-----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, WvYacGtOMMhwyQqwrcVpk0YvzE/wQ/+xHEJK2bU0lrXqOSZG0e/RzL0QHYZFizVd vCOAv9UlcR1SNX41/Y4gdA== 0001047469-99-001204.txt : 19990115 0001047469-99-001204.hdr.sgml : 19990115 ACCESSION NUMBER: 0001047469-99-001204 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990114 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: 000-16984 FILM NUMBER: 99506653 BUSINESS ADDRESS: STREET 1: 104 E 25TH ST 10TH FLR CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2129089500 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 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------- [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED NOVEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-10583 ------- ATC GROUP SERVICES INC. ---------------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 46-0399408 - --------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 104 EAST 25TH STREET, 10TH FLOOR NEW YORK, NEW YORK 10010 - --------------------------------- ------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (212) 353-8280 -------------- NONE ------------------------------------------------------------------------- (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No The number of shares outstanding of the Registrant's Common Stock, par value $0.01 per share, as of January 14, 1999 was 1,000. ATC GROUP SERVICES INC. AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998 ------------------------------------------------------------------------
Page ---- PART I - FINANCIAL INFORMATION: Item 1 - Unaudited Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets February 28, 1998 and November 30, 1998............................. F-3 Condensed Consolidated Statements of Operations Three and Nine months ended November 30, 1997 and 1998.............. F-4 Condensed Consolidated Statements of Stockholders' Equity Nine months ended November 30, 1997 and 1998........................ F-5 Condensed Consolidated Statements of Cash Flows Nine months ended November 30, 1997 and 1998........................ F-6 Notes to Condensed Consolidated Financial Statements................ F-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................................. F-20 PART II - OTHER INFORMATION: Items 1-6................................................................. F-25 Signatures................................................................ F-27
F-2 ATC GROUP SERVICES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (DOLLARS IN THOUSANDS, except per share data) ------------------------------------------------------------------
FEBRUARY 28, NOVEMBER 30, 1998 1998 ASSETS ------ CURRENT ASSETS: Cash and cash equivalents................................ $ 5,269 $1,412 Trade accounts receivable, less allowance for doubtful accounts ($3,078 at February 28, 1998 and $5,559 at November 30,1998)........................................ 39,934 45,373 Unbilled receivables, net of reserve..................... 10,196 7,940 Prepaid expenses and other current assets................ 2,423 1,111 Deferred income taxes.................................... 2,041 2,041 Refundable income taxes.................................. 4,233 2,832 ----------------- ---------------- Total current assets............................... 64,096 60,709 PROPERTY AND EQUIPMENT, net (Note C) ....................... 5,794 5,994 GOODWILL, net of accumulated amortization ($3,261 at February 28, 1998 and $5,832 at November 30,1998)(Note B) 106,829 112,566 COVENANTS NOT TO COMPETE, net of accumulated amortization ($775 at February 28,1998 and $2,078 at November 30,1998) (Note B) ................................................ 5,163 3,920 DEBT ISSUANCE COSTS, net of accumulated amortization ($108 at February 28, 1998 and $843 at November 30, 1998) 5,808 6,533 (Note B) OTHER ASSETS................................................ 1,365 3,800 ----------------- ---------------- $189,055 $193,522 ----------------- ---------------- ----------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt.......................................... $300 $530 Current maturities of long-term debt..................... 1,421 3,000 Accounts payable......................................... 7,738 13,001 Accrued compensation..................................... 5,097 6,247 Tender Offer liability (Note B) ......................... 14,279 2,741 Accrued interest expense................................. 1,266 5,184 Other accrued expenses................................... 4,554 8,462 ----------------- ---------------- Total current liabilities............................ 34,655 39,165 LONG-TERM DEBT, less current maturities (Note B) ........... 120,420 127,614 OTHER LIABILITIES, including non-current payment obligations (Note B) ................................................ 2,737 1,608 DEFERRED INCOME TAXES....................................... 4,607 4,607 ----------------- ---------------- Total liabilities.................................... 162,419 172,994 ----------------- ----------------
FEBRUARY 28, NOVEMBER 30, COMMITMENTS AND CONTINGENCIES (Notes B and E) 1998 1998 STOCKHOLDERS' EQUITY: Common stock, par value $.01 per share/authorized 10,000 Shares; issued and outstanding 1,000 shares at February -- -- 28, 1998 and November 30, 1998........................... Additional paid-in capital............................... 28,425 28,425 Holdings restricted Common Stock net of deferred executive compensation................................... -- 153 Deficit.................................................. (1,789) (8,050) ---------------- ---------------- Total stockholders' equity........................... 26,636 20,528 ---------------- ---------------- $189,055 $193,522 ---------------- ---------------- ---------------- ----------------
See notes to condensed consolidated financial statements. F-3 ATC GROUP SERVICES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 30, 1997 AND 1998 (Dollars in thousands) -----------------------------------------------------------
Three Months Ended Nine Months Ended November 30, November 30, ---------------- - --------------- ---------------- --- ------------- Predecessor Successor Predecessor Successor 1997 1998 1997 1998 ---------------- --------------- ---------------- ------------- REVENUES $ 38,167 $41,316 $104,263 $121,511 Reimbursable Costs 5,513 7,725 15,874 20,283 ---------------- --------------- ---------------- ------------- NET REVENUES 32,654 33,591 88,389 101,228 COST OF NET REVENUES 17,528 18,661 47,941 56,782 ---------------- --------------- ---------------- ------------- Gross Profit 15,126 14,930 40,448 44,446 OPERATING EXPENSES: Selling 1,187 1,475 3,226 4,361 General and administration 10,648 12,267 28,077 36,138 Provision for bad debts 416 461 1,161 1,542 ---------------- --------------- ---------------- ------------- 12,251 14,203 32,464 42,041 ---------------- --------------- ---------------- ------------- Operating income 2,875 727 7,984 2,405 NONOPERATING EXPENSE (INCOME) Interest expense 902 3,976 2,163 11,680 Interest income (16) (4) (165) (11) Other (32) -- (44) -- ---------------- --------------- ---------------- ------------- 854 3,972 1,954 11,669 ---------------- --------------- ---------------- ------------- Income (loss) before income taxes 2,021 (3,245) 6,030 (9,264) INCOME TAX EXPENSE (BENEFIT) 841 (1,059) 2,426 (3,003) ---------------- --------------- ---------------- ------------- NET INCOME (LOSS) $1,180 $(2,186) $3,604 $(6,261) ---------------- --------------- ---------------- ------------- ---------------- --------------- ---------------- -------------
See notes to condensed consolidated financial statements. F-4 ATC GROUP SERVICES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED NOVEMBER 30, 1997 AND 1998 (Dollars in thousands, except per share data)
1997 --------------------------------------------------------------------------------------- Holdings Common Stock Additional Restricted Retained ------------------------ Pain-In Stock- Earnings/ Shares Amount Capital Net (Deficit) Total ------------- -------------------------- -------------- --------------- --------------- BALANCE, February 28, 1997..... 7,800,187 $78 $28,997 -- $16,365 $45,440 Sale of common stock at $1.88 to $10.00 per share, upon exercise of stock options and warrants........................... 96,920 1 289 -- -- 290 Issuance of common stock in connection with the acquisition of Bing Yen & Associates, Inc......... 33,000 -- 365 -- -- 365 Continuing registration costs applied against additional paid-in capital............................ -- -- (55) -- -- (55) Net income of predecessor......... -- -- -- -- 3,604 3,604 ------------- ------------------------- -------------- --------------- --------------- BALANCE, November 30, 1997......... 7,930,107 $79 $29,596 $ -- $19,969 $49,644 ------------- ------------------------- -------------- --------------- --------------- ------------- ------------------------- -------------- --------------- ---------------
1998 --------------------------------------------------------------------------------------- Holdings Common Stock Additional Restricted ------------------------ Pain-In Stock- Shares Amount Capital Net Deficit Total ------------- -------------------------- -------------- --------------- --------------- BALANCE, February 28, 1998......... 1,000 -- $28,425 -- $ (1,789) $ 26,636 Amortization of deferred compensation costs.............. -- -- -- 153 -- 153 Net loss of successor.............. -- -- -- -- (6,261) (6,261) ------------- ------------------------- -------------- --------------- --------------- BALANCE, November 30, 1998......... 1,000 -- $ 28,425 $153 $(8,050) $20,528 ------------- ------------------------- -------------- --------------- --------------- ------------- ------------------------- -------------- --------------- ---------------
See notes to condensed consolidated financial statements. F-5 ATC GROUP SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED NOVEMBER 30, 1997 AND 1998 (Dollars in thousands)
Nine Months Ended November 30, --------------------------------------- Predecessor Successor 1997 1998 ------------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).................................... $3,604 $(6,261) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and leasehold amortization.............. 889 1,287 Amortization of goodwill and covenants............... 1,392 4,124 Provision for bad debts.............................. 1,160 1,542 Other................................................ (2,230) (581) Changes in operating assets and liabilities, net of Amounts acquired in acquisitions: Receivables...................................... (2,725) (7,742) Prepaid expenses and other assets................ 1,991 (1,123) Accounts payable and other liabilities........... (6,514) 8,595 Income taxes payable............................. 888 -- Refundable income taxes.......................... -- 1,401 ------------------- ---------------- Net cash flows from operating activities............. (1,545) 1,242 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of On-Site Technologies, Inc. .............. -- (59) Purchase of Aerovironment Environmental Services,Inc. -- (100) Purchase of BCM Engineers, Inc. ..................... (5,425) -- Purchase of American Testing and Engineering Corp., net of cash acquired................................. (2,421) -- Purchase of Bing Yen & Assoc., net of cash acquired.. (2,093) -- Purchase of Environment Warranty Inc., net of cash Acquired............................................. 19 -- Purchase of property and equipment................... (1,503) (1,670) Other................................................ 92 392 ------------------- ---------------- Net cash flows from investing activities............... (11,331) (1,435) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of long-term debt and Notes payable........................................ 41,100 9,003 Proceeds from issuance of common stock, net of Expenses............................................. 290 -- Payment of Tender Offer obligations.................. -- (12,667) Principal payments on long-term debt and notes Payable.............................................. (24,623) -- Other capital transactions........................... (55) -- ------------------- ---------------- Net cash flows from financing activities............. 16,712 (3,664) ------------------- ---------------- Net change in cash and cash equivalents.............. 3,836 (3,857) CASH AND CASH EQUIVALENTS, Beginning of period 2,004 5,269 ------------------- ---------------- CASH AND CASH EQUIVALENTS, End of period $5,840 $1,412 ------------------- ---------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for: Interest........................................... $745 $7,111 ------------------- ---------------- ------------------- ---------------- Income taxes....................................... $1,753 $214 ------------------- ---------------- ------------------- ----------------
