ATC GROUP SERVICES INC /DE/, 10-Q, 1998-10-20

ATC GROUP SERVICES INC /DE/
10-Q, 1998-10-20
TESTING LABORATORIES

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<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, 1998

[ ] 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 (Zip Code)
offices)

Registrant's telephone number, including area code: (212) 353-8280
--------------

NONE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year if changed since last
report)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --

The number of shares outstanding of the Registrant's Common Stock, par value
$0.01 per share, as of October 15, 1998 was 1,000.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<PAGE>

ATC GROUP SERVICES INC. AND SUBSIDIARIES

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED AUGUST 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Page
------
PART I - FINANCIAL INFORMATION:

Item 1 - Unaudited Financial Statements:

<S> <C>
Condensed Consolidated Balance Sheets
February 28, 1998 and August 31, 1998 (Unaudited)............... F-3

Condensed Consolidated Statements of Operations
Three and Six months ended August 31, 1997 and 1998 (Unaudited). F-4

Condensed Consolidated Statements of Stockholders' Equity
Six months ended August 31, 1997 and 1998 (Unaudited)........... F-5

Condensed Consolidated Statements of Cash Flows
Six months ended August 31, 1997 and 1998 (Unaudited)........... F-6

Notes to Consolidated Financial Statements (Unaudited)........... F-7

Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. F-20

PART II - OTHER INFORMATION:

Items 1-6........................................................ F-25

Signatures....................................................... F-27
</TABLE>

F-2
<PAGE>

ATC GROUP SERVICES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1998 AND AUGUST 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEBRUARY 28, August 31,
1998 1998
------------ -----------

<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 5,268,708 $ 1,113,030
Trade accounts receivable, less allowance for doubtful accounts
($3,077,829 at February 28, 1998 and $5,030,896 at August 31, 1998)............ 39,934,302 46,107,699
Unbilled receivables............................................................ 10,196,397 7,682,111
Prepaid expenses and other current assets....................................... 2,422,523 954,974
Deferred income taxes........................................................... 2,041,200 2,041,200
Refundable income taxes......................................................... 4,232,505 4,232,505
------------ ------------
Total current assets........................................................... 64,095,635 62,131,519

PROPERTY AND EQUIPMENT, Net (Note C)............................................. 5,793,928 5,943,738

GOODWILL, net of accumulated amortization
($3,261,108 at February 28, 1998 and $4,837,237 at August 31, 1998)(Note B)..... 106,829,231 113,322,111
COVENANTS NOT TO COMPETE, net of accumulated amortization
($774,589 at February 28, 1998 and $1,630,837 at August 31, 1998)(Note B)....... 5,162,911 4,386,532
DEBT ISSUANCE COSTS, net of accumulated amortization
($107,570 at February 28, 1998 and $598,124 at August 31, 1998)(Note B)......... 5,808,246 6,913,263
OTHER ASSETS..................................................................... 1,365,056 3,709,328
------------ ------------
$189,055,007 $196,406,491
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term debt................................................................. $ 300,000 $ 479,000
Current maturities of long-term debt............................................ 1,420,816 3,000,213
Accounts payable................................................................ 7,738,433 13,985,707
Accrued compensation............................................................ 5,096,880 4,973,406
Tender Offer liability (Note B)................................................. 14,278,838 3,368,524
Accrued interest expense......................................................... 1,266,011 1,989,893
Other accrued expenses.......................................................... 4,554,179 9,245,690
------------ ------------
Total current liabilities...................................................... 34,655,157 37,042,433

LONG-TERM DEBT, less current maturities (Note D)................................. 120,419,684 130,469,685
OTHER LIABILITIES, including non-current payment obligations (Note B)............ 2,737,185 1,623,640
DEFERRED INCOME TAXES............................................................ 4,606,800 4,606,800
------------ ------------
Total liabilities.............................................................. 162,418,826 173,742,558
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes B and E)

STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; authorized 10,000 shares;
issued and outstanding 1,000 shares at February 28, 1998 and August 31, 1998... 10 10
Additional paid-in capital...................................................... 28,425,589 28,425,589
Additional paid-in capital - Holdings restricted Common Stock,
net of deferred executive compensation......................................... -- 101,688
Retained (Deficit).............................................................. (1,789,418) (5,863,354)
------------ ------------
Total stockholders' equity.................................................... 26,636,181 22,663,933
------------ ------------
$189,055,007 $196,406,491
------------ ------------
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>

ATC GROUP SERVICES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1997 AND 1998
- --------------------------------------------------------------------------------

Three Months Ended Six Months Ended
August 31, August 31,
--------------------------------- -----------------------------
Predecessor Successor Predecessor Successor
1997 1998 1997 1998
----------- ----------- ----------- -----------

<S> <C> <C> <C> <C>
REVENUES............................... $34,722,201 $39,912,560 $66,096,867 $80,195,474
Reimbursable Costs.................... 5,905,664 6,788,950 10,361,497 12,558,632
----------- ----------- ----------- -----------

NET REVENUES........................... 28,816,537 33,123,610 55,735,370 67,636,842

COST OF NET REVENUES................... 15,751,062 19,302,401 30,412,683 38,121,307
----------- ----------- ----------- -----------

Gross profit......................... 13,065,475 13,821,209 25,322,687 29,515,535

OPERATING EXPENSES:
Selling............................... 1,039,462 1,477,609 2,039,457 2,885,882
General and administrative............ 8,951,861 12,954,733 17,429,197 23,869,809
Provision for bad debts............... 366,945 710,116 744,384 1,081,108
----------- ----------- ----------- -----------
10,358,268 15,142,458 20,213,038 27,836,799
----------- ----------- ----------- -----------

Operating income (loss).............. 2,707,207 (1,321,249) 5,109,649 1,678,736

NONOPERATING EXPENSE (INCOME):
Interest expense...................... 763,501 3,908,112 1,261,909 7,704,046
Interest income....................... (97,121) (1,268) (148,904) (7,060)
Other................................. (22,212) 1,332 (12,711) (314)
----------- ----------- ----------- -----------
644,168 3,908,176 1,100,294 7,696,672
----------- ----------- ----------- -----------

Income (loss) before income taxes.... 2,063,039 (5,229,425) 4,009,355 (6,017,936)

INCOME TAX EXPENSE (BENEFIT)........... 815,000 (1,858,000) 1,585,000 (1,944,000)
----------- ----------- ----------- -----------

NET INCOME (LOSS)...................... $ 1,248,039 $(3,371,425) $ 2,424,355 $(4,073,936)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>

See notes to condensed consolidated financial statements.

F-4
<PAGE>

ATC GROUP SERVICES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED AUGUST 31, 1997 AND 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------------------------
Common Stock Additional Holdings Retained
-------------------- Paid-in Restricted Earnings
Shares Amount Capital Stock-Net (Deficit) 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 of predecessor.............. - - - - 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>

<TABLE>

1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, February 28, 1998............. 1,000 $ 10 $28,425,589 $ - $(1,789,418) $26,636,181

Amortization of deferred
compensation costs.................... - - - 101,688 - 101,688
Net loss of successor................ - - - - (4,073,936) (4,073,936)
------------- ------------ --------------- ---------- -------------- ------------
BALANCE, August 31, 1998............... 1,000 $ 10 $28,425,589 $ 101,688 $(5,863,354) $22,663,933
------------- ------------ --------------- ---------- -------------- ------------
------------- ------------ --------------- ---------- -------------- ------------
</TABLE>

See notes to condensed consolidated financial statements.

