UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended November 30, 1996 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 10010 New York, New York -------------------------------- ------------------------------ (Address of principal (Zip Code) executive 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 as of January 6, 1997 was 7,799,937. ATC GROUP SERVICES INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1996 PART I - FINANCIAL INFORMATION: Item 1 - Financial Statements: Consolidated Balance Sheets February 29, 1996 and November 30, 1996 (Unaudited).............. F-3 Consolidated Statements of Operations Three months and nine months ended November 30, 1995 and 1996 (Unaudited)...................................................... F-4 Consolidated Statements of Stockholders' Equity Nine months ended November 30, 1995 and 1996 (Unaudited)......... F-5 Consolidated Statements of Cash Flows Nine months ended November 30, 1995 and 1996 (Unaudited)......... F-6 Notes to Consolidated Financial Statements Three months and nine months ended November 30, 1996 (Unaudited). F-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. F-13 PART II - OTHER INFORMATION: Items 1-6.............................................................. F-18 Signatures............................................................. F-19 Exhibit 11 - Computation of Earnings Per Share Three months and nine months ended November 30, 1995 and 1996 (Unaudited).............................................. F-20 Exhibit 27 - Financial Data Schedule November 30, 1996 (Unaudited)............................ F-21 F-2 PAGE ATC GROUP SERVICES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS FEBRUARY 29, 1996 AND NOVEMBER 30, 1996 (Unaudited) February 29, November 30, 1996 1996 --------------------- -------------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents.............................................. $ 13,469,443 $ 2,714,709 Trade accounts receivable, less allowance for doubtful accounts ($383,220 at February 29, 1996 and 1,284,925 at November 30, 1996). 14,161,774 35,212,157 Costs in excess of billings on uncompleted contracts................... 2,333,835 6,439,405 Prepaid expenses and other current assets.............................. 906,289 2,764,651 Deferred income taxes ................................................. 440,600 440,600 -------------------- --------------------- Total current assets............................................... 31,311,941 47,571,522 PROPERTY AND EQUIPMENT, Net (Note C)....................................... 3,606,755 3,930,679 GOODWILL, net of accumulated amortization (Note B) ($453,646 at February 29, 1996 and 1,188,477 at November 30, 1996)..... 11,375,399 34,910,499 COVENANTS NOT TO COMPETE, net of accumulated amortization (Note B) ($258,099 at February 29, 1996 and 410,573 at November 30, 1996)....... 274,401 676,927 OTHER ASSETS............................................................... 116,104 1,438,425 -------------------- -------------------- $ 46,684,600 $ 88,528,052 ==================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt........................................................$ 1,122,552 $ 305,000 Current maturities of long-term debt................................... 354,858 1,972,668 Accounts payable....................................................... 2,231,175 8,382,843 Income taxes payable................................................... 42,500 267,937 Accrued compensation................................................... 1,421,330 4,425,458 Accrued payment obligations - ATEC acquisition (Note B)................ - 2,923,511 Other accrued expenses ................................................ 1,162,210 3,679,664 -------------------- -------------------- Total current liabilities.......................................... 6,334,625 21,957,081 LONG-TERM DEBT, less current maturities (Note A)........................... 361,944 21,599,058 OTHER LIABILITIES.......................................................... 598,817 295,289 DEFERRED INCOME TAXES...................................................... 196,800 196,800 -------------------- -------------------- Total liabilities.................................................. 7,492,186 44,048,228 -------------------- -------------------- COMMITMENTS AND CONTINGENCIES (Notes B and E) STOCKHOLDERS' EQUITY (Note D): Common stock, par value $.01 per share; authorized 20,000,000 shares; issued and outstanding: 7,796,577 shares at February 29, 1996 and 7,797,937 shares at November 30, 1996............................... 77,966 77,979 Additional paid-in capital............................................. 29,030,189 29,018,831 Notes receivable - common stock........................................ (45,000) - Retained earnings...................................................... 10,129,259 15,383,014 -------------------- ------------------- Total stockholders' equity......................................... 39,192,414 44,479,824 -------------------- ------------------- $ 46,684,600 $ 88,528,052 ==================== =================== See notes to consolidated financial statements. F-3 PAGE ATC GROUP SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 30, 1995 AND 1996 (Unaudited) Three Months Ended Nine Months Ended November 30, November 30, -------------------------- -------------------------- 1995 1996 1995 1996 ------------ ------------ ------------ ------------ REVENUES.............................. $ 11,223,139 $ 32,848,840 $ 33,687,570 $ 83,416,851 REIMBURSABLE COSTS.................... 1,150,943 5,655,772 3,399,809 13,354,833 ------------ ------------ ------------ ------------ NET REVENUES.......................... 10,072,196 27,193,068 30,287,761 70,062,018 COST OF NET REVENUES.................. 4,729,573 15,905,505 14,146,180 38,962,629 ------------ ------------ ------------ ------------ Gross Profit............... 5,342,623 11,287,563 16,141,581 31,099,389 OPERATING EXPENSE: Selling............................ 392,631 887,098 1,106,824 2,180,498 General and administration......... 3,083,198 7,201,702 9,435,809 18,779,916 Provision for bad debts............ 78,300 283,680 197,515 624,981 ------------ ------------ ------------ ------------ 3,554,129 8,372,480 10,740,148 21,585,395 ------------ ------------ ------------ ------------ Operating income........... 1,788,494 2,915,083 5,401,433 9,513,994 ------------ ------------ ------------ ------------ NONOPERATING EXPENSE (INCOME): Interest expense................... 86,443 510,118 335,910 1,080,217 Interest income.................... (106,064) (25,668) (153,637) (221,115) Other.............................. (3,560) (2,645) 23,240 (36,182) ------------ ------------ ------------- ------------ (23,181) 481,805 205,513 822,920 ------------ ------------ ------------- ------------ Income before income taxes. 1,811,675 2,433,278 5,195,920 8,691,074 INCOME TAX EXPENSE (Note B)........... 707,000 927,000 1,677,000 3,365,000 ------------ ------------ ------------- ------------ NET INCOME............................ $ 1,104,675 $ 1,506,278 $ 3,518,920 $ 5,326,074 ============ ============ ============= ============ EARNINGS PER COMMON SHARE AND DILUTIVE COMMON EQUIVALENT SHARE: Primary (Note D) (1).......... $ .15 $ .18 $ .52 $ .62 ============ ============ ============= ============ Fully diluted (Note D) (1).... $ .15 $ .18 $ .52 $ .62 ============ ============ ============= ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Primary....................... 7,542,528 8,454,151 6,735,948 8,537,271 ============ ============ ============= ============ Fully diluted................. 7,542,528 8,454,151 6,735,948 8,570,170 ============ ============ ============= ============ (1) Includes a one-time tax benefit of $.05 per share related to the merger of Aurora Environmental Inc. for the nine months ended November 30, 1995 (Note B). See notes to consolidated financial statements. F-4 PAGE ATC GROUP SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED NOVEMBER 30, 1995 AND 1996 (Unaudited) 1995 ---------------------------------------------------------------------------------- Notes Additional Receivable Common Stock Paid-in -Common Retained Shares Amount Capital Stock Earnings Total ------------ ---------- ----------- ------------ ----------- ----------- BALANCE, February 28, 1995................... 