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 Quarterly Period Ended August 31, 1997
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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
104 East 25th Street, 10th Floor
New York, New York 10010
- ---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
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 October
14, 1997 was 7,807,107.
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1997
PART I - FINANCIAL INFORMATION:
<TABLE>
Item 1 - Financial Statements:
<S> <C>
Consolidated Balance Sheets
February 28, 1997 and August 31, 1997 (Unaudited)....................................................... F-3
Consolidated Statements of Operations
Three months and six months ended August 31, 1996 and 1997 (Unaudited).................................. F-4
Consolidated Statements of Stockholders' Equity
Six months ended August 31, 1996 and 1997 (Unaudited)................................................... F-5
Consolidated Statements of Cash Flows
Six months ended August 31, 1996 and 1997 (Unaudited)................................................... F-6
Notes to Consolidated Financial Statements
Three months and six months ended August 31, 1997 (Unaudited)........................................... F-7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................... F-14
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 31, 1996 and 1997 (Unaudited)............................ F-21
Exhibit 27 - Financial Data Schedule
August 31, 1997 (Unaudited)........................................................................ F-22
</TABLE>
F-2
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1997 AND AUGUST 31, 1997 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February 28, August 31,
1997 1997
--------------- --------------
<S> <C> <C>
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 2,003,890 $ 7,893,465
Trade accounts receivable, less allowance for doubtful accounts
($1,455,716 at February 28, 1997 and $2,106,863 at August 31, 1997)............ 34,406,026 41,600,223
Costs in excess of billings on uncompleted contracts............................. 5,191,569 10,535,085
Prepaid expenses and other current assets........................................ 2,934,193 3,413,025
Deferred income taxes ........................................................... 790,400 790,400
Refundable income taxes.......................................................... 118,340 -
---------------- --------------
Total current assets......................................................... 45,444,418 64,232,198
PROPERTY AND EQUIPMENT, Net (Note C).................................................. 3,784,633 5,025,542
GOODWILL, net of accumulated amortization (Note B)
($1,478,876 at February 28, 1997 and $2,297,353 at August 31, 1997)............... 35,587,076 45,713,191
COVENANTS NOT TO COMPETE, net of accumulated amortization (Note B)
($455,316 at February 28, 1997 and $557,207 at August 31, 1997).................. 632,184 630,293
OTHER ASSETS.......................................................................... 845,346 4,228,040
--------------- --------------
$ 86,293,657 $ 119,829,264
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt.................................................................. $ 300,000 $ 3,072,219
Current maturities of long-term debt............................................. 1,986,730 1,601,692
Accounts payable................................................................. 7,440,024 11,750,239
Income taxes payable............................................................. - 554,241
Accrued compensation............................................................. 3,789,233 4,877,043
Accrued payment obligations - ATEC acquisition (Note B).......................... 1,721,594 3,880,285
Other accrued expenses (Note B).................................................. 2,505,143 3,507,311
--------------- --------------
Total current liabilities.................................................... 17,742,724 29,243,030
LONG-TERM DEBT, less current maturities............................................... 22,123,344 38,697,491
OTHER LIABILITIES..................................................................... 270,386 3,305,019
DEFERRED INCOME TAXES................................................................. 717,900 717,900
---------------- ---------------
Total liabilities............................................................ 40,854,354 71,963,440
---------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes B and D)
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; authorized 20,000,000 shares;
issued and outstanding: 7,800,187 shares at February 28, 1997 and 7,805,407
shares at August 31, 1997...................................................... 78,002 78,054
Additional paid-in capital....................................................... 28,996,627 28,998,741
Retained earnings................................................................ 16,364,674 18,789,029
---------------- --------------
Total stockholders' equity................................................... 45,439,303 47,865,824
---------------- --------------
$ 86,293,657 $ 119,829,264
=============== ==============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1996 AND 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
1996 1997 1996 1997
----------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES ................................... $ 33,922,028 $ 34,722,201 $ 50,568,011 $ 66,096,867
Reimbursable Costs..................... 5,077,483 5,905,664 7,699,061 10,361,497
----------------- ------------------ ---------------- ----------------
NET REVENUES ............................. 28,844,545 28,816,537 42,868,950 55,735,370
COST OF NET REVENUES........................ 16,314,731 15,751,062 23,057,124 30,412,683
----------------- ------------------ ---------------- ----------------
Gross Profit....................... 12,529,814 13,065,475 19,811,826 25,322,687
OPERATING EXPENSE:
Selling................................ 750,818 1,039,462 1,293,400 2,039,457
General and administration............. 7,660,199 8,951,861 11,578,214 17,429,197
Provision for bad debts................ 208,666 366,945 341,301 744,384
----------------- ------------------ ---------------- ----------------
8,619,683 10,358,268 13,212,915 20,213,038
----------------- ---------------- --------------- ---------------
Operating income................... 3,910,131 2,707,207 6,598,911 5,109,649
NONOPERATING EXPENSE (INCOME):
Interest expense....................... 512,773 763,501 570,099 1,261,909
Interest income........................ (65,412) (97,121) (195,447) (148,904)
Other.................................. (22,723) (22,212) (33,537) (12,711)
----------------- ------------------ ---------------- ----------------
424,638 644,168 341,115 1,100,294
----------------- ------------------ ---------------- ----------------
Income before income taxes......... 3,485,493 2,063,039 6,257,796 4,009,355
INCOME TAX EXPENSE (Note B)................. 1,384,000 815,000 2,438,000 1,585,000
----------------- ------------------ ---------------- ----------------
NET INCOME.................................. $ 2,101,493 $ 1,248,039 $ 3,819,796 $ 2,424,355
================ ================ =============== ===============
EARNINGS PER COMMON SHARE
AND DILUTIVE COMMON
EQUIVALENT SHARE:
Primary............................ $ .25 $ .15 $ .45 $ .29
=============== =============== ================ ===============
Fully diluted...................... $ .25 $ .15 $ .44 $ .28
=============== =============== ================ ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Primary............................ 8,576,018 8,533,775 8,578,831 8,467,249
================ ================ ================ ===============
Fully diluted...................... 8,576,018 8,533,775 8,628,179 8,525,884
================ ================ ================ ===============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED AUGUST 31, 1996 AND 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------------------------------
Notes
Additional Receivable-
Common Stock Paid-in Common Retained
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 $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 capital.. - - (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>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------------------------
Notes
Additional Receivable-
Common Stock Paid-in Common Retained
Shares Amount Capital Stock Earnings Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, February 28, 1997............ 7,800,187 $ 78,002 $ 28,996,627 $ - $ 16,364,674 $ 45,439,303
Sale of common stock at $1.88 to
$10.00 per share, upon exercise of
stock options and warrants......... 5,220 52 36,098 - - 36,150
Continuing registration costs applied
against additional paid-in capital. - - (33,984) - - (33,984)
Net income............................ - - - - 2,424,355 2,424,355
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, August 31, 1997.............. 7,805,407 $ 78,054 $28,998,741 $ - $ 18,789,029 $ 47,865,824
============ ============ ============= ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED AUGUST 31, 1996 AND 1997 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
August 31,
---------------------------------
1996 1997
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 3,819,796 $ 2,424,355
Adjustments to reconcile net income to net cash from operating activities:..........