See notes to condensed consolidated financial statements. F-6 ATC GROUP SERVICES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED NOVEMBER 30, 1998 - ------------------------------------------------------------------------------- A. GENERAL ACQUISITION OF THE COMPANY BY ACQUISITION HOLDINGS, INC.---ATC Group Services Inc. and subsidiaries ("ATC" or the "Company") became a wholly owned subsidiary of Acquisition Holdings, Inc. ("Holdings") effective February 5, 1998 (the "Merger Date") upon the merger of the Company with Acquisition Corp., a wholly owned subsidiary of Holdings, with ATC being the surviving corporation (the "Merger"). Holdings, through Acquisition Corp., completed an offer to purchase the outstanding common stock of ATC at $12.00 per share using the proceeds from the issuance of 12% senior subordinated notes (the "Notes"), bank borrowings (the "Bank Credit Facilities") and new equity investments. The accompanying financial statements for the Company from February 5, 1998 and subsequent thereto (the "Successor Period"), are attributable to operations of the Company under the successor ownership of Holdings. The predecessor financial statements, representing the period prior to February 5, 1998 (the "Predecessor Period"), relate to the previous ownership of the Company. PRINCIPALS OF CONSOLIDATION--The consolidated financial statements include the accounts of ATC Group Services Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly, in all material respects, the financial position, the results of operations and the cash flows for the periods presented herein. These results of operations are not necessarily indicative of the results to be expected for the full year due to certain seasonality factors and the effects and timing of large service projects. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These condensed-consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements for the fiscal year ended February 28, 1998, which are included in the Company's Annual Report on Form 10-K and amendments thereto. NATURE OF BUSINESS--The Company is a national business services firm providing technical and project management services relating to environmental consulting (the "environmental consulting and engineering" segment) and information technology consulting services (the "information technology consulting" segment). The Company's environmental consulting and engineering segment provides environmental and geotechnical engineering services, architectural engineering services, construction materials testing and analytical testing. The Company's information technology consulting segment provides analysis and design services and system programming services to assist clients in building new or modifying existing computer systems. This business unit also provides support to clients in maintaining computer systems. RECLASSIFICATIONS -- Certain reclassifications have been made to the prior period's financial statements to conform to the current year's presentation. B. MERGER AND BUSINESS ACQUISITIONS MERGER, NOTE OFFERING, AND TENDER OFFER TRANSACTIONS---Acquisition Holdings,Inc. ("Holdings" or "Parent") and its wholly owned subsidiary, Acquisition Corp.("Issuer"), were organized to effect the acquisition of the Company under the terms and conditions of a Merger Agreement dated November 26, 1997 (the "Merger Agreement"). F-7 Pursuant to the Merger Agreement, the Issuer offered (the "Tender Offer")to purchase all the issued and outstanding shares of the Company's Common Stock at a price of $12.00 per share. The Tender Offer was conditioned upon Issuer issuing $100,000,000 of Senior Subordinated Notes (the "Notes"; see Note D) and obtaining sufficient bank financing necessary to consummate the Tender Offer. Effective February 5, 1998, (the "Merger Date") upon satisfaction of the necessary conditions, the Issuer was merged into ATC, with ATC being the surviving corporation (the "Merger"). The Merger Agreement followed the execution of a stockholders agreement (the "Stockholders Agreement") with George Rubin and Morry F. Rubin (collectively the "Stockholders") requiring the Stockholders to vote 14.8% of their interest in the Company in favor of the Merger. In connection with the Stockholders Agreement, the Stockholders each agreed to and entered into Severance Consulting and Non-Competition Agreements (the "Severance Agreements"). Under these agreements, the Stockholders resigned from their officer positions, agreed to provide certain consulting services as requested by the Company for a period of three years following the consummation of the transactions, and agreed to restrict the Stockholders from competing with the Company's business and restricting certain other activities for a period ranging from three to four years from the effective date of the Merger. In consideration of the Severance Agreements, the Company paid the Stockholders $3.1 million on the Merger Date. The Severance Agreements also provide for the Company to pay to the Stockholders a quarterly payment of $553,430 on each of the six succeeding quarters commencing April 1, 1998. The Company has not made the January 1, 1999 payment of $553,430 due under the Severance Agreements. In connection with the Merger and Tender Offer, the Company, through the Issuer, entered into a new bank credit agreement which provided for a $20,000,000 Term Loan and $30,000,000 Revolving Credit Facility (collectively the "Bank Credit Facilities"). The proceeds of the Term Loan along with the proceeds of the Notes and equity investments in Holdings were used to finance the Tender Offer, repay certain indebtedness including related accrued interest and prepayment penalties, pay a portion of the Severance Agreement consideration, and to pay financing costs and expenses. The acquisition of the Company by Holdings has been accounted for as a purchase. The excess of the purchase cost over the historical book value of the net assets acquired was allocated to the Severance Agreements and the remainder, to goodwill, is being amortized over 30 years. The purchase price allocation was preliminary, pending completion of appraisal and other information-gathering activities. The accompanying consolidated balance sheet reflects the following sources and uses of funds related to the Tender Offer, Merger, Stockholders Agreement and the Bank Credit Facilities (collectively the "Transactions").
Sources of Funds: Notes........................................................ $100,000,000 Bank Term Loan............................................... 20,000,000 Equity investment from Holdings.............................. 30,714,639 Tender Offer obligations to be funded from cash on hand and revolving credit borrowings. (The outstanding balance of Tender Offer obligation at November 30, 1998 was $2,741,110)............................................. 16,082,850 ------------ $166,797,489 ------------ ------------ Uses of Funds: Purchase of common stock, warrants and stock options......... $105,473,603 Repay existing debt: Principal.................................................. 42,076,461 Accrued interest........................................... 577,345 Accrued ATEC obligations................................... 754,250 Shareholder Agreement Consideration: Amount paid at Merger Date................................. 3,100,002 Amounts payable in quarterly installments.................. 3,320,578 Financing costs and expenses, including debt prepayment penalty.................................................. 11,495,250 ------------ $166,797,489 ------------ ------------
Adjustments to goodwill have been recorded by the Company in fiscal 1999 related to the finalization of amounts to be allocated to a certain business venture and estimated costs to settle certain litigation which was outstanding at the date of the Transactions. Predecessor management was contesting certain matters with the belief that they would prevail and any adverse outcome would not be significant to the predecessor's financial position or results of operations. The new owners of the Company have directed successor management to use its best efforts to settle certain litigation and due to this change in approach, the company has recorded its best estimate of the expected costs. Should such estimate be in excess of amounts ultimately paid, goodwill will be reduced in future periods. F-8 The total consideration paid in connection with the Transactions and allocation of the consideration to the historical book value of assets, covenant not to compete and goodwill is as follows: Consideration: Purchase price of common stock, warrants, and stock options. $105,473,603 Severance Agreements consideration.......................... 6,420,580 Financing costs and expenses less amount related to debt issuances................................................. 4,828,614 ------------ 116,722,797 Allocation of Consideration: Net assets acquired......................................... 51,214,836 Fair value adjustments: Non-compete agreement....................................... 4,700,000 Other....................................................... (301,537) ------------ Excess purchase consideration................................. 61,109,498 Predecessor basis adjustment.................................. (2,289,050) ------------ Goodwill.................................................... $ 58,820,448 ------------ ------------
Holdings is not engaged in any activities other than those related to its ownership interest in ATC. A majority interest in Holdings is owned by affiliates of Weiss, Peck & Greer, L.L.C. ("Weiss Peck"), who was also a party to the Merger Agreement. Other actual and beneficial owners of Holdings include ATC management and employees who made equity contributions or elected to receive options to purchase common stock of Holdings in replacement of their "in-the-money" ATC stock options. Weiss Peck is a private investment firm, founded in 1970, which manages in excess of $14 billion in public equities and fixed-income securities for institutional and individual clients worldwide. In addition to its money management activities, the firm has a twenty-seven year history as an investor of equity capital in over 200 venture capital and private equity transactions. Investments of its Private Equity Group are made through affiliated funds with $230 million of committed capital. BUSINESS ACQUISITIONS--The following acquisitions have been accounted for as purchases. The acquired company's assets and liabilities are included in the accompanying condensed consolidated balance sheets at fair value at the date of purchase. The acquired company's operations subsequent to the acquisition are included in the accompanying condensed consolidated statements of operations. The preliminary purchase price allocation is subject to change when additional information concerning asset and liability valuations is obtained. Therefore, the final allocation may differ from the preliminary allocation. Fiscal 1999 AEROVIRONMENT ENVIRONMENTAL SERVICES INC.--On July 31, 1998 ATC acquired certain assets and assumed certain liabilities of AeroVironmental Environmental Services, Inc. ("AVES"), a regional provider of engineering and technical consulting services, with emphasis on the air quality and pollution fields. AVES is located in Monrovia, CA. During its fiscal year ended April 30, 1998, AVES reported $2.3 million in revenues. ATC paid $642,000, $100,000 of which was cash paid at closing, $312,000 in assumed liabilities and transaction costs, and $230,000 in a non-interest bearing note, payable six months from the date of purchase. Assets purchased included work in progress, property and equipment, certain intangible assets, and an ownership interest in Aerovironment/NESA LLC, a subsidiary of AVES. ON-SITE TECHNOLOGIES, INC--On July 10, 1998 ATC acquired certain assets and assumed certain liabilities of On-Site Technologies, Inc. ("OST"), a remediation engineering services company based in Hayward, CA. OST reported revenues of approximately $1.2 million for its year ended December 31, 1997. ATC acquired property and intangible assets including customer contracts. The consideration paid totaled $204,000 consisting of $59,000 in cash paid at closing and $145,000 in assumed liabilities and transaction costs. F-9 Fiscal 1998 BING YEN & ASSOCIATES, INC.--On November 26, 1997 ATC purchased all of the outstanding stock of Bing Yen & Associates, Inc. ("Bing Yen"). Bing Yen provides geotechnical and structural forensic services to a wide variety of clients in the western United States and is located in Tustin, California. The purchase price was comprised of the following consideration:
Amounts paid to seller: Cash......................................................... $2,200,000 Note payable at 8% due January 2, 1998....................... 550,000 Notes payable at 8% due in three annual installments commencing January 1999..................................... 1,150,000 ----------- 3,900,000 Liabilities assumed: Current liabilities.......................................... 313,254 Direct expenses of transaction............................... 50,000 ----------- $4,263,254 ----------- -----------
In addition, a maximum aggregate principal amount of $1,500,000 in unsecured contingent achievement promissory notes will be issued if certain minimum net revenue levels are achieved, resulting in a maximum total consideration to seller of $5,400,000. The notes payable of $1,150,000 are subject to setoffs if actual net assets as of the closing date are below warranted amounts, for trade receivables not collected within one year of the closing date and under certain other specified conditions. During the quarter ended November 30, 1998, Bing Yen achieved the minimum net revenue levels required to earn the $1,500,000 in contingent achievement promissory notes. The Company has not paid the initial installment of $354,371, net of setoffs, on the notes payable due January 4, 1999 and the initial payment of $750,000 under the contingent achievement promissory notes due January 4, 1999. The preliminary purchase price allocation is as follows: Cash........................................................... $ 163,680 Accounts receivable, net....................................... 2,292,191 Unbilled receivables........................................... 5,122 Prepaid expense................................................ 10,746 Property and equipment......................................... 142,241 Covenant not to compete........................................ 50,000 Goodwill....................................................... 1,595,324 Other assets................................................... 3,950 ----------- $4,263,254 ----------- -----------
