjusting for the one-time
tax benefit.
Six Months Ended August 31, 1996 Compared with Six Months Ended August
31, 1995
Revenues in the six months ended August 31, 1996 increased 125% to
$50,568,011, compared with $22,464,431 in the six months ended August
31, 1995. This increase was primarily attributable to the acquisition of
ATEC and 3D in May 1996 and from the positive acquisitions of the Hill
Businesses and AGI during the second half of fiscal 1996.
Revenues in the six months ended August 31, 1996 from ATC's branch
offices having comparable operations in the six months ended August 31,
1995 increased 4.5% to $22,546,783, compared with $21,580,851 in the six
months ended August 31, 1995. Revenues attributable to the acquisitions
of certain assets of the Hill Businesses, AGI, ATEC and 3D totaled
$27,993,740, or 55.4% of revenues, for the six months ended August 31,
1996. Revenues from branch operations sold or discontinued contributed
only $27,488 for the six months ended August 31, 1996 compared to
$883,580 for the six months ended August 31, 1995.
Gross profit in the six months ended August 31, 1996 increased 83%
to $19,811,826, compared with $10,798,958 in the six months ended August
31, 1995. Gross profit as a percentage of net revenue decreased to 46.2%
in the six months ended August 31, 1996, compared with 53.4% in the six
months ended August 31, 1995. The gross profit percentage decrease is
due to lower margins earned on certain of ATEC's environmental services,
the final project costs incurred to complete a large fixed-price
contract which could not be billed to the client, and the impact of
lower net revenues in certain regions where costs could not be reduced
proportionately. In addition, the gross profit percentage for the prior
year was higher than normal due to the profitability level of certain
large projects.
F-15
PAGES
<PAGE>
Operating expenses in the six months ended August 31, 1996
increased 84% to $13,212,915, compared with $7,186,019 in the six months
ended August 31, 1995. Operating expenses decreased as a percentage of
net revenues to 30.8% in the six months ended August 31, 1996, compared
with 35.5% in the six months ended August 31, 1995. The decrease in
operating expenses as a percentage of net revenue is the result of the
additional net revenue from the ATEC and other acquisitions without
corresponding increases in fixed and administrative costs. Employee
costs increased 58% to $5,736,029, or 13.4% of net revenues, in the
six months ended August 31, 1996 compared with $3,630,992, or 18% of
net revenues, in the six months ended August 31, 1995. These increases
in total cost were due to employees hired 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 six months ended August 31, 1996, amortization of
goodwill and intangibles increased to $524,795, compared with $194,037
in the six months ended August 31, 1995 reflecting the additional
goodwill amortization resulting from acquisitions.
Operating income in the six months ended August 31, 1996 increased
83% to $6,598,911, compared with $3,612,939 in the six months ended
August 31, 1995. Operating income decreased as a percentage of net
revenues to 15.4% in the six months ended August 31, 1996, compared with
17.9% in the six months ended August 31, 1995.
Nonoperating expense in the six months ended August 31, 1996
increased to $341,115 compared with $228,694 in the six months ended
August 31, 1995. The increase in nonoperating expense is primarily
attributable to increased interest expense due to increased bank debt
outstanding since May 1996 when the ATEC and 3D acquisitions were
completed, offset in part by higher interest income earned during the
first three months of fiscal 1997 on the net offering proceeds invested
in short term investments prior to the acquisitions.
Income tax expense in the six months ended August 31, 1996 was
$2,438,000, compared with $970,000 in the six months ended August 31,
1995. The income tax expense for the six months ended August 31, 1995
reflects a one-time benefit of $350,000 resulting from the merger of
Aurora into ATC which allowed ATC to utilize Aurora's net operating loss
carryforward as offsets to future taxable income. During the six months
ended August 31, 1996 and 1995, after adjusting for the one-time tax
benefit, the Company's effective tax rates were 39%.
