<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 NOVEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-10583
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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 January 14, 1999 was 1,000.
ATC GROUP SERVICES INC. AND SUBSIDIARIES
<PAGE>
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION:
<S> <C>
Item 1 - Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
February 28, 1998 and November 30, 1998............................. F-3
Condensed Consolidated Statements of Operations
Three and Nine months ended November 30, 1997 and 1998.............. F-4
Condensed Consolidated Statements of Stockholders' Equity
Nine months ended November 30, 1997 and 1998........................ F-5
Condensed Consolidated Statements of Cash Flows
Nine months ended November 30, 1997 and 1998........................ F-6
Notes to Condensed Consolidated Financial Statements................ 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 NOVEMBER 30, 1998
(DOLLARS IN THOUSANDS, except per share data)
------------------------------------------------------------------
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
1998 1998
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 5,269 $1,412
Trade accounts receivable, less allowance for doubtful
accounts ($3,078 at February 28, 1998 and $5,559 at
November 30,1998)........................................ 39,934 45,373
Unbilled receivables, net of reserve..................... 10,196 7,940
Prepaid expenses and other current assets................ 2,423 1,111
Deferred income taxes.................................... 2,041 2,041
Refundable income taxes.................................. 4,233 2,832
----------------- ----------------
Total current assets............................... 64,096 60,709
PROPERTY AND EQUIPMENT, net (Note C) ....................... 5,794 5,994
GOODWILL, net of accumulated amortization ($3,261 at
February 28, 1998 and $5,832 at November 30,1998)(Note B) 106,829 112,566
COVENANTS NOT TO COMPETE, net of accumulated amortization
($775 at February 28,1998 and $2,078 at November 30,1998)
(Note B) ................................................ 5,163 3,920
DEBT ISSUANCE COSTS, net of accumulated amortization ($108
at February 28, 1998 and $843 at November 30, 1998) 5,808 6,533
(Note B)
OTHER ASSETS................................................ 1,365 3,800
----------------- ----------------
$189,055 $193,522
----------------- ----------------
----------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt.......................................... $300 $530
Current maturities of long-term debt..................... 1,421 3,000
Accounts payable......................................... 7,738 13,001
Accrued compensation..................................... 5,097 6,247
Tender Offer liability (Note B) ......................... 14,279 2,741
Accrued interest expense................................. 1,266 5,184
Other accrued expenses................................... 4,554 8,462
----------------- ----------------
Total current liabilities............................ 34,655 39,165
LONG-TERM DEBT, less current maturities (Note B) ........... 120,420 127,614
OTHER LIABILITIES, including non-current payment obligations
(Note B) ................................................ 2,737 1,608
DEFERRED INCOME TAXES....................................... 4,607 4,607
----------------- ----------------
Total liabilities.................................... 162,419 172,994
----------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
COMMITMENTS AND CONTINGENCIES (Notes B and E) 1998 1998
<S> <C> <C>
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share/authorized 10,000
Shares; issued and outstanding 1,000 shares at February -- --
28, 1998 and November 30, 1998...........................
Additional paid-in capital............................... 28,425 28,425
Holdings restricted Common Stock net of deferred
executive compensation................................... -- 153
Deficit.................................................. (1,789) (8,050)
---------------- ----------------
Total stockholders' equity........................... 26,636 20,528
---------------- ----------------
$189,055 $193,522
---------------- ----------------
---------------- ----------------
</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 NINE MONTHS ENDED NOVEMBER 30, 1997 AND 1998
(Dollars in thousands)
-----------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
---------------- - --------------- ---------------- --- -------------
Predecessor Successor Predecessor Successor
1997 1998 1997 1998
---------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
REVENUES $ 38,167 $41,316 $104,263 $121,511
Reimbursable Costs 5,513 7,725 15,874 20,283
---------------- --------------- ---------------- -------------
NET REVENUES 32,654 33,591 88,389 101,228
COST OF NET REVENUES 17,528 18,661 47,941 56,782
---------------- --------------- ---------------- -------------
Gross Profit 15,126 14,930 40,448 44,446
OPERATING EXPENSES:
Selling 1,187 1,475 3,226 4,361
General and administration 10,648 12,267 28,077 36,138
Provision for bad debts 416 461 1,161 1,542
---------------- --------------- ---------------- -------------
12,251 14,203 32,464 42,041
---------------- --------------- ---------------- -------------
Operating income 2,875 727 7,984 2,405
NONOPERATING EXPENSE (INCOME)
Interest expense 902 3,976 2,163 11,680
Interest income (16) (4) (165) (11)
Other (32) -- (44) --
---------------- --------------- ---------------- -------------
854 3,972 1,954 11,669
---------------- --------------- ---------------- -------------
Income (loss) before income taxes 2,021 (3,245) 6,030 (9,264)
INCOME TAX EXPENSE (BENEFIT) 841 (1,059) 2,426 (3,003)
---------------- --------------- ---------------- -------------
NET INCOME (LOSS) $1,180 $(2,186) $3,604 $(6,261)
---------------- --------------- ---------------- -------------
---------------- --------------- ---------------- -------------
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED NOVEMBER 30, 1997 AND 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------------------
Holdings
Common Stock Additional Restricted Retained
------------------------
Pain-In Stock- Earnings/
Shares Amount Capital Net (Deficit) Total
------------- -------------------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, February 28, 1997..... 7,800,187 $78 $28,997 -- $16,365 $45,440
Sale of common stock at $1.88 to $10.00
per share, upon exercise of stock options
and warrants...........................