F-5
<PAGE>

ATC GROUP SERVICES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED AUGUST 31, 1997 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
August 31,
----------------------------------
Predecessor Successor
1997 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)............................................................................. $ 2,424,355 $ (4,073,936)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and leasehold amortization...................................................... 503,855 857,022
Amortization of goodwill and covenants....................................................... 920,368 2,682,377
Provision for bad debts...................................................................... 744,384 1,081,108
Other........................................................................................ (1,077,567) 580,594
Changes in operating assets and liabilities, net of amounts acquired in
acquisitions:
Receivables............................................................................... (5,100,710) (6,688,139)
Prepaid expenses and other assets......................................................... (1,149,515) (1,366,857)
Accounts payable and other liabilities.................................................... 332,285 5,723,523
Income taxes payable...................................................................... 554,241 --
---------- -----------
Net cash flows from operating activities..................................................... (1,848,304) (1,204,308)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of On-Site Technologies, Inc......................................................... - (59,000)
Purchase of Aerovironment Environmental Services, Inc......................................... - (100,000)
Purchase of BCM Engineers, Inc. .............................................................. (5,425,539) -
Purchase of American Testing and Engineering Corp, net of cash acquired....................... (2,420,766) -
Purchase of property and equipment............................................................ (667,393) (1,187,782)
Other......................................................................................... 60,302 394,110
---------- -----------
Net cash flows from investing activities..................................................... (8,453,396) (952,672)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt and notes payable, net of issuance costs......... 38,500,000 10,260,525
Proceeds from issuance of common stock, net of expenses....................................... 36,150 -
Payment of Tender Offer obligations........................................................... - (12,017,174)
Principal payments on long-term debt.......................................................... (22,310,891) (242,049)
Other capital transactions.................................................................... (33,984) -
---------- -----------
Net cash flows from financing activities..................................................... 16,191,275 (1,998,698)
---------- ------------
Net change in cash and cash equivalents...................................................... 5,889,575 (4,155,678)

CASH AND CASH EQUIVALENTS, Beginning of period.................................................. 2,003,890 5,268,708
---------- -----------
CASH AND CASH EQUIVALENTS, End of period........................................................ $7,893,465 $ 1,113,030
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest..................................................................................... $ 557,486 $ 6,609,605
---------- -----------
---------- -----------
Income taxes................................................................................. $ 489,187 $ 31,596
---------- -----------
---------- -----------
</TABLE>

See notes to condensed consolidated financial statements.

F-6
<PAGE>

ATC GROUP SERVICES INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 31, 1998
- --------------------------------------------------------------------------------

A. GENERAL

ACQUISITION OF THE COMPANY BY ACQUISITION HOLDINGS, INC.--ATC Group
Services Inc. and subsidiaries ("ATC" or the "Company") became a wholly owned
subsidiary of Acquisition Holdings, Inc. ("Holdings") effective February 5,
1998 (the "Merger Date") upon the merger of the Company with Acquisition
Corp., a wholly owned subsidiary of Holdings, with ATC being the surviving
corporation (the "Merger"). Holdings, through Acquisition Corp., completed an
offer to purchase the outstanding common stock of ATC at $12.00 per share
using the proceeds from the issuance of 12% senior subordinated notes (the
"Notes"), bank borrowings (the "Bank Credit Facilities") and new equity
investments. The accompanying financial statements for the Company from
February 5, 1998 and subsequent thereto (the "Successor Period"), are
attributable to operations of the Company under the successor ownership of
Holdings. The predecessor financial statements, representing the period prior
to February 5, 1998 (the "Predecessor Period"), relate to the previous
ownership of the Company.

PRINCIPALS OF CONSOLIDATION--The consolidated financial statements include
the accounts of ATC Group Services Inc. and its wholly owned subsidiaries.
All significant inter-company accounts and transactions have been eliminated.

In the opinion of the Company, the accompanying unaudited condensed
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
notes to the consolidated financial statements for the fiscal year ended
February 28, 1998, which are included in the Company's Annual Report on
Form 10-K and amendments thereto.

NATURE OF BUSINESS--The Company 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.

RECLASSIFICATIONS -- Certain reclassifications have been made to the prior
period's financial statements to conform to the current year's presentation.

B. MERGER AND BUSINESS ACQUISITIONS

MERGER, NOTE OFFERING, AND TENDER OFFER TRANSACTIONS--Acquisition Holdings,
Inc. ("Holdings" or "Parent") and its wholly owned subsidiary, Acquisition Corp.
("Issuer"), were organized to effect the acquisition of the Company under the
terms and conditions of a Merger Agreement dated November 26, 1997 (the "Merger
Agreement").

F-7

<PAGE>

Pursuant to the Merger Agreement, the Issuer offered (the "Tender Offer")
to purchase all the issued and outstanding shares of the Company's Common Stock
at a price of $12.00 per share. The Tender Offer was conditioned upon Issuer
issuing $100,000,000 of Senior Subordinated Notes (the "Notes"; see Note D) and
obtaining sufficient bank financing necessary to consummate the Tender Offer.
Effective February 5, 1998, (the "Merger Date") upon satisfaction of the
necessary conditions, the Issuer was merged into ATC, with ATC being the
surviving corporation (the "Merger").

The Merger Agreement followed the execution of a stockholders agreement
(the "Stockholders Agreement") with George Rubin and Morry F. Rubin
(collectively the "Stockholders") requiring the Stockholders to vote 14.8% of
their interest in the Company in favor of the Merger. In connection with the
Stockholders Agreement, the Stockholders each agreed to and entered into
Severance Consulting and Non-Competition Agreements (the "Severance
Agreements"). Under these agreements, the Stockholders resigned from their
officer positions, agreed to provide certain consulting services as requested
by the Company for a period of three years following the consummation of the
transactions, and agreed to restrict the Stockholders from competing with the
Company's business and restricting certain other activities for a period
ranging from three to four years from the effective date of the Merger. In
consideration of the Severance Agreements, the Company paid the Stockholders
$3.1 million on the Merger Date and will pay $553,430 on each of the next six
succeeding quarters commencing April 1, 1998.

In connection with the Merger and Tender Offer, the Company, through the
Issuer, entered into a new bank credit agreement which provided for a
$20,000,000 Term Loan and $30,000,000 Revolving Credit Facility (collectively
the "Bank Credit Facilities"). The proceeds of the Term Loan along with the
proceeds of the Notes and equity investments in Holdings were used to finance
the Tender Offer, repay certain indebtedness including related accrued
interest and prepayment penalties, pay a portion of the Severance Agreement
consideration, and to pay financing costs and expenses.

The acquisition of the Company by Holdings has been accounted for as a
purchase. The excess of the purchase cost over the historical book value of
the net assets acquired was allocated to the Severance Agreements and the
remainder, to goodwill, is being amortized over 30 years.

The accompanying consolidated balance sheet reflects the following
sources and uses of funds related to the Tender Offer, Merger, Stockholders
Agreement and the Bank Credit Facilities (collectively the "Transactions").

<TABLE>

<S> <C>
Sources of Funds:
Notes........................................................ $100,000,000
Bank Term Loan............................................... 20,000,000
Equity investment from Holdings.............................. 30,714,639
Tender Offer obligations to be funded from cash on hand and
revolving credit borrowings. (The outstanding balance at
May 31, 1998 was $3,681,818)................................ 16,082,850
------------
$166,797,489
------------
------------
Uses of Funds:
Purchase of common stock, warrants and stock options......... $105,473,603
Repay existing debt:
Principal.................................................. 42,076,461
Accrued interest........................................... 577,345
Accrued ATEC obligations................................... 754,250
Shareholder Agreement Consideration:
Amount paid at Merger Date................................. 3,100,002
Amounts payable in quarterly installments.................. 3,320,578
Financing costs and expenses, including debt prepayment
penalty.................................................. 11,495,250
------------
$166,797,489
------------
------------
</TABLE>

F-8
<PAGE>

The total consideration paid in connection with the Transactions and
allocation of the consideration to the historical book value of assets,
covenant not to compete and goodwill is as follows:

<TABLE>

<S> <C>
Consideration:
Purchase price of common stock, warrants, and stock options. $ 105,473,603
Severance Agreements consideration............................ 6,420,580
Financing costs and expenses net of amount related to debt
issuance..................................................... 4,828,614
-------------
116,722,797
Allocation of Consideration:
Net assets acquired........................................... 51,214,836
Fair value adjustments:
Non-compete agreement..................................... 4,700,000
Other..................................................... (301,537)
-------------
Excess purchase consideration................................. 61,109,498
Predecessor basis adjustment.................................. (2,289,050)
-------------
Goodwill........................................................ $ 58,820,448
-------------
-------------
</TABLE>
Holdings is not engaged in any activities other than those related to its
ownership interest in ATC. A majority interest in Holdings is owned by
affiliates of Weiss, Peck & Greer, L.L.C. ("Weiss Peck"), who was also a
party to the Merger Agreement. Other actual and beneficial owners of Holdings
include ATC management and employees who made equity contributions or elected
to receive options to purchase common stock of Holdings in replacement of
their "in-the-money" ATC stock options.