As a result of the foregoing, net income in the six months ended
August 31, 1996 increased 58% to $3,819,796, or $ .44 per share on a
fully diluted basis, compared with $2,414,245 or $.38 per share on a
fully diluted basis, in the six months ended August 31, 1995. Excluding
the impact of the one-time tax benefit of $350,000, net income and fully
diluted earnings per share for the six months ended August 31, 1995
would have been $2,064,245 and $.33, respectively. The fully diluted
weighted average number of shares outstanding increased 2,295,522 shares
to 8,628,179 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 decreased as a percentage of net revenues to 8.9% in the six
months ended August 31, 1996, compared with 10.2% in the six months
ended August 31, 1995 after adjusting for the one-time tax benefit.
Liquidity and Capital Resources
At August 31, 1996, working capital was $25,405,292 compared with
working capital of $24,977,316 at February 29, 1996, a decrease of
$427,976. This decrease in working capital is primarily a result of the
acquisitions of ATEC and 3D and the assumed acquisition liabilities
including accounts payable and other current liabilities and future
payment obligations, cash paid to the sellers, offset by increases from
purchased accounts receivable, unbilled receivables and prepaid
expenses. As a result of the Company's recent acquisitions of ATEC and
3D, the Company's tangible net worth decreased to $7,285,898 at August
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 six months ended August 31, 1996, net cash flows used in
operating activities were $6,058,393, primarily due to the decrease in
accounts payable and other liabilities, representing payments of
property facility rentals, non-compete consideration and assumed
liabilities of ATEC and other acquisitions, and an increase in billed
and unbilled receivables. Net cash flows used in investing activities
were $12,659,842, resulting from the acquisitions of ATEC and 3D and
purchases of property and equipment. Net cash flows provided by
financing activities were $8,686,118, primarily representing the
proceeds of the bridge credit facility, less payments made on long-term
debt and notes payable assumed from ATEC.
F-16
PAGES
<PAGE>
During the six months ended August 31, 1995, net cash flows used by
operating activities were $1,727,423. Net cash flows used in investing
activities were $896,436 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
Management Inc. and the purchase of property and equipment. Also during
this period, net cash flows from financing activities were $1,710,207,
primarily from proceeds from increased bank debt less principal payments
on long-term debt and notes payable of $499,159.
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.
In May 1996, the Company entered into a bridge credit facility with
The Chase Manhattan Bank (formerly Chemical Bank) and Atlantic Bank
which provided $20,000,000 of funds, of which $14,025,000 was used in
May 1996 in connection with the Company's acquisition of ATEC and 3D.
The bridge credit facility has been increased to $23,000,000 and
borrowings under the agreement are due January 13, 1997, however, the
Company expects to complete a longer term agreement with the banks prior
to the maturity date of the bridge facility. The Company may also seek
to obtain additional public or private debt or equity financing in the
future in order to reduce certain existing bank 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, current
working capital, the expected increase in available funds upon the
completion of the long-term bank credit facility, and anticipated funds
generated internally from operations will be sufficient to finance ATC's
operations, 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-17
PAGES
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
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. ("Hill") 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 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. In August, 1996, Hill and
the Richters filed an answer denying ATC's cross claims, a cross-
claim against ATC and a third party claim against certain members
of ATC's management. The cross claim and third party claim seek
unspecified damages, including punitive damages, for defamation,
breach of the Richters' non-competition agreements and securities
fraud. The defamation claim is based on plaintiff banks'
allegation of fraud against Hill and the Richters in their amended
complaint, which Hill and the Richters allege was based on
defamatory statements made by ATC in settlement discussions with
the plaintiff banks. The Company both denies that it made
defamatory statements and asserts that the defamation allegations
fail to state a legally valid claim. The breach of contract and
securities claims are based on allegations that ATC made
representations concerning a registration rights agreement to be
provided in connection with options issued to the Richters as
consideration for their non-competition agreements. The Company
denies that an agreement concerning registration rights was ever
reached and asserts that the Richters forfeited any such rights in
any case as a result of their conduct in connection with the asset
purchase. 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 significant effect on the Company's
financial position or future results of operations, although no
assurances can be given in this regard.
Commonwealth of Massachusetts v. TLT Construction Corp. et al,
Civ. Action No. 96-02281 F, Superior Court of Middlesex County,
Massachusetts. This is an action brought by the Commonwealth of
Massachusetts in April 1996, against the architects and general
contractor on a renovation and construction project on the Suffolk
County Courthouse in Massachusetts. The basis of the lawsuit is
that one or more damp-proofing products specified by the architect
defendants and installed by the contractor defendant made employees
in the courthouse ill because of the off-gassing of harmful vapors.
