-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DyjdWd7T6IJMw2Md66aN//sUDk2i4RP+3a8GEsfvImzWUpNIWTtVKgFvfrS8zk/Q C5hZH2SAf3PKfq1EvySRdA== 0000828828-97-000021.txt : 19971023 0000828828-97-000021.hdr.sgml : 19971023 ACCESSION NUMBER: 0000828828-97-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971022 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATC GROUP SERVICES INC /DE/ CENTRAL INDEX KEY: 0000828828 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] IRS NUMBER: 460399408 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10583 FILM NUMBER: 97699173 BUSINESS ADDRESS: STREET 1: 104 E 25TH ST 10TH FLR CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2123538280 MAIL ADDRESS: STREET 1: 104 EAST 25TH STREET STREET 2: 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10010 FORMER COMPANY: FORMER CONFORMED NAME: ATC ENVIRONMENTAL INC DATE OF NAME CHANGE: 19920703 10-Q 1 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended August 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-10583 ATC GROUP SERVICES INC. ----------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 46-0399408 - ---------------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 104 East 25th Street, 10th Floor New York, New York 10010 - ---------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 353-8280 None ---- (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the Registrant's Common Stock as of October 14, 1997 was 7,807,107. ATC GROUP SERVICES INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1997 PART I - FINANCIAL INFORMATION: Item 1 - Financial Statements: Consolidated Balance Sheets February 28, 1997 and August 31, 1997 (Unaudited)....................................................... F-3 Consolidated Statements of Operations Three months and six months ended August 31, 1996 and 1997 (Unaudited).................................. F-4 Consolidated Statements of Stockholders' Equity Six months ended August 31, 1996 and 1997 (Unaudited)................................................... F-5 Consolidated Statements of Cash Flows Six months ended August 31, 1996 and 1997 (Unaudited)................................................... F-6 Notes to Consolidated Financial Statements Three months and six months ended August 31, 1997 (Unaudited)........................................... F-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................... F-14 PART II - OTHER INFORMATION: Items 1-6........................................................................................................ F-18 Signatures....................................................................................................... F-20 Exhibit 11 - Computation of Earnings Per Share Three months and six months ended August 31, 1996 and 1997 (Unaudited)............................ F-21 Exhibit 27 - Financial Data Schedule August 31, 1997 (Unaudited)........................................................................ F-22
F-2 ATC GROUP SERVICES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS FEBRUARY 28, 1997 AND AUGUST 31, 1997 (Unaudited) - -------------------------------------------------------------------------------
February 28, August 31, 1997 1997 --------------- -------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents........................................................ $ 2,003,890 $ 7,893,465 Trade accounts receivable, less allowance for doubtful accounts ($1,455,716 at February 28, 1997 and $2,106,863 at August 31, 1997)............ 34,406,026 41,600,223 Costs in excess of billings on uncompleted contracts............................. 5,191,569 10,535,085 Prepaid expenses and other current assets........................................ 2,934,193 3,413,025 Deferred income taxes ........................................................... 790,400 790,400 Refundable income taxes.......................................................... 118,340 - ---------------- -------------- Total current assets......................................................... 45,444,418 64,232,198 PROPERTY AND EQUIPMENT, Net (Note C).................................................. 3,784,633 5,025,542 GOODWILL, net of accumulated amortization (Note B) ($1,478,876 at February 28, 1997 and $2,297,353 at August 31, 1997)............... 35,587,076 45,713,191 COVENANTS NOT TO COMPETE, net of accumulated amortization (Note B) ($455,316 at February 28, 1997 and $557,207 at August 31, 1997).................. 632,184 630,293 OTHER ASSETS.......................................................................... 845,346 4,228,040 --------------- -------------- $ 86,293,657 $ 119,829,264 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt.................................................................. $ 300,000 $ 3,072,219 Current maturities of long-term debt............................................. 1,986,730 1,601,692 Accounts payable................................................................. 7,440,024 11,750,239 Income taxes payable............................................................. - 554,241 Accrued compensation............................................................. 3,789,233 4,877,043 Accrued payment obligations - ATEC acquisition (Note B).......................... 1,721,594 3,880,285 Other accrued expenses (Note B).................................................. 2,505,143 3,507,311 --------------- -------------- Total current liabilities.................................................... 17,742,724 29,243,030 LONG-TERM DEBT, less current maturities............................................... 22,123,344 38,697,491 OTHER LIABILITIES..................................................................... 270,386 3,305,019 DEFERRED INCOME TAXES................................................................. 717,900 717,900 ---------------- --------------- Total liabilities............................................................ 40,854,354 71,963,440 ---------------- --------------- COMMITMENTS AND CONTINGENCIES (Notes B and D) STOCKHOLDERS' EQUITY: Common stock, par value $.01 per share; authorized 20,000,000 shares; issued and outstanding: 7,800,187 shares at February 28, 1997 and 7,805,407 shares at August 31, 1997...................................................... 78,002 78,054 Additional paid-in capital....................................................... 28,996,627 28,998,741 Retained earnings................................................................ 16,364,674 18,789,029 ---------------- -------------- Total stockholders' equity................................................... 45,439,303 47,865,824 ---------------- -------------- $ 86,293,657 $ 119,829,264 =============== ==============
See notes to consolidated financial statements. F-3 ATC GROUP SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1996 AND 1997 (Unaudited) - --------------------------------------------------------------------------------
Three Months Ended Six Months Ended August 31, August 31, 1996 1997 1996 1997 ----------------- ------------------ ---------------- ---------------- REVENUES ................................... $ 33,922,028 $ 34,722,201 $ 50,568,011 $ 66,096,867 Reimbursable Costs..................... 5,077,483 5,905,664 7,699,061 10,361,497 ----------------- ------------------ ---------------- ---------------- NET REVENUES ............................. 28,844,545 28,816,537 42,868,950 55,735,370 COST OF NET REVENUES........................ 16,314,731 15,751,062 23,057,124 30,412,683 ----------------- ------------------ ---------------- ---------------- Gross Profit....................... 12,529,814 13,065,475 19,811,826 25,322,687 OPERATING EXPENSE: Selling................................ 750,818 1,039,462 1,293,400 2,039,457 General and administration............. 7,660,199 8,951,861 11,578,214 17,429,197 Provision for bad debts................ 208,666 366,945 341,301 744,384 ----------------- ------------------ ---------------- ---------------- 8,619,683 10,358,268 13,212,915 20,213,038 ----------------- ---------------- --------------- --------------- Operating income................... 3,910,131 2,707,207 6,598,911 5,109,649 NONOPERATING EXPENSE (INCOME): Interest expense....................... 512,773 763,501 570,099 1,261,909 Interest income........................ (65,412) (97,121) (195,447) (148,904) Other.................................. (22,723) (22,212) (33,537) (12,711) ----------------- ------------------ ---------------- ---------------- 424,638 644,168 341,115 1,100,294 ----------------- ------------------ ---------------- ---------------- Income before income taxes......... 3,485,493 2,063,039 6,257,796 4,009,355 INCOME TAX EXPENSE (Note B)................. 1,384,000 815,000 2,438,000 1,585,000 ----------------- ------------------ ---------------- ---------------- NET INCOME.................................. $ 2,101,493 $ 1,248,039 $ 3,819,796 $ 2,424,355 ================ ================ =============== =============== EARNINGS PER COMMON SHARE AND DILUTIVE COMMON EQUIVALENT SHARE: Primary............................ $ .25 $ .15 $ .45 $ .29 =============== =============== ================ =============== Fully diluted...................... $ .25 $ .15 $ .44 $ .28 =============== =============== ================ =============== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Primary............................ 8,576,018 8,533,775 8,578,831 8,467,249 ================ ================ ================ =============== Fully diluted...................... 8,576,018 8,533,775 8,628,179 8,525,884 ================ ================ ================ ===============
See notes to consolidated financial statements. F-4 ATC GROUP SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED AUGUST 31, 1996 AND 1997 (Unaudited) - --------------------------------------------------------------------------------
1996 -------------------------------------------------------------------------------------- Notes Additional Receivable- Common Stock Paid-in Common Retained Shares Amount Capital Stock Earnings Total ------------ ------------ ------------- ------------ ------------ ------------ BALANCE, February 29, 1996............ 7,796,577 $ 77,966 $ 29,030,189 $ (45,000) $ 10,129,259 $ 39,192,414 Sale of common stock at $2.50 to $10.00 per share, upon exercise of stock options and warrants.......... 2,980 29 24,376 - - 24,405 Stock received as consideration for sale of assets..................... (12,320) (123) (51,990) - (72,319) (124,432) Continuing registration costs applied against additional paid-in capital.. - - (28,570) - - (28,570) Other capital transactions............ - - - 45,000 - 45,000 Net income............................ - - - - 3,819,796 3,819,796 ------------ ------------ ------------- ------------ ------------ ----------- BALANCE, August 31, 1996.............. 7,787,237 $ 77,872 $ 28,974,005 $ - $ 13,876,736 $42,928,613 ============ ============ ============= ============ ============ ===========
