10-Q 1 a4493578.txt ATC HEALTHCARE 10-Q 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 AUGUST 31, 2003, 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes No X The number of shares of Class A Common Stock and Class B Common Stock outstanding on October 9, 2003 were 24,618,035 and 247,631 shares, respectively.
ATC HEALTHCARE, INC. AND SUBSIDIARIES INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets August 31, 2003 (unaudited) and February 28, 2003 3 Condensed Consolidated Statements of Operations (unaudited) Three and six months ended August 31, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows (unaudited) Six months ended August 31, 2003 and 2002 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-13 ITEM 3. QUANTITATIVE AND QUALITATIVE DESCRIPTION OF MARKET RISK 14 ITEM 4. CONTROLS AND PROCEDURES 14 PART II. OTHER INFORMATION 15 ITEM 1. LEGAL PROCEDINGS 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
2 PART I. FINANCIAL INFORMATION ATC HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
August 31, February 28, 2003 2003 (Unaudited) ------------------- -------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 567 $ 585 Accounts receivable, less allowance for doubtful accounts of $1,133 and $1,784, respectively 27,084 26,876 Deferred income taxes 1,787 1,787 Prepaid expenses and other current assets 3,623 3,087 ------------------- -------------------- Total current assets 33,061 32,335 Fixed assets, net 2,117 2,670 Intangibles 6,892 7,186 Goodwill 33,145 33,449 Deferred income taxes 2,188 2,076 Other assets 878 899 ------------------- -------------------- Total assets $78,281 $78,615 =================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $1,099 $1,332 Accrued expenses 6,820 6,192 Book overdraft 2,196 2,580 Current portion due under bank financing 919 679 Current portion of notes and guarantee payable 1,012 896 ------------------- -------------------- Total current liabilities 12,046 11,679 Notes and guarantee payable 31,254 31,463 Due under bank financing 23,538 24,249 Other liabilities 41 78 ------------------- -------------------- Total liabilities 66,879 67,469 ------------------- -------------------- Commitments and contingencies Convertible Series A Preferred Stock ($.01 par value 4,000 shares authorized, 2,000 and 1,200 shares issued and outstanding at August 31, 2003 and February 28, 2003, respectively) 1,032 600 ------------------- -------------------- STOCKHOLDERS' EQUITY: Class A Common Stock - $.01 par value; 75,000,000 shares authorized; 24,587,585 and 23,582,552 shares issued and outstanding at August 31, 2003 and February 28, 2003, respectively 245 235 Class B Common Stock - $.01 par value; 1,554,936 shares authorized; 256,191 shares issued and outstanding at August 31, 2003 and February 28, 2003, respectively 3 3 Additional paid-in capital 14,397 13,679 Accumulated deficit (4,275) (3,371) ------------------- -------------------- Total stockholders' equity 10,370 10,546 ------------------- -------------------- Total liabilities and stockholders' equity $78,281 $78,615 =================== ==================== See notes to condensed consolidated financial statements.
3 ATC HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share data)
For the Three Months For the Six Months Ended (unaudited) Ended August 31, August 31, August 31, August 31, 2003 2002 2003 2002 ---- ---- -------- ---- REVENUES: Service revenues $33,640 $38,979 $67,683 $76,679 ---------------------------------------------------------------------- ------------- ----------- ------------ ------------ COSTS AND EXPENSES: Service costs 26,636 29,819 53,198 58,535 General and administrative expenses 6,006 7,345 12,414 14,518 Depreciation and amortization 594 527 1,181 877 ---------------------------------------------------------------------- ------------- ----------- ------------ ------------ Total operating expenses 33,236 37,691 66,793 73,930 ---------------------------------------------------------------------- ------------- ----------- ------------ ------------ INCOME FROM OPERATIONS 404 1,288 890 2,749 ---------------------------------------------------------------------- ------------- ----------- ------------ ------------ INTEREST AND OTHER EXPENSES (INCOME): Interest expense, net 1,115 766 1,963 1,509 Other (income), net (57) (230) (89) (235) ---------------------------------------------------------------------- ------------- ----------- ------------ ------------ Total interest and other expenses 1,058 536 1,874 1,274 ---------------------------------------------------------------------- ------------- ----------- ------------ ------------ (LOSS) INCOME BEFORE INCOME TAXES (654) 752 (984) 1,475 INCOME TAX (BENIFIT) PROVISION -- 310 (112) 606 ---------------------------------------------------------------------- ------------- ----------- ------------ ------------ NET (LOSS) INCOME $ (654) $ 442 $ (872) $ 869 ====================================================================== ============= =========== ============ ============ DIVIDENDS ACCRETED TO PREFERRED SHAREHOLDERS 17 32 NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (671) $ 442 $ (904) $ 869 ---------------------------------------------------------------------- ------------- ----------- ------------ ------------ (LOSS) EARNINGS PER COMMON SHARE - BASIC: $ (.03) $ .02 $ (.04) $ .04 ====================================================================== ============= =========== ============ ============ (LOSS) EARNINGS PER COMMON SHARE - DILUTED $ (.03) $ .02 $ (.04) $ .03 ====================================================================== ============= =========== ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 24,238 23,759 24,049 23,726 ====================================================================== ============= =========== ============ ============ Diluted 24,238 26,796 24,049 27,218 ====================================================================== ============= =========== ============ ============ See notes to condensed consolidated financial statements.