5,738,018 $ 57,380 $ 7,484,453 $ (15,000) $ 6,286,361 $13,813,194 Issuance of common stock in public offering at $12.00 per share, less expenses (Note D) ......... 1,970,000 19,700 21,608,289 - - 21,627,989 Sale of common stock at $1.83 to $10.00 per share, upon exercise of stock options and warrants............. 33,600 336 64,503 - - 64,839 Net issuance of common stock and adjustments in connection with the merger of Aurora Environmental Inc. into ATC (Note B).................. 83,452 835 61,719 (30,000) - 32,554 Continuing registration costs applied against additional paid-in capital...... - - (88,827) - - (88,827) Common stock recovered in connection with the Con-Test, Inc. acquisition........................ (33,130) (331) (139,682) - - (140,013) Other capital transactions................. 2,920 29 22,471 - - 22,500 Net income................................. - - - - 3,518,920 3,518,920 ------------ ---------- ----------- ------------ ----------- ----------- BALANCE, November 30, 1995......... 7,794,860 $ 77,949 $29,012,926 $ (45,000) $ 9,805,281 $38,851,156 ============ ========== =========== ============ =========== =========== 1996 ---------------------------------------------------------------------------------- Notes Additional Receivable Common Stock Paid-in -Common Retained Shares Amount Capital Stock Earnings Total ------------ ---------- ----------- ------------ ----------- ----------- BALANCE, February 29, 1996.................... 7,796,577 $ 77,966 $29,030,189 $ ( 45,000) $10,129,259 $39,192,414 Sale of common stock at $2.50 to $10.00 per share, upon exercise of stock options and warrants............. 13,680 136 69,202 - - 69,338 Stock received as consideration for sale ofassets........................... (12,320) (123) (51,990) - (72,319) (124,432) Continuing registration costs applied against additional paid-in capital...... - - (28,570) - - (28,570) Other capital transactions................. - - - 45,000 - 45,000 Net income................................. - - - - 5,326,074 5,326,074 ------------ ----------- ----------- ------------ ----------- ----------- BALANCE, November 30, 1996.................... 7,797,937 $ 77,979 $29,018,831 $ - $15,383,014 $44,479,824 ============ =========== =========== ============ =========== =========== See notes to consolidated financial statements. F-5 PAGE ATC GROUP SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED NOVEMBER 30, 1995 AND 1996 (Unaudited) Nine Months Ended November 30, 1995 1996 --------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................................... $ 3,518,920 $ 5,326,074 Adjustments to reconcile net income to net cash from operating activities: Depreciation and leasehold amortization .............................. 543,991 642,779 Amortization of goodwill and covenants ............................... 304,450 887,305 Provision for bad debts .............................................. 197,515 624,981 Deferred income taxes ................................................ (206,559) - Other ................................................................. (293,620) (130,586) Changes in operating assets and liabilities, net ofamounts acquired in acquisitions: Accounts receivable and costs in excess of billings on uncompleted contracts ......................................................... (3,712,216) (5,400,578) Prepaid expenses and other assets.................................... (550,843) (448,876) Accounts payable and accrued liabilities ............................ (1,020,947) (7,316,178) Income taxes payable................................................. (113,248) 225,455 ------------------- -------------------- Net cash flows from operating activities .......................... (1,332,557) (5,589,624) ------------------- -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of American Testing and Engineering Corp., net of cash acquired ............................................................ - (8,965,952) Purchase of 3D Information Services, Inc., net of cash acquired........ - (2,926,681) Purchase of Hill International, Inc. subsidiaries ..................... (2,517,950) - Purchase of BSE Management, Inc. ...................................... (207,990) - Purchase of Con-Test, Inc. ............................................ (169,044) - Purchase of R.E. Blattert and Associates .............................. (34,375) - Purchase of property and equipment..................................... (711,031) (1,123,416) Other.................................................................. (29,639) (1,353) ------------------- -------------------- Net cash flows from investing activities........................... (3,670,029) (13,017,402) ------------------- -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt and notes payable............. 2,585,125 21,403,572 Proceeds from issuance of common stock, net of expenses................ 21,755,382 69,338 Principal payments on long-term debt and notes payable, including capital lease obligations .............................. (6,467,167) (13,592,048) Payments for continuing registration costs ............................ (88,827) (28,570) ------------------- -------------------- Net cash flows from financing activities .......................... 17,784,513 7,852,292 ------------------- -------------------- Net change in cash and cash equivalents ........................... 12,781,927 (10,754,734) CASH AND CASH EQUIVALENTS, Beginning of period .......................... 1,377,862 13,469,443 ------------------- -------------------- CASH AND CASH EQUIVALENTS, End of period ................................ $ 14,159,789 $ 2,714,709 =================== ==================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for: Interest ........................................................... $ 332,797 $ 967,711 =================== ==================== Income taxes......................................................... $ 1,646,957 $ 3,139,546 =================== ==================== See notes to consolidated financial statements. F-6 PAGE ATC GROUP SERVICES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 30, 1996 (Unaudited) A. GENERAL Name Change - Effective October 8, 1996, the Company received shareholder approval to change its name to "ATC Group Services Inc." from it former name, ATC Environmental Inc. The change was made to reflect the Company's expanded operations which extend beyond environmental consulting and now include information technology consulting services. Principles of Consolidation - The consolidated financial statements include the accounts of ATC Group Services Inc and its wholly-owned subsidiaries ("ATC" or the "Company"). In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly, in all material respects, the financial position, the results of operations and the cash flows for the periods presented herein. These results of operations are not necessarily indicative of the results to be expected for the full year due to certain seasonality factors and the effects and timing of large service projects. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These condensed financial statements should be read in conjunction with the consolidated financial statements and the notes included in the Company's financial statements for the fiscal year ended February 29, 1996, which are included in the Company's Annual Report on Form 10-K. Nature of Business - ATC is a national business services firm providing technical and project management services relating to environmental consulting (the "environmental consulting and engineering" segment) and information technology consulting services (the "information technology consulting" segment). The Company's environmental consulting and engineering segment provides environmental and geotechnical engineering services, architectural engineering services, construction materials testing and analytical testing. The Company's information technology consulting segment provides analysis and design services and system programming services to assist clients in building new or modifying existing computer systems. This business unit also provides support to clients in maintaining computer systems. Credit Facility - On May 24, 1996 the Company entered into a $20,000,000 bridge credit facility with The Chase Manhattan Bank (formerly Chemical Bank) and Atlantic Bank of New York. Under the terms of the credit agreement, the Company may borrow up to the amount of the facility, with interest payable monthly at 1.75% above the adjusted Eurodollar rate (for an effective interest rate of 7.31% at November 30, 1996). The agreement contains certain restrictive covenants which are consistent for this type of facility, including restrictions on dividend payments. Pursuant to an amendment, the facility was increased to $23,000,000 and amounts borrowed are due May 30, 1997. The Company is currently negotiating and anticipates entering into a longer term agreement with the banks prior to the maturity date of the credit agreement. As a result of the Company's intent and ability to secure long term financing, the amounts borrowed under the bridge credit facility have been classified as long term debt in the accompanying consolidated balance sheet. Statement of Financial Accounting Standards No. 121 - On March 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of. " The adoption of SFAS No. 121 has not had a material effect on the Company's financial statements. Earnings Per Share Data - Earnings per common share and dilutive common equivalent share have been computed by using the weighted average number of shares outstanding during each period. Outstanding dilutive stock warrants and options are included in the computation of weighted average number of shares. Reclassifications - Certain reclassifications have been made to the prior period's financial statements to conform to the current years presentation. F-7 PAGE B. BUSINESS ACQUISITIONS AND MERGER Business Acquisitions - The following acquisitions have been accounted for as purchases. The acquired company's assets and liabilities are included in the accompanying consolidated balance sheets at fair value at the date of purchase. The acquired company's operations subsequent to the acquisition are included in the accompanying consolidated statements of operations. Fiscal 1997 American Testing and Engineering Corporation - On May 24, 1996 ATC purchased certain assets and assumed certain liabilities of American Testing and Engineering Corporation ("ATEC"), a national environmental consulting firm. ATEC provides environmental engineering and consulting services through a large network of branch and regional offices. The purchase price was comprised of the following consideration: Amounts paid to seller and a majority owner: Cash.......................................... $ 9,000,000 Payment obligations, for property and facility rentals and non-compete consideration..... 6,001,000 Liabilities assumed: Current liabilities........................... 15,731,076 Bank debt..................................... 10,750,000 Direct expenses related to acquisition................ 139,438 ------------- $ 41,621,514 The payment obligations to seller/majority owner are payable monthly or quarterly and are included in accrued payment obligations - ATEC acquisition in the accompanying consolidated balance sheet at November 30,1996. The Company is contingently liable to ATEC for additional purchase consideration up to $10,750,000 if certain net revenue levels are achieved and certain other conditions are met. The maximum amounts payable, if fully earned, would be paid as follows: $3,883,333 in fiscal 1998, $3,873,333 in fiscal 1999, $1,293,334 in fiscal 2000 and $1,700,000 in fiscal 2002. The initial purchase price allocation is summarized as follows: Accounts receivable and work in process, net of allowances ........................................ $ 18,957,768 Other current assets.................................. 2,023,996 Other assets.......................................... 548,301 Covenants not to compete.............................. 430,000 Goodwill .......................................... 19,661,449 ------------- $ 41,621,514 The Company may set-off against certain payment obligations the amount of any uncollected accounts receivable and work in process, net of recorded allowances, not collected within one year. 3D Information Services, Inc. - On May 28, 1996, ATC purchased certain assets and assumed certain liabilities of 3D Information Services, Inc. ("3D"), a New Jersey based information services company providing technical information consulting services in all phases of information system design, development, maintenance and management in client server and mainframe based environments. The purchase price was comprised of the following consideration: Amounts paid to seller: Cash.......................................... $ 3,000,000 Note payable.................................. 2,500,000 Assumed liabilities................................... 175,724 Direct expenses related to acquisition................ 23,149 ------------- $ 5,698,873 F-8 PAGE The initial purchase price allocation is summarized as follows: Accounts receivable................................... $ 1,163,981 Work in process....................................... 279,047 Property and equipment................................ 77,381 Other current assets.................................. 77,560 Covenant not to compete............................... 100,000 Goodwill .......................................... 4,000,904 ------------- $ 5,698,873 Fiscal 1996 Hill Businesses - In November 1995, ATC purchased certain assets and assumed certain liabilities of Kaselaan & D'Angelo Associates, Inc., Hill Environmental, Inc. (formerly the environmental division of Gibbs & Hill, Inc.) and Particle Diagnostics, Inc., wholly owned subsidiaries of Hill International, Inc. (collectively the "Hill Businesses"). The Hill Businesses provide environmental consulting and engineering services, including asbestos management, industrial hygiene and indoor air quality consulting, environmental auditing and permitting, environmental regulatory compliance, water and wastewater engineering, solid waste landfill management and analytical laboratory services. The purchase price was comprised of the following consideration: Amounts paid to seller: Cash .......................................... $ 2,517,949 Letter of credit, net of imputed interest.... 700,000 Note payable at 8.75% interest............... 300,000 Liabilities assumed................................... 414,544 Direct expenses related to acquisition................ 885,538 ------------- $ 4,818,031 In addition, the Company issued to certain selling shareholders, 50,000 stock options to purchase restricted common stock at $13.875 per share as consideration for non compete agreements. The purchase price allocation is summarized as follows: Costs in excess of billings on uncompleted contracts, net of unrealizable amounts................................ $ 620,000 Property and equipment................................ 175,000 Covenants not to compete.............................. 37,500 Other assets.......................................... 30,572 Goodwill.............................................. 3,954,959 ------------- $ 4,818,031 The Company is contingently liable to reimburse up to $150,000 of certain facility lease costs. Hill International, Inc. has requested reimbursement of the full amount of the facility lease costs, however, the Company is disputing the reimbursement based on its counter-claims. Applied Geosciences Inc. - Effective February 29, 1996, ATC purchased certain assets and assumed certain liabilities of Applied Geosciences, Inc. ("AGI"), a California based environmental consulting company having offices in San Diego, Tustin and San Jose, California. The purchase price was comprised of the following consideration: Cash to seller........................................ $ 147,546 Cash to secured creditors of seller................... 441,514 Liabilities assumed................................... 225,538 Direct expenses related to acquisition................ 31,246 ------------- $ 845,844 F-9 PAGE In addition, AGI will receive contingent consideration of up to $190,000 subject to actual collections of the purchased trade receivables in excess of a minimum amount established under the agreement. At November 30, 1996, no contingent amounts had been earned. The initial purchase price allocation is summarized as follows: Accounts receivable, net.............................. $ 474,973 Property and equipment................................ 