1997 -------------------------------------------------------------------------------------- Notes Additional Receivable- Common Stock Paid-in Common Retained Shares Amount Capital Stock Earnings Total ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, February 28, 1997............ 7,800,187 $ 78,002 $ 28,996,627 $ - $ 16,364,674 $ 45,439,303 Sale of common stock at $1.88 to $10.00 per share, upon exercise of stock options and warrants......... 5,220 52 36,098 - - 36,150 Continuing registration costs applied against additional paid-in capital. - - (33,984) - - (33,984) Net income............................ - - - - 2,424,355 2,424,355 ------------ ------------ ------------ ------------ ------------ ------------ BALANCE, August 31, 1997.............. 7,805,407 $ 78,054 $28,998,741 $ - $ 18,789,029 $ 47,865,824 ============ ============ ============= ============ ============ ============
See notes to consolidated financial statements. F-5 ATC GROUP SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED AUGUST 31, 1996 AND 1997 (Unaudited) - -------------------------------------------------------------------------------
Six Months Ended August 31, --------------------------------- 1996 1997 ---------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.......................................................................... $ 3,819,796 $ 2,424,355 Adjustments to reconcile net income to net cash from operating activities:.......... Depreciation and leasehold amortization.......................................... 405,074 503,855 Amortization of goodwill and covenants........................................... 524,795 920,368 Provision for bad debts.......................................................... 341,301 744,384 Other liabilities................................................................ (85,292) (1,077,567) Changes in operating assets and liabilities, net of amounts acquired in acquisitions: Accounts receivable and cost in excess of billings on uncompleted contracts.. (4,042,124) (5,100,710) Prepaid expenses and other assets............................................ (847,080) (1,149,515) Accounts payable and other liabilities........................................... (6,808,932) 332,285 Income taxes payable......................................................... 634,069 554,241 ---------------- ------------- Net cash flows from operating activities................................... (6,058,393) (1,848,304) ---------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of BCM Engineers, Inc................................................... - (5,425,539) Purchase of American Testing and Engineering Corp., net of cash acquired......... (8,965,952) (2,420,766) Purchase of 3D Information Services, Inc., net of cash acquired.................. (2,926,681) - Purchase of property and equipment............................................... (783,686) (667,393) Other............................................................................ 16,477 60,302 --------------- ------------ Net cash flows from investing activities................................... (12,659,842) (8,453,396) --------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt and notes payable....................... 20,923,572 38,500,000 Proceeds from issuance of common stock, net of expenses.......................... 24,405 36,150 Principal payments on long-term debt and notes payable, including capital lease obligations............................................ (12,233,289) (22,310,891) Payments for continuing registration costs....................................... (28,570) (33,984) ------------------ --------------- Net cash flows from financing activities................................... 8,686,118 16,191,275 ---------------- --------------- Net change in cash and cash equivalents.................................... (10,032,117) 5,889,575 CASH AND CASH EQUIVALENTS, Beginning of period...................................... 13,469,443 2,003,890 ---------------- -------------- CASH AND CASH EQUIVALENTS, End of period............................................ $ 3,437,326 $ 7,893,465 ================ ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for:............................................................... Interest..................................................................... $ 527,314 $ 577,486 ================ ============== Income taxes................................................................. $ 1,803,931 $ 489,187 ================ ==============
See notes to consolidated financial statements. F-6 ATC GROUP SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1997 (Unaudited) - ------------------------------------------------------------------------------- A. GENERAL Principles of Consolidation - The consolidated financial statements include the accounts of ATC Group Services Inc. and its wholly-owned subsidiaries ("ATC" or the "Company"). In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly, in all material respects, the financial position, the results of operations and the cash flows for the periods presented herein. These results of operations are not necessarily indicative of the results to be expected for the full year due to certain seasonality factors and the effects and timing of large service projects. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These condensed financial statements should be read in conjunction with the consolidated financial statements and the notes included in the Company's financial statements for the fiscal year ended February 28, 1997, which are included in the Company's Annual Report on Form 10-K. Nature of Business - ATC is a national business services firm providing technical and project management services relating to environmental consulting (the "environmental consulting and engineering" segment) and information technology consulting services (the "information technology consulting" segment). The Company's environmental consulting and engineering segment provides environmental and geotechnical engineering services, architectural engineering services, construction materials testing and analytical testing. The Company's information technology consulting segment provides analysis and design services and system programming services to assist clients in building new or modifying existing computer systems. This business unit also provides support to clients in maintaining computer systems. Senior Secured Notes - On May 29, 1997, the Company issued $32,500,000 of 8.18% Senior Secured Notes due in annual installments beginning May, 2000, through May, 2004, to a group of financial institutions. Interest on the Senior Secured Notes is payable semi-annually on May 31, and November 30, commencing on November 30, 1997. The Senior Secured Notes are collateralized by accounts receivable, work-in-process, intangible assets and the Company's primary depository accounts. The proceeds from the Senior Secured Notes have in part been utilized to repay the Company's outstanding bridge credit facility. Accordingly, at February 28, 1997, the Company classified its $20,850,000 outstanding bridge credit facility as long-term debt. The bridge facility was entered into in May, 1996, to provide capital in connection with the Company's acquisition of American Testing and Engineering Corporation and 3D Information Services, Inc. Bank Credit Agreement - In connection with the Senior Secured Note offering, the Company executed a credit agreement with the Chase Manhattan Bank and Atlantic Bank of New York. The credit agreement provides for a $15,000,000 revolving line of credit maturing on November 30, 1999. The borrowings under the line of credit are collateralized by the Company's cash, accounts receivable, work in process, and intangible assets on a pari passu basis with the Senior Secured Note holders. Under the terms of the Note and Credit Agreements, the Company is required to comply with certain financial and business covenants including maintaining minimum working capital levels, fixed charge and interest ratios and restrictions on dividend payments. Statement of Financial Accounting Standards No. 121 - On March 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of. The adoption of SFAS No. 121 did not have a material effect on the Company's financial statements. Earnings Per Share Data - Earnings per common share and dilutive common equivalent share have been computed by using the weighted average number of shares outstanding during each period. Outstanding dilutive stock warrants and options are included in the computation of weighted average number of shares. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share. SFAS No. 128, which becomes effective for financial statements of the Company issued for fiscal years ending after December 15, 1997, replaces primary and fully diluted earnings per share, as disclosed under certain pronouncements, with basic and diluted earnings per share. Pro forma basic earnings per share for the three months ended August 31, 1996 and 1997 are $.27 and $.16, respectively. Pro forma diluted earnings per share for the three months ended August 31, 1996 and 1997 are $.25 and $.15, respectively. Pro forma F-7 basic earnings per share for the six months ended August 31, 1996 and 1997 are $.49 and $.31, respectively. Pro forma diluted earnings per share for the six months ended August 31, 1996 and 1997 are $.45 and $.29, respectively. Reclassifications - Certain reclassifications have been made to the prior period's financial statements to conform to the current years presentation. B. BUSINESS ACQUISITIONS AND MERGER Business Acquisitions - The following acquisitions have been accounted for as purchases. The acquired company's assets and liabilities are included in the accompanying consolidated balance sheets at fair value at the date of purchase. The acquired company's operations subsequent to the acquisition are included in the accompanying consolidated statements of operations. Fiscal 1998 BCM Engineers, Inc. - On August 20, 1997 ATC purchased certain assets and assumed certain liabilities of the environmental consulting and engineering services division of the Smith Technology Corporation ("Smith") which operated primarily as BCM Engineers, Inc. ("BCM"). BCM is a leading municipal water and wastewater environmental engineering firm and provides services in water, resource management, environmental compliance and site investigations, remedial design and engineering, asbestos, and air quality management. BCM serves major industrial clients in the chemical, petrochemical, oil and gas manufacturing, water supply, commercial development and utilities industries from multiple locations in the east and Gulf Coast.