4 ATC HEALTHCARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Six Months Ended August 31, August 31, 2003 2002 ----------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(872) $869 Adjustments to reconcile net (loss) income to net cash provided by Operating activities: Depreciation and amortization 1,181 877 Disposition of goodwill and intangibles -- 42 Amortization of Debt Financing costs 124 79 Provision for doubtful accounts (651) (32) Deferred Income Taxes (112) -- Accrued Interest 457 437 Changes in operating assets and liabilities net of Effects of acquisitions Accounts receivable 443 (328) Prepaid expenses and other current assets (536) (627) Other assets (26) (60) Accounts payable and accrued expenses 395 366 Other long-term liabilities (37) (7) --------------------------------- Net cash provided by operating activities 366 1,616 --------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (161) (206) Finalization of acquisition purchase price 150 Acquisition of business (20) (457) Cash received for repayment of notes receivable -- 43 --------------------------------- Net cash used in investing activities (31) (620) --------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of notes and capital lease obligations (1,649) (1,690) Repayment of term loan facility (695) Book overdraft (384) Debt Financing costs (77) Issuance of preferred and Common Stock 1,128 114 Borrowings (payments) due under credit facility 1,324 (48) --------------------------------- Net cash (used in) financing activities (353) (1,624) --------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (18) (628) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 585 1,320 --------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $567 $692 ================================= Supplemental Data: Interest paid $961 $ 1,057 ================================= Income taxes paid $86 $ 135 ================================= Issuance of notes payable for acquisition of businesses -- $ 820 =================================
See notes to condensed consolidated financial statements. 5 ATC HEALTHCARE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Amounts in Thousands, Except Where Indicated Otherwise, and for Per Share Amounts) 1. BASIS OF PRESENTATION - The accompanying condensed consolidated financial statements as of August 31, 2003 and for the three and six months ended August 31, 2003 and 2002 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, 2003 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 of ATC Healthcare, Inc. (the "Company") for the year ended February 28, 2003. Certain prior period amounts have been reclassified to conform with the August 31, 2003 presentation. Results for the three and six month periods ended August 31, 2003 are not necessarily indicative of the results for the full year ending February 29, 2004. 2. EARNINGS PER SHARE -Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding for the applicable period. Diluted earnings (loss) per share is computed using the weighted average number of common shares plus common equivalent shares outstanding, unless the inclusion of such common equivalent shares would be anti-dilutive. Earnings per share for the three and six months ended August 31, 2002 include common stock equivalents of 3,037 and 3,492 shares relating to the dilutive effect of stock options. For the three and six months ended August 31, 2003, common stock equivalents would have been anti-dilutive. 3. PROVISION (BENEFIT) FOR INCOME TAXES - Management believes that it is more likely than not that the Company's deferred tax assets will be realized through future profitable operations. This is based upon the fact that the company has had profitable operations in each of its quarters since September 1, 2000 through the third quarter ended November 30, 2002, which quarterly results are profitable before a charge for the guarantee of certain debt of a former related party, Tender Loving Care Health Care Services, Inc. ("TLCS"). Losses incurred in the fourth quarter of fiscal 2003 and first and second quarters of fiscal 2004 were primarily due to an unexpected shortfall in hospital patient volumes, which volumes appear to be returning in the third quarter of fiscal 2004 and increased borrowing costs. As of February 28, 2003, the Company has a Federal net operating loss of approximately $2.4 million which expires in 2020 through 2023. 4. RECENT ACQUISITIONS - In January 2002, the Company purchased substantially all of the assets of Direct Staffing, Inc. ("DSI"), a licensee of the Company serving the territory consisting of Westchester County, New York and Northern New Jersey, and DSS Staffing Corp. ("DSS"), a licensee of the Company serving New York City and Long Island, New York for a purchase price of $30.2 million. These two licensees were owned by an unrelated third party and by a son and two sons-in-law of the Company's Chairman of the Board of Directors who have received an aggregate 60% of the proceeds of the sale. Under the original purchase agreement, the Company had agreed to pay contingent consideration equal to the amount by which (a) the product of (i) Annualized Revenues (as defined in the purchase agreement) and (ii) 5.25 exceeds (b) $17.2 million but if and only if the resulting calculation exceeds $20 million. However, under the June 13, 2003 amendment discussed below, the contingent obligation was terminated. The Company has obtained a valuation on the tangible and intangible assets associated with the transaction and has allocated $6.4 million to customer lists (which is being amortized over 10 years), $200,000 to a covenant not to compete (which is being amortized over 8 years) and the remaining balance to goodwill. The purchase price was initially evidenced by two series of promissory notes issued to each of the four owners of DSS and DSI. The first series of notes (the "First Series"), in the aggregate principal amount of $12.9 million bore interest at the rate of 5% per annum and was payable in 36 consecutive equal monthly installments of principal, together with interest thereon, with the first installment becoming due on March 1, 2002. The second series of notes (the "Second Series"), in the aggregate principal amount of $17.2 million, bore interest at the rate of 5% per annum and was payable as follows: $11 million, together with interest thereon, on April 30, 2005 (or earlier if certain capital events occur prior to such date) and the balance in 60 consecutive equal monthly installments of principal, together with interest thereon, with the first installment becoming due on April 30, 2005. Payment of both the First Series and the Second Series was collateralized by a second lien on the assets of the acquired licensees. 