115,060 Covenants not to compete.............................. 30,000 Goodwill.............................................. 225,811 ------------- $ 845,844 Merger of Aurora Environmental Inc. - ATC and its parent, Aurora Environmental Inc. ("Aurora") were merged pursuant to an agreement (the "Merger Agreement") approved by a majority of shareholders of each company on June 29, 1995, with ATC being the surviving corporation. Under the Merger Agreement, ATC exchanged .545 of a share of ATC Common Stock for each of Aurora's 6,131,104 shares of stock outstanding. ATC's common shares held by Aurora of 3,258,000 were canceled. Actual common shares outstanding increased by 83,356 shares. The merger has been accounted for in a manner similar to a pooling of interests. Under this method of accounting, recorded assets and liabilities of Aurora were combined with those of ATC and the results of operations of ATC and Aurora were combined as of the effective date of the merger. In addition, the intercompany balance between ATC and Aurora was forgiven. As a result of the merger, ATC utilized Aurora's net operating loss carryforward to reduce its taxable income and accordingly recorded a one-time reduction in income tax expense of approximately $350,000 ($.05 per share) in the second quarter of fiscal 1996. Pro Forma Financial Information (Unaudited) - The following unaudited pro forma information sets forth the results of operations of ATC as if the merger of Aurora and ATC's purchase of the Hill Businesses, ATEC and 3D had occurred on March 1, 1995. PRO FORMA ------------------------------------------------------------ Three Months Ended Six Months Ended November 30, November 30, 1995 1996 1995 1996 ------------- ------------- ------------ ------------- Revenues......................................... $ 38,823,591 $ 32,848,840 $115,314,350 $ 104,892,835 Net income....................................... $ 3,114,536 $ 1,506,278 $ 8,618,438 $ 6,451,246 Earnings per share (fully diluted)............... $ .41 $ .18 $ 1.23 $ .75 Weighted average shares (fully diluted).......... 7,542,528 8,454,151 7,003,329 8,570,170 Reductions of pro forma revenues, net income and earnings per share from 1995 to 1996 are attributable to declining revenue levels of the Hill Businesses and ATEC in the periods preceding their purchase by ATC and the increased weighted average shares resulting from the common stock offering. C. PROPERTY AND EQUIPMENT February 29, November 30, 1996 1996 ---------- ---------- Office equipment............................... $2,645,325 $3,065,973 Laboratory and field.equiptment................ 3,528,410 3,560,901 Transportation equipment....................... 267,304 269,084 Leasehold improvements......................... 633,595 839,905 ---------- ---------- 7,074,634 7,735,863 Less accumulated depreciation................... (3,467,879) (3,805,184) ---------- ---------- $3,606,755 $3,930,679 ========== ========== F-10 PAGE D. COMMON STOCK OFFERING On October 10, 1995, the Company filed a Registration Statement with the Securities and Exchange Commission for the sale of 1,800,000 shares of Common Stock of which 1,700,000 were sold by ATC, while the remaining were sold by an officer/director of ATC. On October 30, 1995, the Company sold an additional 270,000 shares to cover over-allotments under the same terms and conditions as the public offering. E. CONTINGENCIES First Fidelity Bank, N.A., et al v. Hill International, Inc. et al, Superior Court of New Jersey, Law Division, Burlington County, Docket No. Bur-L-03400-95, filed December 19, 1995. On December 19, 1995, a second amended complaint was filed in the above-entitled action which joined the Company as a defendant and included a count against the Company seeking recovery of certain assets purchased from Hill International, Inc. ("Hill") on the grounds that plaintiff banks hold security interests in the assets and that Hill is in default under the security agreement creating such alleged security interests. The plaintiffs in this action are First Fidelity Bank, N.A. and United Jersey Bank, N.A. The primary defendants are Hill and certain of its subsidiaries, and Irvin Richter, David Richter, Janice Richter and William Doyle. Irvin Richter and David Richter are officers and stockholders of Hill. In April 1996, the Company filed a cross-claim against Hill, Irvin Richter and David Richter alleging breach of contract, fraud, among other allegations and seeking unspecified damages, including punitive damages and equitable relief. In August, 1996, Hill and the Richters filed an answer denying ATC's cross claims, a cross-claim against ATC and a third party claim against certain members of ATC's management. The cross claim and third party claim seek unspecified damages, including punitive damages, for defamation, breach of the Richters' non-competition agreements and securities fraud. The defamation claim is based on plaintiff banks' allegation of fraud against Hill and the Richters in their amended complaint, which Hill and the Richters allege was based on defamatory statements made by ATC in settlement discussions with the plaintiff banks. In its answer, the Company both denies that it made defamatory statements and asserts that the defamation allegations fail to state a legally valid claim. The breach of contract and securities claims are based on allegations that ATC made representations concerning a registration rights agreement to be provided in connection with options issued to the Richters as consideration for their non-competition agreements. In its answer, the Company denies that an agreement concerning registration rights was ever reached and asserts that the Richters forfeited any such rights in any case as a result of their conduct in connection with the asset purchase. These related cases are in their early stages with discovery yet to take place. In the Company's opinion, the outcome of this matter will not have a significant effect on the Company's financial position or future results of operations, although no assurances can be given in this regard. Commonwealth of Massachusetts v. TLT Construction Corp. et al, Civ. Action No. 96-02281 F, Superior Court of Middlesex County, Massachusetts. This is an action brought by the Commonwealth of Massachusetts in April 1996, against the architects and general contractor on a renovation and construction project on the Suffolk County Courthouse in Massachusetts. The basis of the lawsuit is that one or more damp-proofing products specified by the architect defendants and installed by the contractor defendant made employees in the courthouse ill because of the off-gassing of harmful vapors. Dennison Environmental Services Inc., ("Dennison") an ATC subsidiary, was joined on August 13, 1996, as a third party defendant by TLT Construction Corporation, the general contractor, because Dennison performed some air quality testing of the air in the courthouse for the Commonwealth of Massachusetts during the construction process. The contractor alleges that it acted in reliance on these tests in continuing to install the material after the test report was given to it by the state. Dennison has just recently been served and has not yet answered the complaint. At this point, ATC considers the case to be totally without merit, and ATC intends to vigorously defend the action. The Company currently has in force a professional liability insurance policy covering this claim in the amount of $10,000,000 with a deductible of $250,000. Notice of claim has been made regarding this action and the insurer has agreed to assume the defense. These related cases are in their early stages with discovery yet to take place. In the Company's opinion, the outcome of this matter will not have a significant effect on the Company's financial position or future results of operations, although no assurances can be given in this regard. State of New York Department of Taxation and Finance- The Company has received a notice of audit from the New York State Department of Taxation and Finance for the three fiscal years 1993, 1994, and 1995. The State has made a routine request for information to which the Company has responded. The Company has been named or has claims pending arising out of the conduct of its business. In the opinion of management, all other matters are adequately covered by insurance, are without merit, or are not material. F-11 PAGE F. INDUSTRY SEGMENT DATA The Company provides services through its environmental consulting and engineering segment and its information technology consulting segment. Prior year segment data is not presented as the Company only operated in the environmental and engineering segment. Environmental Information Adjustments & Industry Segment Data & Engineering Technology Elimination's Total ------------- ------------- ------------- ------------- Quarter Ended November 30, 1996 - ------------------------------- Revenues......................................... $ 30,432,499 $ 2,416,341 $ - $ 32,848,840 Operating Income................................. 