The purchase price was comprised of the following consideration: Amounts paid to seller or to others on behalf of seller: Cash.................................................................................. $ 5,425,539 Notes payable......................................................................... 2,950,000 Less note payable offset.............................................................. (200,000) Liabilities assumed: Current liabilities................................................................... 2,833,665 Non current liabilities............................................................... 1,356,151 Direct expenses related to acquisition...................................................... 112,133 ------------ $ 12,477,488 ============
Notes payable includes a $200,000 note which became due September 20, 1997 and is subject to offset for reductions in net assets and for unrecorded liabilities arising through the closing date of the transaction. The seller has not delivered a final closing balance sheet, however, based on preliminary information available and unrecorded liabilities incurred by the Company, the note is expected to be offset in full. Current liabilities includes an amount equal to the offset. An additional note payable in the amount of $2,750,000 is due February 27, 1998 and is subject to offset for uncollected accounts receivable and work in process in excess of recorded reserves and for certain other specified matters.
The preliminary purchase price allocation is summarized as follows: Accounts receivable, net of allowance....................................................... $ 4,710,960 Work in process............................................................................. 3,684,939 Other current assets........................................................................ 7,357 Other assets................................................................................ 1,327,270 Covenants not to compete.................................................................... 100,000 Goodwill.................................................................................... 2,646,962 ------------ $ 12,477,488 ============
The preliminary purchase price allocation is subject to change when additional information concerning asset and liability valuations is obtained. Therefore, the final allocation may differ froom the preliminary allocation. F-8 Fiscal 1997 American Testing and Engineering Corporation - On May 24, 1996 ATC purchased certain assets and assumed certain liabilities of American Testing and Engineering Corporation ("ATEC"), a national environmental consulting firm. ATEC provides environmental engineering and consulting services through a large network of branch and regional offices. Under the original purchase agreement, the Company was contingently liable to ATEC for additional purchase consideration up to $10,750,000 if certain conditions were met. The seller since met certain of these contingent consideration requirements in the quarter ended May 31, 1997 and the Company began to amortize the associated goodwill in this period. In addition, in connection with the issuance of the Senior Secured Notes on May 29, 1997, the Company and the seller executed an amendment to the original purchase agreement and agreed to remove or modify the remaining contingent consideration requirements. As a result of the foregoing, the Company paid $2,420,766 on May 30, 1997 and is obligated to make monthly payments through February 1999. The monthly payments due during the next year are included in short-term liabilities. The non-current portion at August 31, 1997 of $1,721,500 is included in Other Liabilities in the accompanying consolidated balance sheet. Additionally, the Company has the option to purchase certain properties from the seller for $1,700,000 in fiscal 2002.
The purchase price as amended was comprised of the following consideration: Amounts paid to seller and a majority owner: Cash.................................................................................. $ 9,000,000 Payment obligations, for property and facility rentals and non-compete consideration.............................................. 6,001,000 Contingent/additional consideration under amended purchase agreement.................. 9,049,000 Liabilities assumed: Current liabilities................................................................... 15,731,076 Bank debt............................................................................. 10,750,000 Direct expenses related to acquisition...................................................... 139,438 ------------- $ 50,670,514 ============= The purchase price allocation reflecting the additional consideration is summarized as follows: Accounts receivable and work in process, net of allowances.................................. $ 18,957,768 Other current assets........................................................................ 2,023,996 Other assets................................................................................ 1,428,617 Covenants not to compete.................................................................... 430,000 Goodwill ................................................................................... 27,830,133 ------------- $ 50,670,514 =============
As a result of sellers warranties of purchased trade receivables and work in process that were not realized, the Company is entitled to set-offs of $618,835 against the option price to acquire certain properties in fiscal 2002. If the Company does not exercise its option, the set-offs will be refunded by the seller. Amounts are included in other non-current assets in the accompanying consolidated balance sheet. In connection with the purchase agreement, the Company has issued an irrevocable letter of credit in the amount of $500,000 to secure the Company's performance of its payment obligations. The letter of credit is renewable by the seller until such time the Company has paid the purchase obligations in full. No amounts have been drawn against the letter of credit. F-9 3D Information Services, Inc. - On May 28, 1996, ATC purchased certain assets and assumed certain liabilities of 3D Information Services, Inc. ("3D"), a New Jersey based information services company providing technical information consulting services in all phases of information system design, development, maintenance and management in client server and mainframe based environments. The purchase price was comprised of the following consideration:
Amounts paid to seller: Cash.................................................................................. $ 3,000,000 Note payable.......................................................................... 2,500,000 Assumed liabilities......................................................................... 247,905 Direct expenses related to acquisition...................................................... 23,149 ------------ $ 5,771,054 ============ The initial purchase price allocation is summarized as follows: Accounts receivable......................................................................... $ 1,163,981 Work in process............................................................................. 279,047 Property and equipment...................................................................... 77,381 Other current assets........................................................................ 77,560 Covenant not to compete..................................................................... 100,000 Goodwill ................................................................................... 4,073,085 ------------ $ 5,771,054 ============
Fiscal 1996 Hill Businesses - In November 1995, ATC purchased certain assets and assumed certain liabilities of Kaselaan & D'Angelo Associates, Inc., Hill Environmental, Inc. (formerly the environmental division of Gibbs & Hill, Inc.) and Particle Diagnostics, Inc., wholly owned subsidiaries of Hill International, Inc. (collectively the "Hill Businesses"). The Hill Businesses provide environmental consulting and engineering services, including asbestos management, industrial hygiene and indoor air quality consulting, environmental auditing and permitting, environmental regulatory compliance, water and wastewater engineering, solid waste landfill management and analytical laboratory services. The purchase price was comprised of the following consideration.
Amounts paid to seller: Cash................................................................................. $ 2,517,949 Letter of credit, net of imputed interest (Note E)................................... 700,000 Note payable at 8.75% interest (Note E).............................................. 300,000 Liabilities assumed......................................................................... 907,884 Direct expenses related to acquisition...................................................... 885,538 ------------ $ 5,311,371 ============
Direct expenses related to acquisition includes costs incurred in order to obtain proper title to the assets from Sellers bank as described further in Note D. In addition, the Company issued to certain selling shareholders, 50,000 stock options to purchase restricted common stock at $13.875 per share as consideration for non compete agreements.
