10-Q 1 d93422e10-q.txt FORM 10-Q FOR QUARTER ENDED NOVEMBER 30, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2001, OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . Commission file number 0-11380 ATC HEALTHCARE, INC. (Exact name of registrant as specified in its charter) Delaware 11-2650500 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1983 Marcus Avenue, Lake Success, New York 11042 (Address of principal executive offices) (Zip Code) (516) 750-1600 (Registrant's telephone number, including area code) (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 of Class A Common Stock and Class B Common Stock outstanding on January 11, 2002 were 23,366,410 and 265,387 shares, respectively. ATC HEALTHCARE, INC. AND SUBSIDIARIES INDEX
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets - November 30, 2001 (unaudited) and February 28, 2001 2 Condensed Consolidated Statements of Operations (unaudited)- Three and nine months ended November 30, 2001 and 2000 3 Condensed Consolidated Statements of Cash Flows (unaudited)- Nine months ended November 30, 2001 and 2000 4 Notes to Condensed Consolidated Financial Statements (unaudited) 5-7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 10 PART II. OTHER INFORMATION 11 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
PART I. FINANCIAL INFORMATION ATC HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
NOVEMBER 30, 2001 FEBRUARY 28, (UNAUDITED) 2001 ASSETS: CURRENT ASSETS: Cash and cash equivalents $ 514 $ 2,013 Accounts receivable, net of allowance for doubtful accounts of $1,360 and $1,344, respectively 28,795 26,569 Prepaid expenses and other current assets 661 197 -------- -------- Total current assets 29,970 28,779 FIXED ASSETS, net of accumulated depreciation of $3,487 and $2,593, respectively 3,854 4,291 INTANGIBLE ASSETS, net of accumulated amortization of $2,929 and $2,537, respectively 8,272 7,545 OTHER ASSETS 568 816 -------- -------- TOTAL ASSETS $ 42,664 $ 41,431 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable $ 770 $ 1,048 Accrued expenses 3,510 4,461 Accrued payroll and payroll related expenses 2,390 4,631 Current portion of long-term debt 822 605 -------- -------- Total current liabilities 7,492 10,745 LONG-TERM DEBT 580 315 BORROWINGS UNDER CREDIT FACILITY 24,278 20,636 OTHER LIABILITIES 108 108 -------- -------- TOTAL LIABILITIES 32,458 31,804 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Class A Common Stock - $.01 par value; 50,000,000 shares authorized; 23,362,046 and 23,357,782 outstanding at November 30, 2001 and February 28, 2001, respectively 233 233 Class B Common Stock - $.01 par value; 1,554,936 shares authorized; 269,751 and 274,015 outstanding at November 30, 2001 and February 28, 2001, respectively 3 3 Additional paid-in capital 13,522 13,522 Accumulated deficit (3,552) (4,131) -------- -------- Total stockholders' equity 10,206 9,627 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,664 $ 41,431 ======== ========
See notes to condensed consolidated financial statements. 2 ATC HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share data)
Three Months Ended Nine Months Ended November 30, November 30, 2001 2000 2001 2000 --------- --------- --------- --------- REVENUES: Service revenues $ 38,530 $ 30,232 $ 112,552 $ 87,812 --------- --------- --------- --------- COSTS AND EXPENSES: Service costs 29,410 23,315 86,435 68,200 General and administrative expenses 7,815 5,964 22,520 18,295 Depreciation and amortization 453 371 1,283 1,269 --------- --------- --------- --------- Total operating expenses 37,678 29,650 110,238 87,764 --------- --------- --------- --------- INCOME FROM OPERATIONS 852 582 2,314 48 INTEREST AND OTHER EXPENSES(INCOME) Interest expense, (net) 418 552 1,379 1,645 Other (income) expense, net (300) (5) (574) (399) --------- --------- --------- --------- Total interest and other expenses 118 547 805 1,246 --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 734 35 1,509 (1,198) PROVISION FOR INCOME TAXES 25 -- 76 -- --------- --------- --------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 709 35 1,433 (1,198) EXTRAORDINARY LOSS ON DEBT RESTRUCTURE -- -- (854) -- --------- --------- --------- --------- NET INCOME (LOSS) $ 709 $ 35 $ 579 $ (1,198) ========= ========= ========= ========= NET INCOME (LOSS) PER COMMON SHARE - BASIC: Income (Loss) before extraordinary loss $ .03 $ .00 $ .06 $ (.05) Extraordinary loss -- -- (.04) -- --------- --------- --------- --------- Net income(loss) $ .03 $ .00 $ .02 $ (.05) ========= ========= ========= ========= NET INCOME (LOSS) PER COMMON SHARE - DILUTED: Income (Loss) before extraordinary loss $ .03 $ .00 $ .06 $ (.05) Extraordinary loss -- -- (.04) -- --------- --------- --------- --------- Net income (loss) $ .03 $ .00 $ .02 $ (.05) ========= ========= ========= ========= WEIGHTED AVERAGE NUMBER COMMON SHARES USED IN COMPUTING EARNINGS PER SHARE Basic 23,632 23,632 23,632 23,632 ========= ========= ========= ========= Diluted 25,506 23,632 24,352 23,632 ========= ========= ========= =========