Weiss Peck is a private investment firm, founded in 1970, which manages
in excess of $14 billion in public equities and fixed-income securities for
institutional and individual clients worldwide. In addition to its money
management activities, the firm has a twenty-seven year history as an
investor of equity capital in over 200 venture capital and private equity
transactions. Investments of its Private Equity Group are made through
affiliated funds with $230 million of committed capital.

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. The
preliminary purchase price allocation are subject to change when additional
information concerning asset and liability valuations is obtained. Therefore,
the final allocation may differ from the preliminary allocation.

Fiscal 1999

AEROVIRONMENT ENVIRONMENTAL SERVICES INC.--On July 31, 1998 ATC acquired
certain assets and assumed certain liabilities of AeroVironmental
Environmental Services, Inc. ("AVES"), a regional provider of engineering and
technical consulting services, with emphasis on the air quality and pollution
fields. AVES is located in Monrovia, CA. During its fiscal year ended April
30, 1998, AVES reported $2.3 million in revenues. ATC paid $591,000, $100,000
of which was cash paid at closing, $312,000 in assumed liabilities and
transaction costs, and $179,000 in a noninterest bearing note, payable six
months from the date of purchase. Assets purchased included work in progress,
property and equipment, certain intangible assets, and an ownership interest
in AeroVironment/NESA LLC, a subsidiary of AVES.

ON-SITE TECHNOLOGIES, INC--On July 10, 1998 ATC acquired certain assets
and assumed certain liabilities of On-Site Technologies, Inc. ("OST"), a
remediation engineering services company based in Hayward, CA. OST reported
revenues of approximately $1.2 million for its year ended December 31, 1997.
ATC acquired property and intangible assets including customer contracts. The
consideration paid totaled $204,000 consisting of $59,000 in cash paid at
closing and $145,000 in assumed liabilities and transaction costs.

F-9
<PAGE>
Fiscal 1998

BING YEN & ASSOCIATES, INC.--On November 26, 1997 ATC purchased all of
the outstanding stock of Bing Yen & Associates, Inc. ("Bing Yen"). Bing Yen
provides geotechnical and structural forensic services to a wide variety of
clients in the western United States and is located in Tustin, California.

The purchase price was comprised of the following consideration:
<TABLE>
<S> <C>
Amounts paid to seller:
Cash......................................................... $2,200,000
Note payable at 8% due January 2, 1998....................... 550,000
Notes payable at 8% due in three annual installments
commencing January 1999..................................... 1,150,000
----------
3,900,000
Liabilities assumed:
Current liabilities.......................................... 313,254
Direct expenses of transaction............................... 50,000
----------
$4,263,254
----------
----------
</TABLE>
In addition, a maximum aggregate principal amount of $1,500,000 in
unsecured contingent achievement promissory notes will be issued if certain
minimum net revenue levels are achieved, resulting in a maximum total
consideration to seller of $5,400,000.

The notes payable of $1,150,000 are subject to setoffs if actual net
assets as of the closing date are below warranted amounts, for trade
receivables not collected within one year of the closing date and under
certain other specified conditions.

The preliminary purchase price allocation is as follows:
<TABLE>
<S> <C>
Cash........................................................... $ 163,680
Accounts receivable, net....................................... 2,292,191
Unbilled receivables........................................... 5,122
Prepaid expense................................................ 10,746
Property and equipment......................................... 142,241
Covenant not to compete........................................ 50,000
Goodwill....................................................... 1,595,324
Other assets................................................... 3,950
----------
$4,263,254
----------
----------
</TABLE>

ENVIRONMENTAL WARRANTY, INC.--On November 4, 1997, ATC purchased 90.9% of
the outstanding stock of Environmental Warranty, Inc. ("E.W.I."), a property
and casualty insurance brokerage firm specializing in environmental insurance
products.

The purchase price was comprised of the following consideration:

<TABLE>
<S> <C>
Amounts paid to sellers:
Cash......................................................... $ 150,000
Notes payable, net of imputed interest at 8.0%............... 582,424
Payment commitments.......................................... 275,000
ATC Common Stock (33,000 shares)............................. 365,062
----------
1,372,486
Liabilities assumed:
Current liabilities.......................................... 314,811
Direct expenses of transaction............................... 25,000
----------
$1,712,297
----------
----------
</TABLE>
F-10

<PAGE>
The notes payable are due in three annual installments commencing November
1998 and are subject to certain setoffs. The payment commitments are due in
four installments. The first two installments were paid in connection with
the closing and the final two installments are due in November 1999 and
November 2000. ATC issued 33,000 shares of restricted common stock valued at
11 1/16 per share.

The preliminary purchase price allocation is as follows:
<TABLE>

<S> <C>
Cash........................................................... $ 169,350
Receivables.................................................... 158,391
Prepaid and other current assets............................... 2,875
Property and other............................................. 15,384
Goodwill....................................................... 1,366,297
----------
$1,712,297
----------
----------
</TABLE>
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, which operated
primarily as BCM Engineers, Inc. ("BCM"). BCM is a leading municipal water
and wastewater environmental engineering firm and provides services in water,
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.

The purchase price was comprised of the following consideration:
<TABLE>
<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)
-----------
8,175,539
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 was subject to offset for reductions in net assets and for
unrecorded liabilities arising through the closing date of the transaction.
Based on the closing balance sheet provided by the Seller, the Company offset
the $200,000 in full. In addition, based on unrealized unbilled receivables
warranted by the seller and other claims, an additional $2,750,000 has been
reflected as an offset of short-term debt in the accompanying consolidated
balance sheet.

The preliminary purchase price allocation is summarized as follows:

<TABLE>
<S> <C>
Accounts receivable, net of allowance.......................... $ 4,710,960
Unbilled receivables........................................... 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>

F-11

<PAGE>

Prior Acquisitions

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 Senior Secured Notes on May 29, 1997 (since
repaid), 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. In connection with the issuance of the 12% Senior
Subordinated Notes and Tender Offer transactions, the Company paid $754,250
on January 29, 1998 and is obligated to make monthly payments through
February 1999. Additionally, the Company has the option to purchase certain
properties from the seller for $1,700,000 in fiscal 2002.

As a result of sellers warranties of purchased trade receivables and
unbilled receivables 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. The set-off amount is included in other assets in the
accompanying consolidated balance sheets.

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.

PRO FORMA FINANCIAL INFORMATION (UNAUDITED) - The following unaudited pro
forma information sets forth the results of operations of ATC as if the Merger
and Tender Offer and ATC's purchases of BCM, EWI and Bing Yen had occurred on
March 1, 1997:

PRO FORMA
THREE MONTHS ENDED AUGUST 31, SIX MONTHS ENDED AUGUST 31,
----------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ----------- -------------

<S> <C> <C> <C> <C>
Revenues.............................................. $42,724,968 $39,912,560 84,274,545 $80,195,474
Operating Income...................................... 2,339,866 (1,321,249) 4,204,241 1,678,736
Net income (loss)..................................... $ 422,014 $(3,371,425) 451,257 $(4,073,936)
</TABLE>

F-12
<PAGE>

C. PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following:

FEBRUARY 28, AUGUST 31,
1998 1998
------------ ------------

<S> <C> <C>
Office equipment......................................... $ 5,345,109 $ 6,185,395
Laboratory and field equipment........................... 3,967,605 3,711,232
Transportation equipment................................. 582,524 591,677
Leasehold improvements................................... 1,111,823 1,133,126
------------ ------------
11,007,061 11,624,430
Less accumulated depreciation............................ (5,213,133) (5,682,692)
------------ ------------
Property and Equipment, net.............................. $ 5,793,928 $ 5,943,738
------------ ------------
------------ ------------
</TABLE>

D. DEBT AND CREDIT AGREEMENTS

BANK CREDIT FACILITIES--On January 29, 1998, a credit facility with various
lending institutions was established providing the Company senior secured credit
facilities consisting of a $20 million Term Loan and a $30 million Revolving
Credit Facility (the "Bank Credit Facilities").