96,920 1 289 -- -- 290
Issuance of common stock in connection
with the acquisition of Bing Yen &
Associates, Inc......... 33,000 -- 365 -- -- 365
Continuing registration costs applied
against additional paid-in
capital............................ -- -- (55) -- -- (55)
Net income of predecessor......... -- -- -- -- 3,604 3,604
------------- ------------------------- -------------- --------------- ---------------
BALANCE, November 30, 1997......... 7,930,107 $79 $29,596 $ -- $19,969 $49,644
------------- ------------------------- -------------- --------------- ---------------
------------- ------------------------- -------------- --------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------------------
Holdings
Common Stock Additional Restricted
------------------------
Pain-In Stock-
Shares Amount Capital Net Deficit Total
------------- -------------------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
BALANCE, February 28, 1998......... 1,000 -- $28,425 -- $ (1,789) $ 26,636
Amortization of deferred
compensation costs.............. -- -- -- 153 -- 153
Net loss of successor.............. -- -- -- -- (6,261) (6,261)
------------- ------------------------- -------------- --------------- ---------------
BALANCE, November 30, 1998......... 1,000 -- $ 28,425 $153 $(8,050) $20,528
------------- ------------------------- -------------- --------------- ---------------
------------- ------------------------- -------------- --------------- ---------------
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NOVEMBER 30, 1997 AND 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
November 30,
---------------------------------------
Predecessor Successor
1997 1998
------------------- ----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... $3,604 $(6,261)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and leasehold amortization.............. 889 1,287
Amortization of goodwill and covenants............... 1,392 4,124
Provision for bad debts.............................. 1,160 1,542
Other................................................ (2,230) (581)
Changes in operating assets and liabilities, net of Amounts acquired in
acquisitions:
Receivables...................................... (2,725) (7,742)
Prepaid expenses and other assets................ 1,991 (1,123)
Accounts payable and other liabilities........... (6,514) 8,595
Income taxes payable............................. 888 --
Refundable income taxes.......................... -- 1,401
------------------- ----------------
Net cash flows from operating activities............. (1,545) 1,242
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of On-Site Technologies, Inc. .............. -- (59)
Purchase of Aerovironment Environmental Services,Inc. -- (100)
Purchase of BCM Engineers, Inc. ..................... (5,425) --
Purchase of American Testing and Engineering Corp.,
net of cash acquired................................. (2,421) --
Purchase of Bing Yen & Assoc., net of cash acquired.. (2,093) --
Purchase of Environment Warranty Inc., net of cash
Acquired............................................. 19 --
Purchase of property and equipment................... (1,503) (1,670)
Other................................................ 92 392
------------------- ----------------
Net cash flows from investing activities............... (11,331) (1,435)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt and
Notes payable........................................ 41,100 9,003
Proceeds from issuance of common stock, net of
Expenses............................................. 290 --
Payment of Tender Offer obligations.................. -- (12,667)
Principal payments on long-term debt and notes
Payable.............................................. (24,623) --
Other capital transactions........................... (55) --
------------------- ----------------
Net cash flows from financing activities............. 16,712 (3,664)
------------------- ----------------
Net change in cash and cash equivalents.............. 3,836 (3,857)
CASH AND CASH EQUIVALENTS, Beginning of period 2,004 5,269
------------------- ----------------
CASH AND CASH EQUIVALENTS, End of period $5,840 $1,412
------------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest........................................... $745 $7,111
------------------- ----------------
------------------- ----------------
Income taxes....................................... $1,753 $214
------------------- ----------------
------------------- ----------------
</TABLE>
See notes to condensed consolidated financial statements.
F-6
<PAGE>
ATC GROUP SERVICES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED NOVEMBER 30, 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-consolidated
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. The Severance Agreements also provide for the
Company to pay to the Stockholders a quarterly payment of $553,430 on each of
the six succeeding quarters commencing April 1, 1998. The Company has not
made the January 1, 1999 payment of $553,430 due under the Severance Agreements.
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 purchase price allocation
was preliminary, pending completion of appraisal and other
information-gathering activities.
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>
<CAPTION>
<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 of
Tender Offer obligation at November 30, 1998
was $2,741,110)............................................. 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>
Adjustments to goodwill have been recorded by the Company in fiscal 1999
related to the finalization of amounts to be allocated to a certain business
venture and estimated costs to settle certain litigation which was
outstanding at the date of the Transactions. Predecessor management was
contesting certain matters with the belief that they would prevail and any
adverse outcome would not be significant to the predecessor's financial
position or results of operations. The new owners of the Company have
directed successor management to use its best efforts to settle certain
litigation and due to this change in approach, the company has recorded its
best estimate of the expected costs. Should such estimate be in excess of
amounts ultimately paid, goodwill will be reduced in future periods.
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 less amount related to debt
issuances................................................. 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 condensed 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 condensed consolidated
statements of operations. The preliminary purchase price allocation is
subject to change when additional information concerning asset and liability
valuations is obtained. Therefore, the final allocation may differ 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 $642,000, $100,000 of which was cash
paid at closing, $312,000 in assumed liabilities and transaction costs, and
$230,000 in a non-interest 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>
<CAPTION>
<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.