ENVIRONMENTAL WARRANTY, INC.--On November 4, 1997, ATC purchased 90.9% of the outstanding stock of Environmental Warranty, Inc. ("E.W.I."), a property and casualty insurance brokerage firm specializing in environmental insurance products. The purchase price was comprised of the following consideration: Amounts paid to sellers: Cash......................................................... $ 150,000 Notes payable, net of imputed interest at 8.0%............... 582,424 Payment commitments.......................................... 275,000 ATC Common Stock (33,000 shares)............................. 365,062 ---------- 1,372,486 Liabilities assumed: Current liabilities.......................................... 314,811 Direct expenses of transaction............................... 25,000 ---------- $1,712,297 ---------- ----------
F-10 The notes payable are due in three annual installments commencing November 1998 and are subject to certain setoffs. The payment commitments are due in four installments. The first two installments were paid in connection with the closing and the final two installments are due in November 1999 and November 2000. ATC issued 33,000 shares of restricted common stock valued at 11 1/16 per share. The preliminary purchase price allocation is as follows: Cash........................................................... $ 169,350 Receivables.................................................... 158,391 Prepaid and other current assets............................... 2,875 Property and other............................................. 15,384 Goodwill....................................................... 1,366,297 ---------- $1,712,297 ---------- ----------
BCM ENGINEERS, INC.--On August 20, 1997 ATC purchased certain assets and assumed certain liabilities of the environmental consulting and engineering services division of the Smith Technology Corporation, which operated primarily as BCM Engineers, Inc. ("BCM"). BCM is a leading municipal water and wastewater environmental engineering firm and provides services in water, environmental compliance and site investigations, remedial design and engineering, asbestos, and air quality management. BCM serves major industrial clients in the chemical, petrochemical, oil and gas manufacturing, water supply, commercial development and utilities industries from multiple locations in the east and Gulf Coast. The purchase price was comprised of the following consideration: Amounts paid to seller or to others on behalf of seller: Cash........................................................ $5,425,539 Notes payable............................................... 2,950,000 Less note payable offset.................................... (200,000) ----------- 8,175,539 Liabilities assumed: Current liabilities......................................... 2,833,665 Non current liabilities..................................... 1,356,151 Direct expenses related to acquisition...................... 112,133 ----------- $12,477,488 ----------- -----------
Notes payable includes a $200,000 note which became due September 20, 1997 and was subject to offset for reductions in net assets and for unrecorded liabilities arising through the closing date of the transaction. Based on the closing balance sheet provided by the Seller, the Company offset the $200,000 in full. In addition, based on unrealized unbilled receivables warranted by the seller and other claims, an additional $2,750,000 has been reflected as an offset of short-term debt in the accompanying consolidated balance sheet. The preliminary purchase price allocation is summarized as follows: Accounts receivable, net of allowance..........................$ 4,710,960 Unbilled receivables.......................................... 3,684,939 Other current assets.......................................... 7,357 Other assets.................................................. 1,327,270 Covenants not to compete...................................... 100,000 Goodwill...................................................... 2,646,962 ----------- $12,477,488 ----------- -----------
F-11 Prior Acquisitions AMERICAN TESTING AND ENGINEERING CORPORATION--On May 24, 1996 ATC purchased certain assets and assumed certain liabilities of American Testing and Engineering Corporation ("ATEC"), a national environmental consulting firm. ATEC provides environmental engineering and consulting services through a large network of branch and regional offices. Under the original purchase agreement, the Company was contingently liable to ATEC for additional purchase consideration up to $10,750,000 if certain conditions were met. The seller since met certain of these contingent consideration requirements in the quarter ended May 31, 1997 and the Company began to amortize the associated goodwill in this period. In addition, in connection with the issuance of Senior Secured Notes on May 29, 1997 (since repaid), the Company and the seller executed an amendment to the original purchase agreement and agreed to remove or modify the remaining contingent consideration requirements. As a result of the foregoing, the Company paid $2,420,766 on May 30, 1997. In connection with the issuance of the 12% Senior Subordinated Notes and Tender Offer transactions, the Company paid $754,250 on January 29, 1998 and is obligated to make monthly payments through February 1999. Additionally, the Company has the option to purchase certain properties from the seller for $1,700,000 in fiscal 2002. As a result of sellers warranties of purchased trade receivables and unbilled receivables that were not realized, the Company is entitled to set-offs of $618,835 against the option price to acquire certain properties in fiscal 2002. The set-off amount is included in other assets in the accompanying consolidated balance sheets. In connection with the purchase agreement, the Company has issued an irrevocable letter of credit in the amount of $500,000 to secure the Company's performance of its payment obligations. The letter of credit is renewable by the seller until such time the Company has paid the purchase obligations in full. No amounts have been drawn against the letter of credit. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) - The following unaudited pro forma information sets forth the results of operations of ATC as if the Merger and Tender Offer and ATC's purchases of BCM, EWI and Bing Yen had occurred on March 1, 1997: (Dollars in thousands)
PRO FORMA PRO FORMA THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30, ---------------------------------------- -------------------------------------- 1997 1998 1997 1998 --------------------- --------------------- ---------------- ------------- Revenues $39,181 $ 41,316 $123,453 $ 121,511 Operating Income 2,366 727 6,071 2,405 Net income (loss) (898) (2,186) (2,987) (6,261)
F-12 C. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following: (Dollars in thousands)
FEBRUARY 28, 1998 NOVEMBER 30, 1998 -------------------- -------------------- Office equipment $ 5,345 $6,464 Laboratory and field equipment 3,968 3,904 Transportation equipment 582 593 Leasehold improvements 1,112 1,145 -------------------- -------------------- 11,007 12,106 Less accumulated depreciation (5,213) (6,112) -------------------- -------------------- Property and Equipment, net $ 5,794 $5,994 -------------------- -------------------- -------------------- --------------------
D. DEBT AND CREDIT AGREEMENTS BANK CREDIT FACILITIES--On January 29, 1998, a credit facility with variouslending institutions was established providing the Company senior secured credit facilities consisting of a $20 million Term Loan and a $30 million Revolving Credit Facility (the "Bank Credit Facilities"). On October 30, 1998, the Revolving Credit Facility available to the Company for working capital and general corporate purposes was reduced from the original $15 million to $13 million, with $15 million available for certain permitted acquisitions. Revolving loans mature on January 29, 2003. At the Company's option, revolving loans will accrue interest at either (a) an adjusted rate based on the Eurodollar rate plus a margin of 2.25% or (b) the base rate (effectively the prime rate) plus a margin of 1.25%. The loan margins are subject to quarterly decreases based upon improvements in the Company's leverage ratio. Interest is payable monthly and the Company pays a revolving loan commitment fee of 1/2 of 1% on a quarterly basis. The Term Loan amortizes quarterly commencing in February 1999 initially at $750,000 per quarter, increasing to $1,000,000 per quarter in February 2000, $1,500,000 per quarter in February 2001 and $1,750,000 per quarter in February 2002 with the final loan maturity on January 29, 2003. The Bank Credit Facilities require the Company to meet certain financial tests, including minimum interest coverage and maximum leverage ratios beginning as of and for the quarter ended May 31, 1998. The Bank Credit Facilities also contain covenants which, among other things, limit the ability of the Company to incur additional indebtedness, pay dividends, enter into transactions with affiliates, form subsidiaries, enter into sale-leaseback transactions, make capital expenditures, loans, investments or lease payments, merge, consolidate or acquire or dispose of assets, voluntarily prepay or amend other indebtedness, incur liens and encumbrances and other matters customarily restricted in loan agreements of this type. For the quarters ended May 31, 1998, August 31, 1998 and November 30, 1998, the Company was in default of certain financial covenants. The Company's lenders had provided an interim waiver with respect to the defaults which waiver expired on December 4, 1998. Due to the expiration of the waiver on December 4, 1998, the Company is unable to borrow any additional amounts under the Revolving Credit Agreement. The total amount outstanding under the Revolving Credit Agreement at January 14, 1999 approximates $11.7 million. F-13 The Company is in discussion with its lenders and believes the covenant provisions of the credit agreement, among other items, will be amended. Accordingly, the Company continues to classify its outstanding debt as long term in accordance with the existing loan maturity dates. The Bank Credit Facilities also contain customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross defaults, certain events of bankruptcy and insolvency, ERISA, judgement defaults, failure of any guarantee or security agreement supporting the Company's obligations under the Bank Credit Facilities to be in full force and effect, and a change of control of the Company's Parent or the Company. The obligations of the Company under the Bank Credit Facilities are unconditionally guaranteed by the Company's Parent and any direct or indirect subsidiaries of the Company. In addition, the obligations of the Company under the Bank Credit Facilities are secured by substantially all of the assets of the Company. 12% SENIOR SUBORDINATED NOTES DUE 2008--The 12% Senior Subordinated Notes due 2008 were issued January 29, 1998 pursuant to the indenture dated as of January 29, 1998 between Acquisition Corp. and State Street Bank and Trust Company (the "Indenture") and became obligations of the Company as of the Merger Date. Interest accrues at 12% per annum and is payable semiannually in arrears on each January 15 and July 15, commencing July 15, 1998. The Notes are unsecured obligations of the Company, ranking subordinate in right of payment to all Senior Indebtedness (as defined in the Indenture), and ranking pari passu in right of payment with any future senior subordinated indebtedness and senior in right of payment to all other subordinated obligations of the Company. The Notes will be redeemable, in whole of in part, at the Company's option on or after January 15, 2003 at redemption prices set forth in the Indenture. Up to 35% of the aggregate principal amount of the Notes may be redeemed on or prior to January 15, 2001 with the net cash proceeds of a public offering at redemption prices and terms in accordance with the Indenture. The Indenture provides noteholders the option to have their notes purchased in the event of a change in control. In addition, the Indenture contains covenants restricting the incurrence of additional indebtedness, payment of dividends, sales of assets, incurrence of liens, mergers and acquisitions and conduct of the business to existing businesses. The Company will be unable to make the interest payment due on January 15, 1999 on the Notes. The Company is unable to make the interest payment for two reasons. The Company's cash flow is insufficient. In addition, as a result of a payment default with respect to certain Senior Indebtedness as defined in the Indenture dated as of January 29, 1998 between Acquisition Corp. and State Street Bank and Trust Company (the "Indenture"), the Company is prohibited, pursuant to the terms of the Indenture, from making any payments on the Notes until the payment default is cured or waived. The payment default stems from the failure to pay on January 4, 1999 $1.1 million owing with respect to certain seller notes issued in connection with the acquisition by the Company of Bing Yen & Associates, Inc. in November 1997. The Company is in the process of retaining Houlihan Lokey Howard & Zukin Capital, investment bankers ("Houlihan Lokey"). Houlihan Lokey is expected to review the Company's financial position, cash flow requirements, financial history, operations, competitive environment and assets to assist the Company in developing a business plan which will serve as the basis in determining its various financial alternatives, and ultimately the proposed terms of a comprehensive financial restructuring. In doing so, Houlihan Lokey is expected to work with the Company's senior management to complete, and review the Company's new business plan. Once the review of the Company is begun, a proposed timetable is expected to be communicated to the holders of the Notes. 