6 On June 13, 2003, the debt between the Company and the noteholders was amended to reduce the aggregate monthly payments and extend the terms thereof. In connection therewith, the subordination agreement between the Company, the noteholders and the Company's primary lender was also amended. The two series of promissory notes to the former owners of DSS and DSI have been condensed into one series of notes. One of the promissory notes is for a term of seven years, in the principal amount of $8.6 million, bears interest at the rate of 5% per annum, with a minimum monthly payment (including interest) of $40,000, with the first installment becoming due on June 13, 2003, and minimum monthly payments (including interest) of $80,000 beginning on June 1, 2004, thereafter, with a balloon payment of $3.7 million due on May 7, 2007. The balance on the first note after the balloon payment is payable in minimum monthly installments of $80,000 over the remaining three years of the note, subject to certain limitations under the amended subordination agreement. The other three promissory notes are for ten years, in the aggregate principal amount of $17.5 million, bear interest at the rate of 5% per annum, with minimum monthly payments (including interest) of $25,000, in the aggregate, with the first installment becoming due on June 13, 2003, and minimum monthly payments (including interest) of $51,000, in the aggregate beginning on June 1, 2004, thereafter. Any unpaid balances at the end of the note terms will be due at that time. If the Company achieves certain financial ratios, its minimum monthly payments under all four of the notes will be increased, as provided in the amended subordination agreement. Payment of the notes is collateralized by a second lien on the assets of the original franchises. In conjunction with the amendment of the notes, one of the note holders reduced his note by approximately $2.8 million, subject to the Company's continued compliance with the modified subordination agreement. Accordingly the Company will not reduce its debt balance until all of the contingencies are resolved. In June 2002 the Company bought out a management contract with a company ("Travel Company") which was managing its travel nurse division. The purchase price of $620,000 is payable over two years beginning in December 2002. The Company is amortizing the cost of the buyout over the five years that were remaining on the management contract. During fiscal 2003, the Company purchased substantially all of the assets and operations of 8 temporary medical staffing companies totaling $3.1 million, of which $2.1 million was paid in cash and the remaining balance is payable under notes payable with maturities through January 2007. The notes bear interest at rates between 6% to 8% per annum. The purchase prices were allocated primarily to goodwill (approximately $2.3 million). The acquisitions were accounted for under the purchase method of accounting; and accordingly, the accompanying consolidated financial statements include the results of the acquired operations from their respective acquisition dates. 5. DEBT - During April 2001, the Company entered into a Financing Agreement with a lending institution, whereby the lender agreed to provide a revolving credit facility of up to $25 million. The Financing Agreement was amended in October 2001 to increase the facility to $27.5 million. Amounts borrowed under the New Financing Agreement were used to repay $20.6 million of borrowing on its existing facility. Availability under the Financing Agreement is based on a formula of eligible receivables, as defined in the Financing Agreement. The borrowings bear interest at rates based on LIBOR plus 3.65%. At February 28, 2002, the interest rate was 5.65%. Interest rates ranged from 5.4% to 8.2% in fiscal 2002. An annual fee of 0.5% is required based on any unused portion of the total loan availability. In November 2002, the lending institution with which the Company has the secured facility, increased the revolving credit line to $35 million and provided for an additional term loan facility totaling $5 million. Interest accrues at a rate of 3.95% over LIBOR on the revolving credit line and 6.37% over LIBOR on the term loan facility. The Facility expires in November 2005. The term loan facility is for acquisitions and capital expenditures. Repayment of this additional term facility will be on a 36 month straight line amortization. The Agreement contains various restrictive covenants that, among other requirements, restrict additional indebtedness. The covenants also require the Company to meet certain financial ratios. In November 2002, the interest rates were revised to 4.55% over LIBOR on the revolving line and 7.27% over LIBOR on the term loan facility as part of a loan modification. On June 13, 2003, the Company received a waiver from the lender for non-compliance of certain Facility covenants as of February 28, 2003. Interest rates on both the revolving line and term loan facility were increased 2% and can decrease if the Company meets certain financial criteria. 7 In addition, certain financial ratio covenants were modified. The additional interest is not payable until the current expiration date of the Facility in November 2005. As of August 31, 2003 and 2002, the outstanding balance on the revolving credit facility was $21.5 million and $23.5 million, respectively. The Company had outstanding borrowings under the term loan of $3.0 as of August 31, 2003. Guarantee of TLCS Liability - The Company is contingently liable on $2.3 million of obligations owed by TLCS which is payable over eight years. The Company is indemnified by TLCS for any obligations arising out of these matters. On November 8, 2002, TLCS filed a petition for relief under Chapter 11 of the United States Bankruptcy Code. As a result, the Company has recorded a provision of $2.3 million representing the balance outstanding on the related TLCS obligations. The Company has not received any demands for payment with respect to these obligations. The next payment is due in September 2003. The obligation is payable over 8 years. The Company believes that it has certain defenses which could reduce or eliminate its recorded liability in this matter. 