The purchase price allocation is summarized as follows: Costs in excess of billings on uncompleted contracts, net of unrealizable amounts........... $ 620,000 Property and equipment...................................................................... 175,000 Other assets................................................................................ 30,572 Covenants not to compete.................................................................... 37,500 Goodwill.................................................................................... 4,448,299 ------------ $ 5,311,371 ============
The Company is contingently liable to reimburse up to $150,000 of certain facility lease costs if incurred by Hill International, Inc. The payment of the contingent liability, which the Seller claims is now due, certain other liabilities and the $300,000 note is being withheld pending the outcome of the litigation (Note D). F-10 Applied Geosciences, Inc. - Effective February 29, 1996, ATC purchased certain assets and assumed certain liabilities of Applied Geosciences, Inc. ("AGI"), a California based environmental consulting company having offices in San Diego, Tustin and San Jose, California. The purchase price was comprised of the following consideration. In addition, AGI will receive contingent consideration of up to $190,000 subject to actual collections of the purchased trade receivables in excess of a minimum amount established under the agreements. As of February 28, 1997 $22,324 of contingent consideration had been earned and paid.
Cash to seller.............................................................................. $ 147,546 Contingent consideration earned to date..................................................... 22,324 Cash to secured creditors of seller......................................................... 441,514 Liabilities assumed......................................................................... 225,538 Direct expenses related to acquisition...................................................... 31,246 -------------- $ 868,168 ============== The purchase price allocation is summarized as follows: Accounts receivable ........................................................................ $ 474,973 Property and equipment...................................................................... 115,060 Covenants not to compete.................................................................... 30,000 Goodwill.................................................................................... 248,135 -------------- $ 868,168 ==============
Pro Forma Financial Information (Unaudited) - The following unaudited pro forma information sets forth the results of operations of ATC as if ATC's purchase of significant subsidiaries including ATEC and 3D had occurred on March 1, 1996:
PRO FORMA ---------------------------------------------------------------- Three Months Ended Six Months Ended August 31, August 31, ------------------------------ ------------------------------- 1996 1997 1996 1997 -------------- -------------- -------------- ------------- Revenues......................................... $ 33,922,028 $ 34,722,201 $ 72,043,995 $ 66,096,867 Net income....................................... $ 2,101,493 $ 1,248,039 $ 4,944,968 $ 2,424,355 Earnings per share (fully diluted)............... $ .25 $ .15 $ .57 $ .28 Weighted average shares (fully diluted).......... 8,576,018 8,533,775 8,628,179 8,525,884
C. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following: February 28 , August 31, 1997 1997 --------------- --------------- Office equipment................................................................. $ 3,339,049 $ 4,035,139 Laboratory and field equipment................................................... 3,335,721 3,939,400 Transportation equipment......................................................... 207,857 450,665 Leasehold improvements........................................................... 849,700 1,041,035 -------------- -------------- 7,732,327 9,466,239 Less accumulated depreciation.................................................... 3,947,694 4,440,697 -------------- -------------- Property and equipment, net...................................................... $ 3,784,633 $ 5,025,542 ============== ==============
F-11 D. CONTINGENCIES First Fidelity Bank, N.A., et al v. Hill International, Inc. et al, Superior Court of New Jersey, Law Division, Burlington County, Docket No. Bur-L-03400-95, filed December 19, 1995. Irvin E. Richter, et al v. ATC Group Services Inc., et al, United States District Court, District of New Jersey, Civ. No. 96 CV 5818 (JBS) filed December 6, 1996. On December 19, 1995, a second amended complaint was filed in the above-entitled action which joined the Company as a defendant and included a count against the Company seeking recovery of certain assets purchased from Hill International, Inc. ("Hill") on the grounds that plaintiff banks hold security interests in the assets and that Hill is in default under the security agreement creating such alleged security interests. The original plaintiffs in this action were First Fidelity Bank, N.A. and United Jersey Bank, N.A. The primary defendants were Hill and certain of its subsidiaries, and Irvin Richter, David Richter, Janice Richter and William Doyle. Irvin Richter and David Richter are officers and stockholders of Hill. In April 1996, the Company filed a cross-claim against Hill, Irvin Richter and David Richter alleging breach of contract, fraud, among other allegations and seeking unspecified damages, including punitive damages and equitable relief. In August, 1996, Hill and the Richters filed an answer denying ATC's cross claims, a cross-claim against ATC and a third party claim against certain members of ATC's management and an employee. The cross claim and third party claim seek unspecified damages, including punitive damages, for defamation, breach of the Richters' non-competition agreements and securities fraud. The defamation claim is based on plaintiff banks' allegation of fraud against Hill and the Richters in their amended complaint, which Hill and the Richters allege was based on defamatory statements made by ATC in settlement discussions with the plaintiff banks. In its answer, the Company both denies that it made defamatory statements and asserts that the defamation allegations fail to state a legally valid claim. The breach of contract and securities claims are based on allegations that ATC made representations concerning a registration rights agreement to be provided in connection with options issued to the Richters as consideration for their non-competition agreements. In its answer, the Company denies that an agreement concerning registration rights was ever reached and asserts that the Richters forfeited any such rights in any case as a result of their conduct in connection with the asset purchase. These related cases are in their early stages with discovery yet to take place. In January, 1997, the plaintiff banks dismissed their claim against ATC. On December 6, 1996, Hill and the Richters commenced an action against ATC and the same officers and employees of ATC alleging essentially the same claims in federal court as in the state action. This action is entitled Irvin E. Richter et al. v. ATC Group Services, et al., Civ. No. 96-5818(JBS), U.S. District. Court for the District of New Jersey, December 6, 1996. ATC has answered, raising the same defenses and additional defenses related to the timeliness of the federal claim. This is essentially the same action as in federal court as the pending state action. The case is currently in the discovery phase. It does not create a risk of double recovery. In the Company's opinion, the outcome of this matter will not have a significant effect on the Company's financial position or future results of operations, although no assurances can be given in this regard. Commonwealth of Massachusetts v. TLT Construction Corp. et al, Civ. Action No. 96-02281 F, Superior Court of Middlesex County, Massachusetts. This is an action brought by the Commonwealth of Massachusetts in April 1996, against the architects and general contractor on a renovation and construction project on the Suffolk County Courthouse in Massachusetts. The basis of the lawsuit is that one or more damp-proofing products specified by the architect defendants and installed by the contractor defendant made employees in the courthouse ill because of the off-gassing of harmful vapors. Dennison Environmental Services Inc., ("Dennison") an ATC subsidiary, was joined on August 13, 1996, as a third party defendant by TLT Construction Corporation, the general contractor, because Dennison performed some air quality testing of the air in the courthouse for the Commonwealth of Massachusetts during the construction process. The contractor alleges that it acted in reliance on these tests in continuing to install the material after the test report was given to it by the state. This case is in the discovery stage. At this point, ATC considers the case to be totally without merit, and ATC intends to vigorously defend the action. The Company currently has in force a professional liability insurance policy covering this claim in the amount of $10,000,000 with a deductible of $250,000. Notice of claim has been made regarding this action and the insurer has agreed to assume the defense. In the Company's opinion, the outcome of this matter will not have a significant effect on the Company's financial position or future results