2,756,379 158,704 - 2,915,083 Depreciation and amortization.................... 233,633 4,072 - 237,705 Capital expenditures............................. 333,972 5,758 - 339,730 Nine Months Ended November 30, 1996 - ----------------------------------- Revenues......................................... $ 78,332,311 $ 5,084,540 $ - $ 83,416,851 Operating Income................................. 9,179,261 334,733 - 9,513,994 Depreciation and amortization.................... 634,574 8,205 - 642,779 Capital expenditures............................. 1,071,339 52,077 - 1,123,416 Identifiable assets as of November 30, 1996 $ 84,594,843 $ 6,233,209 $ (2,300,000) $ 88,528,052 - ----------------------------------------- F-12 PAGES ATC GROUP SERVICES INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Developments FY 1997 Acquisition of American Testing and Engineering Corporation - On May 24, 1996, ATC purchased certain assets and assumed certain liabilities of American Testing and Engineering Corporation ("ATEC"), a national environmental consulting firm. ATEC provides environmental consulting and engineering services including risk assessments, compliance audits, environmental remediation consulting, geotechnical, materials testing, industrial hygiene and analytical services through a large network of branch and regional offices. For its year ended December 31, 1995, ATEC had revenues of $85,020,000 and a net loss of ($1,820,000). The acquisition has been accounted for as a purchase. The assets acquired include certain tangible assets consisting of accounts receivable, work in process and customer and certain other deposits. Additionally, ATC executed an agreement to lease substantially all of ATEC's equipment and executed several sublease agreements for premises leased by ATEC. ATC also obtained non-competition agreements with ATEC, a non-acquired subsidiary, and the majority shareholder of ATEC. The purchase price consideration consisted of $9,000,000 of cash paid at closing and property and facility lease payments and non-compete payment obligations of $6,001,000 payable during the first year following the purchase. The Company also assumed liability for ATEC's bank debt, approximately $10,750,000, its accounts payable, and certain other recorded liabilities. The Company is contingently liable to ATEC for additional purchase consideration up to $10,750,000 if certain net revenue levels are achieved and certain other conditions are met. The maximum amounts payable, if fully earned, would be paid as follows; $3,883,333 in fiscal 1998, $3,873,333 in fiscal 1999, $1,293,334 in fiscal 2000 and $1,700,000 in fiscal 2002. Acquisition of 3D Information Services, Inc. - Effective May 28, 1996, ATC purchased certain assets and assumed certain specified liabilities of 3D Information Services, Inc. ("3D"), a New Jersey based information services company providing technical information system consulting services in all phases of information system design, development, maintenance and management in client server and mainframe based environments. Its clients include major companies in the telecommunications, financial services and pharmaceutical industries. 3D reported revenues and net income of approximately $10,360,000 and $85,000 respectively, for its year ended December 31, 1995. The acquisition has been accounted for as a purchase. Assets purchased include customer contract rights, customer lists, order backlog, customer records, employee contracts and tangible assets including accounts receivable, work in process, field and office supplies, and equipment. Consideration paid consisted of $3,000,000 of cash at closing and a note payable for $2,500,000. In addition, ATC assumed certain liabilities of approximately $175,724. ATC also entered into a three year non-compete agreement with the majority stockholder. FY 1996 Acquisition of Hill International Inc. Environmental Subsidiaries - On November 10, 1995, ATC purchased certain assets and assumed certain liabilities of the subsidiary companies at Hill International, Inc. that provided environmental consulting and engineering services (collectively the "Hill Businesses"). These services include asbestos management, industrial hygiene and indoor air quality consulting, environmental auditing and permitting, environmental regulatory compliance, water and wastewater engineering, solid waste and landfill management, hazardous waste management and analytical laboratory services. Acquisition of Applied Geosciences, Inc. - Effective February 29, 1996, ATC purchased certain assets and assumed certain liabilities of Applied Geosciences, Inc. ("AGI"). AGI's services include environmental and hazardous waste site assessments, remediation design, air quality management, asbestos services, litigation support and engineering geology through its offices located in Southern California. F-13 PAGE Common Stock Offering Effective October 1995, the Company sold 1,970,000 shares of common stock at an offering price of $12.00 per share and received $21,554,461 net of underwriting and other related expenses. Merger of Aurora into ATC Effective June 29, 1995, ATC and its parent, Aurora Environmental Inc. ("Aurora"), were merged pursuant to an agreement approved by the majority of shareholders of each company, with ATC as the surviving corporation (the "Aurora Merger"). Prior to the Aurora Merger, Aurora was a holding company which owned approximately 57% of ATC's outstanding Common Stock and had substantially no other assets. In connection with the merger, each outstanding share of Aurora Common stock was exchanged for .545 shares of ATC Common Stock. ATC issued 3,341,356 shares of ATC Common Stock in exchange for 6,131,104 shares of Aurora's common stock, and issued options and warrants entitling the holders thereof to purchase up to 604,950 shares of ATC Common Stock upon exercise in replacement of previously outstanding options and warrants to purchase Aurora's common stock. ATC common shares held by Aurora of 3,258,000 were canceled. Actual common shares outstanding increased by 83,356 shares. As a result of the Aurora Merger, ATC utilized Aurora's net operating loss carried forward to reduce its taxable income and accordingly recorded a one-time reduction in income tax expense of approximately $350,000 ($.05 per share) in the second quarter of fiscal 1996. Results of Operations Three Months Ended November 30, 1996 Compared with Three Months Ended November 30, 1995 Revenues in the three months ended November 30, 1996 increased 193% to $32,848,840, compared with $11,223,139 in the three months ended November 30, 1995. This increase was primarily attributable to the acquisition of ATEC and 3D in May 1996 and from the acquisitions of the Hill Businesses and AGI completed during the second half of fiscal 1996. Revenues in the three months ended November 30, 1996 from ATC's branch offices having comparable operations in the three months ended November 30, 1995 decreased 1.4% to $10,275,049, compared with $10,422,581 in the three months ended November 30, 1995. Revenues attributable to the acquisitions of certain assets of the Hill Businesses, AGI, ATEC and 3D totaled $22,573,791 or 68.7% of revenues, for the three months ended November 30, 1996. Revenues from branch operations