6. REVENUE RECOGNITION - A substantial portion of the Company's service revenues are derived from a unique form of franchising under which independent companies or contractors ("licensees") represent the Company within a designated territory. These licensees assign Company personnel, including registered nurses and therapists, to service clients using the Company's trade names and service marks. The Company pays and distributes the payroll for the direct service personnel who are all employees of the Company, administers all payroll withholdings and payments, bills the customers and receives and processes the accounts receivable. The revenues and related direct costs are included in the Company's consolidated service revenues and operating costs. The licensees are responsible for providing an office and paying related expenses for administration including rent, utilities and costs for administrative personnel. The Company pays a monthly distribution or commission to its domestic licensees based on a defined formula of gross profit generated. Generally, the Company pays a licensee approximately 55% (60% for certain licensees who have longer relationships with the Company). There is no payment to the licensees based solely on revenues. For the three months ended August 31, 2003 and 2002, total licensee distributions were approximately $1.8 million and $2.5 million respectively, and for the six months ended August 31, 2003 and 2002 total licensee distributions were approximately $3.5 million and $4.8 million respectively, and are included in the general and administrative expenses. The Company recognizes revenue as the related services are provided to customers and when the customer is obligated to pay for such completed services. Revenues are recorded net of contractual or other allowances to which customers are entitled. Employees assigned to particular customers may be changed at the customer's request or at the Company's initiation. A provision for uncollectible and doubtful accounts is provided for amounts billed to customers which may ultimately be uncollectible due to billing errors, documentation disputes or the customer's inability to pay. Revenues generated from the sales of licensees and initial licensee fees are recognized upon signing of the licensee agreement, if collectibility of such amounts is reasonably assured, since the Company has performed substantially all of its obligations under its licensee agreements by such date. Included in revenues for the six months ended August 31, 2003 and 2002 is $449,000 and $430,000 of licensee fees. 7. INTANGIBLE ASSETS - On March 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Intangible Assets" (SFAS 142). SFAS 142 includes requirements to annually test goodwill and indefinite lived intangible assets for impairment rather than amortize them; accordingly, the Company no longer amortizes goodwill and indefinite lived intangibles. 8. CONTINGENCIES The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of business. Management believes the disposition of the lawsuits will not have a material effect on its financial position, results of operations or cash flows. 9. RECENT ACCOUNTING PRONOUNCEMENTS Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements. 8 10. SHAREHOLDERS EQUITY - On March 10, 2003, the Company sold 300 shares of its 7% Convertible Series A Preferred Stock ("the Preferred Stock") and received cash proceeds of $150,000. The purchasers of the stock were two executive officers of the Company. This stock is convertible to Common Stock at the price of $.80 per share which is 120% of the weighted average market close price of the Company's Common Stock for the ten day trading period ending on the date of the purchase of the Convertible Preferred Stock. On April 30, 2003, the Company sold 500 shares of its Preferred Stock and received cash proceeds of $250,000. The purchasers of the stock were two executive officers of the Company and two accredited investors. This stock is convertible to Common Stock at the price of $.93 per share which is 120% of the weighted average market close price of the Company's Common Stock for the ten day trading period ending on the date of the purchase of the Preferred Stock. On July 16, 2003 the Company sold 367,647 shares of Series A Common Stock at $.68 per share. On July 23, 2003 the Company sold 202,703 shares of Series A Common Stock at $.74 per share. On July 24, 2003 the Company sold 133,333 shares of Series A Common Stock at $.75 per share and on August 19, 2003 the Company sold 256,410 shares of Series A Common stock at $.78 per share. The sales price per share was equal to or exceeded the market price of the Company's common stock at the date of each transaction. The purchasers of the Series A Common Stock were related to two executive officers of the Company. On August 12, 2003 the shareholders of the Company approved an amendment to the Company's Restated Certificate of Incorporation to increase the total number of authorized shares of Class A Common Stock from 50,000,000 shares to 75,000,000 shares. The Company accounts for its employee incentive stock option plans using the intrinsic value method in accordance with the recognition and measurement principles of Accounting Principles Board Opinion No 25 " Accounting for Stock Issued to Employees," as permitted by SFAS No. 123. Had the Company determined compensation expense based on the fair value at the grant dates for those awards consistent with the method of SFAS 123, the Company's net income (loss) per share would have been increased to the following pro forma amounts:
---------------------------------- ------------------- -------------------- ---------------------- ---------------------- (In thousands, except per share For the three For the three For the six For the six data) months ended months ended months ended months ended August 31,2003 August 31,2002 August 31, 2003 August 31,2002 ---------------------------------- ------------------- -------------------- ---------------------- ---------------------- Net (loss) income as reported $(654) $442 $(872) $869 ---------------------------------- ------------------- -------------------- ---------------------- ---------------------- Deduct total stock based employee compensation expense determined under fair value based on methods for all awards $ 36 $ 15 $ 49 $ 31 ---------------------------------- ------------------- -------------------- ---------------------- ---------------------- Pro forma net (loss) income $(690) $ 427 $(921) $838 ---------------------------------- ------------------- -------------------- ---------------------- ---------------------- Basic net (loss) earnings per share as reported $ (.03) $ .02 $ (.04) $ .04 ---------------------------------- ------------------- -------------------- ---------------------- ---------------------- Pro forma basic (loss) earnings per share as reported $ (.03) $ .02 $ (.04) $ .04 ---------------------------------- ------------------- -------------------- ---------------------- ---------------------- Diluted (loss) earnings per share as reported $ (.03) $ .02 $ (.04) $ .03 ---------------------------------- ------------------- -------------------- ---------------------- ---------------------- Pro forma diluted (loss) earnings per share as reported $ (.03) $ .02 $ (.04) $ .03 ---------------------------------- ------------------- -------------------- ---------------------- ----------------------