Depreciation and leasehold amortization.......................................... 405,074 503,855
Amortization of goodwill and covenants........................................... 524,795 920,368
Provision for bad debts.......................................................... 341,301 744,384
Other liabilities................................................................ (85,292) (1,077,567)
Changes in operating assets and liabilities, net of amounts acquired in acquisitions:
Accounts receivable and cost in excess of billings on uncompleted contracts.. (4,042,124) (5,100,710)
Prepaid expenses and other assets............................................ (847,080) (1,149,515)
Accounts payable and other liabilities........................................... (6,808,932) 332,285
Income taxes payable......................................................... 634,069 554,241
---------------- -------------
Net cash flows from operating activities................................... (6,058,393) (1,848,304)
---------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of BCM Engineers, Inc................................................... - (5,425,539)
Purchase of American Testing and Engineering Corp., net of cash acquired......... (8,965,952) (2,420,766)
Purchase of 3D Information Services, Inc., net of cash acquired.................. (2,926,681) -
Purchase of property and equipment............................................... (783,686) (667,393)
Other............................................................................ 16,477 60,302
--------------- ------------
Net cash flows from investing activities................................... (12,659,842) (8,453,396)
--------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and notes payable....................... 20,923,572 38,500,000
Proceeds from issuance of common stock, net of expenses.......................... 24,405 36,150
Principal payments on long-term debt and notes payable,
including capital lease obligations............................................ (12,233,289) (22,310,891)
Payments for continuing registration costs....................................... (28,570) (33,984)
------------------ ---------------
Net cash flows from financing activities................................... 8,686,118 16,191,275
---------------- ---------------
Net change in cash and cash equivalents.................................... (10,032,117) 5,889,575
CASH AND CASH EQUIVALENTS, Beginning of period...................................... 13,469,443 2,003,890
---------------- --------------
CASH AND CASH EQUIVALENTS, End of period............................................ $ 3,437,326 $ 7,893,465
================ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:...............................................................
Interest..................................................................... $ 527,314 $ 577,486
================ ==============
Income taxes................................................................. $ 1,803,931 $ 489,187
================ ==============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1997 (Unaudited)
- -------------------------------------------------------------------------------
A. GENERAL
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 28, 1997, 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.
Senior Secured Notes - On May 29, 1997, the Company issued $32,500,000 of
8.18% Senior Secured Notes due in annual installments beginning May, 2000,
through May, 2004, to a group of financial institutions. Interest on the Senior
Secured Notes is payable semi-annually on May 31, and November 30, commencing on
November 30, 1997. The Senior Secured Notes are collateralized by accounts
receivable, work-in-process, intangible assets and the Company's primary
depository accounts. The proceeds from the Senior Secured Notes have in part
been utilized to repay the Company's outstanding bridge credit facility.
Accordingly, at February 28, 1997, the Company classified its $20,850,000
outstanding bridge credit facility as long-term debt. The bridge facility was
entered into in May, 1996, to provide capital in connection with the Company's
acquisition of American Testing and Engineering Corporation and 3D Information
Services, Inc.
Bank Credit Agreement - In connection with the Senior Secured Note
offering, the Company executed a credit agreement with the Chase Manhattan Bank
and Atlantic Bank of New York. The credit agreement provides for a $15,000,000
revolving line of credit maturing on November 30, 1999. The borrowings under the
line of credit are collateralized by the Company's cash, accounts receivable,
work in process, and intangible assets on a pari passu basis with the Senior
Secured Note holders. Under the terms of the Note and Credit Agreements, the
Company is required to comply with certain financial and business covenants
including maintaining minimum working capital levels, fixed charge and interest
ratios and restrictions on dividend payments.
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 did not have 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.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128, which becomes effective for financial
statements of the Company issued for fiscal years ending after December 15,
1997, replaces primary and fully diluted earnings per share, as disclosed under
certain pronouncements, with basic and diluted earnings per share. Pro forma
basic earnings per share for the three months ended August 31, 1996 and 1997 are
$.27 and $.16, respectively. Pro forma diluted earnings per share for the three
months ended August 31, 1996 and 1997 are $.25 and $.15, respectively. Pro forma
F-7
<PAGE>
basic earnings per share for the six months ended August 31, 1996 and 1997 are
$.49 and $.31, respectively. Pro forma diluted earnings per share for the six
months ended August 31, 1996 and 1997 are $.45 and $.29, respectively.