The Revolving Credit Facility available to the Company for working capital
and general corporate purposes totals $15 million, with the remainder available
for certain permitted acquisitions. Revolving loans mature on January 29,
2003. At the Company's option, revolving loans will accrue interest at either
(a) an adjusted rate based on the Eurodollar rate plus a margin of 2.25% or
(b) the base rate (effectively the prime rate) plus a margin of 1.25%. The
loan margins are subject to quarterly decreases based upon improvements in
the Company's leverage ratio. Interest is payable monthly and the Company
pays a revolving loan commitment fee of 1/2 of 1% on a quarterly basis.

The Term Loan amortizes quarterly commencing in February 1999 initially at
$750,000 per quarter, increasing to $1,000,000 per quarter in February 2000,
$1,500,000 per quarter in February 2001 and $1,750,000 per quarter in
February 2002 with the final loan maturity on January 29, 2003.

The Bank Credit Facilities require the Company to meet certain financial
tests, including minimum interest coverage and maximum leverage ratios
beginning as of and for the quarter ended May 31, 1998. The Bank Credit
Facilities also contain covenants which, among other things, limit the
ability of the Company to incur additional indebtedness, pay dividends, enter
into transactions with affiliates, form subsidiaries, enter into
sale-leaseback transactions, make capital expenditures, loans, investments or
lease payments, merge, consolidate or acquire or dispose of assets, voluntarily
prepay or amend other indebtedness, incur liens and encumbrances and other
matters customarily restricted in loan agreements of this type.

For the quarters ended May 31, 1998, and August 31, 1998 the Company was in
default of certain financial covenants. The Company's lenders have provided
an interim waiver with respect to the defaults. Under the waiver, the Company
has approximately $5.1 million of availability under its revolving line of
credit as of October 20, 1998.

F-13
<PAGE>

The Company is in discussion with its lenders and believes the covenant
provisions of the credit agreement will be amended. Accordingly, the Company
continues to classify its outstanding debt as long term in accordance with
the existing loan maturity dates. The final classification of the Company's
outstanding bank debt and 12% Senior Subordinated Notes, will be in
accordance with the terms of any final credit agreement.

The Bank Credit Facilities also contain customary events of default,
including payment defaults, breach of representations and warranties,
covenant defaults, cross defaults, certain events of bankruptcy and
insolvency, ERISA, judgement defaults, failure of any guarantee or security
agreement supporting the Company's obligations under the Bank Credit
Facilities to be in full force and effect, and a change of control of the
Company's Parent or the Company.

The obligations of the Company under the Bank Credit Facilities are
unconditionally guaranteed by the Company's Parent and any direct or indirect
subsidiaries of the Company. In addition, the obligations of the Company
under the Bank Credit Facilities are secured by substantially all of the
assets of the Company.

12% SENIOR SUBORDINATED NOTES DUE 2008--The 12% Senior Subordinated Notes
due 2008 were issued January 29, 1998 pursuant to an indenture agreement and
became obligations of the Company as of the Merger Date. Interest accrues at
12% per annum and is payable semiannually in arrears on each January 15 and
July 15, commencing July 15, 1998. The Notes are unsecured obligations of the
Company, ranking subordinate in right of payment to all senior indebtedness
(as defined), and ranking pari passu in right of payment with any future
senior subordinated indebtedness and senior in right of payment to all other
subordinated obligations of the Company. The Notes will be redeemable, in
whole of in part, at the Company's option on or after January 15, 2003 at
redemption prices set forth in the indenture agreement. Up to 35% of the
aggregate principal amount of the Notes may be redeemed on or prior to
January 15, 2001 with the net cash proceeds of a public offering at
redemption prices and terms in accordance with the Note indenture agreement.
The Note indenture agreement provides noteholders the option to have their
notes purchased in the event of a change in control. In addition, the Note
indenture contains covenants restricting the incurrence of additional
indebtedness, payment of dividends, sales of assets, incurrence of liens,
mergers and acquisitions and conduct of the business to existing businesses.

8.18% SENIOR SECURED NOTES--On May 29, 1997, the Company issued
$32,500,000 of 8.18% Senior Secured Notes to a group of financial
institutions. The proceeds were used in part to repay the Company's bridge
credit facility outstanding as of February 28, 1997. In connection with the
issuance of the 8.18% Senior Secured Notes, the Company had entered into a
bank credit agreement providing a $15,000,000 revolving line of credit.
Amounts outstanding under the bank revolver and the 8.18% Senior Secured
Notes were repaid in full using proceeds of the 12% Senior Subordinated Notes
due 2008 and the Bank Credit Facilities.

F-14
<PAGE>

E. COMMITMENTS AND CONTINGENCIES

Joseph I. Peters v. George Rubin, et al, Civ. Action No. 16026-NC, Court
of Chancery, New Castle County, Delaware. On or about November 12, 1997, a
summons and complaint were filed in the Delaware Court on behalf of Joseph I.
Peters, as plaintiff. On or about December 18, 1997, an amended complaint was
filed (the "Amended Complaint"). The Amended Complaint names the Company, the
members of the Company's board of directors, Weiss, Peck & Greer ("Weiss
Peck") and the WPG Corporate Development Associates V, L.P., a Weiss Peck
affiliate, as defendants. The Amended Complaint challenges the Tender Offer
and Merger. The Amended Complaint seeks class action status on behalf of the
stockholders of the Company. The plaintiff in the action claims that the
offer price for the Company's Common Stock is inadequate and that the
defendants have breached their fiduciary duties to the plaintiff and other
stockholders of the Company. The plaintiff seeks unspecified damages. On
January 7, 1998, a motion to dismiss was filed by Weiss Peck and WPG
Corporate Development Associates V, L.P. On January 13, 1998, answers to the
complaint were filed by the Company and the remaining defendants. The parties
to the action are currently conducting discovery. The Company believes the
allegations contained in the Amended Complaint are without merit and intends
to defend the action vigorously.

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 held security interests in the assets and
that Hill was 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 and 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 claims are based (i) 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 and (ii) on a letter alleged
to contain defamatory statements which was sent to an account debtor of the
Company by an employee. In its answer, the Company both denies that it made
defamatory statements and asserts that the defamation allegations fail to
state legally valid claims. 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 any such rights were forfeited or suspended
by the Richters in any case as a result of their conduct in connection with
the asset purchase. ATC also disputes that the Richters sustained damages on
the grounds, among others, that the options were non-transferable and because
ATC's stock price never exceeded the exercise price at any point where the
options would have been exercisable. In January, 1997, the plaintiff banks
dismissed their claim against ATC. The remaining claims are subject to a stay
pending the federal action described below.

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 Irwin
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 securities claims. The case is currently in the
discovery and pretrial motion phase. It does not create a risk of double
recovery.
F-15
<PAGE>

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. ATC's position is that it did
not commit any error or omission in this case, that ATC made no
representation to the contractors or material supplier and had no privity
with them and that Dennison's opinion concerning short term, during-
construction health effects of the off-gassing could not be justifiably
relied upon with respect to the long-term performance and health effects of
the product or its installation. This case is in the discovery phase. At this
point, ATC considers the case to be without merit, and ATC intends to
vigorously defend the action.

Barrett-Moeller et al. v. ATC Associates Inc., Civ. Action No. 97-01037D,
Superior Court of Middlesex County, Massachusetts. This is an action arising
out of the same set of occurrences as gave rise to Commonwealth of
Massachusetts v. TLT Construction, Corp. described above. The action was
brought by a group of employees who worked in the Suffolk County Courthouse
during the period in which the off-gassing of harmful vapors was alleged to
have occurred. The suit seeks damages for personal injury in an unspecified
amount. Notice of this claim has been made to ATC's professional liability
insurer.

Joan Spencer v. TLT Construction et al., Civ. Action No. 97-4161C,
Superior Court of Middlesex County, Massachusetts. This is an action arising
out of the same set of occurrences as gave rise to Commonwealth of
Massachusetts v. TLT Construction, Corp. described above. The action was
brought by an employee who worked in the Suffolk County Courthouse during the
period in which the off-gassing of harmful vapors was alleged to have
occurred. The suit seeks damages for personal injury in an unspecified
amount.