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts 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 for the three month period ended August 31, 2003 were $33.6 million, a decrease of $5.3 million or 13.7% from total revenues of $38.9 million for the three months ended August 31, 2002. Total revenues for the six month period ended August 31,2003 were $67.7 million, a decrease of $9.0 million or 11.7% from total revenues of $76.7 million for the six months ended August 31, 2002. The revenue decrease is primarily due to reduced demand for temporary nurses as hospitals are continuing to experience flat to declining admission rates. Service costs were 79.2% and 76.5% of total revenues for the three months ended August 31, 2003 and 2002, respectively, and 78.6% and 76.3% for the six months ended August 31, 2003 and 2002, respectively. Margins have declined due to the decreased demand for temporary nurses which has increased the competitive environment pressuring fees and increased insurance costs. Service costs represent the direct costs of providing services to patients or clients, including wages, payroll taxes, travel costs, insurance costs, medical supplies and the cost of contracted services. General and administrative expenses were $6.0 and $7.3 million for the three months ended August 31, 2003 and 2002, and were $12.4 million and $14.5 million for the six months ended August 31, 2003 and 2002, respectively. General and administrative costs, expressed as a percentage of total revenues, were 17.8% and 18.8% for the three months ended August 31, 2003 and 2002, respectively, and was 18.3% and 18.9% for the six months ended August 31, 2003 and 2002, respectively. The reduction in general and administrative expenses as a percentage of sales in 2003 is the result of the reduction in royalty payments to licensees due to decreased revenues as well initiatives undertaken by the Company to reduce the size of or close marginally performing offices and a reduction of back office support staff. Interest expense (net), increased to $1.1 million from $766,000 for the three months ended August 31, 2003 versus 2002 and increased to $1.9 million from $1.5 million for the six months ended August 31, 2003 versus 2002, primarily due to interest costs associated with the Company's term loan facility and to increased interest rates associated with its revolving line of credit. Liquidity and Capital Resources Cash and cash equivalents decreased by $18,000 as of August 31, 2003 as compared to February 28, 2003 as a result of cash used in investing activities of $31,000 and financing activities of $353,000 offset by cash provided by operations of $366,000. Cash used in investing activities was primarily used for capital expenditures and the cash used in financing activities was primarily used to pay notes and capital lease obligations. In April 2001, the Company obtained a new financing facility (the "Facility") with a new lending institution for a $25 million, three year term, revolving loan, $20.6 million of which was used to pay down borrowings under the Company's previous financing facility. The Facility limit was increased to $27.5 million in October 2001. Under the Facility, the Company may borrow amounts up to 85% of the Company's eligible accounts receivable subject to a maximum of $27.5 million. Interest on borrowings under the Facility is at the annual rate of 3.65% over LIBOR in addition to a .5% annual fee for the unused portion of the total loan availability. In November 2002, the lending institution with which the Company has the Facility, increased the revolving credit line to $35 million and provided for an additional term loan facility totaling $5 million. Interest accrues at a rate of 3.95% over LIBOR on the revolving credit line and 6.37% over LIBOR on the term loan facility. The New Facility expires in November 2005. The term loan facility is for acquisitions and capital expenditures. Repayment of this additional term facility will be in 36 equal monthly installments. 10 In November 2002, the interest rates were revised to 4.55% over LIBOR on the revolving line and 7.27% over LIBOR on the term loan facility as part of a loan modification. On June 13, 2003, the Company received a waiver from the lender for non-compliance with certain Facility covenants as of February 28, 2003. Interest rates on both the revolving line and term loan facility were increased 2% and can decrease if the Company meets certain financial criteria. In addition, certain financial ratio covenants were modified. The additional interest is not payable until the current expiration date of the Facility which is November 2005. At the same time, the lender and DSS and DSI note holders amended the subordination agreements. As a result of that amendment, the two series of promissory notes to the former owners of DSS and DSI have been condensed into one series of notes. One of the promissory notes is for a term of seven years, in the principal amount of $8.6 million, bears interest at the rate of 5% per annum, with a minimum monthly payment (including interest) of $40,000 with the first installment becoming due on June 13, 2003, and minimum monthly payments (including interest) of $80,000 beginning on June 1, 2004, thereafter, with a balloon payment of $3.7 million due on May 7, 2007. The balance on the first note after the balloon payment is payable in minimum monthly installments of $80,000 over the remaining 3 years of the note, subject to certain limitations under the amended subordination agreement. The other three promissory notes are for ten years, in the aggregate principal amount of $17.5 million, bear interest at the rate of 5% per annum, with minimum monthly payments (including interest) of $25,000 in the aggregate, with the first installment becoming due on June 13, 2003, and minimum monthly payments (including interest) of $51,000 in the aggregate beginning on June 1, 2004, thereafter. Any unpaid balances at the end of the note terms will be due at that time. If the Company achieves certain financial ratios, its minimum monthly payments under all four of the notes will be increased, as provided in the amended subordination agreement. Payment of the notes is collateralized by a second lien on the assets of the original franchises. In conjunction with the amendment of the notes, one of the note holders reduced his note by approximately $2.8 million, subject to the Company's compliance with the modified subordination agreement. The Company anticipates that capital expenditures for furniture and equipment, including improvements to its management information and operating systems during the next twelve months will be approximately $400,000. Operating cash flows have been our primary source of liquidity and historically have been sufficient to fund our working capital, capital expenditures, and internal business expansion and debt service. The Company's cash flow has been aided by the recent sales of unregistered securities and by the debt restructuring completed on June 13, 2003. We believe that our capital resources are sufficient to meet our working capital requirements for the next twelve months. We expect to meet our future working capital, capital expenditure, internal business expansion, and debt