See notes to condensed consolidated financial statements. 3 ATC HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Nine Months Ended November 30, 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income\(loss) $ 579 $ (1,198) Adjustments to reconcile net income (loss) to net cash(used in) operations: Depreciation and amortization 1,283 1,269 Provision for doubtful accounts 400 (878) Extraordinary loss on early extinguishment of credit facility 854 -- Change in operating assets and liabilities (excluding acquisition): Accounts receivable (2,626) 1,381 Prepaid expenses and other current assets (1,018) (157) Other assets 249 (348) Accounts payable, accrued expenses, and accrued payroll and other related costs (3,470) (4,242) Other liabilities -- 64 -------- -------- Net cash used in operating activities (3,749) (4,109) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (359) (468) Payment for acquisition of Doctors' Corner (329) -- Other (15) -- -------- -------- Net cash used in investing activities (703) (468) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of capital leases, net (389) 206 Repayment of borrowings under prior credit facility (20,936) 4,000 Borrowings under new credit facility 24,278 -- -------- -------- Net cash provided by financing activities 2,953 4,206 -------- -------- NET (DECREASE) IN CASH AND CASH CASH EQUIVALENTS (1,499) (371) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,013 394 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 514 $ 23 ======== ======== SUPPLEMENTAL DATA: Cash paid for: Interest $ 1,474 $ 1,770 ======== ======== Taxes $ 138 $ -- ======== ======== Non-cash activities: Capital leases incurred $ 97 $ 379 ======== ======== Doctor's Corner Financing $ 775 $ -- ======== ========
See notes to condensed consolidated financial statements. 4 ATC HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in Thousands, Except Where Indicated Otherwise and for Per Share Amounts) 1. FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements as of November 30, 2001 and for the three and nine months ended November 30, 2001 are unaudited. In the opinion of management, all adjustments, consisting of only normal and recurring accruals necessary for a fair presentation of the consolidated financial position and results of operations for the periods presented have been included. The condensed consolidated balance sheet as of February 28, 2001 was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. The accompanying condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and notes thereto included in the Annual Report on Form 10-K/A of ATC Healthcare, Inc. (the "Company") for the year ended February 28, 2001. Certain prior period amounts have been reclassified to conform with the November 30, 2001 presentation. The results for the three-month and nine-month periods ended November 30, 2001 are not necessarily indicative of the results for the full year ending February 28, 2002. 2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE The calculation of basic and fully diluted earnings (loss) per share were calculated for all periods in accordance with the requirements of Statement of Financial Accounting Standards No. 128, "Earnings per Share." The shares used in computing basic earnings (loss) per share were 23,632,000 shares for the three-month and nine-month periods ended November 30, 2001 and 2000, respectively. The shares used in computing diluted earnings per share were 25,506,000 and 24,352,000 for the three-month and nine-month periods ended November 30, 2001 and 23,632,000 for the three-month and nine-month periods ended November 30, 2000, respectively. 3. DEBT In April 2001, the Company entered into a new $25 million secured facility ("New Facility") with a lending institution which expires in April 2004. The Company's previous credit facility was repaid in full concurrent with the closing of the New Facility. In connection with the early retirement of its debt, the Company wrote-off the unamortized balance of deferred financing fees and recorded an extraordinary charge of $854 in the quarter ended May 31, 2001. The Company may borrow up to 85% of the Company's eligible accounts receivable. Interest accrues at a rate per annum of 3.4% over LIBOR. There is also a .5% annual fee for the unused portion of the total loan availability. During October 2001, the Company's New Facility agreement was amended to increase the revolving credit line to $27.5 million. The New Facility contains various financial and other covenants and conditions, including but not limited to the following; debt service coverage, interest coverage, net worth, tangible net worth, current ratio and accounts receivable turnover. 