8.18% SENIOR SECURED NOTES--On May 29, 1997, the Company issued $32,500,000 of 8.18% Senior Secured Notes to a group of financial institutions. The proceeds were used in part to repay the Company's bridge credit facility outstanding as of February 28, 1997. In connection with the issuance of the 8.18% Senior Secured Notes, the Company had entered into a bank credit agreement providing a $15,000,000 revolving line of credit. Amounts outstanding under the bank revolver and the 8.18% Senior Secured Notes were repaid in full using proceeds of the 12% Senior Subordinated Notes due 2008 and the Bank Credit Facilities. F-14 E. COMMITMENTS AND CONTINGENCIES Joseph I. Peters v. George Rubin, et al, Civ. Action No. 16026-NC, Court of Chancery, New Castle County, Delaware. On or about November 12, 1997, a summons and complaint were filed in the Delaware Court on behalf of Joseph I. Peters, as plaintiff. On or about December 18, 1997, an amended complaint was filed (the "Amended Complaint"). The Amended Complaint names the Company, the members of the Company's board of directors, Weiss, Peck & Greer ("Weiss Peck") and the WPG Corporate Development Associates V, L.P., a Weiss Peck affiliate, as defendants. The Amended Complaint challenges the Tender Offer and Merger. The Amended Complaint seeks class action status on behalf of the stockholders of the Company. The plaintiff in the action claims that the offer price for the Company's Common Stock is inadequate and that the defendants have breached their fiduciary duties to the plaintiff and other stockholders of the Company. The plaintiff seeks unspecified damages. On January 7, 1998, a motion to dismiss was filed by Weiss Peck and WPG Corporate Development Associates V, L.P. On January 13, 1998, answers to the complaint were filed by the Company and the remaining defendants. The parties to the action are currently conducting discovery. The Company believes the allegations contained in the Amended Complaint are without merit and intends to defend the action vigorously. First Fidelity Bank, N.A., et al v. Hill International, Inc. et al., Superior Court of New Jersey, Law Division, Burlington County, Docket No. Bur-L-03400-95, filed December 19, 1995. Irvin E. Richter, et al v. ATC Group Services Inc., et al. United States District Court, District of New Jersey, Civ. No. 96 CV 5818 (JBS) filed December 6, 1996. On December 19, 1995, a second amended complaint was filed in the above-entitled action which joined the Company as a defendant and included a count against the Company seeking recovery of certain assets purchased from Hill International, Inc. ("Hill") on the grounds that plaintiff banks held security interests in the assets and that Hill was in default under the security agreement creating such alleged security interests. The original plaintiffs in this action were First Fidelity Bank, N.A. and United Jersey Bank, N.A. The primary defendants were Hill and certain of its subsidiaries, and Irvin Richter, David Richter, Janice Richter and William Doyle. Irvin Richter and David Richter are officers and stockholders of Hill. In April 1996, the Company filed a cross-claim against Hill, Irvin Richter and David Richter alleging breach of contract and fraud, among other allegations, and seeking unspecified damages, including punitive damages, and equitable relief. In August, 1996, Hill and the Richters filed an answer denying ATC's Cross-claims, a cross-claim against ATC and a third party claim against certain members of ATC's management and an employee. The cross-claim and third party claim seek unspecified damages, including punitive damages, for defamation, breach of the Richters' non-competition agreements and securities fraud. The defamation claims are based (i) on plaintiff banks' allegation of fraud against Hill and the Richters in their amended complaint, which Hill and the Richters allege was based on defamatory statements made by ATC in settlement discussions with the plaintiff banks and (ii) on a letter alleged to contain defamatory statements which was sent to an account debtor of the Company by an employee. In its answer, the Company both denies that it made defamatory statements and asserts that the defamation allegations fail to state legally valid claims. The breach of contract and securities claims are based on allegations that ATC made representations concerning a registration rights agreement to be provided in connection with options issued to the Richters as consideration for their non-competition agreements. In its answer, the Company denies that an agreement concerning registration rights was ever reached and asserts that any such rights were forfeited or suspended by the Richters in any case as a result of their conduct in connection with the asset purchase. ATC also disputes that the Richters sustained damages on the grounds, among others, that the options were non-transferable and because ATC's stock price never exceeded the exercise price at any point where the options would have been exercisable. In January, 1997, the plaintiff banks dismissed their claim against ATC. The remaining claims are subject to a stay pending the federal action described below. On December 6, 1996, Hill and the Richters commenced an action against ATC and the same officers and employees of ATC alleging essentially the same claims in federal court as in the state action. This action is entitled Irwin E. Richter et al. v. ATC Group Services, et al., Civ. No. 96-5818 (JBS), U.S. District Court for the District of New Jersey, December 6, 1996. ATC has answered, raising the same defenses and additional defenses related to the timeliness of the federal securities claims. The case is currently in the discovery and pretrial motion phase. ATC filed a motion for Summary Judgement on the Federal Court claims. This motion was heard on January 8, 1999 and the Court dismissed the Plaintiff's state and federal securities fraud claims and common law fraud claims and reserved judgement on the other counts. The dual forum litigation does not create a risk of double recovery. Commonwealth of Massachusetts v. TLT Construction Corp. et al., Civ. Action No. 96-02281 F, Superior Court of Middlesex County, Massachusetts. This is an action brought by the Commonwealth of Massachusetts in April 1996, against the architects and general contractor on a renovation and construction project on the Suffolk County Courthouse in Massachusetts. The basis of the lawsuit is that one or more damp-proofing products specified by the architect defendants and installed by the contractor defendant made employees in the courthouse ill because of the off-gassing of harmful vapors. Dennison Environmental Services Inc., ("Dennison") an ATC subsidiary, was joined on August 13, 1996, as a third party defendant by TLT Construction Corporation, the general contractor, because Dennison performed some air quality testing of the air in the courthouse for the Commonwealth of Massachusetts during the construction process. The contractor alleges that it acted in reliance on these tests in continuing to install the material after the test report was given to it by the state. ATC's position is that it did not commit any error or omission in this case, that ATC made no representation to the contractors or material supplier and had no privity with them and that Dennison's opinion concerning short term, during- construction health effects of the off-gassing could not be justifiably relied upon with respect to the long-term performance and health effects of the product or its installation. This case is in the discovery phase. At this point, ATC considers the case to be without merit, and ATC intends to vigorously defend the action. Notice of this claim has been made to ATC's professional liability insurer. At the time that notice of Suffolk County claims was filed, the Company had in effect a professional liability insurance policy in the amount of $10.0 million with a deductible of $250,000. Barrett-Moeller et al. v. ATC Associates Inc., Civ. Action No. 97-01037D, Superior Court of Middlesex County, Massachusetts and Joan Spencer v. TLT Construction et al., Civ. Action No. 97-4161C, Superior Court of Middlesex County, Massachusetts . These actions arise out of the same set of occurrences as gave rise to Commonwealth of Massachusetts v. TLT Construction, Corp. described above. One action( Barrett-Moeller) was brought by a group of employees who worked in the Suffolk County Courthouse during the period in which the off-gassing of harmful vapors was alleged to have occurred. The other action (Spencer)was brought by an employee who worked in the Suffolk County Courthouse during the period in which the off-gassing of harmful vapors was alleged to have occurred. Both suits seeks damages for personal injury in an unspecified amount. ATC, AIG ( our insurer) and the manufacturer-defendant, Pecora, reached settlement with the Barrett-Moeller and Spencer plaintiffs in January of 1999. As a result of this settlement, ATC has expended its deductible portion for these claims and AIG will now assume the defense of the Commonwealth of Massachusetts claim. Cambridge Housing Authority v. CON-TEST, Inc. and ATC Group Services Inc., Civil Action No. MICV 97-04893, Superior Court of Middlesex County, Massachusetts. This action was brought on October 1, 1997 for damages in the amount of $3,381,805 alleging that Con-Test, Inc. breached its contract with Cambridge Housing Authority and was negligent in performing asbestos survey work preparatory to a housing project re-modernization project. ATC was joined as a party on the theory of successor liability. ATC has filed an answer denying that it was a successor to Con-Test under Massachusetts's law and asserting that it should therefore have no liability for Con-Test's alleged acts or omissions. The Company believes that the case is without merit because ATC does not meet the criteria for a finding of successor liability in the State of Massachusetts. ATC has filed a notice of claim with Con-Test's insurance company which has assumed the defense of the action. Con-Test's insurance company made an offer to settle for $460,001 alleging that their damage expert had determined this sum was the amount of actual damages incurred by Cambridge Housing Authority. Cambridge Housing Authority rejected the offer and countered with $2,150,000 as a settlement figure. Professional Service Industries, Inc. v. ATC Group Services Inc. and Thomas Bowker, Superior Court, Norfolk County, Massachusetts, June 19, 1997, Civ. No. 97-01146. The complaint alleges that ATC interfered with a Non-competition agreement between Mr. Bowker, an ATC employee, and PSI. An injunction has been issued by the court against ATC and Mr. Bowker prohibiting them from competitive acts within certain geographic areas. The parties to this suit have reached a settlement effective December 19, 1998. F-15 Etzel Place II, L.P. v. ATC Environmental Inc. Action No. 982-01473, Missouri Circuit Court, Twenty-Second Judicial Circuit (St. Louis City). This action was brought on June 2, 1998 and alleges that ATC breached its contract with the plaintiff and was negligent in performing asbestos survey services in connection with an asbestos removal project. Plaintiff requests damages in the amount of $207,310. Plaintiff has offered to settle this matter for $103,655. ATC is currently engaged in settlement discussions with plaintiff and is reviewing their offer to settle. Notice of this claim has been made under ATC's professional liability and pollution liability insurance policy. The insurance policy is subject to a $150,000 self-insured retention amount. 1100 Airport North Partnership v. ATC Group Services Inc., Case No. 02D01-9804-CP-813, Superior Court of Allen County Indiana. This action was filed on May 1, 1998 and arises out of ATC's lease of office space in Fort Wayne, Indiana. The Plaintiff seeks damages and attorneys fees for ATC's alleged breach of the lease. On July 1, 1998, a default judgment was entered against ATC in the amounts of $302,116.13 and $1,443.00 for damages and attorneys fees, respectively. The default judgment against ATC was vacated on November 5, 1998, and the case has been settled between all parties involved. QST Environmental Inc. v. ATC Group Services Inc. and Environmental Warranty Inc.