Reclassifications - Certain reclassifications have been made to the
prior period's financial statements to conform to the current years
presentation.
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 1998
BCM Engineers, Inc. - On August 20, 1997 ATC purchased certain assets
and assumed certain liabilities of the environmental consulting and engineering
services division of the Smith Technology Corporation ("Smith") which operated
primarily as BCM Engineers, Inc. ("BCM"). BCM is a leading municipal water and
wastewater environmental engineering firm and provides services in water,
resource management, environmental compliance and site investigations, remedial
design and engineering, asbestos, and air quality management. BCM serves major
industrial clients in the chemical, petrochemical, oil and gas manufacturing,
water supply, commercial development and utilities industries from multiple
locations in the east and Gulf Coast.
<TABLE>
<CAPTION>
The purchase price was comprised of the following consideration:
<S> <C>
Amounts paid to seller or to others on behalf of seller:
Cash.................................................................................. $ 5,425,539
Notes payable......................................................................... 2,950,000
Less note payable offset.............................................................. (200,000)
Liabilities assumed:
Current liabilities................................................................... 2,833,665
Non current liabilities............................................................... 1,356,151
Direct expenses related to acquisition...................................................... 112,133
------------
$ 12,477,488
============
</TABLE>
Notes payable includes a $200,000 note which became due September 20,
1997 and is subject to offset for reductions in net assets and for unrecorded
liabilities arising through the closing date of the transaction. The seller has
not delivered a final closing balance sheet, however, based on preliminary
information available and unrecorded liabilities incurred by the Company, the
note is expected to be offset in full. Current liabilities includes an amount
equal to the offset.
An additional note payable in the amount of $2,750,000 is due February
27, 1998 and is subject to offset for uncollected accounts receivable and work
in process in excess of recorded reserves and for certain other specified
matters.
<TABLE>
<CAPTION>
The preliminary purchase price allocation is summarized as follows:
<S> <C>
Accounts receivable, net of allowance....................................................... $ 4,710,960
Work in process............................................................................. 3,684,939
Other current assets........................................................................ 7,357
Other assets................................................................................ 1,327,270
Covenants not to compete.................................................................... 100,000
Goodwill.................................................................................... 2,646,962
------------
$ 12,477,488
============
</TABLE>
The preliminary purchase price allocation is subject to change when
additional information concerning asset and liability valuations is obtained.
Therefore, the final allocation may differ froom the preliminary allocation.
F-8
<PAGE>
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.
Under the original purchase agreement, the Company was contingently
liable to ATEC for additional purchase consideration up to $10,750,000 if
certain conditions were met. The seller since met certain of these contingent
consideration requirements in the quarter ended May 31, 1997 and the Company
began to amortize the associated goodwill in this period. In addition, in
connection with the issuance of the Senior Secured Notes on May 29, 1997, the
Company and the seller executed an amendment to the original purchase agreement
and agreed to remove or modify the remaining contingent consideration
requirements. As a result of the foregoing, the Company paid $2,420,766 on May
30, 1997 and is obligated to make monthly payments through February 1999. The
monthly payments due during the next year are included in short-term
liabilities. The non-current portion at August 31, 1997 of $1,721,500 is
included in Other Liabilities in the accompanying consolidated balance sheet.
Additionally, the Company has the option to purchase certain properties from the
seller for $1,700,000 in fiscal 2002.
<TABLE>
<CAPTION>
The purchase price as amended was comprised of the following
consideration:
<S> <C>
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
Contingent/additional consideration under amended purchase agreement.................. 9,049,000
Liabilities assumed:
Current liabilities................................................................... 15,731,076
Bank debt............................................................................. 10,750,000
Direct expenses related to acquisition...................................................... 139,438
-------------
$ 50,670,514
=============
The purchase price allocation reflecting the additional consideration
is summarized as follows:
Accounts receivable and work in process, net of allowances.................................. $ 18,957,768
Other current assets........................................................................ 2,023,996
Other assets................................................................................ 1,428,617
Covenants not to compete.................................................................... 430,000
Goodwill ................................................................................... 27,830,133
-------------
$ 50,670,514
=============
</TABLE>
As a result of sellers warranties of purchased trade receivables and
work in process that were not realized, the Company is entitled to set-offs of
$618,835 against the option price to acquire certain properties in fiscal 2002.
If the Company does not exercise its option, the set-offs will be refunded by
the seller. Amounts are included in other non-current assets in the accompanying
consolidated balance sheet.
In connection with the purchase agreement, the Company has issued an
irrevocable letter of credit in the amount of $500,000 to secure the Company's
performance of its payment obligations. The letter of credit is renewable by the
seller until such time the Company has paid the purchase obligations in full. No
amounts have been drawn against the letter of credit.
F-9
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
Amounts paid to seller:
Cash.................................................................................. $ 3,000,000
Note payable.......................................................................... 2,500,000
Assumed liabilities......................................................................... 247,905
Direct expenses related to acquisition...................................................... 23,149
------------
$ 5,771,054
============
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 ................................................................................... 4,073,085
------------
$ 5,771,054
============
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C>
Amounts paid to seller:
Cash................................................................................. $ 2,517,949
Letter of credit, net of imputed interest (Note E)................................... 700,000
Note payable at 8.75% interest (Note E).............................................. 300,000
Liabilities assumed......................................................................... 907,884
Direct expenses related to acquisition...................................................... 885,538
------------
$ 5,311,371
============
</TABLE>
Direct expenses related to acquisition includes costs incurred in order
to obtain proper title to the assets from Sellers bank as described further in
Note D. 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.