Notice of the related Commonwealth of Massachusetts, Barrett-Moeller and
Spencer claims (the "Suffolk County" claims) has been made to ATC's
professional liability insurer. At the time that notice of Suffolk County
claims was filed, the Company had in effect a professional liability insurance
policy in the amount of $10.0 million with a deductible of $250,000.

Cambridge Housing Authority v. CON-TEST, Inc. and ATC Group Services Inc.,
Superior Court of Middlesex County, Massachusetts. This action was brought on
October 1, 1997 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 was joined as a party on the theory of
continuous business enterprise successor liability. ATC has filed an answer
denying that it was a successor to Con-Test under Massachusetts's law and
asserting that it should therefore have no liability for Con-Test's alleged
acts or omissions. The Company believes that the case is without merit
because ATC does not meet the criteria for a finding of successor liability
in the State of Massachusetts. ATC has filed a notice of claim with
Con-Test's insurance company which has assumed the defense of the action.

Professional Service Industries, Inc. v. ATC Group Services Inc. and
Thomas Bowker, Superior Court, Norfolk County, Massachusetts, June 19, 1997,
Civ. No. 97-01146. The complaint alleges that ATC interfered with a
non-competition agreement between Mr. Bowker, an ATC employee, and PSI. An
injunction has been issued by the court against ATC and Mr. Bowker
prohibiting them from competitive acts within certain geographic areas. The
case is currently on hold pending mediation between the parties in an attempt
to settle the case. If settlement is not achieved through the mediation
process, ATC intends to continue to vigorously defend the claim.

F-16
<PAGE>

Etzel Place II, L.P. v. ATC Environmental Inc. Action No. 982-01473,
Missouri Circuit Court, Twenty-Second Judicial Circuit (St. Louis City). This
action was brought on June 2, 1998 and alleges that ATC breached its contract
with the plaintiff and was negligent in performing asbestos survey services
in connection with an asbestos removal project. Plaintiff requests damages in
the amount of $241,062.40. ATC is currently engaged in settlement discussions
with plaintiff. Notice of this claim has been made under ATC's professional
liability and pollution liability insurance policy. The insurance policy is
subject to a $150,000 self-insured retention amount.

1100 Airport North Partnership v. ATC Group Services Inc., Cause No.
02D01-9804-CP-813, Superior Court of Allen County Indiana. This action was
filed on May 1, 1998 and arises out of ATC's lease of office space in Fort
Wayne, Indiana. The Plaintiff seeks damages and attorneys fees for ATC's
alleged breach of the lease. On July 1, 1998, a default judgment was entered
against ATC in the amounts of $302,116.13 and $1,443.00 for damages and
attorneys fees, respectively. ATC has initiated settlement discussions and
will proceed to have the judgement overturned to continue to dispute the
claim if necessary.

PROBABLE CLAIMS

One Parkway Project. ATC has received notice of related claims by R.M.
Shoemaker Co., a Pennsylvania construction firm, and four of its workers
arising out of ATC's performance of asbestos abatement survey, design and
project monitoring services. The services were performed by ATC's Burlington,
New Jersey office on a project known as the One Parkway Project. The claims
allege that ATC: (i) failed to locate certain asbestos-containing materials
in a high rise building during its inspection of the facility; (ii) failed to
include these undiscovered materials in the design specifications for an
asbestos abatement project in connection with a renovation project on the
building; and (iii) failed to properly clearance inspect and test the areas
on which abatement had been performed prior to demobilization of the asbestos
abatement project. The claimants allege that ATC's acts or omissions resulted
in additional corrective actions including remobilization of certain areas,
delays of the renovation project and exposure of construction workers to
asbestos contamination. R.M. Shoemaker has alleged that it sustained damages
in the amount of $1,500,000 for additional abatement costs plus additional
damages for delay. The workers' exposure claims have not been quantified. No
suit has been filed.

The Company believes that it was not responsible for the alleged problems
on this project. ATC's responsibilities on the project were limited, and ATC
believes that the alleged omissions which allegedly resulted in the alleged
losses were outside the scope of the Company's contractual responsibilities.
The Company has served notice of these claims upon its professional liability
insurer. This coverage is subject to a $250,000 deductible.

Bob Moore Construction/Garden Ridge, Inc. ATC received notice of a claim
arising out of ATC's performance of soil compaction testing for Bob Moore
Construction, Inc., the general contractor on a retaining wall construction
project for Garden Ridge, Inc., a garden supply chain, in Norcross, Georgia.
ATC settled this claim for $88,000 during the three months ended August 31,
1998.

Argosy Casino, Lawrenceburg, Indiana. ATC has received notice of claim
arising out of geotechnical analyses for which American Testing and
Engineering Corporation originally provided the geotechnical analyses and on
which ATC subsequently performed the design of a Tensar/soil stabilized earth
slope. A tentative settlement reached among the parties to this claim would
result in ATC's payment of $266,000 in corrective costs, of which ATC expects
contribution from other parties in an amount of up to $80,000. The Company
has previously recorded a reserve of the minimum expected loss in the
accompanying consolidated balance sheet. Notice of this claim has been made
under ATC's professional liability insurance policy. The professional
liability insurance is subject to a $250,000 deductible.

F-17
<PAGE>

TG Kentucky, Lebanon, Kentucky. The potential claim arises out of a
contract to perform preliminary geotechnical investigations at the TG
Kentucky Facility, Lebanon, Kentucky, for James M. Gray Construction Company
("Gray"). ATC issued geotechnical engineering reports based on its
investigations. Gray alleges that it encountered differing site conditions
from those identified in ATC's geotechnical reports. Gray asserts it could
incur over $500,000 in additional costs to finish the project considering
these alleged unexpected conditions. Allegations have been made against ATC
for costs over budget. ATC believed it performed all services properly and
that it should incur no liability. Notice has been given to ATC's
professional liability insurer. The policy is subject to the $150,000
self-insured retention amount.

Marina Bay Development Group. On October 7, 1998, ATC received a notice of
claim from Marina Bay Development Group, LLC and related parties alleging a
breach of contract and negligence by ATC or its subcontractor in the
performance of geophysical survey and environmental assessment services on a
property in Quincy, Massachusetts. The claimants allege that ATC failed to
disclose the existence of truck washing operations formerly conducted on the
site and that ATC's subcontractor failed to locate an underground storage
tank. The claimants have alleged damages in an amount ranging from $100,000
to $250,000. ATC has entered into settlement negotiations with the claimants.
ATC has served a notice of claim regarding this matter on its professional
liability insurance policy, which is subject to a $150,000 self-insured
retention.

Smith Technology Acquisition Claims. ATC has filed two claims for
recoupment against Smith Technology Corporation ("Smith") arising out of the
Agreement for Sale and Purchase of Business Assets of August 19, 1997,
between ATC and Smith ("the Agreement"). The first claim asserted a
recoupment against the full amount of the $200,000 30-day note and a return
of conditionally assumed liabilities in the total amount of $135,000. These
remedies were asserted to partially recoup a deficiency in the Adjusted
Equity Value as stated on Smith's closing Engineering Division Balance Sheet
from that warranted in the purchase agreement.

On March 27, 1998, ATC asserted a second set of recoupment claims arising
under the Agreement for various value, liability, and loss issues in the
amount of $5,127,859 against the $2,750,000 note payable to Smith which had
been assigned to Chase Manhattan Bank. On April 13, 1998, ATC served a
corrective amendment to this claim asserting an additional claim amount of
$21,475. This resulted in a total claim amount of $5,149,334.

On May 22, 1998, ATC filed notice to Smith and Chase Bank of Smith's
breach of the covenants of the Agreement in failing to turn over $606,604.39
of ATC's cash receipts. Smith and Chase have thus far refused to turn over
these funds on the basis of their allegation that a dispute between Smith and
ATC exists concerning certain payments and recoupment claims under the
Agreement as described above. Although ATC believes it is entitled to these
funds under the Agreement, the release of such funds will not be obtained
without legal action or settlement of the matters in dispute.