("EWI"), Case No. 98-421, Circuit Court of the Tenth Judicial Circuit, Peoria County, Ilinois. This action was brought on December 4, 1998 and alleges that ATC and its subsidiary, EWI, violated the Illinois Trade Secrets Act as well as committed common law conversion. The claim arises out of ATC's submission of a proposal to remediate a parcel of property in the City of Olney, Illinois and EWI's underwriting of a policy to insure the parcel. Plaintiff alleges that the ATC and EWI used their proprietary data and information in this transaction. Notice of this claim has been made under both ATC's and EWI's professional liability and commercial liability insurance policy. Borough of Kane Authority v. BCM Engineers, Inc. a Division of ATC Group Services Inc., et al., Case No. 1074 CD 1998, Court of Common Pleas of McKean County, Pennsylvania. This action was filed on October 22, 1998 and arises out of an alleged breach of warranty, breach of contract and professional negligence by Smith Technology Corporation ("Smith") in a design project at a wastewater treatment facility for the Borough of Kane. ATC did not purchase this contract in the Smith Transaction and is wrongly named in the case as a successor. The Company believes the case against ATC is without merit because ATC was not involved in the project and the contract in question was not assumed by ATC in the Smith transaction. ATC has filed a notice of claim with Smith's professional liability carrier as well as ATC's carrier. This claim is subject to a $150,000 self insured retention. Morry F. Rubin and George Rubin v. ATC Group Services Inc. (Index No. 600130/99), Supreme Court of the State of New York County of New York. This action was brought on January 11, 1999 by Morry Rubin and George Rubin and seeks damages of $553,430 in connection with the failure by the Company to pay amounts owed the Rubins on January 1, 1999 pursuant to a Severance, Consulting and Non Competition Agreement entered into by the Company with each of Morry Rubin and George Rubin. F-16 PROBABLE CLAIMS One Parkway Project. ATC has received notice of related claims by R.M. Shoemaker Co., a Pennsylvania construction firm, and four of its workers arising out of ATC's performance of asbestos abatement survey, design and project monitoring services. The services were performed by ATC's Burlington, New Jersey office on a project known as the One Parkway Project. The claims allege that ATC: (i) failed to locate certain asbestos-containing materials in a high rise building during its inspection of the facility; (ii) failed to include these undiscovered materials in the design specifications for an asbestos abatement project in connection with a renovation project on the building; and (iii) failed to properly clearance inspect and test the areas on which abatement had been performed prior to demobilization of the asbestos abatement project. The claimants allege that ATC's acts or omissions resulted in additional corrective actions including remobilization of certain areas, delays of the renovation project and exposure of construction workers to asbestos contamination. R.M. Shoemaker has alleged that it sustained damages in the reduced amount of $883,955 for additional abatement costs plus additional damages for delay. The workers' exposure claims have not been quantified. ATC has been engaged in settlement discussions with RM Shoemaker. No suit has been filed. The Company believes that it was not responsible for the alleged problems on this project. ATC's responsibilities on the project were limited, and ATC believes that the alleged omissions which allegedly resulted in the alleged losses were outside the scope of the Company's contractual responsibilities. The Company has served notice of these claims upon its professional liability insurer. This coverage is subject to a $250,000 deductible. Bob Moore Construction/Garden Ridge, Inc. ATC received notice of a claim arising out of ATC's performance of soil compaction testing for Bob Moore Construction, Inc., the general contractor on a retaining wall construction project for Garden Ridge, Inc., a garden supply chain, in Norcross, Georgia. ATC settled this claim for $88,000 during the three months ended August 31, 1998. Argosy Casino, Lawrenceburg, Indiana. ATC has received notice of claim arising out of geotechnical analyses for which American Testing and Engineering Corporation originally provided the geotechnical analyses and on which ATC subsequently performed the design of a Tensar/soil stabilized earth slope. A tentative settlement reached among the parties to this claim would result in ATC's payment of $266,000 in corrective costs, of which ATC expects contribution from other parties in an amount of up to $80,000. ATC is currently negotiating with the Subcontractor for contribution toward this settlement. Notice of this claim has been made under ATC's professional liability insurance policy. The professional liability insurance is subject to a $250,000 deductible. TG Kentucky, Lebanon, Kentucky. The potential claim arises out of a contract to perform preliminary geotechnical investigations at the TG Kentucky Facility, Lebanon, Kentucky, for James M. Gray Construction Company ("Gray"). ATC issued geotechnical engineering reports based on its investigations. Gray alleges that it encountered differing site conditions from those identified in ATC's geotechnical reports. Gray asserts it could incur over $500,000 in additional costs to finish the project considering these alleged unexpected conditions. Allegations have been made against ATC for costs over budget. ATC believed it performed all services properly and that it should incur no liability. Gray has not pursued ATC any further on this matter. Notice has been given to ATC's professional liability insurer. The policy is subject to the $150,000 self-insured retention amount. F-17 Marina Bay Development Group. On October 7, 1998, ATC received a notice of claim from Marina Bay Development Group, LLC and related parties alleging a breach of contract and negligence by ATC or its subcontractor in the performance of geophysical survey and environmental assessment services on a property in Quincy, Massachusetts. The claimants allege that ATC failed to disclose operations formerly conducted on the site and that ATC's subcontractor failed to locate an underground storage tank. The claimants have alleged damages in an amount ranging from $100,000 to $250,000. ATC has entered into settlement negotiations with the claimants. ATC has served a notice of claim regarding this matter on its professional liability insurance policy, which is subject to a $150,000 self-insured retention. Smith Technology Acquisition Claims. ATC has filed two claims for recoupment against Smith Technology Corporation ("Smith") arising out of the Agreement for Sale and Purchase of Business Assets of August 19, 1997, between ATC and Smith ("the Agreement"). The first claim asserted a recoupment against the full amount of the $200,000 30-day note and a return of conditionally assumed liabilities in the total amount of $135,000. These remedies were asserted to partially recoup a deficiency in the Adjusted Equity Value as stated on Smith's closing Engineering Division Balance Sheet from that warranted in the purchase agreement. On March 27, 1998, ATC asserted a second set of recoupment claims arising under the Agreement for various value, liability, and loss issues in the amount of $5,127,859 against the $2,750,000 note payable to Smith which had been assigned to Chase Manhattan Bank. On April 13, 1998, ATC served a corrective amendment to this claim asserting an additional claim amount of $21,475. This resulted in a total claim amount of $5,149,334. On May 22, 1998, ATC filed notice to Smith and Chase Bank of Smith's breach of the covenants of the Agreement in failing to turn over $606,604.39 of ATC's cash receipts. Smith and Chase have thus far refused to turn over these funds on the basis of their allegation that a dispute between Smith and ATC exists concerning certain payments and recoupment claims under the Agreement as described above. Although ATC believes it is entitled to these funds under the Agreement, the release of such funds will not be obtained without legal action or settlement of the matters in dispute. On August 21, 1998, ATC filed a claim in the case entitled Plymouth Nine Hundred, Inc./DE f/k/a BCM Engineers, Inc. of Delaware, Case No. 97-2066 (HSB), U.S. Bankruptcy Court for the District of Delaware, asserting claims against Smith in the aggregate amount of $5,287,727. Since the filing of this original claim, status changes in certain of the claim items has reduced the claim amount to $4,745,906. ATC has made a settlement offer to Smith and Chase Bank, assignee of the Smith notes, to resolve the parties respective claims arising out of the notes, the purchase agreement and the related joint services agreement. The general terms of the settlement are as follows: ATC pays $264,346 to Smith to satisfy its obligation for the joint services costs and ATC is released from any further liability for joint services. ATC releases its claim to the $606,604.39 held by Chase in the Smith lock box. Chase and Smith agree to release ATC from any obligations under the notes. The payment obligations are contingent on ATC receiving a channeling order to protect ATC from claims from Smith's creditors. In addition, the court would issue an order declaring that ATC is not a successor to Smith. ATC would also gain the ability to pursue Smith's rights against third parties who have committed acts that resulted in losses that ATC had to pay on behalf of Smith. The parties are in the process of negotiating a stipulation that will address the settlement terms. There are several non-litigation matters and potential claims that arise out of Smith's performance of services or Smith's business prior to the Sale Agreement which are non-assumed liabilities. In general these relate to performance or business errors by Smith that require ATC to perform corrective services to preserve a client relationship under a Smith assumed contract. These potential costs were factored into the decision to settle with Smith and Chase. The terms of the settlement will allow ATC several avenues to minimize losses incurred in resolving these Smith related non-litigation, potential claims. ATC has recorded reserves which the Company believes are appropriate, representing actual or estimated losses arising from the above claims, or revisions to litigation reserves previously established. The ultimate outcomes of the above matters can not be assured, and accordingly, the actual costs may differ from recorded estimates. F-18 F. INDUSTRY SEGMENT DATA The Company provides services through its environmental consulting and engineering segment and its information technology consulting segment. Industry segment data is as follows: (Dollars in thousands)
Environmental Information Adjustments & & Engineering Technology Eliminations Total ------------------ ---------------- ----------------- ------------------ FISCAL 1999 Quarter Ended November 30, 1998 Revenues........................ $ 39,142 $2,249 $ (75) $ 41,316 Operating income................ 656 72 -- 727 Depreciation and amortization... 1,809 63 -- 1,872 Capital expenditures............ 470 12 -- 482 Nine Months Ended November 30, 1998 Revenues........................ $115,376 $7,197 $(1,062) $121,511 Operating income................ 1,845 560 -- 2,405 Depreciation and amortization... 5,229 182 5,411 Capital Expenditures............ 1,606 64 1,670 Identifiable Assets as of November 30, 1998............................... $191,188 $5,749 $(3,415) $193,522 FISCAL 1998 Quarter Ended November 30, 1997 Revenues........................ $ 35,874 $2,293 $ -- $ 38,167 Operating income................ 2,723 152 -- 2,875 Depreciation and amortization... 845 12 -- 857 Capital expenditures............ 820 15 -- 835 Nine Months Ended November 30, 1997 Revenues........................ $98,086 $6,480 $ (303) $104,263 Operating income................ 7,608 376 -- 7,984 Depreciation and amortization... 2,249 32 -- 2,281 Capital expenditures............ 1,447 56 -- 1,503 Identifiable Assets as of November 30, 1997........................... $114,456 $5,760 $(2,671) $117,545