During the quarter ended November 30, 1998, Bing Yen achieved the minimum
net revenue levels required to earn the $1,500,000 in contingent achievement
promissory notes. The Company has not paid the initial installment of
$354,371, net of setoffs, on the notes payable due January 4, 1999 and the
initial payment of $750,000 under the contingent achievement promissory notes
due January 4, 1999.
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.
<PAGE>
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:
(Dollars in thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
---------------------------------------- --------------------------------------
1997 1998 1997 1998
--------------------- --------------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenues $39,181 $ 41,316 $123,453 $ 121,511
Operating Income 2,366 727 6,071 2,405
Net income (loss) (898) (2,186) (2,987) (6,261)
</TABLE>
F-12
<PAGE>
C. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
(Dollars in thousands)
<TABLE>
<CAPTION>
FEBRUARY 28, 1998 NOVEMBER 30, 1998
-------------------- --------------------
<S> <C> <C>
Office equipment $ 5,345 $6,464
Laboratory and field equipment 3,968 3,904
Transportation equipment 582 593
Leasehold improvements 1,112 1,145
-------------------- --------------------
11,007 12,106
Less accumulated depreciation (5,213) (6,112)
-------------------- --------------------
Property and Equipment, net $ 5,794 $5,994
-------------------- --------------------
-------------------- --------------------
</TABLE>
D. DEBT AND CREDIT AGREEMENTS
BANK CREDIT FACILITIES--On January 29, 1998, a credit facility with
variouslending 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").
On October 30, 1998, the Revolving Credit Facility available to the Company
for working capital and general corporate purposes was reduced from the original
$15 million to $13 million, with $15 million 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, August 31, 1998 and November 30,
1998, the Company was in default of certain financial covenants. The
Company's lenders had provided an interim waiver with respect to the defaults
which waiver expired on December 4, 1998. Due to the expiration of the waiver
on December 4, 1998, the Company is unable to borrow any additional amounts
under the Revolving Credit Agreement. The total amount outstanding under the
Revolving Credit Agreement at January 14, 1999 approximates $11.7 million.
F-13
<PAGE>
The Company is in discussion with its lenders and believes the covenant
provisions of the credit agreement, among other items, will be amended.
Accordingly, the Company continues to classify its outstanding debt as long term
in accordance with the existing loan maturity dates.
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 the indenture dated as of
January 29, 1998 between Acquisition Corp. and State Street Bank and Trust
Company (the "Indenture") 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 in the Indenture), 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. 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 Indenture. The Indenture provides noteholders the
option to have their notes purchased in the event of a change in control. In
addition, the 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.
The Company will be unable to make the interest payment due on January 15,
1999 on the Notes. The Company is unable to make the interest payment for two
reasons. The Company's cash flow is insufficient. In addition, as a result of a
payment default with respect to certain Senior Indebtedness as defined in the
Indenture dated as of January 29, 1998 between Acquisition Corp. and State
Street Bank and Trust Company (the "Indenture"), the Company is prohibited,
pursuant to the terms of the Indenture, from making any payments on the Notes
until the payment default is cured or waived. The payment default stems from the
failure to pay on January 4, 1999 $1.1 million owing with respect to certain
seller notes issued in connection with the acquisition by the Company of Bing
Yen & Associates, Inc. in November 1997.
The Company is in the process of retaining Houlihan Lokey Howard & Zukin
Capital, investment bankers ("Houlihan Lokey"). Houlihan Lokey is expected to
review the Company's financial position, cash flow requirements, financial
history, operations, competitive environment and assets to assist the Company
in developing a business plan which will serve as the basis in determining
its various financial alternatives, and ultimately the proposed terms of a
comprehensive financial restructuring. In doing so, Houlihan Lokey is
expected to work with the Company's senior management to complete, and review
the Company's new business plan. Once the review of the Company is begun, a
proposed timetable is expected to be communicated to the holders of the Notes.
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. ATC filed a motion for Summary Judgement on the Federal
Court claims. This motion was heard on January 8, 1999 and the Court dismissed
the Plaintiff's state and federal securities fraud claims and common law fraud
claims and reserved judgement on the other counts. The dual forum litigation
does not create a risk of double recovery.
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.
Notice of this claim 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.
Barrett-Moeller et al. v. ATC Associates Inc., Civ. Action No. 97-01037D,
Superior Court of Middlesex County, Massachusetts and Joan Spencer v. TLT
Construction et al., Civ. Action No. 97-4161C, Superior Court of Middlesex
County, Massachusetts . These actions arise out of the same set of
occurrences as gave rise to Commonwealth of Massachusetts v. TLT
Construction, Corp. described above. One action( Barrett-Moeller) 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 other action (Spencer)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. Both suits seeks damages for
personal injury in an unspecified amount. ATC, AIG ( our insurer) and the
manufacturer-defendant, Pecora, reached settlement with the Barrett-Moeller
and Spencer plaintiffs in January of 1999. As a result of this settlement,
ATC has expended its deductible portion for these claims and AIG will now
assume the defense of the Commonwealth of Massachusetts claim.