<TABLE>
<CAPTION>
The purchase price allocation is summarized as follows:
<S> <C>
Costs in excess of billings on uncompleted contracts, net of unrealizable amounts........... $ 620,000
Property and equipment...................................................................... 175,000
Other assets................................................................................ 30,572
Covenants not to compete.................................................................... 37,500
Goodwill.................................................................................... 4,448,299
------------
$ 5,311,371
============
</TABLE>
The Company is contingently liable to reimburse up to $150,000 of
certain facility lease costs if incurred by Hill International, Inc. The payment
of the contingent liability, which the Seller claims is now due, certain other
liabilities and the $300,000 note is being withheld pending the outcome of the
litigation (Note D).
F-10
<PAGE>
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. 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
agreements. As of February 28, 1997 $22,324 of contingent consideration had been
earned and paid.
<TABLE>
<CAPTION>
<S> <C>
Cash to seller.............................................................................. $ 147,546
Contingent consideration earned to date..................................................... 22,324
Cash to secured creditors of seller......................................................... 441,514
Liabilities assumed......................................................................... 225,538
Direct expenses related to acquisition...................................................... 31,246
--------------
$ 868,168
==============
The purchase price allocation is summarized as follows:
Accounts receivable ........................................................................ $ 474,973
Property and equipment...................................................................... 115,060
Covenants not to compete.................................................................... 30,000
Goodwill.................................................................................... 248,135
--------------
$ 868,168
==============
</TABLE>
Pro Forma Financial Information (Unaudited) - The following unaudited
pro forma information sets forth the results of operations of ATC as if ATC's
purchase of significant subsidiaries including ATEC and 3D had occurred on March
1, 1996:
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------------------------
Three Months Ended Six Months Ended
August 31, August 31,
------------------------------ -------------------------------
1996 1997 1996 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 33,922,028 $ 34,722,201 $ 72,043,995 $ 66,096,867
Net income....................................... $ 2,101,493 $ 1,248,039 $ 4,944,968 $ 2,424,355
Earnings per share (fully diluted)............... $ .25 $ .15 $ .57 $ .28
Weighted average shares (fully diluted).......... 8,576,018 8,533,775 8,628,179 8,525,884
</TABLE>
C. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment is comprised of the following:
February 28 , August 31,
1997 1997
--------------- ---------------
<S> <C> <C>
Office equipment................................................................. $ 3,339,049 $ 4,035,139
Laboratory and field equipment................................................... 3,335,721 3,939,400
Transportation equipment......................................................... 207,857 450,665
Leasehold improvements........................................................... 849,700 1,041,035
-------------- --------------
7,732,327 9,466,239
Less accumulated depreciation.................................................... 3,947,694 4,440,697
-------------- --------------
Property and equipment, net...................................................... $ 3,784,633 $ 5,025,542
============== ==============
</TABLE>
F-11
<PAGE>
D. 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. Irvin E. Richter, et al v. ATC Group
Services Inc., et al, United States District Court, District of New Jersey, Civ.
No. 96 CV 5818 (JBS) filed December 6, 1996. 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 original plaintiffs in this action were First Fidelity Bank, N.A.
and United Jersey Bank, N.A. The primary defendants were 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 and an employee. 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. In its answer, 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. In its answer, 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 January, 1997, the plaintiff banks dismissed
their claim against ATC. On December 6, 1996, Hill and the Richters commenced an
action against ATC and the same officers and employees of ATC alleging
essentially the same claims in federal court as in the state action. This action
is entitled Irvin E. Richter et al. v. ATC Group Services, et al., Civ. No.
96-5818(JBS), U.S. District. Court for the District of New Jersey, December 6,
1996. ATC has answered, raising the same defenses and additional defenses
related to the timeliness of the federal claim. This is essentially the same
action as in federal court as the pending state action. The case is currently in
the discovery phase. It does not create a risk of double recovery. 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. This case is in the discovery stage. 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
deductible of $250,000. Notice of claim has been made regarding this action and
the insurer has agreed to assume the defense. 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 agent has issued a
preliminary audit report, which is expected to be the basis of a formal
assessment estimated to be approximately $200,000. The Company is disputing the
agents positions and intends to appeal any assessment if rendered. No assurances
can be given regarding the ultimate liability, if any, which may result.
F-12
<PAGE>
Cambridge Housing Authority v. Con-Test, Inc. and ATC Group Services
Inc., Superior Court of Middlesex County, Massachusetts; October 1, 1997. This
is a claim for damages in excess of $1,000,000 alleging that Con-Test, Inc.
breached its contract with Cambridge Housing Authority and was negligent in
performing asbestos survey work preparatory to a housing project
re-modernization project. ATC is joined as a party on a successor liability
theory, even though the services giving rise to the claim occurred over two
years prior to ATC's purchase of business assets from Con-Test. Although ATC has
not yet answered the complaint, ATC intends to vigorously defend the claim on
the grounds that it is not a successor under any known precedent of
Massachusetts law. It is therefore the opinion of the Company that the
probability of material loss from this claim is low.
The Company has been named or has claims pending arising out of the
conduct of its business. In the opinion of management, these matters are
adequately covered by insurance, are without merit, or are not material.