Dennison Environmental Services Inc., ("Dennison") an ATC
subsidiary, was joined on August 13, 1996, as a third party
defendant by TLT Construction Corporation, the general contractor,
because Dennison performed some air quality testing of the air in
the courthouse for the Commonwealth of Massachusetts during the
construction process. The contractor alleges that it acted in
reliance on these tests in continuing to install the material after
the test report was given to it by the state. Dennison has just
recently been served and has not yet answered the complaint. At
this point, ATC considers the case to be totally without merit, and
ATC intends to vigorously defend the action. The Company currently
has in force a professional liability insurance policy covering
this claim in the amount of $10,000,000 with a deductable $250,000.
Notice of claim has been made regarding this action and the
insurer has agreed to assume the defense. 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
significant effect on the Company's financial position or future
results of operations, although no assurances can be given in this
regard.
Item 2. Changes in Securities:
Not Applicable
Item 3. Defaults Upon Senior Securities:
Not Applicable
F-18
PAGES
<PAGE>
Item 4. Submission of Matters to a Vote of
Security Holders:
On October 8, 1996, the Company held its annual meeting of
shareholders at which time the following matters were voted
upon by security holders:
(1) The following individuals were re-elected as directors by
the votes indicated.
Name Votes For Votes Against
------------------------ --------- ------------
George Rubin 6,473,687 28,886
Morry F. Rubin 6,473,487 29,086
Richard L. Pruitt 6,473,687 28,886
Richard S. Greenberg, Esq. 6,473,687 28,886
Julia S. Heckman 6,473,487 29,806
(2) An amendment to the 1993 Incentive and Non-Qualified
Stock Option Plan increasing the number of
shares covered by the Plan from 500,000 to
1,000,000 shares was approved by a vote of
3,867,590 in favor, 193,641 against, 36,687 abstaining
and 2,404,655 unvoted.
(3) An amendment to the Company's Certificate of
Incorporation to change the name of the Company to
ATC Group Services Inc. was approved by a vote of
6,278,417 in favor, 34,445 against , 34,240
abstaining and 155,471 unvoted.
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 and six months ended August 31,1995
and 1996 (Unaudited)
27 - Financial Data Schedule
August 31, 1996 (Unaudited)
(b) Reports on Form 8-K:
An amendment #1 to a Form 8- K dated May 24,
1996 - date of earliest event reported - was
filed August 6, 1996. The amendment
contained the required financial information of
American Testing and Engineering Corporation
("ATEC") and proforma financial data in
connection with the acquisition of ATEC and 3D
Information Services, Inc.
F-19
PAGES
<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 GROUP SERVICES INC.
(Registrant)
Dated: October 15, 1996 /s/ Morry F. Rubin
------------------------ -------------------------------------
Morry F. Rubin,
President and Chief Executive Officer
Dated: October 15, 1996 /s/ Richard L. Pruitt
------------------------ -------------------------------------
Richard L. Pruitt,
Vice President and Principal
Accounting Officer
F-20
PAGES
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1995 and 1996 (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, 1996 August 31, 1996
-------------------------- --------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary Earnings Per Share:
- --------------------------
Weighted averang numbe of shares of common stock
outstanding........................................ 5,797,818 7,785,761 5,768,058 7,787,174
Additional shared assuming exercise of dilutive
stock options and stock warrants................... 744,184 790,257 564,599 791,657
----------- ----------- ----------- -----------
Total average common and common equivalent shares
outstanding.................................... 6,542,002 8,576,018 6,332,657 8,578,831
============ =========== =========== ===========
Net Income........................................... $ 1,519,117 $ 2,101,493 $ 2,414,245 $ 3,819,796
============ =========== =========== ===========
Earings per common and dilutive common equivalent
share (1).......................................... $ .23 $ .25 $ .38 $ .45
============ =========== =========== ===========
Fully Diluted Earnings Per Share:
- --------------------------------
Weighted averang numbe of shares of common stock
outstanding........................................ 5,797,818 7,785,761 5,768,058 7,787,174
Additional shared assuming exercise of dilutive
stock options and stock warrants................... 744,184 790,257 564,599 841,005
----------- ----------- ----------- -----------
Total average common and common equivalent shares
outstanding.................................... 6,542,002 8,576,018 6,332,657 8,628,179
============ =========== =========== ===========
Net Income........................................... $ 1,519,117 $ 2,101,493 $ 2,414,245 $ 3,819,796
============ =========== =========== ===========
Earings per common and dilutive common equivalent
share (1).......................................... $ .23 $ .25 $ .38 $ .45
============ =========== =========== ===========
</TABLE>
(1) Includes a one-time tax benefit of $.05 per share related to
the merger of Aurora Environmental Inc. for the three months
and six months ended August 31, 1995 (Note B).