F-19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS The Company is currently in default under its Bank Credit Facilities. In addition, the Company will be unable to make the $6.0 million interest payment due on January 15, 1999 on the Notes. The Company is unable to make the interest payment for two reasons. The Company's cash flow is insufficient. In addition, as a result of a payment default with respect to certain Senior Indebtedness as defined in the Indenture dated as of January 29, 1998 between Acquisition Corp. and State Street Bank and Trust Company (the "Indenture"), the Company is prohibited, pursuant to the terms of the Indenture, from making any payments on the Notes until the payment default is cured or waived. The payment default stems from the failure to pay on January 4, 1999 $1.1 million owing with respect to certain seller notes issued in connection with the acquisition by the Company of Bing Yen & Associates, Inc. in November 1997. In addition, on January 1, 1999, the Company failed to pay $553,430 owed to Morry Rubin and George Rubin, pursuant to the Severance Agreements described below. On January 11, 1999 the Rubins filed suit against the Company in New York Supreme Court seeking $553,430 in damages as a result of this failure to pay. During the nine months ended November 30, 1998, the Company completed two acquisitions. On July 31, 1998, ATC acquired certain assets and assumed certain liabilities of AeroVironmental Environmental Services, Inc. ("AVES"); a southern California provider of engineering and technical consulting services. On July 10, 1998, ATC acquired certain assets and assumed certain liabilities of On-Site Technologies, Inc. ("OST"), a remediation engineering services company headquartered in Hayward, California. AVES and OST reported revenues of $2.3 million and $1.2 million, respectively, for their latest fiscal years. Fiscal 1998 Tender Offer and Merger. The Company became a wholly owned subsidiary of Acquisition Holdings, Inc. ("Holdings") upon the merger of ATC with Acquisition Corp., a wholly owned subsidiary of Holdings, with ATC being the surviving corporation (the "Merger"). Acquisition Corp. offered (the "Tender Offer") and completed the purchase of the issued and outstanding shares of the Company's Common Stock at a price of $12.00 per share. The Tender Offer was consummated using the proceeds from the issuance of $100,000,000 of 12% Senior Subordinated Notes (the "Notes"), borrowings under a new bank credit facility (the "Bank Credit Facilities") and equity investments in Holdings. The accompanying condensed consolidated financial statements for the Company from February 5, 1998 (the "Successor Period") are attributable to operations of the Company under the successor ownership of Holdings. The predecessor condensed consolidated financial statements, representing the period prior to February 5, 1998 (the "Predecessor Period"), relate to the previous ownership of the Company. Prior to the Tender Offer and Merger, the Company had entered into two separate Severance, Consulting and Noncompetition Agreements (the "Severance Agreements") with two officers of the Company. The Severance Agreements provided for the resignation of the officers upon completion of the Merger and the terms of a non-compete agreement. The Tender Offer and Merger, issuance of the Notes, execution of the Bank Credit Facilities and Severance Agreements, are collectively referred to as the "Transactions". As a result of the Merger, the consolidated financial statements for the Successor Period are presented on a different basis of accounting than that of the Predecessor Period and are therefore not directly comparable. Through fiscal 1998 the Company acquired twelve businesses since 1993. Three acquisitions include: (i) the purchase by the Company of all of the stock of Bing Yen & Associates, Inc. ("Bing Yen") on November 26, 1997; (ii) the purchase by the Company of substantially all of the stock of Environmental Warranty, Inc. ("EWI") on November 4, 1997; and (iii) the purchase by the Company of certain assets and the assumption by the Company of certain liabilities on August 20, 1997 of the Engineering Division of Smith Technology Corporation which operated primarily as BCM Engineers Inc.("BCM"). OVERVIEW ATC is a leading national provider of professional consulting, engineering and testing services within the environmental and construction materials industries. Management believes the Company is also a leading provider of integrated environmental information management technology services. The Company provides a broad range of services to a diverse client base of over 8,000 customers. The Company provides its services through a network of 74 branch offices located in 35 states covering every major market of the United States. The Company's rapid growth is primarily attributable to the acquisition of assets of American Testing and Engineering Corporation ("ATEC") in May 1996 and the acquisition of assets of BCM in August 1997. ATEC, with its large network of regional and branch offices, positioned the Company as a national provider of professional environmental consulting, testing and engineering services. As a result of the BCM acquisition, ATC has become a high quality provider of consulting, engineering and design services in water supply and treatment, wastewater systems, air quality management, traditional environmental site investigations, site assessments and storage tank management services. Subsequent to each acquisition that it has made, the Company has implemented cost reduction measures, including integration of Offices, introduction of flexible staffing programs and reduction of duplicate corporate overhead costs. F-20 RESULTS OF OPERATIONS Three Months Ended November 30, 1998 Compared with Three Months Ended November 30, 1997 Revenues in the three months ended November 30, 1998 increased 8.3% to $41.3 million, compared with $38.2 million in the three months ended November 30, 1997. This increase was primarily attributable to revenues associated with the acquisitions of EWI and Bing Yen which were completed in November 1997 and the acquisitions of OST and AVES which were completed in July 1998. Revenues in the three months ended November 30, 1998 attributable to the acquisitions of EWI, Bing Yen, OST and AVES totaled $1.6 million or 3.9% of revenues in the three months ended November 30, 1998. Revenues were not affected by the Transactions. Reimbursable costs represent direct project expenses billed to environmental and engineering segment clients. For the three months ended November 30, 1998, reimbursable costs increased 40.1% to $7.7 million compared with $5.5 million in the three months ended November 30, 1997. Reimbursable costs as a percentage of revenues increased to 18.7% in the three months ended November 30, 1998 from 14.4% in the comparable prior year period, principally due to changes in Sales mix, which required increased use of various subcontractor services in the 1998 period. Reimbursable costs were not affected by the Transactions. Cost of net revenues in the three months ended November 30, 1998 increased by $1.2 million or 6.5% to $18.7 million compared with $17.5 million in the three months ended November 30, 1997. Cost of net revenues as a percentage of net revenues increased to 55.6% in the three months ended November 30, 1998 compared to 53.7% in the three months ended November 30, 1997. The increase in cost of net revenues as a percentage of net revenues for the three months ended November 30, 1998 over the prior year's comparable period was principally impacted by the Company's Sales mix during the three months ended November 30, 1998. Gross profit in the three months ended November 30, 1998 decreased 1.3% to $14.9 million, compared with $15.1 million in the three months ended November 30, 1997. Gross margin decreased to 44.4% in the three months ended November 30, 1998, compared to 46.3% in the three months ended November 30,1997. The reduction in the gross margin percentage of 1.9% for the three months ended November 30, 1998 was principally caused by the Company's Sales mix during the three months ended November 30, 1998. Operating expenses in the three months ended November 30, 1998 increased 15.9% to $14.2 million, compared with $12.3 million in the three months ended November 30, 1997. Operating expenses increased as a percentage of net revenues to 42.3% in the three months ended November 30, 1998, compared with 37.5% in the three months ended November 30, 1997. The increase in operating expenses was attributable to an increase in Employee costs. Employee costs increased 16.1% to $6.5 million, or 19.4% of net revenues in the three months ended November 30, 1998 compared with $5.6 Million, or 17.1% of net revenues, in the three months ended November 30, 1997. These increases in total employee costs were due to employees hired in connection with the expansion of ATC's operations. The increase in operating expenses also resulted from higher facility costs and administrative expenses resulting from the growth in operations, increased employee levels and costs related to the establishment of the Company's corporate administrative group, and implementation of new accounting systems and processes. Additionally, in the three months ended November 30, 1998, amortization of goodwill and intangibles increased to $1.4 million, compared with $0.5 million in the three months ended November 30, 1997 reflecting the additional goodwill amortization resulting from acquisitions and the Transactions. For the reasons set forth above, operating income in the three months ended November 30, 1998 totaled $0.7 million compared with operating income of $2.9 million in the three months ended November 30, 1997. Operating income decreased as a percentage of net revenues to 2.2% in the three months ended November 30, 1998, compared with 8.8% in the three months ended November 30, 1997. F-21 Non-operating expense in the three months ended November 30, 1998 increased to $4.0 million compared with $0.9 million in the three months ended November 30, 1997. The increase in non-operating expense is attributable to increased interest expense related to the 12% Senior Subordinated Notes and bank debt outstanding during the quarter ended November 30, 1998. Income tax (benefit) expense in the three months ended November 30, 1998 was $(1.1 million), compared with $0.8 million in the three months ended November 30, 1997. During the three months ended November 30, 1998 and 1997, the Company's effective tax rates were 32.6% and 41.6%, respectively. The lower effective tax rate for the three months ended November 30, 1998 is due principally to non deductible goodwill amortization related to the Transactions. As a result of the foregoing, the Company incurred a net loss of $2.2 million compared with net income of $1.2 million in the three months ended November 30, 1997. Net income (loss) decreased as a percentage of net revenues to (6.5)% in the three months ended November 30, 1998 compared with 3.6% in the three months ended November 30, 1997. Nine Months Ended November 30, 1998 Compared with Nine Months Ended November 30, 1997 Revenues in the nine months ended November 30, 1998 increased 16.5% to $121.5 million, compared with $104.3 million in the nine months ended November 30, 1997. This increase was primarily attributable to revenues associated with the BCM acquisition which was consummated on August 20, 1997 and the acquisitions of EWI and Bing Yen which were completed in November 1997 and the acquisitions of OST and AVES in July, 1998. Revenues for the nine months ended November 30, 1998 reflected certain one time adjustments to revenue related to unbilled receivables reserves, cost overruns and billing adjustments. Revenues in the nine months ended November 30, 1998 attributable to the acquisition of BCM totaled $13.2 million. Revenues attributable to the acquisition of EWI, Bing Yen, AVES and OST totaled $4.5 million or 3.7% of revenues in the nine months ended November 30, 1998. Revenues were not affected by the Transactions. Reimbursable costs represent direct project expenses billed to environmental and engineering segment clients. For the nine months ended November 30, 1998, reimbursable costs increased 27.8% to $20.3 million, compared with $15.9 million in the nine months ended November 30, 1997. Reimbursable costs as a percentage of revenues increased to 16.7% for the nine months ended November 30, 1998 from 15.2% in the comparable prior year period, principally due to changes in sales mix, which required increased use of various subcontractor services in the 1998 period. Reimbursable costs were not affected by the Transactions. Cost of net revenues in the nine months ended November 30, 1998 increased by $8.9 million or 18.4% to $56.8 million compared with $47.9 million in the nine months ended November 30, 1997. Cost of net revenues as a percentage of net revenues increased to 56.1% in the nine months ended November 30, 1998 compared to 54.2% in the nine months ended November 30, 1997, principally due to changes in sales mix during the 1998 period. Gross profit in the nine months ended November 30, 1998 increased 9.9% to $44.4 million, compared with $40.4 million in the nine months ended November 30, 1997. Gross margin decreased to 43.9% in the nine months ended November 30, 1998 compared to 45.8% in the nine months ended November 30, 1997. The decrease in gross profit percentage was principally impacted by both one time adjustments to revenue and the Company's sales mix during the 1998 nine month period. Operating expenses in the nine months ended November 30, 1998 increased 29.5% to $42.0 million, compared with $32.5 million in the nine months ended November 30, 1997. Operating expenses increased as a percentage of net revenues to 41.5% in the nine months ended November 30, 1998, compared with 36.7% in the nine months ended November 30, 1997. The increase in operating expense was principally attributable to an increase in employee costs. Employee costs increased 27.4% to $18.6 million, or 18.4% of net revenues, in the nine months ended November 30, 1998 compared with $14.6 million, or 16.5% of net revenues, in the nine months ended November 30, 1997. These increases in employee cost were due to employees hired in connection with the expansion of ATC's operations including acquisitions completed during the period. Increases in operating expenses also resulted from higher facility costs and administrative expenses resulting from the growth in operations and increased employee levels and increased allowance for doubtful accounts. Additionally, in the nine months ended November 30, 1998, amortization of goodwill and intangibles increased to $4.1 million, compared with $1.4 million in the nine months ended November 30, 1997 reflecting the additional goodwill amortization resulting from acquisitions and the Transactions. Operating income in the nine months ended November 30, 1998 decreased 