E. INDUSTRY SEGMENT DATA
The Company provides services through its environmental consulting and
engineering segment and its information technology consulting segment. Industry
segment data is as follows:
<TABLE>
<CAPTION>
Environmental Information Adjustments &
& Engineering Technology Elimination's Total
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Fiscal 1998
Quarter Ended August 31, 1997
Revenues........................... $ 32,852,171 $ 1,945,894 $ (75,864) $ 34,722,201
Operating income................... 2,653,929 53,279 - 2,707,208
Depreciation and amortization...... 253,450 10,825 - 264,275
Capital expenditures............... 390,515 20,125 - 410,640
Six Months-Ended August 31, 1997
Revenues........................... $ 62,214,082 $ 4,186,193 $ (303,408) $ 66,096,867
Operating income................... 4,885,372 224,277 - 5,109,649
Depreciation and amortization...... 484,185 19,670 - 503,855
Capital expenditures............... 626,781 40,612 - 667,393
Identifiable Assets as of August 31, 1997 $ 117,701,868 $ 5,363,196 $ (3,235,800) $ 119,829,264
-----------------------------------------
Fiscal 1997
Quarter Ended August 31, 1996
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
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-13
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
Recent Developments
FY 1998
Acquisition of BCM Engineers, Inc. - On August 20, 1997, ATC purchased
certain assets and assumed certain liabilities of the environmental consulting
and engineering services division of the Smith Technology Corporation ("Smith")
which operated primarily as BCM Engineers, Inc. ("BCM" or the "Engineering
Division"). BCM is a leading municipal water and wastewater environmental
engineering firm with current operations at multiple locations in the east and
Gulf Coast. BCM's other primary service specializations include water resource
management, environmental compliance and site investigation, remedial design and
engineering, asbestos, and air quality management. BCM serves major industrial
clients in the chemical, petrochemical, oil and gas manufacturing, water supply,
commercial development and utilities industries among others. For its most
recent twelve month period ended July 31, 1997, the Engineering Division had
unaudited revenues of $40,531,000 and division operating income before corporate
allocations of $3,673,000.
The acquisition has been accounted for as a purchase. The assets
acquired consist of intangible assets including customer contract rights,
customer lists, order backlog, patents and the right to the "BCM Engineers Inc."
name and tangible assets including trade accounts receivable, work in process,
property and equipment, supplies and general records. ATC additionally entered
into non-competition agreements with Smith and a major shareholder/officer of
Smith. Total consideration paid to the seller for the assets and non-competition
agreements totaled $8,375,539 including a $5,425,539 cash payment at closing and
short-term notes payable totaling $2,950,000. The notes payable are subject to
setoffs for uncollected accounts receivable and work in process, and changes in
the net tangible assets through the date of closing. Offsets of $200,000 have
been reflected in the accompanying financial statements (Note B). In addition,
ATC assumed certain liabilities of Smith of approximately $4,189,816, including,
a portion of the trade payables of BCM/Smith, employee obligations and certain
other specified liabilities.
Senior Debt Offering and Bank Credit Agreement
On May 29, 1997 the Company issued $32,500,000 of 8.18% Senior Secured
Notes in a private placement offering. The notes are payable in five
installments beginning May 31, 2000; interest is payable semi-annually
commencing November 30, 1997. The Company has the right to prepay the loans at a
premium over the outstanding principal. In connection with the note offering,
the Company executed a credit agreement with the Chase Manhattan Bank and
Atlantic Bank of New York. The credit agreement provides for a $15,000,000
revolving line of credit maturing on November 30, 1999. A portion of the
proceeds of the Senior Secured Notes were used to repay the outstanding
borrowings of $21,350,000 as of May 29, 1997 under the Company's bridge credit
facility. The bridge facility was entered into in May, 1996 to provide capital
in connection with the Company's acquisition of American Testing and Engineering
Corporation and 3D Information Services, Inc.
Prior Year Acquisitions
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.
In the three months ended May 31, 1997, the seller met certain
contingent consideration requirements. Additionally, in connection with the
issuance of the Senior Secured Notes, the Company and seller amended the
original purchase agreement. As a result of these events, additional purchase
consideration of $9,049,000 was recorded (Note B).
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.
F-14
<PAGE>
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.
Results of Operations
Three Months Ended August 31, 1997 Compared with
Three Months Ended August 31, 1996
- --------------------------------------------------------------------------------
Revenues in the three months ended August 31, 1997 increased 2.4% to
$34,722,201, compared with $33,922,028 in the three months ended August 31,
1996. This increase was primarily attributable to the acquisition of BCM
effective August 20, 1997.
Revenues in the three months ended August 31, 1997 from ATC's branch
offices having comparable operations in the three months ended August 31, 1996
remained approximately the same at $33,950,934, compared with $33,922,028 in the
three months ended August 31, 1996. Revenues attributable to the acquisition of
certain assets of BCM totaled $771,267, or 2.2% of revenues, for the three
months ended August 31, 1997.
Reimbursable costs represent direct project expenses billed to
environmental and engineering segment clients. For the three months ended August
31, 1997, reimbursable costs increased 16.3% to $5,905,664 compared with
$5,077,483, in the three months ended August 31, 1996. Reimbursable costs as a
percentage of revenues increased to 17.0% in the three months ended August 31,
1997 compared with 15.0% in the three months ended August 31, 1996. The
Company's environmental management and traditional consulting services,
consisting of drilling, materials testing and engineering services represented a
larger portion of total revenues and these services utilize higher amounts of
outside services and direct project expenses resulting in the higher percentage
of reimbursable costs.
Gross profit in the three months ended August 31, 1997 increased 4.3%
to $13,065,475, compared with $12,529,814 in the three months ended August 31,
1996. Gross profit as a percentage of net revenue increased to 45.3% in the
three months ended August 31, 1997, compared with 43.4% in the three months
ended August 31, 1996. The gross profit percentage increase is due to lower
margins in the prior period related to 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.