service from a combination of operating cash flows and funds available under the Facility. Business Trends Sales and margins have been under pressure as demand for temporary nurses is currently going through a period of contraction. Hospitals are experiencing flat to declining admission rates and are placing greater reliance on full-time staff overtime and increased nurse patient loads. Because of difficult economic times, nurses in many households are becoming the primary breadwinner, causing them to seek more traditional full time employment. The U.S. Department of Health and Human Services said in a July 2002 report that the national supply of full-time equivalent registered nurses was estimated at 1.89 million and demand was estimated at 2 million. The 6 percent gap between the supply of nurses and vacancies in 2000 is expected to grow to 12 percent by 2010 and then to 20 percent five years later. As the economy rebounds, the prospects for the medical staffing industry and the Company should improve as hospitals experience higher admission rates and increasing shortages of healthcare workers. 11 Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. From time to time, the Company also provides forward-looking statements in other materials it releases to the public as well as oral forward-looking statements. 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 include, but are not limited to, those discussed below in the section entitled "Risk Factors." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. Risk Factors Currently We Are Unable to Recruit Enough Nurses to Meet Our Clients' Demands for our Nurse Staffing Services, Limiting the Potential Growth of Our Staffing Business We rely significantly on our ability to attract, develop and retain nurses and other healthcare personnel who possess the skills, experience and, as required, licenses necessary to meet the specified requirements of our healthcare staffing clients. We compete for healthcare staffing personnel with other temporary healthcare staffing companies, as well as actual and potential clients, some of which seek to fill positions with either regular or temporary employees. Currently, there is a shortage of qualified nurses in most areas of the United States and competition for nursing personnel is increasing. This shortage of nurses limits our ability to grow our staffing business. Furthermore, we believe that the aging of the existing nurse population and declining enrollments in nursing schools will further exacerbate the existing nurse shortage. In addition, in the aftermath of the terrorist attacks on New York and Washington, we experienced a temporary interruption of normal business activity. Similar events in the future could result in additional temporary or longer-term interruptions of our normal business activity, which would adversely affect our financial results. The Costs of Attracting and Retaining Qualified Nurses and Other Healthcare Personnel May Rise More than We Anticipate We compete with other healthcare staffing companies for qualified nurses and other healthcare personnel. Because there is currently a shortage of qualified healthcare personnel, competition for these employees is intense. To induce healthcare personnel to sign on with them, our competitors may increase hourly wages or other benefits. If we do not raise wages in response to such increases by our competitors, we could face difficulties attracting and retaining qualified healthcare personnel. In addition, if we raise wages in response to our competitors' wage increases and are unable to pass such cost increases on to our clients, our margins could decline. We Operate in a Highly Competitive Market and Our Success Depends on our Ability to Remain Competitive in Obtaining and Retaining Hospital and Healthcare Facility Clients and Temporary Healthcare Professionals. The temporary medical staffing business is highly competitive. We compete in national, regional and local markets with full-service staffing companies and with specialized temporary staffing agencies. Some of these companies may have greater marketing and financial resources than we do. Competition for hospital and healthcare facility clients and temporary healthcare professionals may increase in the future and, as a result, we may not be able to remain competitive. To the extent competitors seek to gain or retain market share by reducing prices or increasing marketing expenditures, we could lose revenues or hospital and healthcare facility clients and our margins could decline, which could seriously harm our operating results and cause the price of our stock to decline. In addition, the development of alternative recruitment channels could lead our hospital and healthcare facility clients to bypass our services, which would also cause our revenues and margins to decline. 12 Our Business Depends upon our Continued Ability to Secure and Fill New Orders from our Hospital and Healthcare Facility Clients, Because We Do Not Have Long-Term Agreements or Exclusive Contracts With Them. We do not have long-term agreements or exclusive guaranteed order contracts with our hospital and healthcare facility clients. The success of our business depends upon our ability to continually secure new orders from hospitals and other healthcare facilities and to fill those orders with our temporary healthcare professionals. Our hospital and healthcare facility clients are free to place orders with our competitors and may choose to use temporary healthcare professionals that our competitors offer them. Therefore, we must maintain positive relationships with our hospital and healthcare facility clients. If we fail to maintain positive relationships with our hospital and healthcare facility clients, we may be unable to generate new temporary healthcare professional orders and our business may be adversely affected. Decreases in Patient Occupancy at Our Clients' Facilities May Adversely Affect the Profitability of Our Business Demand for our temporary healthcare staffing services is significantly affected by the general level of patient occupancy at our clients' facilities. When a hospital's occupancy increases, temporary employees are often added before full-time employees are hired. As occupancy decreases, clients may reduce their use of temporary employees before undertaking layoffs of their regular employees. We also may experience more competitive pricing pressure during periods of occupancy downturn. In addition, if a trend emerges toward providing healthcare in alternative settings, as opposed to acute care hospitals, occupancy at our clients' facilities could decline. This reduction in occupancy could adversely affect the demand for our services and our profitability. Healthcare Reform Could Negatively Impact Our Business Opportunities, Revenues and Margins. The U.S. government has undertaken efforts to control