Cambridge Housing Authority v. CON-TEST, Inc. and ATC Group Services Inc., Civil
Action No. MICV 97-04893, Superior Court of Middlesex County, Massachusetts.
This action was brought on October 1, 1997 for damages in the amount of
$3,381,805 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 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. Con-Test's insurance company made an offer to settle
for $460,001 alleging that their damage expert had determined this sum was the
amount of actual damages incurred by Cambridge Housing Authority. Cambridge
Housing Authority rejected the offer and countered with $2,150,000 as a
settlement figure.
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 parties to this suit have reached a
settlement effective December 19, 1998.
F-15
<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 $207,310. Plaintiff has offered to settle this matter for $103,655.
ATC is currently engaged in settlement discussions with plaintiff and is
reviewing their offer to settle. 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., Case 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. The default judgment against ATC was vacated on November 5, 1998,
and the case has been settled between all parties involved.
QST Environmental Inc. v. ATC Group Services Inc. and Environmental Warranty
Inc.("EWI"), Case No. 98-421, Circuit Court of the Tenth Judicial Circuit,
Peoria County, Ilinois. This action was brought on December 4, 1998 and alleges
that ATC and its subsidiary, EWI, violated the Illinois Trade Secrets Act as
well as committed common law conversion. The claim arises out of ATC's
submission of a proposal to remediate a parcel of property in the City of Olney,
Illinois and EWI's underwriting of a policy to insure the parcel. Plaintiff
alleges that the ATC and EWI used their proprietary data and information in this
transaction. Notice of this claim has been made under both ATC's and EWI's
professional liability and commercial liability insurance policy.
Borough of Kane Authority v. BCM Engineers, Inc. a Division of ATC Group
Services Inc., et al., Case No. 1074 CD 1998, Court of Common Pleas of McKean
County, Pennsylvania. This action was filed on October 22, 1998 and arises
out of an alleged breach of warranty, breach of contract and professional
negligence by Smith Technology Corporation ("Smith") in a design project at a
wastewater treatment facility for the Borough of Kane. ATC did not purchase
this contract in the Smith Transaction and is wrongly named in the case as a
successor. The Company believes the case against ATC is without merit because
ATC was not involved in the project and the contract in question was not
assumed by ATC in the Smith transaction. ATC has filed a notice of claim with
Smith's professional liability carrier as well as ATC's carrier. This claim
is subject to a $150,000 self insured retention.
Morry F. Rubin and George Rubin v. ATC Group Services Inc. (Index No.
600130/99), Supreme Court of the State of New York County of New York. This
action was brought on January 11, 1999 by Morry Rubin and George Rubin and
seeks damages of $553,430 in connection with the failure by the Company to
pay amounts owed the Rubins on January 1, 1999 pursuant to a Severance,
Consulting and Non Competition Agreement entered into by the Company with
each of Morry Rubin and George Rubin.
F-16
<PAGE>
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
reduced amount of $883,955 for additional abatement costs plus additional
damages for delay. The workers' exposure claims have not been quantified. ATC
has been engaged in settlement discussions with RM Shoemaker. 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. ATC is currently negotiating
with the Subcontractor for contribution toward this settlement. 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.
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. Gray has
not pursued ATC any further on this matter. Notice has been given to ATC's
professional liability insurer. The policy is subject to the $150,000
self-insured retention amount.
F-17
<PAGE>
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
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, to resolve the parties respective claims
arising out of the notes, the purchase agreement and the related joint services
agreement. The general terms of the settlement are as follows:
ATC pays $264,346 to Smith to satisfy its obligation for the joint services
costs and ATC is released from any further liability for joint services. ATC
releases its claim to the $606,604.39 held by Chase in the Smith lock box. Chase
and Smith agree to release ATC from any obligations under the notes. The payment
obligations are contingent on ATC receiving a channeling order to protect ATC
from claims from Smith's creditors. In addition, the court would issue an order
declaring that ATC is not a successor to Smith. ATC would also gain the ability
to pursue Smith's rights against third parties who have committed acts that
resulted in losses that ATC had to pay on behalf of Smith. The parties are in
the process of negotiating a stipulation that will address the settlement terms.
There are several non-litigation matters and potential claims that arise out of
Smith's performance of services or Smith's business prior to the Sale Agreement
which are non-assumed liabilities. In general these relate to performance or
business errors by Smith that require ATC to perform corrective services to
preserve a client relationship under a Smith assumed contract. These potential
costs were factored into the decision to settle with Smith and Chase. The terms
of the settlement will allow ATC several avenues to minimize losses incurred in
resolving these Smith related non-litigation, potential claims.