Operating expenses in the three months ended August 31, 1997 increased
20.2% to $10,358,268, compared with $8,619,683 in the three months ended August
31, 1996. Operating expenses increased as a percentage of net revenues to 35.9%
in the three months ended August 31, 1997, compared with 29.9% in the three
months ended August 31, 1996. The increase in operating expenses as a percentage
of net revenue is the result of increases in labor, administrative costs and
fixed costs while net revenue levels have remained constant. The prior year
period results included the initial staffing levels and costs for employees
hired from ATEC. The Company had eliminated approximately 13% of ATEC's total
labor costs by hiring revenue generating field personnel and minimizing
administrative personnel and related costs. However, after the first few months,
the Company added higher level administrative employees including corporate and
regional financial personnel and sales personnel for its corporate sales
programs. In addition, executive and employee compensation levels increased
during the latter part of fiscal 1997 and certain additional bonuses to branch
personnel were paid during the current quarterly period in excess of amounts
previously accrued. As a result of the foregoing, employee costs increased 36.6%
to $4,804,677, or 16.7% of net revenues, in the three months ended August 31,
1997 compared with $3,517,889, or 12.2% of net revenues, in the three months
ended August 31, 1996. Other increases in operating expenses resulted from legal
expenses and administrative expenses resulting from the growth in operations and
increased employee levels. Additionally, in the three months ended August 31,
1997, amortization of goodwill and intangibles increased to $494,769, compared
with $362,091 in the three months ended August 31, 1996 reflecting the
additional goodwill amortization resulting from acquisitions.
F-15
<PAGE>
Operating income in the three months ended August 31, 1997 decreased
30.8% to $2,707,207 compared with $3,910,131 in the three months ended August
31, 1996. Operating income decreased as a percentage of net revenues to 9.4% in
the three months ended August 31, 1997, compared with 13.6% in the three months
ended August 31, 1996.
Nonoperating expense in the three months ended August 31, 1997
increased to $644,168 compared with $424,638 in the three months ended August
31, 1996. The increase is primarily attributable to increased interest expense
on the Senior Secured Notes in excess of bank debt outstanding in the prior
period. Increases in interest expense were offset in part by interest income on
the net cash proceeds received from the Senior Secured Notes.
Income tax expense in the three months ended August 31, 1997 was
$815,000, compared with $1,384,000 in the three months ended August 31, 1996.
During the three months ended August 31, 1997 and 1996, the Company's effective
tax rates were 39.5% and 39.7%, respectively.
As a result of the foregoing, net income in the three months ended
August 31, 1997 decreased 40.6% to $1,248,039, or $.15 per share on a fully
diluted basis, compared with $2,101,493 or $.25 per share on a fully diluted
basis, in the three months ended August 31, 1996. The fully diluted weighted
average number of shares outstanding remained approximately the same. Net income
decreased as a percentage of net revenues to 4.3% in the three months ended
August 31, 1997, compared with 7.3% in the three months ended August 31, 1996.
Six Months Ended August 31, 1997 Compared with Six Months Ended August 31, 1996
- --------------------------------------------------------------------------------
Revenues in the six months ended August 31, 1997 increased 30.7% to
$66,096,867, compared with $50,568,011 in the six months ended August 31, 1996.
This increase was primarily attributable to the acquisition of BCM effective
August 20, 1997 and revenues from the ATEC and 3D acquisitions completed in May
1996.
Revenues in the six months ended August 31, 1997 from ATC's branch
offices having comparable operations in the six months ended August 31, 1996
decreased 3.2% to $45,815,867, compared with $47,318,770 in the six months ended
August 31, 1996. (Comparable revenues was based on total revenues less BCM
revenues in August 1997, and less estimated revenues of ATEC and 3D for the
three months ended May 31 of each fiscal period.) Comparable revenues decreased
in part, due to a large project which was completed in the first quarter of the
prior year period. Revenues attributable to the acquisition of certain assets of
BCM totaled $771,267, or 1.2% of revenues, for the six months ended August 31,
1997.
Reimbursable costs represent direct project expenses billed to
environmental and engineering segment clients. For the three months ended August
31, 1997, reimbursable costs increased 34.6% to $10,361,497 compared with
$7,699,061, in the six months ended August 31, 1996. Reimbursable costs as a
percentage of revenues increased to 15.7% in the six months ended August 31,
1997 compared with 15.2% in the six months ended August 31, 1996. The Company's
environmental management and traditional consulting services, consisting of
drilling, materials testing and engineering services represented a larger
portion of total revenues and these services utilize higher amounts of outside
services and direct project expenses resulting in the higher percentage of
reimbursable costs.
Gross profit in the six months ended August 31, 1997 increased 27.8% to
$25,322,687 compared with $19,811,626 in the six months ended August 31, 1996.
Gross profit as a percentage of net revenue decreased to 45.4% in the six months
ended August 31, 1997, compared with 46.2% in the six months ended August 31,
1996. The gross profit percentage for the prior year period was up slightly due
to a highly profitable first quarter which benefited from work previously
delayed from adverse winter weather conditions.
Operating expenses in the six months ended August 31, 1997 increased
53.0% to $20,213,038, compared with $13,212,915 in the six months ended August
31, 1996. Operating expenses increased as a percentage of net revenues to 36.3%
in the six months ended August 31, 1997, compared with 30.8% in the six months
ended August 31, 1996. The increase in operating expenses as a percentage of net
revenue for the current six month period fully reflects the ATEC service mix and
integration of its operations including additional labor and administrative
costs. The prior year period results included the initial staffing levels and
costs for employees hired from ATEC. The Company had eliminated approximately
13% of ATEC's total labor costs by hiring revenue generating field personnel and
minimizing administrative personnel and related costs. However, after the first
few months, the Company added higher level administrative employees including
corporate and regional financial personnel and sales personnel for its corporate
sales programs. In addition, executive and employee compensation levels
increased during the latter part of fiscal 1997 and certain additional bonuses
to branch personnel were paid during the quarterly period ended August 31, 1997
in excess of amounts previously accrued. Employee costs increased 56.8% to
$8,992,507, or 16.1% of net revenues, in the six months ended August 31, 1997
compared with $5,736,092, or 13.4% of net revenues, in the six months ended
August 31, 1996. 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 legal expenses and administrative expenses resulting from
F-16
<PAGE>
the growth in operations and increased employee levels. Additionally, in the six
months ended August 31, 1997, amortization of goodwill and intangibles increased
to $920,368, compared with $524,795 in the six months ended August 31, 1996
reflecting the additional goodwill amortization resulting from acquisitions.