On August 21, 1998, ATC filed a claim in the case entitled Plymouth Nine
Hundred, Inc./DE f/k/a BCM Engineers, Inc. of Delaware, Case No. 97-2066
(HSB), U.S. Bankruptcy Court for the District of Delaware, asserting claims
against Smith in the aggregate amount of $5,287,727. Since the filing of this
original claim, status changes in certain of the claim items has reduced the
claim amount to $4,745,906. ATC has made a settlement offer to Smith and
Chase Bank, assignee of the Smith notes, in the amount of $477,913 to resolve
the parties respective claims arising out of the notes, the purchase
agreement and the related joint services agreement. During the three months
ended August 31, 1998, ATC recorded additional reserves relating to the
outstanding disputes and liabilities arising out of the purchase transaction
with a corresponding charge to goodwill.

ATC has recorded reserves which the Company believes are appropriate,
representing actual or estimated losses arising from the above claims, or
revisions to litigation reserves previously established. The ultimate
outcomes of the above matters can not be assured, and accordingly, the actual
costs may differ from recorded estimates.

F-18
<PAGE>

F. 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
--------------- --------------- --------------- ---------------
FISCAL 1999
- -----------

Quarter Ended August 31, 1998
-----------------------------
<S> <C> <C> <C> <C>
Revenues............................. $ 38,485,397 $2,223,417 $ (796,254) $ 39,912,560
Operating income..................... (1,470,525) 149,276 - (1,321,249)
Depreciation and amortization........ 410,068 17,988 - 428,056
Capital expenditures................. 463,581 50,929 - 514,510

Six Months-Ended August 31, 1998
--------------------------------
Revenues............................. $ 76,234,783 $4,948,153 $ (987,462) $ 80,195,474
Operating income..................... 1,188,434 490,302 - 1,678,736
Depreciation and amortization........ 822,519 34,503 - 857,022
Capital expenditures................. 1,135,746 52,036 - 1,187,782

Identifiable Assets as of August 31, 1998 $194,251,387 $5,868,973 $(3,713,869) $196,406,491
-----------------------------------------

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...................... 4,885,372 224,227 - 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
-----------------------------------------
</TABLE>

F-19
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------

RECENT DEVELOPMENTS

During the three months ended August 31, 1998, the Company completed two
acquisitions. On July 31, 1998, ATC acquired certain assets and assumed
certain liabilities of AeroVironmental Environmental Services, Inc. ("AVES");
a southern California provider of engineering and technical consulting
services. On July 10, 1998, ATC acquired certain assets and assumed certain
liabilities of On-Site Technologies, Inc. ("OST"), a remediation engineering
services company headquartered in Hayward, California. AVES and OST reported
revenues of $2.3 million and $1.2 million, respectively for their latest
fiscal years.

Fiscal 1998

Tender Offer and Merger. The Company became a wholly owned subsidiary of
Acquisition Holdings, Inc. ("Holdings") upon the merger of ATC with
Acquisition Corp., a wholly owned subsidiary of Holdings, with ATC being the
surviving corporation (the "Merger"). Acquisition Corp. offered (the "Tender
Offer") and completed the purchase of the issued and outstanding shares of
the Company's Common Stock at a price of $12.00 per share. The Tender Offer
was consummated using the proceeds from the issuance of $100,000,000 of 12%
Senior Subordinated Notes (the "Notes"), borrowings under a new bank credit
facility (the "Bank Credit Facilities") and equity investments in Holdings.
The accompanying financial statements for the Company from February 5, 1998
(the "Successor Period") are attributable to operations of the Company under
the successor ownership of Holdings. The predecessor financial statements,
representing the period prior to February 5, 1998 (the "Predecessor Period"),
relates to the previous ownership of the Company. Prior to the Tender Offer
and Merger, the Company had entered into two separate Severance, Consulting
and Noncompetition Agreements (the "Severance Agreements") with two officers
of the Company. The Severance Agreements provided for the resignation of the
officers upon completion of the Merger and the terms of a non-compete
agreement. The Tender Offer and Merger, issuance of the Notes, execution of
the Bank Credit Facilities and Severance Agreements, are collectively
referred to as the "Transactions".

As a result of the Merger, the consolidated financial statements for the
Successor Period are presented on a different basis of accounting than that
of the Predecessor Period and are therefore not directly comparable.

Through fiscal 1998 the Company acquired twelve businesses since 1993.
Three acquisitions include: (i) the purchase by the Company of all of the
stock of Bing Yen & Associates, Inc. ("Bing Yen") on November 26, 1997; (ii)
the purchase by the Company of substantially all of the stock of
Environmental Warranty, Inc. ("EWI") on November 4, 1997; and (iii) the
purchase by the Company of certain assets and the assumption by the Company
of certain liabilities on August 20, 1997 of the Engineering Division of
Smith Technology Corporation which operated primarily as BCM Engineers Inc.
("BCM").

OVERVIEW

General. ATC is a leading national provider of professional consulting,
engineering and testing services within the environmental and construction
materials industries. Management believes the Company is also a leading
provider of integrated environmental information management technology
services. The Company provides a broad range of services to a diverse client
base of over 8,000 customers. The Company provides its services through a
network of 74 branch offices located in 35 states covering every major market
of the United States.

The Company's rapid growth is primarily attributable to the acquisition of
assets of American Testing and Engineering Corporation ("ATEC") in May 1996
and the acquisition of assets of BCM in August 1997. ATEC, with its large
network of regional and branch offices, positioned the Company as a national
provider of professional environmental consulting, testing and engineering
services. As a result of the BCM acquisition, ATC has become a high-quality
provider of consulting, engineering and design services in water supply and
treatment, wastewater systems, air quality management, traditional
environmental site investigations, site assessments and storage tank
management services. Subsequent to each acquisition that it has made, the
Company has implemented cost reduction measures, including integration of
offices, introduction of flexible staffing programs and reduction of
duplicative corporate overhead costs.

F-20
<PAGE>
RESULTS OF OPERATIONS

Three Months Ended August 31, 1998 Compared with Three Months Ended August
31, 1997
- ------------------------------------------------------------------------------

Revenues in the three months ended August 31, 1998 increased 15.0% to
$39,912,560, compared with $34,722,201 in the three months ended August 31,
1997. This increase was primarily attributable to revenues associated with
the BCM acquisition which was consummated on August 20, 1997 and the
acquisitions of EWI and Bing Yen which were completed in November 1997 and
the acquisition of OST and AVES which were completed in July 1998. The
revenue increases from acquisitions were partially offset by charges to revenues
related to an increased reserve for unbilled receivables at August 31, 1998
and other revenue reductions for estimated cost overruns and billing
adjustments. These charges to revenues were approximately $1.7 million for
the three months ended August 31, 1998. Revenues in the three months ended
August 31, 1998 from ATC's branch offices having comparable operations in the
three months ended August 31, 1997 decreased 3.4% to $32,804,443, compared
with $33,950,934 in the three months ended August 31, 1997. Excluding the
revenue charges of $1.7 million discussed above, revenue from branch offices
having comparable operations increased 1.6% during the quarter ended August
31, 1998. Revenues in the three months ended August 31, 1998 attributable to
the acquisition of BCM totaled $5,560,422. Revenues attributable to the
acquisition of EWI, Bing Yen, OST and AVES totaled $1,547,695 million or 3.9%
of revenues in the three months ended August 31, 1998. Revenues were not
affected by the Transactions.

Reimbursable costs represent direct project expenses billed to
environmental and engineering segment clients. For the three months ended
August 31, 1998, reimbursable costs increased 15.0% to $6,788,950, compared
with $5,905,664 in the three months ended August 31, 1997. Reimbursable costs
as a percentage of revenues remained the same, 17.0% in the three months
ended August 31, 1998 and 1997. Reimbursable costs were not affected by the
Transactions.

Cost of net revenues in the three months ended August 31, 1998 increased
by $3,551,339 or 22.5% to $19,302,401 compared with $15,751,062 in the three
months ended August 31, 1997. Cost of net revenues as a percentage of net
revenues increased to 58.3% in the three months ended August 31, 1998
compared to 54.7% in the three months ended August 31, 1997. The increase in
cost of net revenues as a percentage of net revenues for the three months
ended August 31, 1998 over the prior year's comparable period was principally
impacted by the revenue charges of $1.7 million discussed above and the
Company's sales mix during the three months ended August 31, 1998.