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:
(Dollars in thousands)
<TABLE>
<CAPTION>
Environmental Information Adjustments &
& Engineering Technology Eliminations Total
------------------ ---------------- ----------------- ------------------
<S> <C> <C> <C> <C>
FISCAL 1999
Quarter Ended November 30, 1998
Revenues........................ $ 39,142 $2,249 $ (75) $ 41,316
Operating income................ 656 72 -- 727
Depreciation and amortization... 1,809 63 -- 1,872
Capital expenditures............ 470 12 -- 482
Nine Months Ended November 30, 1998
Revenues........................ $115,376 $7,197 $(1,062) $121,511
Operating income................ 1,845 560 -- 2,405
Depreciation and amortization... 5,229 182 5,411
Capital Expenditures............ 1,606 64 1,670
Identifiable Assets as of November 30,
1998............................... $191,188 $5,749 $(3,415) $193,522
FISCAL 1998
Quarter Ended November 30, 1997
Revenues........................ $ 35,874 $2,293 $ -- $ 38,167
Operating income................ 2,723 152 -- 2,875
Depreciation and amortization... 845 12 -- 857
Capital expenditures............ 820 15 -- 835
Nine Months Ended November 30, 1997
Revenues........................ $98,086 $6,480 $ (303) $104,263
Operating income................ 7,608 376 -- 7,984
Depreciation and amortization... 2,249 32 -- 2,281
Capital expenditures............ 1,447 56 -- 1,503
Identifiable Assets as of November
30, 1997........................... $114,456 $5,760 $(2,671) $117,545
</TABLE>
F-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
The Company is currently in default under its Bank Credit Facilities. In
addition, the Company will be unable to make the $6.0 million interest payment
due on January 15, 1999 on the Notes. The Company is unable to make the interest
payment for two reasons. The Company's cash flow is insufficient. In addition,
as a result of a payment default with respect to certain Senior Indebtedness as
defined in the Indenture dated as of January 29, 1998 between Acquisition Corp.
and State Street Bank and Trust Company (the "Indenture"), the Company is
prohibited, pursuant to the terms of the Indenture, from making any payments on
the Notes until the payment default is cured or waived. The payment default
stems from the failure to pay on January 4, 1999 $1.1 million owing with respect
to certain seller notes issued in connection with the acquisition by the Company
of Bing Yen & Associates, Inc. in November 1997. In addition, on January 1,
1999, the Company failed to pay $553,430 owed to Morry Rubin and George Rubin,
pursuant to the Severance Agreements described below. On January 11, 1999 the
Rubins filed suit against the Company in New York Supreme Court seeking $553,430
in damages as a result of this failure to pay.
During the nine months ended November 30, 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
condensed consolidated 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 condensed
consolidated financial statements, representing the period prior to February 5,
1998 (the "Predecessor Period"), relate 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
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 duplicate corporate overhead costs.
F-20
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended November 30, 1998 Compared with Three Months Ended November
30, 1997
Revenues in the three months ended November 30, 1998 increased 8.3% to $41.3
million, compared with $38.2 million in the three months ended November 30,
1997. This increase was primarily attributable to revenues associated with the
acquisitions of EWI and Bing Yen which were completed in November 1997 and the
acquisitions of OST and AVES which were completed in July 1998. Revenues in the
three months ended November 30, 1998 attributable to the acquisitions of EWI,
Bing Yen, OST and AVES totaled $1.6 million or 3.9% of revenues in the three
months ended November 30, 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
November 30, 1998, reimbursable costs increased 40.1% to $7.7 million
compared with $5.5 million in the three months ended November 30, 1997.
Reimbursable costs as a percentage of revenues increased to 18.7% in the
three months ended November 30, 1998 from 14.4% in the comparable prior year
period, principally due to changes in Sales mix, which required increased use
of various subcontractor services in the 1998 period. Reimbursable costs were
not affected by the Transactions.
Cost of net revenues in the three months ended November 30, 1998 increased
by $1.2 million or 6.5% to $18.7 million compared with $17.5 million in the
three months ended November 30, 1997. Cost of net revenues as a percentage of
net revenues increased to 55.6% in the three months ended November 30, 1998
compared to 53.7% in the three months ended November 30, 1997. The increase in
cost of net revenues as a percentage of net revenues for the three months ended
November 30, 1998 over the prior year's comparable period was principally
impacted by the Company's Sales mix during the three months ended November 30,
1998.
Gross profit in the three months ended November 30, 1998 decreased 1.3% to
$14.9 million, compared with $15.1 million in the three months ended November
30, 1997. Gross margin decreased to 44.4% in the three months ended November 30,
1998, compared to 46.3% in the three months ended November 30,1997. The
reduction in the gross margin percentage of 1.9% for the three months ended
November 30, 1998 was principally caused by the Company's Sales mix during the
three months ended November 30, 1998.
Operating expenses in the three months ended November 30, 1998 increased
15.9% to $14.2 million, compared with $12.3 million in the three months ended
November 30, 1997. Operating expenses increased as a percentage of net
revenues to 42.3% in the three months ended November 30, 1998, compared with
37.5% in the three months ended November 30, 1997. The increase in operating
expenses was attributable to an increase in Employee costs. Employee costs
increased 16.1% to $6.5 million, or 19.4% of net revenues in the three months
ended November 30, 1998 compared with $5.6 Million, or 17.1% of net revenues,
in the three months ended November 30, 1997. These increases in total
employee costs were due to employees hired in connection with the expansion
of ATC's operations. The increase in operating expenses also resulted from
higher facility costs and administrative expenses resulting from the growth
in operations, increased employee levels and costs related to the
establishment of the Company's corporate administrative group, and
implementation of new accounting systems and processes. Additionally, in the
three months ended November 30, 1998, amortization of goodwill and
intangibles increased to $1.4 million, compared with $0.5 million in the
three months ended November 30, 1997 reflecting the additional goodwill
amortization resulting from acquisitions and the Transactions.