of operations, although no assurances can be given in this regard. State of New York Department of Taxation and Finance- The Company has received a notice of audit from the New York State Department of Taxation and Finance for the three fiscal years 1993, 1994, and 1995. The agent has issued a preliminary audit report, which is expected to be the basis of a formal assessment estimated to be approximately $200,000. The Company is disputing the agents positions and intends to appeal any assessment if rendered. No assurances can be given regarding the ultimate liability, if any, which may result. F-12 Cambridge Housing Authority v. Con-Test, Inc. and ATC Group Services Inc., Superior Court of Middlesex County, Massachusetts; October 1, 1997. This is a claim for damages in excess of $1,000,000 alleging that Con-Test, Inc. breached its contract with Cambridge Housing Authority and was negligent in performing asbestos survey work preparatory to a housing project re-modernization project. ATC is joined as a party on a successor liability theory, even though the services giving rise to the claim occurred over two years prior to ATC's purchase of business assets from Con-Test. Although ATC has not yet answered the complaint, ATC intends to vigorously defend the claim on the grounds that it is not a successor under any known precedent of Massachusetts law. It is therefore the opinion of the Company that the probability of material loss from this claim is low. The Company has been named or has claims pending arising out of the conduct of its business. In the opinion of management, these matters are adequately covered by insurance, are without merit, or are not material. E. INDUSTRY SEGMENT DATA The Company provides services through its environmental consulting and engineering segment and its information technology consulting segment. Industry segment data is as follows:
Environmental Information Adjustments & & Engineering Technology Elimination's Total -------------- -------------- --------------- -------------- Fiscal 1998 Quarter Ended August 31, 1997 Revenues........................... $ 32,852,171 $ 1,945,894 $ (75,864) $ 34,722,201 Operating income................... 2,653,929 53,279 - 2,707,208 Depreciation and amortization...... 253,450 10,825 - 264,275 Capital expenditures............... 390,515 20,125 - 410,640 Six Months-Ended August 31, 1997 Revenues........................... $ 62,214,082 $ 4,186,193 $ (303,408) $ 66,096,867 Operating income................... 4,885,372 224,277 - 5,109,649 Depreciation and amortization...... 484,185 19,670 - 503,855 Capital expenditures............... 626,781 40,612 - 667,393 Identifiable Assets as of August 31, 1997 $ 117,701,868 $ 5,363,196 $ (3,235,800) $ 119,829,264 ----------------------------------------- Fiscal 1997 Quarter Ended August 31, 1996 Revenues........................... $ 31,401,790 $ 2,520,238 $ - $ 33,922,028 Operating income................... 3,752,618 157,513 - 3,910,131 Depreciation and amortization...... 206,175 171 - 206,346 Capital expenditures............... 354,251 - - 354,251 Six Months Ended August 31, 1996 Revenues........................... $ 47,899,812 $ 2,668,199 $ - $ 50,568,011 Operating income................... 6,422,882 176,029 - 6,598,911 Depreciation and amortization...... 400,941 4,133 - 405,074 Capital expenditures............... 737,367 46,319 - 783,686 Identifiable Assets as of August 31, 1996 $ 84,596,463 $ 5,903,957 $ (2,000,000) $ 88,500,420 -----------------------------------------
F-13 ATC GROUP SERVICES INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- Recent Developments FY 1998 Acquisition of BCM Engineers, Inc. - On August 20, 1997, ATC purchased certain assets and assumed certain liabilities of the environmental consulting and engineering services division of the Smith Technology Corporation ("Smith") which operated primarily as BCM Engineers, Inc. ("BCM" or the "Engineering Division"). BCM is a leading municipal water and wastewater environmental engineering firm with current operations at multiple locations in the east and Gulf Coast. BCM's other primary service specializations include water resource management, environmental compliance and site investigation, remedial design and engineering, asbestos, and air quality management. BCM serves major industrial clients in the chemical, petrochemical, oil and gas manufacturing, water supply, commercial development and utilities industries among others. For its most recent twelve month period ended July 31, 1997, the Engineering Division had unaudited revenues of $40,531,000 and division operating income before corporate allocations of $3,673,000. The acquisition has been accounted for as a purchase. The assets acquired consist of intangible assets including customer contract rights, customer lists, order backlog, patents and the right to the "BCM Engineers Inc." name and tangible assets including trade accounts receivable, work in process, property and equipment, supplies and general records. ATC additionally entered into non-competition agreements with Smith and a major shareholder/officer of Smith. Total consideration paid to the seller for the assets and non-competition agreements totaled $8,375,539 including a $5,425,539 cash payment at closing and short-term notes payable totaling $2,950,000. The notes payable are subject to setoffs for uncollected accounts receivable and work in process, and changes in the net tangible assets through the date of closing. Offsets of $200,000 have been reflected in the accompanying financial statements (Note B). In addition, ATC assumed certain liabilities of Smith of approximately $4,189,816, including, a portion of the trade payables of BCM/Smith, employee obligations and certain other specified liabilities. Senior Debt Offering and Bank Credit Agreement On May 29, 1997 the Company issued $32,500,000 of 8.18% Senior Secured Notes in a private placement offering. The notes are payable in five installments beginning May 31, 2000; interest is payable semi-annually commencing November 30, 1997. The Company has the right to prepay the loans at a premium over the outstanding principal. In connection with the note offering, the Company executed a credit agreement with the Chase Manhattan Bank and Atlantic Bank of New York. The credit agreement provides for a $15,000,000 revolving line of credit maturing on November 30, 1999. A portion of the proceeds of the Senior Secured Notes were used to repay the outstanding borrowings of $21,350,000 as of May 29, 1997 under the Company's bridge credit facility. The bridge facility was entered into in May, 1996 to provide capital in connection with the Company's acquisition of American Testing and Engineering Corporation and 3D Information Services, Inc. Prior Year Acquisitions FY 1997 Acquisition of American Testing and Engineering Corporation - On May 24, 1996, ATC purchased certain assets and assumed certain liabilities of American Testing and Engineering Corporation ("ATEC"), a national environmental consulting firm. ATEC provides environmental consulting and engineering services including risk assessments, compliance audits, environmental remediation consulting, geotechnical, materials testing, industrial hygiene and analytical services through a large network of branch and regional offices. In the three months ended May 31, 1997, the seller met certain contingent consideration requirements. Additionally, in connection with the issuance of the Senior Secured Notes, the Company and seller amended the original purchase agreement. As a result of these events, additional purchase consideration of $9,049,000 was recorded (Note B). Acquisition of 3D Information Services, Inc. - Effective May 28, 1996, ATC purchased certain assets and assumed certain specified liabilities of 3D Information Services, Inc. ("3D"), a New Jersey based information services company providing technical information system consulting services in all phases of information system design, development, maintenance and management in client server and mainframe based environments. Its clients include major companies in the telecommunications, financial services and pharmaceutical industries. F-14 FY 1996 Acquisition of Hill International Inc. Environmental Subsidiaries - On November 10, 1995, ATC purchased certain assets and assumed certain liabilities of the subsidiary companies at Hill International, Inc. that provided environmental consulting and engineering services (collectively the "Hill Businesses"). These services include asbestos management, industrial hygiene and indoor air quality consulting, environmental auditing and permitting, environmental regulatory compliance, water and wastewater engineering, solid waste and landfill management, hazardous waste management and analytical laboratory services. Acquisition of Applied Geosciences, Inc. - Effective February 29, 1996, ATC purchased certain assets and assumed certain liabilities of Applied Geosciences, Inc. ("AGI"). AGI's services include environmental and hazardous waste site assessments, remediation design, air quality management, asbestos services, litigation support and engineering geology through its offices located in Southern California. Results of Operations Three Months Ended August 31, 1997 Compared with Three Months Ended August 31, 1996 - -------------------------------------------------------------------------------- Revenues in the three months ended August 31, 1997 increased 2.4% to $34,722,201, compared with $33,922,028 in the three months ended August 31, 1996. This