sold or discontinued contributed $325,108 for the three months ended November 30, 1995. Reimbursable costs represent direct project expenses billed to environmental and engineering segment clients. For the three months ended November 30, 1996, reimbursable costs increased 391% to $5,655,772 compared with $1,150,943, in the three months ended November 30, 1995. Reimbursable costs as a percentage of revenues increased to 17.2% in the three months ended November 30, 1996 compared with 10.3% in the three months ended November 30, 1995. ATEC's traditional consulting services, consisting of drilling, materials testing and engineering services, utilize higher amounts of outside services and direct project expenses compared to those consulting services being provided prior to the acquisition. For its year ended December 31, 1995, ATEC's reimbursable costs were approximately 21% of revenues, compared to ATC's fiscal 1996 reimbursable costs which were approximately 11% of revenues. Gross profit in the three months ended November 30, 1996 increased 111% to $11,287,563, compared with $5,342,623 in the three months ended November 30, 1995. Gross profit as a percentage of net revenue decreased to 41.5% in the three months ended November 30, 1996, compared with 53.0% in the three months ended November 30, 1995. The gross profit percentage decrease is due to lower margins earned on certain of ATEC's environmental services, the final project costs incurred to complete a large fixed-price contract which could not be billed to the client, and the impact of lower net revenues in certain regions where costs could not be reduced proportionately. In addition, the gross profit percentage for the prior year was at a record high due to higher than normal profitability level of certain large projects. F-14 PAGE Operating expenses in the three months ended November 30, 1996 increased 136% to $8,372,480, compared with $3,554,129 in the three months ended November 30, 1995. Operating expenses decreased as a percentage of net revenues to 30.8% in the three months ended November 30, 1996 compared with 35.3% in the three months ended November 30, 1995. The decrease in operating expenses as a percentage of net revenue is the result of the additional net revenue from the ATEC and other acquisitions without corresponding increases in fixed and administrative costs. Employee costs increased 67% to $3,132,501, or 11.5% of net revenues in the three months ended November 30, 1996 compared with $1,873,895, or 18.6% of net revenues, in the three months ended November 30, 1995. These increases in total cost were due to employees hired in connection with the expansion of ATC's operations. Other increases in operating expenses resulted from higher facility costs and administrative expenses resulting from the growth in operations and increased employee levels. Additionally, in the three months ended November 30, 1996, amortization of goodwill and intangibles increased to $482,231, compared with $110,413 in the three months ended November 30, 1995 reflecting the additional goodwill amortization resulting from acquisitions. Operating income in the three months ended November 30, 1996 increased 63% to $2,915,083, compared with $1,788,494 in the three months ended November 30, 1995. Operating income decreased as a percentage of net revenues to 10.7% in the three months ended November 30, 1996, compared with 17.8% in the three months ended November 30, 1995. Nonoperating expense in the three months ended November 30, 1996 was $481,805 compared with nonoperating income of $23,181 in the three months ended November 30, 1995. The change is primarily attributable to increased interest expense due to the bank debt incurred in connection with the ATEC and 3D acquisitions. Income tax expense in the three months ended November 30, 1996 was $927,000, compared with $707,000 in the three months ended November 30, 1995. During the three months ended November 30, 1996 and 1995, the Company's effective tax rates were 38.1% and 39.0%, respectively. As a result of the foregoing, net income in the three months ended November 30, 1996 increased 36% to $1,506,278, or $.18 per share on a fully diluted basis, compared with $1,104,675 or $.15 per share on a fully diluted basis, in the three months ended November 30, 1995. The fully diluted weighted average number of shares outstanding increased 12% to 8,454,151 shares primarily due to an increase in shares issued from the Common Stock Offering in October 1995. Net income decreased as a percentage of net revenues to 5.5% in the three months ended November 30, 1996, compared with 11.0% in the three months ended November 30, 1995. Nine Months Ended November 30, 1996 Compared with Nine Months Ended November 30, 1995 Revenues in the nine months ended November 30, 1996 increased 148% to $83,416,851, compared with $33,687,570 in the nine months ended November 30, 1995. This increase was primarily attributable to the acquisition of ATEC and 3D in May 1996 and from the positive acquisitions of the Hill Businesses and AGI during the second half of fiscal 1996. Revenues in the nine months ended November 30, 1996 from ATC's branch offices having comparable operations in the nine months ended November 30, 1995 increased 2.6% to $32,821,516 compared with $32,003,432 in the nine months ended November 30, 1995. Revenues attributable to the acquisitions of certain assets of the Hill Businesses, AGI, ATEC and 3D totaled $50,567,847, or 60.6% of revenues, for the nine months ended November 30, 1996. Revenues from branch operations sold or discontinued contributed only $27,488 for the nine months ended November 30, 1996 compared to $1,208,688 for the nine months ended November 30, 1995. Gross profit in the nine months ended November 30, 1996 increased 93% to $31,099,389, compared with $16,141,581 in the nine months ended November 30, 1995. Gross profit as a percentage of net revenue decreased to 44.4% in the nine months ended November 30, 1996, compared with 53.3% in the nine months ended November 30, 1995. The gross profit percentage decrease is due to lower margins earned on certain of ATEC's environmental services, the final project costs incurred to complete a large fixed-price contract which could not be billed to the client, and the impact of lower net revenues in certain regions where costs could not be reduced proportionately. In addition, the gross profit percentage for the prior year was higher than normal due to high profitability levels of certain large projects. F-15 PAGE Operating expenses in the nine months ended November 30, 1996 increased 101% to $21,585,395, compared with $10,740,148 in the nine months ended November 30, 1995. Operating expenses decreased as a percentage of net revenues to 30.8% in the nine months ended November 30, 1996 compared with 35.5% in the nine months ended November 30, 1995. The decrease in operating expenses as a percentage of net revenue is the result of the additional net revenue from the ATEC and other acquisitions without corresponding increases in fixed and administrative costs. Employee costs increased 61.4% to $8,837,196, or 12.6% of net revenues in the nine months ended November 30, 1996 compared with $5,474,121, or 18.1% of net revenues, in the nine months ended November 30, 1995. These increases in total cost were due to employees hired in connection with the expansion of ATC's operations. Other increases in operating expenses resulted from higher facility costs and administrative expenses resulting from the growth in operations and increased employee levels. Additionally, in the nine months ended November 30, 1996, amortization of goodwill and intangibles increased to $887,305, compared with $304,450 in the nine months ended November 30, 1995 reflecting the additional goodwill amortization resulting from acquisitions. Operating income in the nine months ended November 30, 1996 increased 76% to $9,513,994, compared with $5,401,433 in the nine months ended November 30, 1995. Operating income decreased as a percentage of net revenues to 13.6% in the nine months ended November 30, 1996, compared with 17.8% in the nine months ended November 30, 1995. Nonoperating expense in the nine months ended November 30, 1996 increased to $822,920 compared with $205,513 in