increasing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and drug companies. In the recent past, the U.S. Congress has considered several comprehensive healthcare reform proposals. The proposals were generally intended to expand healthcare coverage for the uninsured and reduce the growth of total healthcare expenditures. While the U.S. Congress did not adopt any comprehensive reform proposals, members of Congress may raise similar proposals in the future. If any of these proposals are approved, hospitals and other healthcare facilities may react by spending less on healthcare staffing, including nurses. If this were to occur, we would have fewer business opportunities, which could seriously harm our business. State governments have also attempted to control increasing healthcare costs. For example, the state of Massachusetts has recently implemented a regulation that limits the hourly rate payable to temporary nursing agencies for registered nurses, licensed practical nurses and certified nurses' aides. The state of Minnesota has also implemented a statute that limits the amount that nursing agencies may charge nursing homes. Other states have also proposed legislation that would limit the amounts that temporary staffing companies may charge. Any such current or proposed laws could significantly harm our business, revenues and margins. Furthermore, third party payors, such as health maintenance organizations, increasingly challenge the prices charged for medical care. Failure by hospitals and other healthcare facilities to obtain full reimbursement from those third party payors could reduce the demand or the price paid for our staffing services. We are Dependent on the Proper Functioning of Our Information Systems Our company is dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations identify and match staffing resources and client assignments and perform billing and accounts receivable functions. Our information systems are protected through physical and software safeguards and we have backup remote processing capabilities. However, they are still vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. In the event that critical information systems fail or are otherwise unavailable, these functions would have to be accomplished manually, which could temporarily impact our ability to identify business opportunities quickly, to maintain billing and clinical records reliably and to bill for services efficiently. 13 We May be Legally Liable for Damages Resulting from our Hospital and Healthcare Facility Clients' Mistreatment of our Healthcare Personnel. Because we are in the business of placing our temporary healthcare professionals in the workplaces of other companies, we are subject to possible claims by our temporary healthcare professionals alleging discrimination, sexual harassment, negligence and other similar activities by our hospital and healthcare facility clients. The cost of defending such claims, even if groundless, could be substantial and the associated negative publicity could adversely affect our ability to attract and retain qualified healthcare professionals in the future. If Regulations that Apply to us Change, We May Face Increased Costs That Reduce Our Revenue and Profitability The temporary healthcare staffing industry is regulated in many states. In some states, firms such as our company must be registered to establish and advertise as a nurse staffing agency or must qualify for an exemption from registration in those states. If we were to lose any required state licenses, we could be required to cease operating in those states. The introduction of new regulatory provisions could substantially raise the costs associated with hiring temporary employees. For example, some states could impose sales taxes or increase sales tax rates on temporary healthcare staffing services. These increased costs may not be able to be passed on to clients without a decrease in demand for temporary employees. In addition, if government regulations were implemented that limited the amounts we could charge for our services, our profitability could be adversely affected. Future Changes in Reimbursement Trends Could Hamper Our Clients' Ability to Pay Us Many of our clients are reimbursed under the federal Medicare program and state Medicaid programs for the services they provide. In recent years, federal and state governments have made significant changes in these programs that have reduced reimbursement rates. In addition, insurance companies and managed care organizations seek to control costs by requiring that healthcare providers, such as hospitals, discount their services in exchange for exclusive or preferred participation in their benefit plans. Future federal and state legislation or evolving commercial reimbursement trends may further reduce, or change conditions for, our clients' reimbursement. Limitations on reimbursement could reduce our clients' cash flows, hampering their ability to pay us. Competition for Acquisition Opportunities May Restrict Our Future Growth by Limiting Our Ability to Make Acquisitions at Reasonable Valuations Our business strategy includes increasing our market share and presence in the temporary healthcare staffing industry through strategic acquisitions of companies that complement or enhance our business. We have historically faced competition for acquisitions. In the future, such competition could limit our ability to grow by acquisitions or could raise the prices of acquisitions and make them less attractive to us. We May Face Difficulties Integrating Our Acquisitions Into Our Operations and Our Acquisitions May be Unsuccessful, Involve Significant Cash Expenditures or Expose Us to Unforeseen Liabilities We continually evaluate opportunities to acquire healthcare staffing companies and other human capital management services companies that complement or enhance our business. From time to time, we engage in strategic acquisitions of such companies or their assets. These acquisitions involve numerous risks, including: - potential loss of key employees or clients of acquired companies; - difficulties integrating acquired personnel and distinct cultures into our business; - difficulties integrating acquired companies into our operating, financial planning and financial reporting systems; - diversion of management attention from existing operations; and - assumption of liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for their failure to comply with healthcare regulations. 