Operating income in the six months ended August 31, 1997 decreased
22.6% to $5,109,649, compared with $6,598,911 in the six months ended August 31,
1996. Operating income decreased as a percentage of net revenues to 9.2% in the
six months ended August 31, 1997, compared with 15.4% in the six months ended
August 31, 1996.
Nonoperating expense in the six months ended August 31, 1997 increased
to $1,100,294 compared with $341,115 in the six months ended August 31, 1996.
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, and the issuance of the Senior Secured
Notes in May 1997 in excess of previously outstanding bank debt.
Income tax expense in the six months ended August 31, 1997 was
$1,585,000, compared with $2,438,000 in the six months ended August 31, 1996.
During the six months ended August 31, 1996 and 1995, the Company's effective
tax rates were 39.5% and 39.0%, respectively.
As a result of the foregoing, net income in the six months ended August
31, 1997 decreased 36.5% to $2,424,355, or $.28 per share on a fully diluted
basis, compared with $3,819,796 or $.44 per share on a fully diluted basis, in
the six months ended August 31, 1996. The fully diluted weighted average number
of shares outstanding decreased to 8,525,884 shares from 8,628,179 shares
primarily due to lower average common stock prices and the impact on the number
of common stock equivalents. Net income decreased as a percentage of net
revenues to 4.3% in the six months ended August 31, 1997, compared with 8.9% in
the six months ended August 31, 1996.
Liquidity and Capital Resources
At August 31, 1997, working capital was $34,989,168 compared with working
capital of $27,701,694 at February 28, 1997, an increase of $7,287,474. This
increase in working capital is primarily a result of the net proceeds of the
Senior Secured Notes after repayment of bank debt and fees, and the purchase of
certain assets of BCM including accounts receivable and unbilled receivables. As
a result of the Company's acquisition of BCM and additional consideration
incurred in connection with the ATEC acquisition, the Company's tangible net
worth decreased to $1,522,340 at August 31, 1997 from $9,220,043 at February 29,
1997, primarily as a result of goodwill amounts recognized in connection with
these transactions.
During the six months ended August 31, 1997, net cash flows used in
operating activities were $1,848,304, primarily due to the increase in billed
and unbilled receivables, and decreases 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 $8,453,396, resulting from the acquisitions of BCM and ATEC and
purchases of property and equipment. Net cash flows provided by financing
activities were $16,191,275, primarily representing the proceeds of Senior
Secured Notes less repayment of outstanding bank debt and a bank borrowing of
$5,500,000 made in the connection with the BCM acquisition.
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.
Management of the Company believes the cash on hand from the issuance
of the Senior Secured Notes after repayment of the bridge credit facility, funds
available from its unused $15,000,000 bank line of credit and cash provided from
operations are adequate to fund current operations including liabilities
incurred in connection with the Company's acquisitions of BCM, ATEC and 3D.
The Company may seek to obtain additional public or private equity
financing in the future in order to expand operations, provide funds for future
acquisitions or reduce debt, however no assurance can be given as to the
Company's ability to obtain funds on acceptable terms and conditions.
F-17
<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. Irvin E. Richter, et al v. ATC Group
Services Inc., et al, United States District Court, District of New Jersey, Civ.
No. 96 CV 5818 (JBS) filed December 6, 1996. 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 original plaintiffs in this action were First Fidelity Bank, N.A.
and United Jersey Bank, N.A. The primary defendants were 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 and an employee. 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. In its answer, 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. In its answer, 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 January, 1997, the plaintiff banks dismissed
their claim against ATC. On December 6, 1996, Hill and the Richters commenced an
action against ATC and the same officers and employees of ATC alleging
essentially the same claims in federal court as in the state action. This action
is entitled Irvin E. Richter et al. v. ATC Group Services, et al., Civ. No.
96-5818(JBS), U.S. District. Court for the District of New Jersey, December 6,
1996. ATC has answered, raising the same defenses and additional defenses
related to the timeliness of the federal claim. This is essentially the same
action as in federal court as the pending state action. The case is currently in
the discovery phase. It does not create a risk of double recovery. 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. This case is in the discovery stage. 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
deductible of $250,000. Notice of claim has been made regarding this action and
the insurer has agreed to assume the defense. 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 agent has issued a
preliminary audit report, which is expected to be the basis of a formal
assessment estimated to be approximately $200,000. The Company is disputing the
agents positions and intends to appeal any assessment if rendered. No assurances
can be given regarding the ultimate liability, if any, which may result.
F-18
<PAGE>
Cambridge Housing Authority v. Con-Test, Inc. and ATC Group Services
Inc., Superior Court of Middlesex County, Massachusetts; October 1, 1997. This
is a claim for damages in excess of $1,000,000 alleging that Con-Test, Inc.
breached its contract with Cambridge Housing Authority and was negligent in
performing asbestos survey work preparatory to a housing project
re-modernization project. ATC is joined as a party on a successor liability
theory, even though the services giving rise to the claim occurred over two
years prior to ATC's purchase of business assets from Con-Test. Although ATC has
not yet answered the complaint, ATC intends to vigorously defend the claim on
the grounds that it is not a successor under any known precedent of
Massachusetts law. It is therefore the opinion of the Company that the
probability of material loss from this claim is low.