the nine months ended November 30, 1995. The increase in nonoperating expense is primarily attributable to increased interest expense due to bank debt outstanding since May 1996 when the ATEC and 3D acquisitions were completed, offset in part by higher interest income earned during the first three months of fiscal 1997 on the net proceeds of the Common Stock Offering invested in short term investments prior to the acquisitions. Income tax expense in the nine months ended November 30, 1996 was $3,365,000, compared with $1,677,000 in the nine months ended November 30, 1995. The income tax expense for the nine months ended November 30, 1995 reflects a one-time benefit of $350,000 resulting from the merger of Aurora into ATC which allowed ATC to utilize Aurora's net operating loss carryforward as offsets to future taxable income. During the nine months ended November 30, 1996 and 1995, after adjusting for the one-time tax benefit, the Company's effective tax rates were 38.7% and 39.0%, respectively. As a result of the foregoing, net income in the nine months ended November 30, 1996 increased 51% to $5,326,074, or $ .62 per share on a fully diluted basis, compared with $3,518,920 or $.52 per share on a fully diluted basis, in the nine months ended November 30, 1995. Excluding the impact of the one-time tax benefit of $350,000, net income and fully diluted earnings per share for the nine months ended November 30, 1995 would have been $3,168,920 and $.47 respectively. The fully diluted weighted average number of shares outstanding increased 27% to 8,570,170 shares primarily due to an increase in shares issued from the Common Stock Offering and from shares, options and warrants outstanding as a result of the Aurora merger effective June 29, 1995. Net income decreased as a percentage of net revenues to 7.6% in the nine months ended November 30, 1996, compared with 10.5% in the nine months ended November 30, 1995 after adjusting for the one-time tax benefit. Liquidity and Capital Resources At November 30, 1996, working capital was $25,614,441 compared with working capital of $24,977,316 at February 29, 1996, an increase of $637,125. This increase in working capital is primarily a result of the acquisitions of ATEC and 3D and the increases from purchased accounts receivable, unbilled receivables and prepaid expenses offset by assumed acquisition liabilities including accounts payable and other current liabilities and future payment obligations and cash paid to the sellers. As a result of the Company's recent acquisitions of ATEC and 3D, the Company's tangible net worth decreased to $8,892,398 at November 30, 1996 from $27,542,614 at February 29, 1996, primarily as a result of goodwill and non-compete amounts recognized in connection with these transactions. During the nine months ended November 30, 1996, net cash flows used in operating activities were $5,589,624, primarily due to the decrease in accounts payable and other liabilities, representing payments of property facility rentals, non-compete consideration and assumed liabilities of ATEC and other acquisitions, and an increase in billed and unbilled receivables. Net cash flows used in investing activities were $13,017,402, resulting from the acquisitions of ATEC and 3D and purchases of property and equipment. Net cash flows provided by financing activities were $7,852,292, primarily representing the proceeds of the bridge credit facility, less payments made on long-term debt and notes payable assumed from ATEC. F-16 PAGE During the nine months ended November 30, 1995, net cash flows used by operating activities were $1,332,557. Net cash flows used in investing activities were $3,670,029 consisting of the purchase of the Hill Businesses and additional acquisition costs in connection with the Con-Test and R.E. Blattert acquisitions plus contingent purchase obligations related to the acquisition of BSE Management Inc. and the purchase of property and equipment. Also during this period, net cash flows from financing activities were $17,784,513, primarily from proceeds from the Common Stock Offering and increased bank debt less principal payments on long-term debt and notes payable of $6,467,167. In October 1995 the Company sold 1,970,000 shares in a common stock offering. The Company utilized a portion of the net proceeds of the offering to repay outstanding bank debt under its credit facilities. In May 1996, the Company entered into a bridge credit facility with The Chase Manhattan Bank (formerly Chemical Bank) and Atlantic Bank which provided $20,000,000 of funds in connection with the Company's acquisition of ATEC and 3D. The bridge credit facility has been increased to $23,000,000 and borrowings under the agreement are due May 30, 1997, however, the Company expects to complete a longer term agreement with the banks prior to the maturity date of the bridge facility. The Company may also seek to obtain additional public or private debt or equity financing in the future in order to reduce certain existing bank debt and provide funds for future acquisitions, however, no assurance can be given as to the Company's ability to obtain funds on acceptable terms and conditions. Management believes that as a result of cash on hand, current working capital, the expected increase in available funds upon the completion of the long-term bank credit facility, and anticipated funds generated internally from operations will be sufficient to finance ATC's operations, to make payments as they come due on ATC's completed acquisitions and to meet ATC's short-term and long-term liquidity requirements. F-17 PAGE PART II - OTHER INFORMATION Item 1. Legal Proceedings: First Fidelity Bank, N.A., et al v. Hill International, Inc. et al, Superior Court of New Jersey, Law Division, Burlington County, Docket No. Bur-L-03400-95, filed December 19, 1995. On December 19, 1995, a second amended complaint was filed in the above-entitled action which joined the Company as a defendant and included a count against the Company seeking recovery of certain assets purchased from Hill International, Inc. ("Hill") on the grounds that plaintiff banks hold security interests in the assets and that Hill is in default under the security agreement creating such alleged security interests. The plaintiffs in this action are First Fidelity Bank, N.A. and United Jersey Bank, N.A. The primary defendants are Hill and certain of its subsidiaries, and Irvin Richter, David Richter, Janice Richter and William Doyle. Irvin Richter and David Richter are officers and stockholders of Hill. In April 1996, the Company filed a cross-claim against Hill, Irvin Richter and David Richter alleging breach of contract, fraud, among other allegations and seeking unspecified damages, including punitive damages and equitable relief. In August, 1996, Hill and the Richters filed an answer denying ATC's cross claims, a cross-claim against ATC and a third party claim against certain members of ATC's management. The cross claim and third party claim seek unspecified damages, including punitive damages, for defamation, breach of the Richters' non-competition agreements and securities fraud. The defamation claim is based on plaintiff banks' allegation of fraud against Hill and the Richters in their amended complaint, which Hill and the Richters allege was based on defamatory statements made by ATC in settlement discussions with the plaintiff banks. In its answer, the Company both denies that it made defamatory statements and asserts that the defamation allegations fail to state a legally valid claim. The breach of contract and securities claims are based on allegations that ATC made representations concerning a registration rights agreement to be provided in connection with options issued to the Richters as consideration for their non-competition agreements. In its answer, the Company denies that an agreement concerning registration rights was ever reached and asserts that the Richters forfeited any such rights in any case as a result of their conduct in connection with the asset purchase. These related cases are in their early stages with discovery yet to take place. In the Company's opinion, the outcome of this matter will not have a significant effect on the Company's financial position or future results of