4. NEW PRONOUNCEMENTS In July 2001, the Financial Standards Accounting Standards Board ("FASB")issued two new standards; Statement of Financial Accounting Standards No.141 ("SFAS 141"), "Business Combinations," and Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 141 prohibits the pooling-of-interest method of accounting for business combinations and prescribes criteria for the initial recognition and measurement of goodwill and other intangible assets. SFAS No. 141 is effective for all business combinations completed after June 30, 2001. The adoption of SFAS No. 141 for the acquisition (See note 5) did not have a material effect on the Company's financial results. SFAS No. 142, which is effective for the Company on March 1, 2002, establishes new guidelines for accounting for goodwill and other intangible assets. The provisions of SFAS No. 142 state that goodwill and indefinite-lived intangible assets will no longer be 5 amortized and that goodwill and indefinite-lived intangible assets will be tested for impairment at least annually. Transitional goodwill impairment tests must be completed within six months of the date of adoption of SFAS No. 142. The Company is still assessing the potential impact of SFAS 142 on its results of operations and financial position. Goodwill amortization expense for the nine months ended November 30, 2001 was $342 and amortization related to other intangible assets was $50. On August 16, 2001, the FASB issued Statement of Financial Accounting Standards SFAS No. 143, "Accounting for Asset Retirement Obligation", which is effective for financial statements issued for fiscal years beginning after June 15, 2002. The pronouncement addresses the recognition and remeasurement of obligations associated with the retirement of a tangible long-lived asset. On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which is effective for financial statements issued for fiscal years beginning after December 15, 2001. SFAS 144 applies to all long-lived assets (including discontinued operations) and it develops one accounting model for long-lived assets that are to be disposed of by sale. The Company is currently reviewing these statements to determine their impact on future financial statements. 5. ACQUISITION OF DOCTOR'S CORNER On October 5, 2001, the Company entered into an asset purchase agreement with Doctors' Corner and Healthcare Staffing, Inc. ("DCHS"), which provides permanent and temporary medical administrative services to clients in southern California, pursuant to which the Company purchased the assets of DCHS for a purchase price of $1,075; $300 of which was paid at closing, $100 payable on January 1, 2002, $100 payable on April 1, 2002 and the remaining $575 payable in 20 quarterly installments beginning July 1, 2002. Installments will accrue interest at 8% per annum. In addition, the Company incurred acquisition expenses of $29. The excess of the purchase price over the fair market value of assets acquired amounted to approximately $575. 6. CONTINGENCIES a. Contingent obligations The Company is contingently liable on obligations owed by Tender Loving Care Health Care Services, Inc.("TLCS") which total approximately $2.7 million as of November 30, 2001. The Company is indemnified by TLCS for any obligations arising out of these matters. As of January 9, 2002, TLCS has represented that it is current on its payments for these obligations. In November 2002, TLCS was acquired by Emedsoft.com. b. Litigation: The Company is a defendant in several civil actions which are routine and incidental to its business. The Company purchases insurance in such amounts which management believes to be reasonable and prudent. Although the Company cannot estimate the ultimate cost of its open legal matters with precision, in the opinion of management, the outcome of pending litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. 7. RELATED PARTY TRANSACTION The Company paid two franchisees whose shareholders include individuals related to officers of the Company, franchise fees of $3,247 and $1,759 for the nine-month periods ended November 30, 2001 and 2000. The terms and conditions of the franchise agreement between the Company and the related parties are substantially similar to those for other franchisees of the Company. The Company has entered into an agreement for the purchase of these franchises (See note 8). 8. SUBSEQUENT EVENT On December 4, 2001, the Company announced its intentions to purchase its two largest franchisees located in the New York Metro area from related parties (see 8-K filed on December 19, 2001). The proposed terms of the agreement require the Company to issue a $12.975 million note, which accrues interest at 5% and will be repaid over a three-year period. Additionally, the agreement contains a contingent purchase price adjustment, which will be based on a calculation of the average franchise fee revenues over a three-year period. The Company has guaranteed the sellers an additional minimum payment of $20 million 6 which will be paid as an $11 million lump sum payment at the end of the initial three years and the remaining amount will be paid in monthly installments over five years, including interest of 5%. The principals of the franchisees will also sign four year employment contracts to remain with the Company. As of the filing of this report the purchase has not been completed. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Thousands, Except Where Indicated Otherwise and for Per Share Amounts) The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements appearing in Item 1. Results of Operations Total revenues increased by $8.3 million or 27.4% for the three months ended November 30, 2001 to $38.5 million from $30.2 million for the three months ended November 30, 2000. For the nine months ended November 30, 2001, total revenues increased by $24.7 million or 28.2% to $112.6 million from $87.8 million for the nine months ended November 30, 2000. The increase in revenues for the three month and nine month periods relates mainly to organic growth from existing locations as well as the opening of new offices. Service costs were 76.3% and 77.1% of total revenues for three months ended November 30, 2001 and 2000, and 76.8% and 77.7% for the nine months ended November 30, 2001 and 2000, respectively. The decrease in service costs as a percentage of total revenues for the three and nine months ended November 30, 2001 as compared to the same periods in the prior year is primarily due to increased sales volume in locations with higher margins. General and administrative expenses were $7.8 million or 20.3% of total revenues for the three months ended November 30, 2001 and $6.0 million or 19.7% of total revenues for the three months ended November 30, 2000. This represents an increase of $1.8 million or 31.0% for the three month period over the comparable period in the prior year. For the nine months ended November 30, 2001, general and administrative expenses were $22.5 million or 20.0% of total revenues and were $18.3 million or 20.8% of total revenues for the nine months ended November 30, 2000. This represents an increase of $4.2 million or 23.1% for the nine month period over the comparable period in the prior year. The increase in general and administrative expenses for the three and nine months ended November 30, 2001 as compared to the same periods of the prior year is primarily due to increased royalties which are directly due to the increase in sales and margin. Additionally, the opening of 8 additional corporate offices has contributed to the increase in general and administrative expenses for the period. Interest expense,(net) was $418 and $552 for the three months ended November 30, 2001 and 2000, and $1.4 million and $1.6 million for the nine months ended November 30, 2001 and 2000, respectively. The decrease in total interest expense for the three and nine months ended November 30, 2001 as compared to the same periods in the prior year is primarily due to lower interest rates associated with the New Facility and a decrease in the LIBOR rate of interest of lending institutions. Other income,(net) totaled $574 for the nine months ended November 30, 2001. Other income was comprised mainly of the termination of franchises leaving the network, offset by any miscellaneous expenses. The provision for income taxes of $25 and $76 for the three and nine months ended November 30, 2001 primarily consist of state income taxes. The federal provision for income taxes has been offset by federal net operating loss carryforwards, which benefits are currently fully reserved. 8 Liquidity and Capital Resources Working capital at November 30, 2001, was $22,478, an increase of $4,444 as compared to $18,034 at February 28, 2001. Net receivables increased by $2,226 in the first nine months of fiscal 2002 as a result of increases in sales revenues. This is offset by a decrease in accounts payable, accrued expenses and accrued payroll and payroll related expenses of $3,470 and a decrease in cash and cash equivalents of $1,499. Cash and cash equivalents decreased by $1,499 as of November 30, 2001 as compared to February 28, 2001 as a result of cash used in operating activities of $3,749, cash used in investing activities of $703 which was for the purchase of computer equipment for new offices opened in the last nine months and the initial purchase cost of its Doctors' Corner acquisition. This was offset by cash provided by financing activities by increases in borrowings under its credit facility. In April 2001, the Company entered into a new $25 million facility ("New Facility") with a lending institution which expires in April 2004. The Company's previous credit facility was repaid in full concurrent with the closing of the New Facility. In connection with the early