Gross profit in the three months ended August 31, 1998 increased 5.8% to
$13,821,209, compared with $13,065,475 in the three months ended August 31,
1997. Gross margin decreased to 41.7% in the three months ended August 31,
1998, compared to 45.3% in the three months ended August 31,1997. The
reduction in the gross margin percentage of 3.6% for the three months ended
August 31, 1998 was principally caused by the additional reserves recorded
during the period.

Operating expenses in the three months ended August 31, 1998 increased
46.2% to $15,142,458, compared with $10,358,268 in the three months ended
August 31, 1997. Operating expenses increased as a percentage of net revenues
to 45.7% in the three months ended August 31, 1998, compared with 35.9% in
the three months ended August 31, 1997. Employee costs increased 86.0% to
$6,542,134, or 19.8% of net revenues in the three months ended August 31,
1998 compared with $3,517,889, or 12.2% of net revenues, in the three months
ended August 31, 1997. 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 from the growth in operations, increased employee levels and certain
one-time adjustments to other expenses of approximately $1.1 million, a
portion of which related to the relocation of the Company's corporate
administrative group, new accounting system installation and increase in
allowance for doubtful accounts. Additionally, in the three months ended
August 31, 1998, amortization of goodwill and intangibles increased to
$1,362,271, compared with $494,769 in the three months ended August 31, 1997
reflecting the additional goodwill amortization resulting from acquisitions
and the Transactions.

Operating loss in the three months ended August 31, 1998 totaled
($1,321,249) compared with operating income of $2,707,207 in the three months
ended August 31, 1997. Operating income decreased as a percentage of net
revenues to (4.0)% in the three months ended August 31, 1998, compared with
9.4% in the three months ended August 31, 1997.

F-21

<PAGE>

Non-operating expense in the three months ended August 31, 1998
increased to $3,908,176 compared with of $644,168 in the three months ended
August 31, 1997. The increase in non-operating expense is attributable to
increased interest expense related to the 12% Senior Subordinated Notes and
bank debt outstanding during the quarter.

Income tax (benefit) expense in the three months ended August 31, 1998
was $(1,858,000), compared with $815,000 in the three months ended August 31,
1997. During the three months ended August 31, 1998 and 1997, the Company's
effective tax rates were 35.5% and 39.5%, respectively. The lower effective
tax rate for the three months ended August 31, 1998 is due to non deductible
goodwill amortization related to the Transactions.

As a result of the foregoing, the Company incurred a net loss of
$3,371,425 compared with net income of $1,248,039 in the three months ended
August 31, 1997. Net income (loss) decreased as a percentage of net revenues
to (10.2)% in the three months ended August 31, 1998 compared with 4.3% in
the three months ended August 31, 1997.

Six Months Ended August 31, 1998 Compared with Six Months Ended August 31,
1997
- ------------------------------------------------------------------------------
Revenues in the six months ended August 31, 1998 increased 21.3% to
$80,195,474, compared with $66,096,867 in the six months ended August 31,
1997. This increase was primarily attributable to revenues associated with
the BCM acquisition which was consummated on August 20, 1997 and the
acquisitions of EWI and Bing Yen which were completed in November 1997 and
the acquisition of OST and AVES in July and August 1998, respectively.
Revenues for the six months ended August 31, 1998 reflected certain one-time
adjustments to revenue related to unbilled receivables reserves, cost
overruns and billing adjustments. Revenues in the six months ended August 31,
1998 from ATC's branch offices having comparable operations in the six months
ended August 31, 1997 decreased 0.3% (but increased 1.5% after excluding the
revenue charges recorded during the period) to $65,108,290, compared with
$65,325,600 in the six months ended August 31, 1997. Revenues in the six
months ended August 31, 1998 attributable to the acquisition of BCM totaled
$11,893,616. Revenues attributable to the acquisition of EWI, Bing Yen, AVES
and OST totaled $3,193,568 million or 4.0% of revenues in the six months
ended August 31, 1998. Revenues were not affected by the Transactions.

Reimbursable costs represent direct project expenses billed to
environmental and engineering segment clients. For the six months ended
August 31, 1998, reimbursable costs increased 21.2% to $12,558,632, compared
with $10,361,497 in the six months ended August 31, 1997. Reimbursable costs
as a percentage of revenues remained the same, 15.7% for the six months ended
August 31, 1998 and 1997. Reimbursable costs were not affected by the
Transactions.

Cost of net revenues in the six months ended August 31, 1998 increased
by $7,708,624 or 25.3% to $38,121,307 compared with $30,412,683 in the six
months ended August 31, 1997. Cost of net revenues as a percentage of net
revenues increased to 56.4% in the six months ended August 31, 1998 compared
to 54.6% in the six months ended August 31, 1997.

Gross profit in the six months ended August 31, 1998 increased 16.6% to
$29,515,535, compared with $25,322,687 in the six months ended August 31,
1997. Gross margin decreased to 43.6% in the six months ended August 31, 1998
compared to 45.4% in the six months ended August 31, 1997. The decrease in
gross profit percentage was principally impacted by both one-time adjustments
to revenue and the Company's sales mix during the 1998 six month period.

Operating expenses in the six months ended August 31, 1998 increased
37.7% to $27,836,799, compared with $20,213,038 in the six months ended
August 31, 1997. Operating expenses increased as a percentage of net revenues
to 41.2% in the six months ended August 31, 1998, compared with 36.3% in the
six months ended August 31, 1997. Employee costs increased 38.7% to
$12,469,775, or 18.4% of net revenues, in the six months ended August 31,
1998 compared with $8,992,507, or 16.1% of net revenues, in the six months
ended August 31, 1997. 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 and increase allowance for doubtful accounts. Additionally, in the six
months ended August 31, 1998, amortization of goodwill and intangibles
increased to $2,682,377, compared with $920,368 in the six months ended
August 31, 1997 reflecting the additional goodwill amortization resulting
from acquisitions and the Transactions.

Operating income in the six months ended August 31, 1998 decreased 67.1%
to $1,678,736 compared with $5,109,649 in the six months ended August 31,
1997. Operating income decreased as a percentage of net revenues to 2.5% in
the six months ended August 31, 1998, compared with 9.2% in the six months
ended August 31, 1997.

F-22
<PAGE>

Non-operating expense in the six months ended August 31, 1998 increased
to $7,696,672 compared with of $1,100,294 in the six months ended August 31,
1997. The increase in non-operating expense is attributable to increased
interest expense related to the 12% Senior Subordinated Notes and bank debt
outstanding during the period.

Income tax (benefit) expense in the six months ended August 31, 1998 was
$(1,944,000), compared with $1,585,000 in the six months ended August 31,
1997. During the six months ended August 31, 1998 and 1997, the Company's
effective tax rates were 32.3% and 39.5%, respectively. The lower effective
tax rate for the six months ended August 31, 1998 is due to non deductible
goodwill amortization related to the Transactions.

As a result of the foregoing, the Company incurred a net loss of
$4,073,936 compared with net income of $2,424,355 in the six months ended
August 31, 1997. Net income (loss) decreased as a percentage of net revenues
to (6.0)% in the six months ended August 31, 1998 compared with 4.3% in the
six months ended August 31, 1997.

SEASONALITY

ATC typically experiences a slow down in business activities during the
winter months and an increase in business activities during the summer
months. This is due to seasonal fluctuations in construction and remediation
activities. As a result, operating results may vary from period to period.
For fiscal 1998, comparable quarterly revenues as a percentage of relevant
annual revenues were 24.6%, 26.6%, 25.0% and 23.8%.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of liquidity are cash flow from
operations and available borrowings under a Revolving Credit Facility
established under the Bank Credit Facilities. The Revolving Credit Facility
of $30.0 million provides the Company with an aggregate of up to $15.0
million of senior secured financing to be used for working capital and
general corporate purposes with $15.0 million available for permitted
acquisitions. It is expected that the Company's principal uses of liquidity
will be to provide working capital, finance capital expenditures, fund costs
associated with acquisitions and meet debt service requirements. As a result
of the consummation of the Transactions, the Company is highly leveraged.
Except to the extent set forth below, there will be no mandatory payments of
principal on the Notes scheduled prior to their maturity. Based upon current
operations, anticipated cost savings and future growth, the Company believes
that its cash flow from operations, together with existing cash balances),
available borrowings under the Revolving Credit Facility and receipt of
approximately $4 million in income tax refunds will be adequate to meet its
anticipated requirements for working capital, capital expenditures and
scheduled principal and interest payments, although the Company believes that
its ability to repay the Notes and amounts outstanding under its Bank Credit
Facilities at maturity will require additional financing. There can be no
assurance, however, that any such additional financing will be available at
such time to the Company, or that any such available financing will be on
terms favorable to the Company. Furthermore, there can be no assurance that
the Company's business will continue to generate cash flow at or above
current levels or that estimated cost savings or growth can be achieved.