69.9% to $2.4 million compared with $8.0 million in the nine months ended November 30, 1997. Operating income decreased as a percentage of net revenues to 2.4% in the nine months ended November 30, 1998, compared with 9.0% in the nine months ended November 30, 1997. F-22 Non-operating expense in the nine months ended November 30, 1998 increased to $11.7 million compared with $2.0 million in the nine months ended November 30, 1997. The increase in non-operating expense is attributable to increased interest expense related to the 12% Senior Subordinated Notes and bank debt outstanding during the 1998 period. Income tax (benefit) expense in the nine months ended November 30, 1998 was $(3.0 million), compared with $2.4 million in the nine months ended November 30, 1997. During the nine months ended November 30, 1998 and 1997, the Company's effective tax rates were 32.4% and 40.2%, respectively. The lower effective tax rate for the nine months ended November 30, 1998 is due principally to non-deductible goodwill amortization related to the Transactions. As a result of the foregoing, the Company incurred a net loss of $6.3 million for the nine months ended November 30, 1998, compared with net income of $3.6 million in the nine months ended November 30, 1997. Net income (loss) decreased as a percentage of net revenues to (6.2)% in the nine months ended November 30, 1998 compared with 4.1% in the nine months ended November 30, 1997. SEASONALITY ATC typically experiences a slow down in business activities during the winter months and an increase in business activities during the summer months. This is due to seasonal fluctuations in construction and remediation activities. As a result, operating results may vary from period to period. For fiscal 1998, comparable quarterly revenues as a percentage of relevant annual revenues were 24.6%, 26.6%, 25.0% and 23.8%. LIQUIDITY AND CAPITAL RESOURCES As a result of the consummation of the Transactions, the Company is highly leveraged. As described in Note D, due to defaults under the Bank Credit Facilities with respect to certain financial covenants for the quarters ended May 31, 1998, August 31, 1998 and November 30, 1998, the Company is presently unable to borrow any additional amounts under its Revolving Credit Agreement. As a result, the Company's only source of liquidity is cash flow from operations. It is expected that the Company's principal uses of liquidity will be to provide working capital for operations and fund necessary capital expenditures. There can be no assurance, however, that cash flow from operations will be sufficient for these purposes and to the extent it is not sufficient for such purposes, the Company's financial condition and results of operations will be materially and adversely affected. The Company is in discussion with the lenders under its Bank Credit Facilities and believes the covenants in the Bank Credit Facilities will be amended and the existing defaults waived. There can be no assurance, however, that any such amendment or waiver will be entered into and to the extent these defaults continue, the lenders under the Bank Credit Facilities could accelerate all amounts owing thereunder. The Company would not have sufficient cash to repay all amounts owing under the Bank Credit Facilities if the lenders accelerated amounts owing thereunder. The Bank Credit Facilities are secured by substantially all of the Company's assets. Proceeds from any sale of assets securing the Bank Credit Facilities would be used first to repay in full amounts outstanding thereunder. In addition, as a result of its lack of liquidity, the Company has not made and will not make certain payments it is contractually obligated to make. The Company will be unable to make the $6.0 million interest payment due on January 15, 1999 on the Notes. The Company is unable to make the interest payment for two reasons. The Company's cash flow is insufficient. In addition, as a result of a payment default with respect to certain Senior Indebtedness as defined in the Indenture dated as of January 29, 1998 between Acquisition Corp. and State Street Bank and Trust Company (the "Indenture"), the Company is prohibited, pursuant to the terms of the Indenture, from making any payments on the Notes until the payment default is cured or waived. The payment default stems from the failure to pay on January 4, 1999 $1.1 million owing with respect to certain seller notes issued in connection with the acquisition by the Company of Bing Yen & Associates, Inc. in November 1997. In addition, on January 1, 1999, the Company failed to pay $553,430 owed to Morry Rubin and George Rubin, pursuent to the Severance Agreements. On January 11, 1999 the Rubins filed suit against the Company in New York Supreme Court seeking $553,430 in damages as a result of this failure to pay. The Company is in the process of retaining Houlihan Lokey Howard & Zukin Capital, investment bankers ("Houlihan Lokey"). Houlihan Lokey is expected to review the Company's financial position, cash flow requirements, financial history, operations, competitive environment and assets to assist the Company in developing a business plan which will serve as the basis for determining its various financial alternatives, and ultimately the proposed terms of a comprehensive financial restructuring. In doing so, Houlihan Lokey is expected to work with the Company's senior management to complete and review the Company's new business plan. Once the review of the Company has begun, a proposed timetable is expected to be communicated to the holders of the Notes. There can be no assurance, however, that the Company will be able to successfully develop and execute alternative financial, and operating plans, ultimately resulting in a comprehensive restructuring plan. The Notes impose certain limitations on the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, issue preferred stock, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company and its subsidiaries. In addition, the New Credit Facility contains other and more restrictive covenants effectively prohibiting the Company from prepaying the Notes. The Bank Credit Facility also requires the Company to maintain specified financial ratios and satisfy certain financial tests. The Company's ability to meet such financial ratios and tests may be affected by events beyond its control. As mentioned above, the Company is currently in default with respect to certain of these financial ratios. F-23 The Company conducts part of its operations through its subsidiaries. As a result, the Company relies, in part, upon payment from its subsidiaries for the funds necessary to meet its obligations, including the payment of interest on and principal of the Notes. The ability of the subsidiaries to make such payments will be subject to, among other things, applicable state laws. Claims of creditors of the Company's subsidiaries will generally have priority as to the assets of such subsidiaries over the claims of the Company. The Company has historically financed its operations through internally generated funds, public and private equity and debt financings and borrowings under its credit facilities. As of November 30, 1998, working capital was $21.5 million, compared with working capital of $29.4 million at February 28, 1998, a decrease of $7.9 million. The decrease in working capital was primarily due to allowances for doubtful accounts and unbilled receivables reserves, increased litigation reserves and expenditures relating to the Transactions. As a result of the Tender Offer and Merger and the Company's prior acquisitions, the Company has a negative tangible net worth, primarily as a result of goodwill amounts recognized in connection with these transactions. During the nine months ended November 30, 1998, net cash flows generated from operating activities were $1.2 million primarily due to operating income offset by interest expense on the 12% Senior Subordinated Notes, the Bank Term Loan and the Revolving Credit Facility. Net cash flows used in investing activities were $1.4 million, resulting from purchases of property and equipment, the acquisition of OST and AVES less the proceeds from the sale of certain assets relating to a laboratory operation. Net cash flows used by financing activities were $3.7 million, primarily representing payments of Tender Offer obligations and net bank borrowings under the Company's Revolving Credit Facility. During the nine months ended November 30, 1997, net cash flows used in operating activities were $1.5 million, primarily due to the increase in billed and unbilled receivables and decreases in accounts payable and other liabilities, representing payments of property facility rentals, non-compete consideration and assumed liabilities of ATEC and other acquisitions. Net cash flows used in investing activities were $11.3 million, resulting from the acquisitions of BCM and ATEC and purchases of property and equipment. Net cash flows provided by financing activities were $16.7 million, primarily representing the proceeds of the Senior Secured Notes less repayment of outstanding bank debt and a bank borrowing of $5.5 million made in connection with the BCM acquisition. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES The market risk exposure inherent in the Company's financial instruments and consolidated financial position represents the potential losses arising from adverse changes in interest rates. The Company is exposed to such interest rate risk primarily in the use of fixed and variable rate debt. The Company utilizes both fixed and variable rate debt to fund its operations. At November 30, 1998, the carrying value and estimated fair value of the Company's fixed rate debt was approximately $101.7 million. The Company also had approximately $29.4 million of variable rate borrowings outstanding, which amount approximated fair value. Market risk for the fixed rate borrowings is estimated as the potential change in the fair value of the debt resulting from a hypothetical 10% adverse change in interest rates, which would have approximated $5.4 million at November 30, 1998. The effect of a similar hypothetical change in interest rates on the Company's variable rate debt would have had a negative impact on the Company's consolidated interest expense of approximately $200,000 for the nine months ended November 30, 1998. For additional information about the Company's financial instruments, see Notes to Consolidated Financial Statements in the Company's annual report on Form 10-K for the year ended February 28, 1998. INFORMATION SYSTEMS AND THE YEAR 2000 The Company is in the process of addressing Year 2000 issues. The Company is currently engaged in a comprehensive project to convert its accounting and management information system to a system consisting of new hardware and packaged software recently purchased from a large vendor who has represented that these systems are Year 2000 compliant. The Company's information technology segment, which provides information system support services to both the Company and the Company's clients, is currently operating on systems that are Year 2000 compliant. ATC's remaining operations are generally dependent only on personal computers and off-the-shelf commercial word processing, drafting, spreadsheet and engineering software. Year 2000 compliant versions of these systems are currently available, and the Company will convert to these compliant systems during calendar year 1999 as the Company upgrades its operational personal computer systems in the ordinary course to the most recently issued software releases. F-24 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS LITIGATION--Joseph I. Peters v. George Rubin, et al, Civ. Action No. 16026-NC, Court of Chancery, New Castle County, Delaware. On or about November 12, 1997, a summons and complaint were filed in the Delaware Court on behalf of Joseph I. Peters, as plaintiff. On or about December 18, 1997, an amended complaint was filed (the "Amended Complaint"). The Amended Complaint names the Company, the members of the Company's board of directors, Weiss, Peck & Greer ("Weiss Peck") and the WPG Corporate Development Associates V, L.P., a Weiss Peck affiliate, as defendants. The Amended Complaint challenges the Tender Offer and Merger. The Amended Complaint seeks class action status on behalf of the stockholders of the Company. The plaintiff in the action claims that the offer price for the Company's Common Stock is inadequate and that the defendants have breached their fiduciary duties to the plaintiff and other stockholders of the Company. The plaintiff seeks unspecified damages. On January 7, 1998, a motion to dismiss was filed by Weiss Peck and WPG Corporate Development Associates V, L.P. On January 13, 1998, answers to the complaint were filed by the Company and the remaining defendants. The parties to the action are currently conducting discovery. The Company believes the allegations contained in the Amended Complaint are without merit and intends to defend the action vigorously. First Fidelity Bank, N.A., et al v. Hill International, Inc. et al., Superior Court of New Jersey, Law Division, Burlington County, Docket No. Bur-L-03400-95, filed December 19, 1995. Irvin E. Richter, et al v. ATC Group Services Inc., et al. United States District Court, District of New Jersey, Civ. No. 96 CV 5818 (JBS) filed December 6, 1996. On December 19, 1995, a second amended complaint was filed in the above-entitled action which joined the Company as a defendant and included a count against the