retirement of its debt, the Company wrote-off the unamortized balance of deferred financing fees and recorded an extraordinary charge of $854 in the quarter ended May 31, 2001. The Company may borrow up to 85% of the Company's eligible accounts receivable. Interest accrues at a rate per annum of 3.4% over LIBOR. There is also a .5% annual fee for the unused portion of the total loan availability. During October 2001, the Company's New Facility agreement was amended to increase the revolving credit line to $27.5 million. The new facility contains various financial and other covenants and conditions, including but not limited to the following; debt service coverage, interest coverage, net worth, tangible net worth, current ratio and accounts receivable turnover. The New Facility can be increased to up to $50 million based the Company having eligible accounts receivable and being in compliance with the New Facility financial and other covenants. To assist in its intended acquisition of its New York Metropolitan area franchise payment due three years after the initial closing and for other potential acquisitions, the Company may seek to raise additional equity/debt capital in the public marketplace. Based on its current cash position and the availability of funds under the New Facility, the Company believes it has sufficient capital to maintain its operations for the foreseeable future. FORWARD-LOOKING STATEMENTS Certain statements in this report on Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are typically identified by the inclusion of phrases such as "the Company anticipates", "the Company believes" and other phrases of similar meaning. These forward-looking statements are based on the Company's current expectations. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The potential risks and uncertainties which would cause actual results to differ materially from the Company's expectations are as follows: BUSINESS CONDITIONS - The Company must continue to establish and maintain close working relationships with physicians and physician groups, managed care organizations, hospitals, clinics, nursing homes, social service agencies and other health care providers. There can be no assurance that the Company will continue to establish or maintain such relationships. The Company expects additional competition will develop in future periods given the increasing market demand for the type of services offered. ATTRACTION AND RETENTION OF LICENSEES AND EMPLOYEES - Maintaining quality licensees, managers and branch administrators will play a significant part in the future success of the Company. The Company's professional nurses and other health care personnel are also key to the continued provision of quality care to the Company's patients. The possible inability to attract and retain qualified licensees, skilled management and sufficient numbers of credentialed health care professionals and para-professionals and information technology personnel could adversely affect the Company's operations and quality of 9 service. Also, because the travel nurse program is dependent upon the attraction of skilled nurses from overseas, such program could be adversely affected by immigration restrictions limiting the number of such skilled personnel who may enter and remain in the United States. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity - The Company's primary market risk exposure is interest rate risk. The Company's exposure to market risk for changes in interest rates relates to its debt obligations under its New Facility described above. The interest rate on drawings is 3.4% over LIBOR. At November 30, 2001, drawings on the New Facility were $24,278. Assuming variable rate debt at November 30, 2001, a one point change in interest rates would impact annual net interest payments by approximately $243 thousand. The Company does not use derivative financial instruments to manage interest rate risk. 10 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits (B) Reports on Form 8-K November 14, 2001 - Announcing the change of its certifying accountants to from Deloitte & Touche, LLP to PricewaterhouseCoopers, LLP. December 19, 2001 - Announcement of the Company's intent to purchase its two largest Franchises. EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 10.2 Amendment #1 to the Loan Service Agreement. (*) NOTES TO EXHIBITS * Incorporated herein. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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 HEALTHCARE, INC. By: /s/ Alan Levy ------------------------------- Alan Levy Senior Vice President - Finance Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer and duly authorized officer of the Registrant) Dated: January 14, 2002 12 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.2 Amendment #1 to the Loan Service Agreement. (*)
NOTES TO EXHIBITS * Incorporated herein.