increase was primarily attributable to the acquisition of BCM effective August 20, 1997. Revenues in the three months ended August 31, 1997 from ATC's branch offices having comparable operations in the three months ended August 31, 1996 remained approximately the same at $33,950,934, compared with $33,922,028 in the three months ended August 31, 1996. Revenues attributable to the acquisition of certain assets of BCM totaled $771,267, or 2.2% of revenues, for the three months ended August 31, 1997. Reimbursable costs represent direct project expenses billed to environmental and engineering segment clients. For the three months ended August 31, 1997, reimbursable costs increased 16.3% to $5,905,664 compared with $5,077,483, in the three months ended August 31, 1996. Reimbursable costs as a percentage of revenues increased to 17.0% in the three months ended August 31, 1997 compared with 15.0% in the three months ended August 31, 1996. The Company's environmental management and traditional consulting services, consisting of drilling, materials testing and engineering services represented a larger portion of total revenues and these services utilize higher amounts of outside services and direct project expenses resulting in the higher percentage of reimbursable costs. Gross profit in the three months ended August 31, 1997 increased 4.3% to $13,065,475, compared with $12,529,814 in the three months ended August 31, 1996. Gross profit as a percentage of net revenue increased to 45.3% in the three months ended August 31, 1997, compared with 43.4% in the three months ended August 31, 1996. The gross profit percentage increase is due to lower margins in the prior period related to the final project costs incurred to complete a large fixed-price contract which could not be billed to the client, and the impact of lower net revenues in certain regions where costs could not be reduced proportionately. Operating expenses in the three months ended August 31, 1997 increased 20.2% to $10,358,268, compared with $8,619,683 in the three months ended August 31, 1996. Operating expenses increased as a percentage of net revenues to 35.9% in the three months ended August 31, 1997, compared with 29.9% in the three months ended August 31, 1996. The increase in operating expenses as a percentage of net revenue is the result of increases in labor, administrative costs and fixed costs while net revenue levels have remained constant. The prior year period results included the initial staffing levels and costs for employees hired from ATEC. The Company had eliminated approximately 13% of ATEC's total labor costs by hiring revenue generating field personnel and minimizing administrative personnel and related costs. However, after the first few months, the Company added higher level administrative employees including corporate and regional financial personnel and sales personnel for its corporate sales programs. In addition, executive and employee compensation levels increased during the latter part of fiscal 1997 and certain additional bonuses to branch personnel were paid during the current quarterly period in excess of amounts previously accrued. As a result of the foregoing, employee costs increased 36.6% to $4,804,677, or 16.7% of net revenues, in the three months ended August 31, 1997 compared with $3,517,889, or 12.2% of net revenues, in the three months ended August 31, 1996. Other increases in operating expenses resulted from legal expenses and administrative expenses resulting from the growth in operations and increased employee levels. Additionally, in the three months ended August 31, 1997, amortization of goodwill and intangibles increased to $494,769, compared with $362,091 in the three months ended August 31, 1996 reflecting the additional goodwill amortization resulting from acquisitions. F-15 Operating income in the three months ended August 31, 1997 decreased 30.8% to $2,707,207 compared with $3,910,131 in the three months ended August 31, 1996. Operating income decreased as a percentage of net revenues to 9.4% in the three months ended August 31, 1997, compared with 13.6% in the three months ended August 31, 1996. Nonoperating expense in the three months ended August 31, 1997 increased to $644,168 compared with $424,638 in the three months ended August 31, 1996. The increase is primarily attributable to increased interest expense on the Senior Secured Notes in excess of bank debt outstanding in the prior period. Increases in interest expense were offset in part by interest income on the net cash proceeds received from the Senior Secured Notes. Income tax expense in the three months ended August 31, 1997 was $815,000, compared with $1,384,000 in the three months ended August 31, 1996. During the three months ended August 31, 1997 and 1996, the Company's effective tax rates were 39.5% and 39.7%, respectively. As a result of the foregoing, net income in the three months ended August 31, 1997 decreased 40.6% to $1,248,039, or $.15 per share on a fully diluted basis, compared with $2,101,493 or $.25 per share on a fully diluted basis, in the three months ended August 31, 1996. The fully diluted weighted average number of shares outstanding remained approximately the same. Net income decreased as a percentage of net revenues to 4.3% in the three months ended August 31, 1997, compared with 7.3% in the three months ended August 31, 1996. Six Months Ended August 31, 1997 Compared with Six Months Ended August 31, 1996 - -------------------------------------------------------------------------------- Revenues in the six months ended August 31, 1997 increased 30.7% to $66,096,867, compared with $50,568,011 in the six months ended August 31, 1996. This increase was primarily attributable to the acquisition of BCM effective August 20, 1997 and revenues from the ATEC and 3D acquisitions completed in May 1996. Revenues in the six months ended August 31, 1997 from ATC's branch offices having comparable operations in the six months ended August 31, 1996 decreased 3.2% to $45,815,867, compared with $47,318,770 in the six months ended August 31, 1996. (Comparable revenues was based on total revenues less BCM revenues in August 1997, and less estimated revenues of ATEC and 3D for the three months ended May 31 of each fiscal period.) Comparable revenues decreased in part, due to a large project which was completed in the first quarter of the prior year period. Revenues attributable to the acquisition of certain assets of BCM totaled $771,267, or 1.2% of revenues, for the six months ended August 31, 1997. Reimbursable costs represent direct project expenses billed to environmental and engineering segment clients. For the three months ended August 31, 1997, reimbursable costs increased 34.6% to $10,361,497 compared with $7,699,061, in the six months ended August 31, 1996. Reimbursable costs as a percentage of revenues increased to 15.7% in the six months ended August 31, 1997 compared with 15.2% in the six months ended August 31, 1996. The Company's environmental management and traditional consulting services, consisting of drilling, materials testing and engineering services represented a larger portion of total revenues and these services utilize higher amounts of outside services and direct project expenses resulting in the higher percentage of reimbursable costs. Gross profit in the six months ended August 31, 1997 increased 27.8% to $25,322,687 compared with $19,811,626 in the six months ended August 31, 1996. Gross profit as a percentage of net revenue decreased to 45.4% in the six months ended August 31, 1997, compared with 46.2% in the six months ended August 31, 1996. The gross profit percentage for the prior year period was up slightly due to a highly profitable first quarter which benefited from work previously delayed from adverse winter weather conditions. Operating expenses in the six months ended August 31, 1997 increased 53.0% to $20,213,038, compared with $13,212,915 in the six months ended August 31, 1996. Operating expenses increased as a percentage of net revenues to 36.3% in the six months ended August 31, 1997, compared with 30.8% in the six months ended August 31, 1996. The increase in operating expenses as a percentage of net revenue for the current six month period fully reflects the ATEC service mix and integration of its operations including additional labor and administrative costs. The prior year period results included the initial staffing levels and costs for employees hired from ATEC. The Company had eliminated approximately 13% of ATEC's total labor costs by hiring revenue generating field personnel and minimizing administrative personnel and related costs. However, after the first few months, the Company added higher level administrative employees including corporate and regional financial personnel and sales personnel for its corporate sales programs. In addition, executive and employee compensation levels increased during the latter part of fiscal 1997 and certain additional bonuses to branch personnel were paid during the quarterly period ended August 31, 1997 in excess of amounts previously accrued. Employee costs increased 56.8% to $8,992,507, or 16.1% of net revenues, in the six months ended August 31, 1997 compared with $5,736,092, or 13.4% of net revenues, in the six months ended August 31, 1996. These increases in total cost were due to employees hired in connection with the expansion of ATC's operations. Other increases in operating expenses resulted from legal expenses and administrative expenses resulting from F-16 the growth