F-21
PAGE
<PAGE>
ATC ENVIRONMENTAL INC. AND SUBSIDIARIES EXHIBIT 27
FINANCIAL DATA SCHEDULE
AUGUST 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
As of
Item Number Item Description August 31, 1996
- ----------- ---------------- ------------
<C> <C> <C>
5-02(1) Cash and cash items.............................. $3,437,326
5-02(2) Marketable securities and short-term investments. N/A
5-02(3)a(1) Notes and accounts receivable - trade............ 33,085,195
5-02(4) Allowances for doubtful accounts................. (1,141,778)
5-02(6) Inventory........................................ N/A
5-02(9) Total current assets............................. 48,213,337
5-02(13) Property, plant and equipment.................... 7,379,400
5-02(14) Accumulated depreciation......................... (3,577,689)
5-02(18) Total assets..................................... 88,500,420
5-02(21) Total current liabilities........................ 22,808,045
5-02(22) Bonds mortgages and similar debt................. 22,229,413
5-02(28) Preferred stock - mandatory redemption........... N/A
5-02(29) Preferred stock - no mandatory redemption........ N/A
5-02(30) Common stock..................................... 77,872
5-02(31) Other stockholders' equity....................... 42,850,741
5-02(32) Total liabilities and stockholders' equity....... 88,500,420
Six Months
ended
August 31, 1996
------------
5-03(b)1(a) Net sales of tangible products................... N/A
5-03(b)1 Total revenues................................... $50,568,011
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........................................ 30,756,185
5-03(b)3 Other costs and expenses......................... 12,642,630
5-03(b)5 Provision for doubtful accounts and notes........ 341,301
5-03(b)(8) Interest and amortization of debt discount....... 570,099
5-03(b)(10) Income before taxes and other items.............. 6,257,796
5-03(b)(11) Income tax expense............................... 2,438,000
5-03(b)(14) Income continuing operations..................... 3,819,796
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....................................... 3,819,796
5-03(b)(20) Earning per share - primary...................... $ .45
5-03(b)(20) Earnings per share - fully diluted .............. $ .44
</TABLE>
F-22
PAGE
<PAGE>
<TABLE> <S> <C>
PAGE
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 3,437,326
<SECURITIES> 0
<RECEIVABLES> 33,085,195
<ALLOWANCES> 1,141,778
<INVENTORY> 0
<CURRENT-ASSETS> 48,213,337
<PP&E> 7,379,400
<DEPRECIATION> 3,577,689
<TOTAL-ASSETS> 88,500,420
<CURRENT-LIABILITIES> 22,808,045
<BONDS> 22,229,413
<COMMON> 77,872
0
0
<OTHER-SE> 42,850,741
<TOTAL-LIABILITY-AND-EQUITY> 88,500,420
<SALES> 0
<TOTAL-REVENUES> 50,568,011
<CGS> 0
<TOTAL-COSTS> 30,756,185
<OTHER-EXPENSES> 12,642,630
<LOSS-PROVISION> 341,301
<INTEREST-EXPENSE> 570,099
<INCOME-PRETAX> 6,257,796
<INCOME-TAX> 2,438,000
<INCOME-CONTINUING> 3,819,796
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,819,796
<EPS-PRIMARY> .45
<EPS-DILUTED> .44
</TABLE>