For the reasons set forth above, operating income in the three months
ended November 30, 1998 totaled $0.7 million compared with operating income of
$2.9 million in the three months ended November 30, 1997. Operating income
decreased as a percentage of net revenues to 2.2% in the three months ended
November 30, 1998, compared with 8.8% in the three months ended November 30,
1997.
F-21
<PAGE>
Non-operating expense in the three months ended November 30, 1998
increased to $4.0 million compared with $0.9 million in the three months ended
November 30, 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 ended November 30, 1998.
Income tax (benefit) expense in the three months ended November 30, 1998
was $(1.1 million), compared with $0.8 million in the three months ended
November 30, 1997. During the three months ended November 30, 1998 and 1997, the
Company's effective tax rates were 32.6% and 41.6%, respectively. The lower
effective tax rate for the three months ended November 30, 1998 is due
principally to non deductible goodwill amortization related to the Transactions.
As a result of the foregoing, the Company incurred a net loss of $2.2
million compared with net income of $1.2 million in the three months ended
November 30, 1997. Net income (loss) decreased as a percentage of net revenues
to (6.5)% in the three months ended November 30, 1998 compared with 3.6% in the
three months ended November 30, 1997.
Nine Months Ended November 30, 1998 Compared with Nine Months Ended November 30,
1997
Revenues in the nine months ended November 30, 1998 increased 16.5% to
$121.5 million, compared with $104.3 million in the nine months ended
November 30, 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 acquisitions of OST and AVES in July, 1998. Revenues for the
nine months ended November 30, 1998 reflected certain one time adjustments to
revenue related to unbilled receivables reserves, cost overruns and billing
adjustments. Revenues in the nine months ended November 30, 1998 attributable
to the acquisition of BCM totaled $13.2 million. Revenues attributable to the
acquisition of EWI, Bing Yen, AVES and OST totaled $4.5 million or 3.7% of
revenues in the nine months ended November 30, 1998. Revenues were not
affected by the Transactions.
Reimbursable costs represent direct project expenses billed to
environmental and engineering segment clients. For the nine months ended
November 30, 1998, reimbursable costs increased 27.8% to $20.3 million,
compared with $15.9 million in the nine months ended November 30, 1997.
Reimbursable costs as a percentage of revenues increased to 16.7% for the
nine months ended November 30, 1998 from 15.2% in the comparable prior year
period, principally due to changes in sales mix, which required increased use
of various subcontractor services in the 1998 period. Reimbursable costs were
not affected by the Transactions.
Cost of net revenues in the nine months ended November 30, 1998
increased by $8.9 million or 18.4% to $56.8 million compared with $47.9
million in the nine months ended November 30, 1997. Cost of net revenues as a
percentage of net revenues increased to 56.1% in the nine months ended
November 30, 1998 compared to 54.2% in the nine months ended November 30,
1997, principally due to changes in sales mix during the 1998 period.
Gross profit in the nine months ended November 30, 1998 increased 9.9% to
$44.4 million, compared with $40.4 million in the nine months ended November 30,
1997. Gross margin decreased to 43.9% in the nine months ended November 30, 1998
compared to 45.8% in the nine months ended November 30, 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 nine month period.
Operating expenses in the nine months ended November 30, 1998 increased
29.5% to $42.0 million, compared with $32.5 million in the nine months ended
November 30, 1997. Operating expenses increased as a percentage of net
revenues to 41.5% in the nine months ended November 30, 1998, compared with
36.7% in the nine months ended November 30, 1997. The increase in operating
expense was principally attributable to an increase in employee costs.
Employee costs increased 27.4% to $18.6 million, or 18.4% of net revenues, in
the nine months ended November 30, 1998 compared with $14.6 million, or 16.5%
of net revenues, in the nine months ended November 30, 1997. These increases
in employee cost were due to employees hired in connection with the expansion
of ATC's operations including acquisitions completed during the period.
Increases in operating expenses also resulted from higher facility costs and
administrative expenses resulting from the growth in operations and increased
employee levels and increased allowance for doubtful accounts. Additionally,
in the nine months ended November 30, 1998, amortization of goodwill and
intangibles increased to $4.1 million, compared with $1.4 million in the nine
months ended November 30, 1997 reflecting the additional goodwill
amortization resulting from acquisitions and the Transactions.
Operating income in the nine months ended November 30, 1998 decreased 69.9%
to $2.4 million compared with $8.0 million in the nine months ended November 30,
1997. Operating income decreased as a percentage of net revenues to 2.4% in the
nine months ended November 30, 1998, compared with 9.0% in the nine months ended
November 30, 1997.
F-22
<PAGE>
Non-operating expense in the nine months ended November 30, 1998 increased
to $11.7 million compared with $2.0 million in the nine months ended November
30, 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 1998 period.
Income tax (benefit) expense in the nine months ended November 30, 1998 was
$(3.0 million), compared with $2.4 million in the nine months ended November 30,
1997. During the nine months ended November 30, 1998 and 1997, the Company's
effective tax rates were 32.4% and 40.2%, respectively. The lower effective tax
rate for the nine months ended November 30, 1998 is due principally to
non-deductible goodwill amortization related to the Transactions.