in operations and increased employee levels. Additionally, in the six months ended August 31, 1997, amortization of goodwill and intangibles increased to $920,368, compared with $524,795 in the six months ended August 31, 1996 reflecting the additional goodwill amortization resulting from acquisitions. Operating income in the six months ended August 31, 1997 decreased 22.6% to $5,109,649, compared with $6,598,911 in the six months ended August 31, 1996. Operating income decreased as a percentage of net revenues to 9.2% in the six months ended August 31, 1997, compared with 15.4% in the six months ended August 31, 1996. Nonoperating expense in the six months ended August 31, 1997 increased to $1,100,294 compared with $341,115 in the six months ended August 31, 1996. The increase in nonoperating expense is primarily attributable to increased interest expense due to increased bank debt outstanding since May 1996 when the ATEC and 3D acquisitions were completed, and the issuance of the Senior Secured Notes in May 1997 in excess of previously outstanding bank debt. Income tax expense in the six months ended August 31, 1997 was $1,585,000, compared with $2,438,000 in the six months ended August 31, 1996. During the six months ended August 31, 1996 and 1995, the Company's effective tax rates were 39.5% and 39.0%, respectively. As a result of the foregoing, net income in the six months ended August 31, 1997 decreased 36.5% to $2,424,355, or $.28 per share on a fully diluted basis, compared with $3,819,796 or $.44 per share on a fully diluted basis, in the six months ended August 31, 1996. The fully diluted weighted average number of shares outstanding decreased to 8,525,884 shares from 8,628,179 shares primarily due to lower average common stock prices and the impact on the number of common stock equivalents. Net income decreased as a percentage of net revenues to 4.3% in the six months ended August 31, 1997, compared with 8.9% in the six months ended August 31, 1996. Liquidity and Capital Resources At August 31, 1997, working capital was $34,989,168 compared with working capital of $27,701,694 at February 28, 1997, an increase of $7,287,474. This increase in working capital is primarily a result of the net proceeds of the Senior Secured Notes after repayment of bank debt and fees, and the purchase of certain assets of BCM including accounts receivable and unbilled receivables. As a result of the Company's acquisition of BCM and additional consideration incurred in connection with the ATEC acquisition, the Company's tangible net worth decreased to $1,522,340 at August 31, 1997 from $9,220,043 at February 29, 1997, primarily as a result of goodwill amounts recognized in connection with these transactions. During the six months ended August 31, 1997, net cash flows used in operating activities were $1,848,304, primarily due to the increase in billed and unbilled receivables, and decreases in accounts payable and other liabilities, representing payments of property facility rentals, non-compete consideration and assumed liabilities of ATEC and other acquisitions, and an increase in billed and unbilled receivables. Net cash flows used in investing activities were $8,453,396, resulting from the acquisitions of BCM and ATEC and purchases of property and equipment. Net cash flows provided by financing activities were $16,191,275, primarily representing the proceeds of Senior Secured Notes less repayment of outstanding bank debt and a bank borrowing of $5,500,000 made in the connection with the BCM acquisition. During the six months ended August 31, 1996, net cash flows used in operating activities were $6,058,393, primarily due to the decrease in accounts payable and other liabilities, representing payments of property facility rentals, non-compete consideration and assumed liabilities of ATEC and other acquisitions, and an increase in billed and unbilled receivables. Net cash flows used in investing activities were $12,659,842, resulting from the acquisitions of ATEC and 3D and purchases of property and equipment. Net cash flows provided by financing activities were $8,686,118, primarily representing the proceeds of the bridge credit facility, less payments made on long-term debt and notes payable assumed from ATEC. Management of the Company believes the cash on hand from the issuance of the Senior Secured Notes after repayment of the bridge credit facility, funds available from its unused $15,000,000 bank line of credit and cash provided from operations are adequate to fund current operations including liabilities incurred in connection with the Company's acquisitions of BCM, ATEC and 3D. The Company may seek to obtain additional public or private equity financing in the future in order to expand operations, provide funds for future acquisitions or reduce debt, however no assurance can be given as to the Company's ability to obtain funds on acceptable terms and conditions. F-17 PART II - OTHER INFORMATION Item 1. Legal Proceedings: First Fidelity Bank, N.A., et al v. Hill International, Inc. et al, Superior Court of New Jersey, Law Division, Burlington County, Docket No. Bur-L-03400-95, filed December 19, 1995. Irvin E. Richter, et al v. ATC Group Services Inc., et al, United States District Court, District of New Jersey, Civ. No. 96 CV 5818 (JBS) filed December 6, 1996. On December 19, 1995, a second amended complaint was filed in the above-entitled action which joined the Company as a defendant and included a count against the Company seeking recovery of certain assets purchased from Hill International, Inc. ("Hill") on the grounds that plaintiff banks hold security interests in the assets and that Hill is in default under the security agreement creating such alleged security interests. The original plaintiffs in this action were First Fidelity Bank, N.A. and United Jersey Bank, N.A. The primary defendants were Hill and certain of its subsidiaries, and Irvin Richter, David Richter, Janice Richter and William Doyle. Irvin Richter and David Richter are officers and stockholders of Hill. In April 1996, the Company filed a cross-claim against Hill, Irvin Richter and David Richter alleging breach of contract, fraud, among other allegations and seeking unspecified damages, including punitive damages and equitable relief. In August, 1996, Hill and the Richters filed an answer denying ATC's cross claims, a cross-claim against ATC and a third party claim against certain members of ATC's management and an employee. The cross claim and third party claim seek unspecified damages, including punitive damages, for defamation, breach of the Richters' non-competition agreements and securities fraud. The defamation claim is based on plaintiff banks' allegation of fraud against Hill and the Richters in their amended complaint, which Hill and the Richters allege was based on defamatory statements made by ATC in settlement discussions with the plaintiff banks. In its answer, the Company both denies that it made defamatory statements and asserts that the defamation allegations fail to state a legally valid claim. The breach of contract and securities claims are based on allegations that ATC made representations concerning a registration rights agreement to be provided in connection with options issued to the Richters as consideration for their non-competition agreements. In its answer, the Company denies that an agreement concerning registration rights was ever reached and asserts that the Richters forfeited any such rights in any case as a result of their conduct in connection with the asset purchase. These related cases are in their early stages with discovery yet to take place. In January, 1997, the plaintiff banks dismissed their claim against ATC. On December 6, 1996, Hill and the Richters commenced an action against ATC and the same officers and employees of ATC alleging essentially the same claims in federal court as in the state action. This action is entitled Irvin E. Richter et al. v. ATC Group Services, et al., Civ. No. 96-5818(JBS), U.S. District. Court for the District of New Jersey, December 6, 1996. ATC has answered, raising the same defenses and additional defenses related to the timeliness of the federal claim. This is essentially the same action as in federal court as the pending state action. The case is currently in the discovery phase. It does not create a risk of double recovery. In the Company's opinion, the outcome of this matter will not have a significant effect on the Company's financial position or future results of operations, although no assurances can be given in this regard. Commonwealth of Massachusetts v. TLT Construction Corp. et al, Civ. Action No. 96-02281 F, Superior Court of Middlesex County, Massachusetts. This is an action brought by the Commonwealth of Massachusetts in April 1996, against the architects and general contractor on a renovation and construction project on the Suffolk County Courthouse in Massachusetts. The basis of the lawsuit is that one or more damp-proofing products specified by the architect defendants and installed by the contractor defendant made employees in the courthouse ill because of the off-gassing of harmful vapors. Dennison Environmental Services Inc., ("Dennison") an ATC subsidiary, was joined on August 13, 1996, as a third party defendant by TLT Construction Corporation, the general contractor, because Dennison performed some air quality testing of the air in the courthouse for the Commonwealth of Massachusetts during the construction process. The contractor alleges that it acted in reliance