14 These acquisitions may also involve significant cash expenditures, debt incurrence and integration expenses that could have a material adverse effect on our financial condition and results of operations. Any acquisition may ultimately have a negative impact on our business and financial condition. Significant Legal Actions Could Subject Us to Substantial Uninsured Liabilities In recent years, healthcare providers have become subject to an increasing number of legal actions alleging malpractice, product liability or related legal theories. Many of these actions involve large claims and significant defense costs. In addition, we may be subject to claims related to torts or crimes committed by our employees or temporary staffing personnel. In some instances, we are required to indemnify clients against some or all of these risks. A failure of any of our employees or personnel to observe our policies and guidelines intended to reduce these risks, relevant client policies and guidelines or applicable federal, state or local laws, rules and regulations could result in negative publicity, payment of fines or other damages. To protect ourselves from the cost of these claims, we maintain professional malpractice liability insurance and general liability insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage may not cover all claims against us or continue to be available to us at a reasonable cost. If we are unable to maintain adequate insurance coverage, we may be exposed to substantial liabilities, which could adversely affect our financial results. If Our Insurance Costs Increase Significantly, These Incremental Costs Could Negatively Affect Our Financial Results The costs related to obtaining and maintaining workers compensation, professional and general liability insurance and health insurance for healthcare providers has been increasing. If the cost of carrying this insurance continues to increase significantly, we will recognize an associated increase in costs which may negatively affect our margins. This could have an adverse impact on our financial condition and the price of our common stock. If We Become Subject to Material Liabilities Under Our Self-Insured Programs, Our Financial Results May Be Adversely Affected We provide workers compensation coverage through a program that is partially self-insured. If we become subject to substantial uninsured workers compensation liabilities, our financial results may be adversely affected. We Have a Substantial Amount of Goodwill on our Balance Sheet. A Substantial Impairment of our Goodwill May Have the Effect of Decreasing Our Earnings or Increasing Our Losses. As of August 31, 2003, we had $33.1 million of unamortized goodwill on our balance sheet, which represents the excess of the total purchase price of our acquisitions over the fair value of the net assets acquired. At August 31, 2003, goodwill represented 42.2% of our total assets. Historically, we amortized goodwill on a straight-line basis over the estimated period of future benefit of up to 25 years. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 142 requires that, subsequent to January 1, 2002, goodwill not be amortized but rather that it be reviewed annually for impairment. In the event impairment is identified, a charge to earnings would be recorded. We have adopted the provisions of SFAS No. 141 and SFAS No. 142 as of March 1, 2002. Although it does not affect our cash flow, an impairment charge to earnings has the effect of decreasing our earnings. If we are required to take a charge to earnings for goodwill impairment, our stock price could be adversely affected. Demand for Medical Staffing Services is Significantly Affected by the General Level of Economic Activity and Unemployment in the United States. When economic activity increases, temporary employees are often added before full-time employees are hired. However, as economic activity slows, many companies, including our hospital and healthcare facility clients, reduce their use of temporary employees before laying off full-time employees. In addition, we may experience more competitive pricing pressure during periods of economic downturn. Therefore, any significant economic downturn could have a material adverse impact on our condition and results of operations. 15 Business Conditions Our business is dependent on the Company continuing 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 patients of the Company's customers. The possible inability to attract and retain qualified licensees, skilled management and sufficient numbers of credentialed health care professional and para-professionals and information technology personnel could adversely affect the Company's operations and quality of 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 Facility described above. Under the Facility, the interest rate is 4.55% over LIBOR. At August 31, 2003, drawings on the Facility were $21.5 million. Assuming variable rate debt at August 31, 2003, a one point change in interest rates would impact annual net interest payments by $215,000. The Company does not use derivative financial instruments to manage interest rate risk. ITEM 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, the Company carried out, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in the Exchange Act Rules 13a-14(c) and 15d-14(c). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the date of that evaluation. There have been no significant changes in internal controls, or in other factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. 16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - See Note 8 in PART I. - ITEM 1. ----------------------------------------------------------- ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------------- (A) The Company held its annual meeting of Shareholders on August 12, 2003 (B) The shareholders voted on and elected the following directors as follows:
NOMINEE FOR WITHELD ---------------------------------------------------- David Savitsky 24,080,414 1,443,012 Jonathan Halpert 24,056,498 1,466,928
The following directors who were not up for election will continue in office: Stephen Savitsky Donald Meyers Bernard Firestone ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- (A) Exhibits Exhibit 31 - Certifications =========================== Exhibit 32 - Section 1350 Certifications ======================================== (B) Reports on Form 8-K The Company filed a current report on Form 8-K on June 2, 2003 to furnish its press release reporting results for the Fourth Quarter ended February 28, 2003. The Company filed a current report on Form 8-K on June 18, 2003 to furnish its press release reporting that the Company had renegotiated it's debt with noteholders. The Company filed a current report on Form 8-K on June 23, 2003 to furnish its press release announcing it has signed a managerial agreement with Travel Choice Staffing Inc. The Company filed a current report on Form 8-K on July 15, 2003 to furnish its press release reporting results for the first quarter for the fiscal year ended February 29, 2004. 17 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. Dated: October 14, 2003 ATC HEALTHCARE, INC. By: /s/ Andrew Reiben -------------------- Andrew Reiben Senior Vice President, Finance Chief Financial Officer and Treasurer (Authorized Officer Principal Financial and Accounting Officer) 18