As a result of the foregoing, the Company incurred a net loss of $6.3
million for the nine months ended November 30, 1998, compared with net income
of $3.6 million in the nine months ended November 30, 1997. Net income (loss)
decreased as a percentage of net revenues to (6.2)% in the nine months ended
November 30, 1998 compared with 4.1% in the nine months ended November 30,
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
As a result of the consummation of the Transactions, the Company is highly
leveraged. As described in Note D, due to defaults under the Bank Credit
Facilities with respect to certain financial covenants for the quarters ended
May 31, 1998, August 31, 1998 and November 30, 1998, the Company is presently
unable to borrow any additional amounts under its Revolving Credit Agreement. As
a result, the Company's only source of liquidity is cash flow from operations.
It is expected that the Company's principal uses of liquidity will be to provide
working capital for operations and fund necessary capital expenditures. There
can be no assurance, however, that cash flow from operations will be sufficient
for these purposes and to the extent it is not sufficient for such purposes, the
Company's financial condition and results of operations will be materially and
adversely affected.
The Company is in discussion with the lenders under its Bank Credit
Facilities and believes the covenants in the Bank Credit Facilities will be
amended and the existing defaults waived. There can be no assurance, however,
that any such amendment or waiver will be entered into and to the extent
these defaults continue, the lenders under the Bank Credit Facilities could
accelerate all amounts owing thereunder. The Company would not have
sufficient cash to repay all amounts owing under the Bank Credit Facilities
if the lenders accelerated amounts owing thereunder. The Bank Credit
Facilities are secured by substantially all of the Company's assets. Proceeds
from any sale of assets securing the Bank Credit Facilities would be used
first to repay in full amounts outstanding thereunder.
In addition, as a result of its lack of liquidity, the Company has not
made and will not make certain payments it is contractually obligated to make.
The Company will be unable to make the $6.0 million interest payment due
on January 15, 1999 on the Notes. The Company is unable to make the interest
payment for two reasons. The Company's cash flow is insufficient. In
addition, as a result of a payment default with respect to certain Senior
Indebtedness as defined in the Indenture dated as of January 29, 1998 between
Acquisition Corp. and State Street Bank and Trust Company (the "Indenture"),
the Company is prohibited, pursuant to the terms of the Indenture, from
making any payments on the Notes until the payment default is cured or
waived. The payment default stems from the failure to pay on January 4, 1999
$1.1 million owing with respect to certain seller notes issued in connection
with the acquisition by the Company of Bing Yen & Associates, Inc. in
November 1997. In addition, on January 1, 1999, the Company failed to pay
$553,430 owed to Morry Rubin and George Rubin, pursuent to the Severance
Agreements. On January 11, 1999 the Rubins filed suit against the Company in
New York Supreme Court seeking $553,430 in damages as a result of this
failure to pay.
The Company is in the process of retaining Houlihan Lokey Howard & Zukin
Capital, investment bankers ("Houlihan Lokey"). Houlihan Lokey is expected to
review the Company's financial position, cash flow requirements, financial
history, operations, competitive environment and assets to assist the Company
in developing a business plan which will serve as the basis for determining
its various financial alternatives, and ultimately the proposed terms of a
comprehensive financial restructuring. In doing so, Houlihan Lokey is
expected to work with the Company's senior management to complete and review
the Company's new business plan. Once the review of the Company has begun, a
proposed timetable is expected to be communicated to the holders of the
Notes. There can be no assurance, however, that the Company will be able to
successfully develop and execute alternative financial, and operating plans,
ultimately resulting in a comprehensive restructuring plan.
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. As mentioned above,
the Company is currently in default with respect to certain of these
financial ratios.
F-23
<PAGE>
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 November 30, 1998, working capital was $21.5
million, compared with working capital of $29.4 million at February 28, 1998, a
decrease of $7.9 million. The decrease in working capital was primarily due to
allowances for doubtful accounts and unbilled receivables reserves, 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 nine months ended November 30, 1998, net cash flows generated
from operating activities were $1.2 million 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 $1.4 million, resulting from purchases of property and
equipment, the acquisition of OST and AVES less the proceeds from the sale of
certain assets relating to a laboratory operation. Net cash flows used by
financing activities were $3.7 million, primarily representing payments of
Tender Offer obligations and net bank borrowings under the Company's Revolving
Credit Facility.
During the nine months ended November 30, 1997, net cash flows used in
operating activities were $1.5 million, primarily due to the increase in
billed and unbilled receivables and decreases in accounts payable and other
liabilities, representing payments of property facility rentals, non-compete
consideration and assumed liabilities of ATEC and other acquisitions. Net
cash flows used in investing activities were $11.3 million, resulting from
the acquisitions of BCM and ATEC and purchases of property and equipment. Net
cash flows provided by financing activities were $16.7 million, primarily
representing the proceeds of the Senior Secured Notes less repayment of
outstanding bank debt and a bank borrowing of $5.5 million 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 November 30, 1998, the carrying value and estimated fair value of
the Company's fixed rate debt was approximately $101.7 million. The Company also
had approximately $29.4 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 November 30, 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 $200,000
for the nine months ended November 30, 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
during calendar year 1999 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.
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. ATC filed a motion for Summary Judgement on the Federal
Court claims. This motion was heard on January 8, 1999 and the Court dismissed
the Plaintiff's state and federal securities fraud claims and common law fraud
claims and reserved judgement on the other counts. The dual forum litigation
does not create a risk of double recovery.