on these tests in continuing to install the material after the test report was given to it by the state. This case is in the discovery stage. At this point, ATC considers the case to be totally without merit, and ATC intends to vigorously defend the action. The Company currently has in force a professional liability insurance policy covering this claim in the amount of $10,000,000 with a deductible of $250,000. Notice of claim has been made regarding this action and the insurer has agreed to assume the defense. In the Company's opinion, the outcome of this matter will not have a significant effect on the Company's financial position or future results of operations, although no assurances can be given in this regard. State of New York Department of Taxation and Finance- The Company has received a notice of audit from the New York State Department of Taxation and Finance for the three fiscal years 1993, 1994, and 1995. The agent has issued a preliminary audit report, which is expected to be the basis of a formal assessment estimated to be approximately $200,000. The Company is disputing the agents positions and intends to appeal any assessment if rendered. No assurances can be given regarding the ultimate liability, if any, which may result. F-18 Cambridge Housing Authority v. Con-Test, Inc. and ATC Group Services Inc., Superior Court of Middlesex County, Massachusetts; October 1, 1997. This is a claim for damages in excess of $1,000,000 alleging that Con-Test, Inc. breached its contract with Cambridge Housing Authority and was negligent in performing asbestos survey work preparatory to a housing project re-modernization project. ATC is joined as a party on a successor liability theory, even though the services giving rise to the claim occurred over two years prior to ATC's purchase of business assets from Con-Test. Although ATC has not yet answered the complaint, ATC intends to vigorously defend the claim on the grounds that it is not a successor under any known precedent of Massachusetts law. It is therefore the opinion of the Company that the probability of material loss from this claim is low. Item 2. Changes in Securities: Not Applicable Item 3. Defaults Upon Senior Securities: Not Applicable Item 4. Submission of Matters to a Vote of Security Holders: On October 10, 1997, the Company held its annual meeting of shareholders at which time the following matters were voted upon by security holders: (1) The following individuals were re-elected as directors by the votes indicated. Name Votes For Votes Against ------------------------- --------- ------------- George Rubin 5,179,723 18,685 Morry F. Rubin 5,182,063 16,345 Richard L. Pruitt 5,182,063 16,345 Richard S. Greenberg, Esq. 5,182,063 16,345 Julia S. Heckman 5,182,063 16,345 Item 5. Other Information: Not Applicable Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits: 11 - Computation of Earnings Per Share - Three months and six months ended August 31,1996 and 1997 (Unaudited) 27 - Financial Data Schedule August 31, 1997 (Unaudited) (b) Reports on Form 8-K: Not Applicable F-19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ATC GROUP SERVICES INC. ----------------------- (Registrant) Dated: October 15, 1997 /s/ MORRY F.RUBIN -------------------------- ------------------------------------- MORRY F. RUBIN, President and Chief Executive Officer Dated: October 15, 1997 /s/ RICHARD L. PRUITT -------------------------- ------------------------------------- RICHARD L. PRUITT, Vice President and Principal Accounting Officer F-20 ATC GROUP SERVICES INC. AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1996 and 1997 (Unaudited) - --------------------------------------------------------------------------------
PRO FORMA ---------------------------------------------------------------- Three Months Ended Six Months Ended August 31, August 31, ------------------------------ ------------------------------- 1996 1997 1996 1997 -------------- -------------- -------------- ------------- Primary Earnings Per Share: Weighted average number of shares of common stock outstanding.................. 7,785,761 7,804,618 7,787,174 7,802,900 Additional shares assuming exercise of dilutive stock options and stock warrants. 790,257 729,157 791,657 664,349 -------------- -------------- -------------- ------------- Total average common and common equivalent shares outstanding......... 8,576,018 8,533,775 8,578,831 8,467,249 ============== ============== ============== ============= Net income.................................. $ 2,101,493 $ 1,248,039 $ 3,819,796 $ 2,424,355 ============== ============== ============== ============= Earnings per common and dilutive common equivalent share................... $ .25 $ .15 $ .45 $ .29 ============== ============== ============== ============= Fully Diluted Earnings Per Share: Weighted average number of shares of common stock outstanding.................. 7,785,761 7,804,618 7,787,174 7,802,900 Additional shares assuming exercise of dilutive stock options and stock warrants. 790,257 729,157 841,005 722,984 -------------- -------------- -------------- ------------- Total average common and common equivalent shares outstanding......... 8,576,018 8,533,775 8,628,179 8,525,884 ============== ============== ============== ============= Net income.................................. $ 2,101,493 $ 1,248,039 $ 3,819,796 $ 2,424,355 ============== ============== ============== ============= Earnings per common and dilutive common equivalent share................... $ .25 $ .15 $ .44 $ .28 ============== ============== ============== =============
F-21 ATC GROUP SERVICES INC. AND SUBSIDIARIES EXHIBIT 27 FINANCIAL DATA SCHEDULE AUGUST 31, 1997 (Unaudited) - --------------------------------------------------------------------------------
As of Item Number Item Description August 31, 1997 --------------- 5-02(1) Cash and cash items.................................................................. $ 7,893,465 5-02(2) Marketable securities ............................................................... - 5-02(3)(a)(1) Notes and accounts receivable - trade................................................ 43,707,086 5-02(4) Allowances for doubtful accounts..................................................... 2,106,863 5-02(6) Inventory............................................................................ - 5-02(9) Total current assets................................................................. 61,388,084 5-02(13) Property, plant and equipment........................................................ 9,466,239 5-02(14) Accumulated depreciation............................................................. 4,440,697 5-02(18) Total assets......................................................................... 119,829,264 5-02(21) Total current liabilities............................................................ 29,243,030 5-02(22) Bonds, mortgages and similar debt.................................................... 43,371,402 5-02(28) Preferred stock - mandatory redemption............................................... - 5-02(29) Preferred stock - no mandatory redemption............................................ - 5-02(30) Common stock......................................................................... 78,054 5-02(31) Other stockholders' equity........................................................... 47,787,770 5-02(32) Total liabilities and stockholders' equity........................................... 119,829,264 Six Months Ended August 31, 1997 ---------------- 5-03(b)1(a) Net sales of tangible products....................................................... - 5-03(b)1 Total revenues....................................................................... 66,096,867 5-03(b)2(a) Cost of tangible goods sold.......................................................... - 5-03(b)2 Total costs and expenses applicable to sales and revenues............................ 40,774,180 5-03(b)3 Other costs and expenses............................................................. 19,307,039 5-03(b)5 Provision for doubtful accounts and notes............................................ 744,384 5-03(b)(8) Interest and amortization of debt discount........................................... 1,261,909 5-03(b)(10) Income before taxes and other items.................................................. 4,009,355 5-03(b)(11) Income tax expense................................................................... 1,585,000 5-03(b)(14) Income/(loss) continuing operations.................................................. 2,424,355 5-03(b)(15) Discontinued operations.............................................................. - 5-03(b)(17) Extraordinary items.................................................................. - 5-03(b)(18) Cumulative effect - changes in accounting principles................................. - 5-03(b)(19) Net Income........................................................................... 2,424,355 5-03(b)(20) Earnings per share - primary......................................................... .29 5-03(b)(20) Earnings per share - fully diluted................................................... .28
F-22 EX-27 2 EXHIBIT 27
5 6-MOS FEB-28-1998 MAR-01-1997 AUG-31-1997 7,893,465 0 43,707,086 2,106,863 0 61,388,084 9,466,239 4,440,697 119,829,264 29,243,030 43,371,402 0 0 78,054 47,787,770 119,829,264 0 66,096,867 0 40,774,180 19,307,039 774,384 1,261,909 4,009,355 1,585,000 2,424,355 0 0 0 2,242,355 .29 .28
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