operations, although no assurances can be given in this regard. Commonwealth of Massachusetts v. TLT Construction Corp. et al, Civ. Action No. 96-02281 F, Superior Court of Middlesex County, Massachusetts. This is an action brought by the Commonwealth of Massachusetts in April 1996, against the architects and general contractor on a renovation and construction project on the Suffolk County Courthouse in Massachusetts. The basis of the lawsuit is that one or more damp-proofing products specified by the architect defendants and installed by the contractor defendant made employees in the courthouse ill because of the off-gassing of harmful vapors. Dennison Environmental Services Inc., ("Dennison") an ATC subsidiary, was joined on August 13, 1996, as a third party defendant by TLT Construction Corporation, the general contractor, because Dennison performed some air quality testing of the air in the courthouse for the Commonwealth of Massachusetts during the construction process. The contractor alleges that it acted in reliance on these tests in continuing to install the material after the test report was given to it by the state. Dennison has just recently been served and has not yet answered the complaint. At this point, ATC considers the case to be totally without merit, and ATC intends to vigorously defend the action. The Company currently has in force a professional liability insurance policy covering this claim in the amount of $10,000,000 with a deductible of $250,000. Notice of claim has been made regarding this action and the insurer has agreed to assume the defense. These related cases are in their early stages with discovery yet to take place. In the Company's opinion, the outcome of this matter will not have a significant effect on the Company's financial position or future results of operations, although no assurances can be given in this regard. Item 2. Changes in Securities: Not Applicable Item 3. Defaults Upon Senior Securities: Not Applicable F-18 PAGE Item 4. Submission of Matters to a Vote of Security Holders: On October 8, 1996, the Company held its annual meeting of shareholders at which time the Company's directors were re-elected and amendments to increase the number of shares in the 1993 Incentive and Non-Qualified Stock Option Plan and to change the Company's name to ATC Group Services Inc. were approved, as previously reported in the Company's prior Form 10-Q for the quarterly period ended August 31, 1996. Item 5. Other Information: Not Applicable Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits: 11 - Computation of Earnings Per Share - Three months and nine months ended November 30, 1995 and 1996 (Unaudited) 27 - Financial Data Schedule November 30, 1996 (Unaudited) (b) Reports on Form 8-K: Not Applicable 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, 1996 /s/ Morry F. Rubin ------------------------ ------------------------------------- Morry F. Rubin, President and Chief Executive Officer Dated: January 14, 1996 /s/ Richard L. Pruitt ------------------------ ------------------------------------- Richard L. Pruitt, Vice President and Principal Accounting Officer F-19 PAGES ATC GROUP SERVICES INC. AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 30, 1995 and 1996 (Unaudited) Three Months Ended Nine Months Ended November 30, 1996 November 30, 1996 -------------------------- -------------------------- 1995 1996 1995 1996 ----------- ----------- ----------- ----------- Primary Earnings Per Share: - -------------------------- Weighted averang numbe of shares of common stock outstanding........................................ 6,738,257 7,792,964 6,091,458 7,789,104 Additional shared assuming exercise of dilutive stock options and stock warrants................... 804,271 661,187 644,490 748,167 ----------- ----------- ----------- ----------- Total average common and common equivalent shares outstanding.................................... 7,542,528 8,454,151 6,735,948 8,537,271 ============ =========== =========== =========== Net Income........................................... $ 1,104,675 $ 1,506,278 $ 3,518,920 $ 5,326,074 ============ =========== =========== =========== Earings per common and dilutive common equivalent share (1).......................................... $ .15 $ .18 $ .52 $ .62 ============ =========== =========== =========== Fully Diluted Earnings Per Share: - -------------------------------- Weighted averang numbe of shares of common stock outstanding........................................ 6,738,257 7,792,964 6,091,458 7,789,104 Additional shared assuming exercise of dilutive stock options and stock warrants................... 804,271 661,187 644,490 781,066 ----------- ----------- ----------- ----------- Total average common and common equivalent shares outstanding.................................... 7,542,528 8,454,151 6,735,948 8,570,170 ============ =========== =========== =========== Net Income........................................... $ 1,104,675 $ 1,506,278 $ 3,518,920 $ 5,326,074 ============ =========== =========== =========== Earings per common and dilutive common equivalent share (1).......................................... $ .15 $ .18 $ .52 $ .62 ============ =========== =========== =========== (1) Includes a one-time tax benefit of $.05 per share related to the merger of Aurora Environmental Inc. for the nine months ended November 30, 1995 (Note B). F-20 PAGE ATC GROUP SERVICES INC. AND SUBSIDIARIES EXHIBIT 27 FINANCIAL DATA SCHEDULE NOVEMBER 30, 1996 (Unaudited) As of Item Number Item Description November 30, 1996 -------------------- 5-02(1) Cash and cash items............................................. $ 2,714,709 5-02(2) Marketable securities........................................... - 5-02(3)(a)(1) Notes and accounts receivable - trade........................... 36,497,082 5-02(4) Allowances for doubtful accounts................................ (1,284,925) 5-02(6) Inventory....................................................... - 5-02(9) Total current assets............................................ 47,571,522 5-02(13) Property, plant and equipment................................... 7,735,863 5-02(14) Accumulated depreciation........................................ (3,805,184) 5-02(18) Total assets.................................................... 88,528,052 5-02(21) Total current liabilities....................................... 21,957,081 5-02(22) Bonds, mortgages, and similar debt.............................. 21,599,058 5-02(28) Preferred stock - mandatory redemption.......................... - 5-02(29) Preferred stock - no mandatory redemption....................... - 5-02(30) Common stock.................................................... 77,979 5-02(31) Other stockholders' equity...................................... 44,401,845 5-02(32) Total liabilities and stockholders' equity...................... 88,528,052 Nine Months Ended November 30, 1996 -------------------- 5-03(b)1(a) Net sales of tangible products.................................. $ - 5-03(b)1 Total revenues.................................................. 83,416,851 5-03(b)2(a) Cost of tangible goods sold..................................... - 5-03(b)2 Total costs and expenses applicable to sales and revenues....... 52,317,462 5-03(b)3 Other costs and expenses........................................ 20,703,117 5-03(b)5 Provision for doubtful accounts and notes....................... 624,981 5-03(b)(8) Interest and amortization of debt discount...................... 1,080,217 5-03(b)(10) Income before taxes and other items............................. 8,691,074 5-03(b)(11) Income tax expense.............................................. 3,365,000 5-03(b)(14) Income/(loss) continuing operations............................. 5,326,074 5-03(b)(15) Discontinued operations......................................... - 5-03(b)(17) Extraordinary items............................................. - 5-03(b)(18) Cumulative effect - changes in accounting principles............ - 5-03(b)(19) Net Income...................................................... 5,326,074 5-03(b)(20) Earnings per share - primary.................................... .62 5-03(b)(20) Earnings per share - fully diluted.............................. .62 F-21 PAGE