The Notes impose certain limitations on the ability of the Company and
its subsidiaries to, among other things, incur additional indebtedness, incur
liens, pay dividends or make certain other restricted payments, consummate
certain asset sales, enter into certain transactions with affiliates, issue
preferred stock, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
the assets of the Company and its subsidiaries. In addition, the New Credit
Facility contains other and more restrictive covenants effectively
prohibiting the Company from prepaying the Notes. The Bank Credit Facility
also requires the Company to maintain specified financial ratios and satisfy
certain financial tests. The Company's ability to meet such financial ratios
and tests may be affected by events beyond its control; there can be no
assurance that the Company will be able to meet such tests.

F-23
<PAGE>

For the quarters ended May 31, 1998 and August 31, 1998, the Company was
in default of certain financial covenants. The Company's lenders have
provided an interim waiver with respect to the defaults. Under the waiver,
the Company has approximately $5.1 million of availability under its
revolving line of credit as of October 20, 1998.

The Company conducts part of its operations through its subsidiaries. As
a result, the Company relies, in part, upon payment from its subsidiaries for
the funds necessary to meet its obligations, including the payment of
interest on and principal of the Notes. The ability of the subsidiaries to
make such payments will be subject to, among other things, applicable state
laws. Claims of creditors of the Company's subsidiaries will generally have
priority as to the assets of such subsidiaries over the claims of the Company.

The Company has historically financed its operations through internally
generated funds, public and private equity and debt financings and borrowings
under its credit facilities. As of August 31, 1998, working capital was $24.7
million, compared with working capital of $29.4 million at February 28, 1998,
an increase of $4.7 million. The decrease in working capital was primarily
due to allowances for doubtful accounts and unbilled receivables reserve,
increased litigation reserves and expenditures relating to the Transactions.
As a result of the Tender Offer and Merger and the Company's prior
acquisitions, the Company has a negative tangible net worth, primarily as a
result of goodwill amounts recognized in connection with these transactions.

During the six months ended August 31, 1998, net cash flows used in
operating activities were $1,204,308 primarily due to operating income offset
by interest expense on the 12% Senior Subordinated Notes, the Bank Term Loan
and the Revolving Credit Facility. Net cash flows used in investing
activities were $952,672, resulting from purchases of property and equipment,
the acquisition of OST and AVE less the proceeds from the sale of certain
assets relating to a laboratory operation. Net cash flows used by financing
activities were $1,998,698, primarily representing payments of Tender Offer
obligations and net bank borrowings under the Company's Revolving Credit
Facility.

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. 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 the Senior Secured Notes
less repayment of outstanding bank debt and a bank borrowing of $5,500,000
made in connection with the BCM acquisition.

QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES

The market risk exposure inherent in the Company's financial instruments
and consolidated financial position represents the potential losses arising
from adverse changes in interest rates. The Company is exposed to such
interest rate risk primarily in the use of fixed and variable rate debt.

The Company utilizes both fixed and variable rate debt to fund its
operations. At August 31, 1998, the carrying value and estimated fair value
of the Company's fixed rate debt was approximately $101.9 million. The
Company also had approximately $31.6 million of variable rate borrowings
outstanding, which amount approximated fair value. Market risk for the fixed
rate borrowings is estimated as the potential change in the fair value of the
debt resulting from a hypothetical 10% adverse change in interest rates, which
would have approximated $5.4 million at August 31, 1998. The effect of a
similar hypothetical change in interest rates on the Company's variable rate
debt would have had a negative impact on the Company's consolidated interest
expense of approximately $85,000 for the quarter ended August 31, 1998.

For additional information about the Company's financial instruments, see
Notes to Consolidated Financial Statements in the Company's annual report on
Form 10-K for the year ended February 28, 1998.

INFORMATION SYSTEMS AND THE YEAR 2000

The Company is in the process of addressing Year 2000 issues. The Company
is currently engaged in a comprehensive project to convert its accounting and
management information system to a system consisting of new hardware and
packaged software recently purchased from a large vendor who has represented
that these systems are Year 2000 compliant. The Company's information
technology segment, which provides information system support services to
both the Company and the Company's clients, is currently operating on systems
that are Year 2000 compliant. ATC's remaining operations are generally
dependent only on personal computers and off-the-shelf commercial word
processing, drafting, spreadsheet and engineering software. Year 2000
compliant versions of these systems are currently available, and the Company
will convert to these compliant systems over the next year and a half as the
Company upgrades its operational personal computer systems in the ordinary
course to the most recently issued software releases.

F-24
<PAGE>

PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS:

LITIGATION--Joseph I. Peters v. George Rubin, et al, Civ. Action No.
16026-NC, Court of Chancery, New Castle County, Delaware. On or about
November 12, 1997, a summons and complaint were filed in the Delaware Court
on behalf of Joseph I. Peters, as plaintiff. On or about December 18, 1997,
an amended complaint was filed (the "Amended Complaint"). The Amended
Complaint names the Company, the members of the Company's board of directors,
Weiss, Peck & Greer ("Weiss Peck") and the WPG Corporate Development
Associates V, L.P., a Weiss Peck affiliate, as defendants. The Amended
Complaint challenges the Tender Offer and Merger. The Amended Complaint seeks
class action status on behalf of the stockholders of the Company. The
plaintiff in the action claims that the offer price for the Company's Common
Stock is inadequate and that the defendants have breached their fiduciary
duties to the plaintiff and other stockholders of the Company. The plaintiff
seeks unspecified damages. On January 7, 1998, a motion to dismiss was filed
by Weiss Peck and WPG Corporate Development Associates V, L.P. On January 13,
1998, answers to the complaint were filed by the Company and the remaining
defendants. The parties to the action are currently conducting discovery. The
Company believes the allegations contained in the Amended Complaint are
without merit and intends to defend the action vigorously.

ITEM 2. CHANGES IN SECURITIES:
Not Applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES:

For the quarters ended May 31, 1998 and August 31, 1998, the Company
was in default of certain financial covenants. The Company's lenders
have provided an interim waiver with respect to the defaults. Under the
waiver, the Company has approximately $5.1 million of availability under
its revolving line of credit as of October 20, 1998.

The Company is in discussion with its lenders and believes the
covenant provisions of the credit agreement will be amended.
Accordingly, the Company continues to classify its outstanding debt as
long term in accordance with the existing loan maturity dates. The final
classification of the Company's outstanding bank debt and 12% Senior
Secured Notes, will be in accordance with the terms of any final credit
agreement.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not Applicable

ITEM 5. OTHER INFORMATION:
On September 22, 1998, Ron H. Danenberg, a principal at Weiss, Peck
& Greer and a director of the Company was named Chairman of the Board of
Directors and replaced Nick Malino as ATC's Chief Executive Officer, Mr.
Danenberg will serve as Interim Chief Executive Officer pending the
appointment of a permanent Chief Executive Officer. Chris Vincze, ATC's
Chief Operating Officer and Paul Grillo, the Company's Chief Financial
Officer, will report to Mr. Danenberg.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
Not applicable

(b) Reports on Form 8-K:
Not Applicable

F-26
<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 20, 1998 /s/ Christopher Vincze
- ----------------------- -----------------------------------
Christopher Vincze
Executive Vice President and
Chief Operations Officer
(Principal Operating Officer)

Dated: October 20, 1998 /s/ Paul Grillo
- ----------------------- -----------------------------------
Paul Grillo
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

Dated: October 20, 1998 /s/ Rachel Trant
- ----------------------- -----------------------------------
Rachel Trant
Controller
(Principal Accounting Officer)

F-27

<PAGE>
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<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 1,113,030
<SECURITIES> 0
<RECEIVABLES> 51,138,595
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