F-25
<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. Notice of this claim 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., Civil
Action No. MICV 97-04893, Superior Court of Middlesex County, Massachusetts.
This action was brought on October 1, 1997 for damages in the amount of
$3,381,805 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 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. Con-Test's insurance company made an offer to settle
for $460,001 alleging that their damage expert had determined this sum was the
amount of actual damages incurred by Cambridge Housing Authority. Cambridge
Housing Authority rejected the offer and countered with $2,150,000 as a
settlement figure.
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 $207,310. Plaintiff has offered to settle this matter for $103,655.
ATC is currently engaged in settlement discussions with plaintiff and is
reviewing their offer to settle. 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.
QST Environmental Inc. v. ATC Group Services Inc. and Environmental Warranty
Inc.("EWI"), Case No. 98-421, Circuit Court of the Tenth Judicial Circuit,
Peoria County, Ilinois. This action was brought on December 4, 1998 and alleges
that ATC and its subsidiary, EWI, violated the Illinois Trade Secrets Act as
well as committed common law conversion. The claim arises out of ATC's
submission of a proposal to remediate a parcel of property in the City of Olney,
Illinois and EWI's underwriting of a policy to insure the parcel. Plaintiff
alleges that the ATC and EWI used their proprietary data and information in this
transaction. Notice of this claim has been made under both ATC's and EWI's
professional liability and commercial liability insurance policy.
Borough of Kane Authority v. BCM Engineers, Inc. a Division of ATC Group
Services Inc., et al., Case No. 1074 CD 1998, Court of Common Pleas of McKean
County, Pennsylvania. This action was filed on October 22, 1998 and arises out
of an alleged breach of warranty, breach of contract and professional negligence
by Smith Technology Corporation ("Smith") in a design project at a
wastewater treatment facility for the Borough of Kane. ATC did not purchase this
contract in the Smith Transaction and is wrongly named in the case as a
successor. The company believes the case against ATC is without merit because
ATC was not involved in the project and the contract in question was not assumed
by ATC in the Smith transaction. ATC has filed a notice of claim with Smith's
professional liability carrier as well as ATC's carrier. This claim is subject
to a $150,000 self insured retention.
Morry F. Rubin and George Rubin v. ATC Group Services Inc. (Index No.
600130/99), Supreme Court of the State of New York County of New York. This
action was brought on January 11, 1999 by Morry Rubin and George Rubin and
seeks damages of $553,430 in connection with the failure by the Company to
pay amounts owed the Rubins on January 1, 1999 pursuant to a Severance,
Consulting and Non Competition Agreement entered into by the Company with
each of Morry Rubin and George Rubin.
ITEM 2. CHANGES IN SECURITIES:
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
For the quarters ended May 31, 1998, August 31, 1998 and November
30, 1998, the Company was in default of certain financial covenants.
The Company's lenders had provided an interim waiver with respect to
the defaults, which waiver expired on December 4, 1998. Due to the
expiration of the waiver on December 4, 1998, the Company is unable to
borrow any additional amounts under the Revolving Credit Agreement. The
total amount outstanding under the Revolving Credit Agreement at
January 14, 1999 approximates $11.7 million.
The Company is also in default under $2.65 million aggregate
principal amount of promissory notes issued in connection with the
acquisition by the Company of Bing Yen & Associates. This default
results from the failure to pay $1.1 million owing with respect to
such notes on January 4, 1999.
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:
None
This Form 10-Q contains "forward-looking" statements within the meaning
of the Securities Litigation Reform Act of 1995, including, without
limitation, those concerning: the results of any discussions with the
Company's creditors; the ability of the Company to make required future
payments; the retention of Houlihan Lokey; whether the Company is able to
propose a comprehensive financial restructuring in a timely manner or propose
a timetable to holders of the Notes; the Company's future financial
performance and cash flow; whether or not the Company's cash flow will be
sufficient to meet its working capital and other cash needs; and the ability
of the Company to meet its short-term cash needs, including the ability to
make the January 15, 1999 $6.0 million interest payment on its senior
subordinated notes. Such statements involve certain risks and uncertainties
that could cause actual results to differ materially from those in the
forward-looking statements. Potential risks and uncertainties include such
factors as: the demand for the Company's services; the impact of cost
reductions on revenues; utilization rates of Company personnel; changes in
the pricing environment; general economic conditions in the Company's
markets; competitors' actions; accuracy of assumptions regarding savings from
restructuring activities; the status and effectiveness of the Company's Year
2000 efforts; the ability to successfully restructure future cash payments,
particularly in the short-term; whether or not the Company ultimately retains
Houlihan Lokey, and if it does, whether or not the Company and Houlihan Lokey
can propose in a timely manner a comprehensive financial restructuring
acceptable to the Company's creditors; and other risks described in the
Company's filings with the Securities and Exchange Commission.
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: January 14, 1999 /s/ Christopher Vincze
Christopher Vincze
Executive Vice President and
Chief Operations Officer
(Principal Operating Officer)
Dated: January 14, 1999 /s/ Paul Grillo
Paul Grillo
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: January 14, 1999 /s/ Rachel Trant
Rachel Trant
Controller
(Principal Accounting Officer)
F-27
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