Company seeking recovery of certain assets purchased from Hill International, Inc. ("Hill") on the grounds that plaintiff banks held security interests in the assets and that Hill was in default under the security agreement creating such alleged security interests. The original plaintiffs in this action were First Fidelity Bank, N.A. and United Jersey Bank, N.A. The primary defendants were Hill and certain of its subsidiaries, and Irvin Richter, David Richter, Janice Richter and William Doyle. Irvin Richter and David Richter are officers and stockholders of Hill. In April 1996, the Company filed a cross-claim against Hill, Irvin Richter and David Richter alleging breach of contract and fraud, among other allegations, and seeking unspecified damages, including punitive damages, and equitable relief. In August, 1996, Hill and the Richters filed an answer denying ATC's Cross-claims, a cross-claim against ATC and a third party claim against certain members of ATC's management and an employee. The cross-claim and third party claim seek unspecified damages, including punitive damages, for defamation, breach of the Richters' non-competition agreements and securities fraud. The defamation claims are based (i) on plaintiff banks' allegation of fraud against Hill and the Richters in their amended complaint, which Hill and the Richters allege was based on defamatory statements made by ATC in settlement discussions with the plaintiff banks and (ii) on a letter alleged to contain defamatory statements which was sent to an account debtor of the Company by an employee. In its answer, the Company both denies that it made defamatory statements and asserts that the defamation allegations fail to state legally valid claims. The breach of contract and securities claims are based on allegations that ATC made representations concerning a registration rights agreement to be provided in connection with options issued to the Richters as consideration for their non-competition agreements. In its answer, the Company denies that an agreement concerning registration rights was ever reached and asserts that any such rights were forfeited or suspended by the Richters in any case as a result of their conduct in connection with the asset purchase. ATC also disputes that the Richters sustained damages on the grounds, among others, that the options were non-transferable and because ATC's stock price never exceeded the exercise price at any point where the options would have been exercisable. In January, 1997, the plaintiff banks dismissed their claim against ATC. The remaining claims are subject to a stay pending the federal action described below. On December 6, 1996, Hill and the Richters commenced an action against ATC and the same officers and employees of ATC alleging essentially the same claims in federal court as in the state action. This action is entitled Irwin E. Richter et al. v. ATC Group Services, et al., Civ. No. 96-5818 (JBS), U.S. District Court for the District of New Jersey, December 6, 1996. ATC has answered, raising the same defenses and additional defenses related to the timeliness of the federal securities claims. The case is currently in the discovery and pretrial motion phase. ATC filed a motion for Summary Judgement on the Federal Court claims. This motion was heard on January 8, 1999 and the Court dismissed the Plaintiff's state and federal securities fraud claims and common law fraud claims and reserved judgement on the other counts. The dual forum litigation does not create a risk of double recovery. F-25 Commonwealth of Massachusetts v. TLT Construction Corp. et al., Civ. Action No. 96-02281 F, Superior Court of Middlesex County, Massachusetts. This is an action brought by the Commonwealth of Massachusetts in April 1996, against the architects and general contractor on a renovation and construction project on the Suffolk County Courthouse in Massachusetts. The basis of the lawsuit is that one or more damp-proofing products specified by the architect defendants and installed by the contractor defendant made employees in the courthouse ill because of the off-gassing of harmful vapors. Dennison Environmental Services Inc., ("Dennison") an ATC subsidiary, was joined on August 13, 1996, as a third party defendant by TLT Construction Corporation, the general contractor, because Dennison performed some air quality testing of the air in the courthouse for the Commonwealth of Massachusetts during the construction process. The contractor alleges that it acted in reliance on these tests in continuing to install the material after the test report was given to it by the state. ATC's position is that it did not commit any error or omission in this case, that ATC made no representation to the contractors or material supplier and had no privity with them and that Dennison's opinion concerning short term, during- construction health effects of the off-gassing could not be justifiably relied upon with respect to the long-term performance and health effects of the product or its installation. This case is in the discovery phase. At this point, ATC considers the case to be without merit, and ATC intends to vigorously defend the action. Notice of this claim has been made to ATC's professional liability insurer. At the time that notice of Suffolk County claims was filed, the Company had in effect a professional liability insurance policy in the amount of $10.0 million with a deductible of $250,000. Cambridge Housing Authority v. CON-TEST, Inc. and ATC Group Services Inc., Civil Action No. MICV 97-04893, Superior Court of Middlesex County, Massachusetts. This action was brought on October 1, 1997 for damages in the amount of $3,381,805 alleging that Con-Test, Inc. breached its contract with Cambridge Housing Authority and was negligent in performing asbestos survey work preparatory to a housing project re-modernization project. ATC was joined as a party on the theory of successor liability. ATC has filed an answer denying that it was a successor to Con-Test under Massachusetts's law and asserting that it should therefore have no liability for Con-Test's alleged acts or omissions. The Company believes that the case is without merit because ATC does not meet the criteria for a finding of successor liability in the State of Massachusetts. ATC has filed a notice of claim with Con-Test's insurance company which has assumed the defense of the action. Con-Test's insurance company made an offer to settle for $460,001 alleging that their damage expert had determined this sum was the amount of actual damages incurred by Cambridge Housing Authority. Cambridge Housing Authority rejected the offer and countered with $2,150,000 as a settlement figure. Etzel Place II, L.P. v. ATC Environmental Inc. Action No. 982-01473, Missouri Circuit Court, Twenty-Second Judicial Circuit (St. Louis City). This action was brought on June 2, 1998 and alleges that ATC breached its contract with the plaintiff and was negligent in performing asbestos survey services in connection with an asbestos removal project. Plaintiff requests damages in the amount of $207,310. Plaintiff has offered to settle this matter for $103,655. ATC is currently engaged in settlement discussions with plaintiff and is reviewing their offer to settle. Notice of this claim has been made under ATC's professional liability and pollution liability insurance policy. The insurance policy is subject to a $150,000 self-insured retention amount. QST Environmental Inc. v. ATC Group Services Inc. and Environmental Warranty Inc.("EWI"), Case No. 98-421, Circuit Court of the Tenth Judicial Circuit, Peoria County, Ilinois. This action was brought on December 4, 1998 and alleges that ATC and its subsidiary, EWI, violated the Illinois Trade Secrets Act as well as committed common law conversion. The claim arises out of ATC's submission of a proposal to remediate a parcel of property in the City of Olney, Illinois and EWI's underwriting of a policy to insure the parcel. Plaintiff alleges that the ATC and EWI used their proprietary data and information in this transaction. Notice of this claim has been made under both ATC's and EWI's professional liability and commercial liability insurance policy. Borough of Kane Authority v. BCM Engineers, Inc. a Division of ATC Group Services Inc., et al., Case No. 1074 CD 1998, Court of Common Pleas of McKean County, Pennsylvania. This action was filed on October 22, 1998 and arises out of an alleged breach of warranty, breach of contract and professional negligence by Smith Technology Corporation ("Smith") in a design project at a wastewater treatment facility for the Borough of Kane. ATC did not purchase this contract in the Smith Transaction and is wrongly named in the case as a successor. The company believes the case against ATC is without merit because ATC was not involved in the project and the contract in question was not assumed by ATC in the Smith transaction. ATC has filed a notice of claim with Smith's professional liability carrier as well as ATC's carrier. This claim is subject to a $150,000 self insured retention. Morry F. Rubin and George Rubin v. ATC Group Services Inc. (Index No. 600130/99), Supreme Court of the State of New York County of New York. This action was brought on January 11, 1999 by Morry Rubin and George Rubin and seeks damages of $553,430 in connection with the failure by the Company to pay amounts owed the Rubins on January 1, 1999 pursuant to a Severance, Consulting and Non Competition Agreement entered into by the Company with each of Morry Rubin and George Rubin. ITEM 2. CHANGES IN SECURITIES: Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES: For the quarters ended May 31, 1998, August 31, 1998 and November 30, 1998, the Company was in default of certain financial covenants. The Company's lenders had provided an interim waiver with respect to the defaults, which waiver expired on December 4, 1998. Due to the expiration of the waiver on December 4, 1998, the Company is unable to borrow any additional amounts under the Revolving Credit Agreement. The total amount outstanding under the Revolving Credit Agreement at January 14, 1999 approximates $11.7 million. The Company is also in default under $2.65 million aggregate principal amount of promissory notes issued in connection with the acquisition by the Company of Bing Yen & Associates. This default results from the failure to pay $1.1 million owing with respect to such notes on January 4, 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: Not Applicable ITEM 5. OTHER INFORMATION: On September 22, 1998, Ron H. Danenberg, a principal at Weiss, Peck & Greer and a director of the Company, was named Chairman of the Board of Directors and replaced Nick Malino as ATC's Chief Executive Officer; Mr. Danenberg will serve as Interim Chief Executive Officer pending the appointment of a permanent Chief Executive Officer. Chris Vincze, ATC's Chief Operating Officer and Paul Grillo, the Company's Chief Financial Officer, will report to Mr. Danenberg. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: Not applicable (b) Reports on Form 8-K: None This Form 10-Q contains "forward-looking" statements within the meaning of the Securities Litigation Reform Act of 1995, including, without limitation, those concerning: the results of any discussions with the Company's creditors; the ability of the Company to make required future payments; the retention of Houlihan Lokey; whether the Company is able to propose a comprehensive financial restructuring in a timely manner or propose a timetable to holders of the Notes; the Company's future financial performance and cash flow; whether or not the Company's cash flow will be sufficient to meet its working capital and other cash needs; and the ability of the Company to meet its short-term cash needs, including the ability to make the January 15, 1999 $6.0 million interest payment on its senior subordinated notes. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include such factors as: the demand for the Company's services; the impact of cost reductions on revenues; utilization rates of Company personnel; changes in the pricing environment; general economic conditions in the Company's markets; competitors' actions; accuracy of assumptions regarding savings from restructuring activities; the status and effectiveness of the Company's Year 2000 efforts; the ability to successfully restructure future cash payments, particularly in the short-term; whether or not the Company ultimately retains Houlihan Lokey, and if it does, whether or not the Company and Houlihan Lokey can propose in a timely manner a comprehensive financial restructuring acceptable to the Company's creditors; and other risks described in the Company's filings with the Securities and Exchange Commission. F-26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ATC GROUP SERVICES INC. (Registrant) Dated: January 14, 1999 /s/ Christopher Vincze Christopher Vincze Executive Vice President and Chief Operations Officer (Principal Operating Officer) Dated: January 14, 1999 /s/ Paul Grillo Paul Grillo Executive Vice President and Chief Financial Officer (Principal Financial Officer) Dated: January 14, 1999 /s/ Rachel Trant Rachel Trant Controller (Principal Accounting Officer) F-27 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS FEB-28-1999 SEP-01-1998 NOV-30-1998 1,412 0 45,373 5,559 0 60,709 5,994 5,331,997 193,522 39,165 124,969,685 0 0 10 20,528 193,522 0 121,511 0 77,065 40,499 1,542 11,669 (9,264) (3,003) (6,261) 0 0 0 (6,261) 0.0 0.0
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