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:
On October 10, 1997, 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 5,179,723 18,685
Morry F. Rubin 5,182,063 16,345
Richard L. Pruitt 5,182,063 16,345
Richard S. Greenberg, Esq. 5,182,063 16,345
Julia S. Heckman 5,182,063 16,345
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 31,1996 and
1997 (Unaudited)
27 - Financial Data Schedule
August 31, 1997 (Unaudited)
(b) Reports on Form 8-K:
Not Applicable
F-19
<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, 1997 /s/ MORRY F.RUBIN
-------------------------- -------------------------------------
MORRY F. RUBIN,
President and Chief Executive Officer
Dated: October 15, 1997 /s/ RICHARD L. PRUITT
-------------------------- -------------------------------------
RICHARD L. PRUITT,
Vice President and
Principal Accounting Officer
F-20
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1996 and 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------------------------
Three Months Ended Six Months Ended
August 31, August 31,
------------------------------ -------------------------------
1996 1997 1996 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Primary Earnings Per Share:
Weighted average number of shares of
common stock outstanding.................. 7,785,761 7,804,618 7,787,174 7,802,900
Additional shares assuming exercise of
dilutive stock options and stock warrants. 790,257 729,157 791,657 664,349
-------------- -------------- -------------- -------------
Total average common and common
equivalent shares outstanding......... 8,576,018 8,533,775 8,578,831 8,467,249
============== ============== ============== =============
Net income.................................. $ 2,101,493 $ 1,248,039 $ 3,819,796 $ 2,424,355
============== ============== ============== =============
Earnings per common and dilutive
common equivalent share................... $ .25 $ .15 $ .45 $ .29
============== ============== ============== =============
Fully Diluted Earnings Per Share:
Weighted average number of shares of
common stock outstanding.................. 7,785,761 7,804,618 7,787,174 7,802,900
Additional shares assuming exercise of
dilutive stock options and stock warrants. 790,257 729,157 841,005 722,984
-------------- -------------- -------------- -------------
Total average common and common
equivalent shares outstanding......... 8,576,018 8,533,775 8,628,179 8,525,884
============== ============== ============== =============
Net income.................................. $ 2,101,493 $ 1,248,039 $ 3,819,796 $ 2,424,355
============== ============== ============== =============
Earnings per common and dilutive
common equivalent share................... $ .25 $ .15 $ .44 $ .28
============== ============== ============== =============
</TABLE>
F-21
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES EXHIBIT 27
FINANCIAL DATA SCHEDULE
AUGUST 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of
Item Number Item Description August 31, 1997
---------------
<S> <C> <C>
5-02(1) Cash and cash items.................................................................. $ 7,893,465
5-02(2) Marketable securities ............................................................... -
5-02(3)(a)(1) Notes and accounts receivable - trade................................................ 43,707,086
5-02(4) Allowances for doubtful accounts..................................................... 2,106,863
5-02(6) Inventory............................................................................ -
5-02(9) Total current assets................................................................. 61,388,084
5-02(13) Property, plant and equipment........................................................ 9,466,239
5-02(14) Accumulated depreciation............................................................. 4,440,697
5-02(18) Total assets......................................................................... 119,829,264
5-02(21) Total current liabilities............................................................ 29,243,030
5-02(22) Bonds, mortgages and similar debt.................................................... 43,371,402
5-02(28) Preferred stock - mandatory redemption............................................... -
5-02(29) Preferred stock - no mandatory redemption............................................ -
5-02(30) Common stock......................................................................... 78,054
5-02(31) Other stockholders' equity........................................................... 47,787,770
5-02(32) Total liabilities and stockholders' equity........................................... 119,829,264
Six Months
Ended
August 31, 1997
----------------
5-03(b)1(a) Net sales of tangible products....................................................... -
5-03(b)1 Total revenues....................................................................... 66,096,867
5-03(b)2(a) Cost of tangible goods sold.......................................................... -
5-03(b)2 Total costs and expenses applicable to sales and revenues............................ 40,774,180
5-03(b)3 Other costs and expenses............................................................. 19,307,039
5-03(b)5 Provision for doubtful accounts and notes............................................ 744,384
5-03(b)(8) Interest and amortization of debt discount........................................... 1,261,909
5-03(b)(10) Income before taxes and other items.................................................. 4,009,355
5-03(b)(11) Income tax expense................................................................... 1,585,000
5-03(b)(14) Income/(loss) continuing operations.................................................. 2,424,355
5-03(b)(15) Discontinued operations.............................................................. -
5-03(b)(17) Extraordinary items.................................................................. -
5-03(b)(18) Cumulative effect - changes in accounting principles................................. -
5-03(b)(19) Net Income........................................................................... 2,424,355
5-03(b)(20) Earnings per share - primary......................................................... .29
5-03(b)(20) Earnings per share - fully diluted................................................... .28
</TABLE>
F-22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 7,893,465
<SECURITIES> 0
<RECEIVABLES> 43,707,086
<ALLOWANCES> 2,106,863
<INVENTORY> 0
<CURRENT-ASSETS> 61,388,084
<PP&E> 9,466,239
<DEPRECIATION> 4,440,697
<TOTAL-ASSETS> 119,829,264
<CURRENT-LIABILITIES> 29,243,030
<BONDS> 43,371,402
0
0
<COMMON> 78,054
<OTHER-SE> 47,787,770
<TOTAL-LIABILITY-AND-EQUITY> 119,829,264
<SALES> 0
<TOTAL-REVENUES> 66,096,867
<CGS> 0
<TOTAL-COSTS> 40,774,180
<OTHER-EXPENSES> 19,307,039
<LOSS-PROVISION> 774,384
<INTEREST-EXPENSE> 1,261,909
<INCOME-PRETAX> 4,009,355
<INCOME-TAX> 1,585,000
<INCOME-CONTINUING> 2,424,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,242,355
<EPS-PRIMARY> .29
<EPS-DILUTED> .28
</TABLE>
